Focus on Valuation of Assets Moves From Exploration Upside to Mature Asset Cash Flow

Focus on Valuation of Assets Moves From Exploration Upside to Mature Asset Cash Flow

8th July 2016

The Acquisition and Divestment (A&D) market has changed. Previously, exploration and discovery upside was sought after with new development potential or undeveloped acreage firmly part of the transactional value expectation. 

However the A&D market has moved, with value now focussed on mature, developed assets that bring instant cashflow. With the change in focus, the due diligence of assets for a potential transaction also requires modification, with the focus now being on enhancement and improvement of current operations, and as such, asset due diligence now requires far more detailed consideration of the surface facilities, costs and abandonment liabilities. 

Background

The oil price collapsed in the summer of 2014, from north of $US 110/Bbl for Brent Crude and fell some 75% to less than $US 28/Bbl in January 2016, causing significant job losses, budget cuts and restructuring across the entire oil and gas industry.   On a more positive note, the oil price has shown a steady upward trend over the first two quarters of 2016, and currently remains within the region of $50/Bbl; although uncertainty continues to cloud the industry.

Figure 1: Brent Crude Spot Price FOB June 2014 – June 2016

As a result, over the last 24 months, a clear trend has developed whereby investor interest has moved away from exploration and pre-development assets, to developed mature assets that can demonstrate an active and positive cash flow under the current market conditions.  These mature assets tend to have reduced subsurface uncertainty due to extensive data acquisition and production history, with Expected Ultimate Recoveries (EUR) often determined solely by simple decline curve analysis.

Mature Asset Value and Upside Controlled by Facilities

There clearly needs to be a mindset change when moving from investing in high subsurface risk exploration assets to low subsurface risk mature assets. With mature assets, investors and borrowers need to rank risk and uncertainty of surface facilities and export infrastructure as highly as for the subsurface; focussing in on the subsurface alone is a recipe for financial loss.

Where a traditional field/asset evaluation used to involve superficial review of FDP plans for surface facilities and some arbitrary $/BBl figure assigned for CAPEX and OPEX, it is actually the facility capacities, costs and physical condition that can actively drive mature field NPV. Clearly a robust field/asset evaluation for mature assets would still require a reasonable examination of the subsurface issues.

In reality, the due diligence of any mature asset requires a complete and seamless review from the subsurface through to point of sale (and possibly beyond) by a single collaborative team, identifying potential risks to future production, costs and cash flow.  

An integrated subsurface and surface evaluation is essential because evaluation of the impact of the subsurface and surface parameters typically requires some form of iteration to fully assess field constraints and opportunity. The enhanced upside value in a mature asset regularly comes from facilities optimisation or new technology implementation. 

Figure 2: Value Creation Capability of Mature Assets by Extending Due Diligence Beyond the Subsurface

It is however inherently important to address the range of uncertainty in mature field assessment, so that the investor or borrower can consider the potential risk and reward associated with their investment, as reported in the Low and High Case NPV’s.  Upside potential reflected within the High Case NPV should consider the value creation capability of the asset going forward, allowing for upside both in terms of subsurface opportunities and surface optimisations.

Ignore Surface Facilities Due Diligence at your Peril

Experience shows that even the best operators have preferred solutions and blind spots that obscure potentially significant improvements in production and operations, missing potential reductions in investment requirements and cash flow improvements.

Smaller companies can readily leverage a different set of skills than that of larger companies, and therefore find cashflow gains in rationalisations and optimisations where traditional operations would not tread. There are many examples where surface facility enhancements have driven a more positive NPV, via facilities optimisation and production engineering.:

  • Re-configuration of planned wellhead platforms, from traditional structures to tailored minimal structures, thereby reducing platform cost, and hence the well-slot cost, by 66% and therefore total potential life of field capex savings of $9bn.

  • Use of low-cost offshore metering (including virtual metering), to allow de-manning of offshore facilities.  The consequential reductions in life-support and HSE systems resulted in a halving of projected operating costs.  Total potential life of field savings $12.5bn.

  • Improvements in production chemistry and well technology selection in a waxy crude environment that extended the time between work-overs by a factor of four – cutting work-over costs by 75%.  OPEX saving of $15mm per year.

  • Improved well-kill procedures that raised the average well production rate by almost 10 times and thereby reducing required future well count by 90%.

  • Field with no effective wellhead water separation limited by export pipeline capacity, recommended to be operated with simple water separation system, thereby increasing field rates by 70%.

Where the subsurface of mature assets may give you pennies, you may find the dollars strewn over the surface facilities

The examples shown above demonstrate that there is much more to be gained from a complete and holistic due-diligence of the subsurface and surface facilities. A full view evaluation can identify  previously unforeseen upside potential to the NPV of a mature asset. 

Authors

Focus on Valuation of Assets Moves From Exploration Upside to Mature Asset Cash Flow

David Jarrett

Senior Consultant: Geoscience - David.Jarrett@gaffney-cline.com
Focus on Valuation of Assets Moves From Exploration Upside to Mature Asset Cash Flow

Drew Powell

Global Operations Director - drew.powell@gaffney-cline.com

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