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Subject:  Re: Oil = Tulips? Date:  10/7/2004  8:48 PM
Author:  DCFNewbie Number:  33750 of 46922


I would point out, though, that while P/E ratios may be valid for the oil services sector and downstream operators, they are not the usual valuation metric for producers ( or extraction companies, as you refer to them ).

Although I largely agree with your comments, I believe that being too conservative regarding the parallelism between reserves and company value is what creates a series of misvaluations in oil equities. I see a few companies that, although they are fairly valued if you only consider their reserves, important details like past record in acquiring new reserves and daily output often go unnoticed.

Right now I'm using the following method to evaluate oil companies:

- Current reserves
- Current daily output
- Average output growth (5yr)
- Average reserves growth (5yr)
- Average operating margins (5yr)

- Obtain maximum reserve value if reserves grow at a rate equivalent to the past 5yrs
- Calculate earnings based on average oil price for the past 5 years ,yearly output (maintaining the same output growth equal to the past 5yr average) and average operating margins.
- Discount it through time using an approximation of future beta (CAPM)
- Cap that calculation at my estimate of total future reserves value discounted at the same rate as used in the previous item

That is roughly what I do when trying to value an oil company. Obviously that will only give me a gross valuation. There are a lot of small details that might severely offset those numbers. I'm thinking of making an analysis of PKZ (which I own shares of) on the FC Projects board in the near future.


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