What is the best qualitative measure for a buyer or seller of producing oil and gas properties to quickly estimate asset value in today's market?

Statistical analysis by Energy Spectrum Advisors Inc. (ESA) shows that a potential buyer or seller can use the property's "proved R/P" (total proved reserves divided by annualized current net daily production) to determine the appropriate rate multiple and, thereby, the approximate sale price to expect in today's market. One does not need to know other variables, such as trailing-12-month cash flow, total proved PV-10 or even the location of the properties. Armed with ESA's proved R/P valuation formula, the only required variables are the current net daily rate of production and risk-adjusted (i.e. buyer-perceived) total proved reserves to quickly estimate the fair market value of a producing oil and gas property.

Using publicly available data, ESA has quantified this axiom by identifying a statistical correlation between proved R/P and purchase price per unit of net daily production-either as dollar per thousand cubic foot equivalent (Mcfe) or barrel of oil equivalent (BOE) per day.

There were 76 upstream asset sales between $10 million and $2 billion announced in the 12 months through September 2007.

ESA divided these transactions into two groups based on the primary phase, which resulted in 50 majority-gas transactions and 26 majority-oil transactions. For each transaction, ESA then calculated the proved R/P. Within the phase group, ESA then plotted each transaction, with proved R/P on the x-axis (independent variable) and dollar per net daily unit of production on the y-axis (dependent variable).

Using regression analysis tools in Microsoft Excel, ESA then calculated a trend-line formula and the corresponding coefficient of determination (denoted R2), a measure of statistical correlation that ranges from zero (no fit) to one (a perfect fit). Both the trend-line formula and the R2 are shown in the bottom right corner of each of the two graphs.

This quarter's gas R2 of 0.69 is a rather high coefficient of determination and indicates a good statistical correlation between proved R/P and dollar paid per net Mcfe of daily production. Of the 11 plotted gas transactions during third-quarter 2007 (shown in red), eight were valued above the trend-line, or at a premium relative to historical transactions. Hence, the market saw the median dollar paid per net daily Mcfe rise to $12,525, a drastic 20% increase from the previous sample set.

The oil R2 of 0.36 indicates a substandard fit and is slightly less than the oil R2 of 0.46 for the prior-quarter sample set. The four plotted oil transactions during third-quarter 2007, seen in red, have a significantly tighter correlation than the average, as can be seen by their close proximity to the trend line.

The market recognized a nominal shift in deal metrics for majority-oil transactions. The median dollars paid per net daily BOE for majority-oil transactions decreased to $73,711, a moderate reduction of less than 1% from the previous sample set.