Valuation of Integrated Oil & Gas Companies Msc Thesis

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MSc Thesis: Valuation of Integrated Oil & Gas Companies

Irakli Menabde

Valuation of Integrated Oil & Gas Companies
A comparative analysis of methodologies and empirical practices

MSc Thesis

MSc in International Business and Economics: Cand. Merc Finance and Strategic Management (FSM) Copenhagen Business School

Date 09/10/2008 Author: Irakli Menabde

MSc Thesis: Valuation of Integrated Oil & Gas Companies

Irakli Menabde

Abstract

The paper examines a number of empirically utilised and academically established valuation methodologies in order to value Integrated Oil & Gas Company’s common stock. By applying and comparing DCF, SOP and Real Options based valuation methodologies with the aims of establishing both, an absolute share price value and relative value for the sample representatives of for Exxon Mobil Corp and BP Plc, the paper highlights key input parameters for each methodology and discusses the key differences in the outputs of the models. The study finds that the market relies on the Discounted Cash flow Valuation methodology and that the Real Option based valuation attributes significantly higher value to the companies, while the Sum Of Parts valuation demonstrates significant discounting of the value in upstream assets and a rather large holding discount as measured by stand alone market peers. The paper then goes further by providing a historical twenty year back test of the global Integrated Oil & Gas stock portfolio based on publicly available company financial factors, and provides a stock selection model for the custom universe in the long/short, market neutral setting. Lastly, a strategic perspective for key stakeholders is provided based on the findings from the comparison of valuation methodologies, highlighting their strategic implications for the practicing investors, corporate leadership and regulatory entities.

Copenhagen Business School

Cand. Merc: Finance & Strategic Management

2

MSc Thesis: Valuation of Integrated Oil & Gas Companies

Irakli Menabde

Table of Contents
ABSTRACT....................................................................................................................................2 TABLE OF CONTENTS..............................................................................................................3 LIST OF FIGURES.......................................................................................................................5 1. INTRODUCTION.....................................................................................................................8 1.1OVERVIEW OF THE VALUATION QUANDARY IN OIL & GAS INDUSTRY .................................................8 1.2 THESIS AIMS AND OBJECTIVES ....................................................................................................9 1.2.2 The Relevance of Thesis...............................................................................................11 1.2.3 Delimitation..................................................................................................................13 2. THEORETICAL FOUNDATION AND RELATED VALUATION METHODOLOGIES .......................................................................................................................................................14 2.1 THE DISCOUNTED CASH FLOW APPROACH...................................................................................15 2.2 REAL OPTIONS APPROACH........................................................................................................21 2.3 SUM OF PARTS AND RELATIVE VALUATION APPROACHES..............................................................23 3.1 INDUSTRY STATE & STRUCTURE................................................................................................29 3.2 DEMAND FOR OIL, GAS AND ENERGY.........................................................................................30 3.3 SUPPLY OF PETROLEUM...
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