Key insights
- A CFA charterholder argues that traditional valuation methods like DCF and P/E multiples are flawed for E&P companies due to asset depletion. The article advocates for a Net Asset Value (NAV) approach, adjusted for company-specific factors. While the examples are Canadian companies, the principles discussed could influence investor sentiment towards US E&P firms, particularly if the NAV approach gains traction.
Long post but worth it if you're trying to understand how to value E&P stocks.
I'm a CFA charterholder with 15+ years in institutional energy research (RS Energy Group/Enverus, Paradigm Capital). I just published a free piece walking through the valuation framework I actually use (not the textbook version).
The short version: most new upstream investors apply DCF terminal values or P/E multiples to E&P companies and get garbage outputs. The reason is structural: an oil and gas producer's asset base depletes whether you drill or not. Every barrel produced is a barrel that no longer exists in the ground. That one fact breaks most standard valuation frameworks in ways that matter for your returns.
The piece covers the mental model, why P/E and EV/EBITDA fail for this sector, what NAV actually means, and how to read a company-disclosed NAV without taking it at face value. I use Headwater Exploration (HWX.TO) and Logan Energy (LGN.V) as real examples throughout.
No paywall, no email gate. Part 2 covers the financial statements.
Link: https://rationalmarketspod.substack.com/p/how-i-actually-value-an-e-and-p-part
Happy to answer questions in the comments.