Title: Futures market observations help in property evaluations
Abstract: A standard approach to the valuation of petroleum properties and to project economics requires the calculation of present value of future cash flows. The technique is well-known and widely used in property evaluations, which are crucial to the acquisition activity in which independent producers recently have been so heavily engaged. But shortcomings of the standard approach also are well-known. Two significant problems are the choice of discount rate and the need to forecast prices. The appropriate discount rate depends upon the risk involved, and the correct relationship between risk and expected return may be difficult to determine. Oil price forecasts, meanwhile, are notoriously unreliable. These problems have led to adaptation of the option-valuation technique now widely and successfully used in the financial markets to the problem of valuing real assets, such as an oil field. In this context an option is the right, but not the obligation, to buy or sell an asset at some future time for a price (the exercise price) determined at the time the option is acquired. The important parameters are equilibrium price, volatility, and convenience yield, each of which can be projected on the basis of market data close at hand. Then the values canmore » be combined with the production profile of an oil field to mathematically estimate present value. The valuation method is described.« less
Publication Year: 1994
Publication Date: 1994-11-14
Language: en
Type: article
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Cited By Count: 1
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