In this month, we take a look at market multiples as compared to the size of each company for a group of E&P companies (but excluding the majors like Exxon Mobil, Chevron, and others).  As shown in the table below, this group of companies had enterprise values in the range of $3.4 billion to $55.3 billion. 

On the graphic below, the upward trend of higher multiples for larger companies is evident.  What this demonstrates is that hypothetically, a larger company could buy the assets of a smaller E&P company and immediately enjoy a market valuation over the purchase price paid.  As an extreme example, purchasing an asset that produced $1,000 from Southwestern Energy Co (ticker SWN) could result in a valuation for Apache or EOG of almost twice that much.

Of course, other factors impact these decisions, but the current disparity in market valuation multiples would be expected to drive future industry consolidation.

WTI Crude Oil Outlook

The price distribution below shows the crude oil spot price on June 17, 2019 and predicted crude oil prices based on option and futures markets. The blue lines are within one standard deviation (σ) of the mean and the red lines are within two standard deviations.

Based on the June 17, 2019 prices, the markets indicate that in mid-July there is a 68% chance that oil prices will be between $46.00 and $59.00 per barrel.  Likewise, there is about a 95% chance that prices will be between $37.50 and $68.50.  In mid-November 2019, the +/- 1σ price range is $41.50 to $66.00 per barrel, and the 2σ range is $29.50 to $88.50 per barrel.   In other words, there is a 95% probability that the expected price of oil will be between approximately $29 and $89 per barrel and a 97.5% probability it will not be above $89 per barrel.

Natural Gas Outlook

We can do the same thing for natural gas, which is currently trading at $2.40 per MMBTU on the Henry Hub.  Although more affected by seasonal factors than crude oil, in mid-July 2019, the +/- 1σ price range is $2.10 to $2.60 per barrel (68% probability) and the +/- 2σ range is $1.75 to $3.00 per MMBTU (95% probability).

Key Takeaways

Remember, these option analyses deal in expected probabilities, not certainty—but that doesn’t make it any less useful.  If someone asks you longingly if oil will be at $100 again soon, you now can respond with “there is about a 97.5% probability that oil prices aren’t expected to get above $89 by mid-November 2019, so I wouldn’t count on it.”  



Tags: Oil & Gas Price Outlook June 2019, Gas Price Outlook June 2019, Oil Price Outlook June 2019

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