Oil & Gas Specifics (E&P)

SYRG seemed a good choice to analyse, but the thing is Oil & Gas Companies require very specific knowledge about the industry and also different approaches to the valuation of the stock.

To understand a bit more about the Exploration and Production business I read the following article: "Overview of the oil and gas exploration and production process". 

Then, to learn a few things about the approach and relevant information for valuation: "Oil and Gas Company Valuations" (2009) - Business Valuation Review.

Main Ideas

With these two articles I think you get an overview about the industry specifics and the main ideas are simple:

1. E&P Companies rely on a depleting asset base that must be continually replaced through either drilling activities or acquisition.

2. Investments in E&P companies are essentially commodity plays. Their market prices are highly correlated to the price expectations of the commodities they sell.

3. If prices are determined externally, you must focus on production volumes (typically expressed as barrels of oil equivalent (boe) or thousands of cubic feet equivalent (mcfe) for gas).

4. Production volumes will be related to the company's reserves, but it's important to understand the different reserve categories: Proved Developed Producing (PDP); Proved Developed Non-producing (PDNP); Proved undeveloped (PUD); Nonproved.

5. There are two methods of accounting for these firms: Successful Efforts versus Full Cost. Basically, the difference is that the first method capitalizes only those exploration costs associated with successfully locating new reserves. So it is usual to use EBITDAX (Earnings Before Income Tax, Depreciation, Depletion, Amortization, and Exploration Costs) analytic ratios to compare firms.

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