A weekly update on issues important to the oil and gas industry
In the current low pricing environment, many oil and gas companies are declaring bankruptcy. However, the decision to file for bankruptcy does not have to signal the demise of the business. If executed properly Chapter 11 reorganization in fact affords these financially distressed or insolvent companies an opportunity to restructure their liabilities and emerge as sustainable going concerns.
This is the third and final post in a series aimed at helping E&P companies to navigate the sale of non-core assets and bankruptcy by examining how option pricing, a sophisticated valuation technique, can be used to understand the future potential of the assets most affected by low prices, PUDs and unproven reserves. In this post, we delve into the specifics of adapting option pricing from shares of stock to oil and gas, highlighting some of the challenges and key steps of the process.
This is the second in a series of three blog posts aimed at helping E&P companies to navigate the sale of non-core assets and bankruptcy by examining how option pricing, a sophisticated valuation technique, can be used to understand the future potential of assets most affected by low prices, PUDs and unproven reserves. In this second installment we explain the general idea behind option pricing and why it may be more suited to a low price environment than traditional DCF models. Part three will then cover some of the issues that arise when using the option pricing method to value oil and gas companies’ assets.
Due to a precipitous drop in oil prices since June 2014, oil exploration and production companies in the US have struggled to pay their debts and in many cases have had to file for bankruptcy. This is the first post in a three part series examining how option pricing, a sophisticated valuation technique, can be used to understand the future potential of the assets most affected by low prices, PUDs and unproven reserves.
Refiners anticipated crude oil exports would increase when the export ban was lifted which reduced excess supply in the US and relieved the downward pressure on market prices. Once the price of crude increased in the US, refiners profit margins shrink, and profits shrank as expected. But with falling crude prices worldwide, the compression of downstream margins cannot be explained by the story refiners expected.
