Upstream Valuation Survey 2015
Published Results – January 2016
Strategy with substance
www.woodmac.com
Wood Mackenzie launched its inaugural Valuation Survey during H2 2015

As oil prices continued to tumble during 2015 and interest in M&A activity increased,
Wood Mackenzie launched its inaugural Valuation Survey

The aim of the survey was to improve the understanding of the metrics being employed in
upstream M&A activity and potential implications for the M&A market over the next few
years

All responses were collected on an anonymised basis with the cut-off for responses being
November 2015

25 responses were received representing participants from across the upstream M&A
sector*: Independents (9), Investment Banks (5), National Oil Companies (4), Integrateds
(3), Majors (1) and Others** (3)

This short report provides feedback to participants of the processed responses we received
© Wood Mackenzie
*note: only 1 client per company contacted to maintain unique company responses
** “Others” may include amongst others utilities, independent consultants & conglomerates
2
DISCOUNT RATES
A discount rate of 10% nominal is relatively standard across private
industry players
What base discount rate do you use in valuing an M&A opportunity?
Independent
Bank
NOC
Integrated
Major
Is this discount rate in real or nominal terms?
Other
14
14
# of Responses
13
12
11
10
12
10
8
6
4
2
# of Responses
9
0
Nominal
7 respondents did not answer
8
7
Real
How is your base discount rate determined?
6
14
# of Responses
5
4
3
2
1
12
10
8
6
4
2
0
0
<8%
8-9.5%
9.5-10.5% 10.5-12%
7 respondents did not answer
© Wood Mackenzie
12-15%
>15%
WACC is used
WACC
adjusted rate
Standard
fixed rate
Other
7 respondents did not answer
3
DISCOUNT RATES
Respondents were split on the use of varying discount rates
Do you use a constant discount rate (or series of rates) for all
upstream M&A opportunities?
Independent
Bank
NOC
Integrated
Major
If different discount rates are used, are they applied to any of the
following:
Other
Includes multiple responses from same “No” clients
14
5
13
12
4
11
10
“No” Responses
# of Responses
9
8
7
6
5
3
2
4
3
1
2
1
0
0
Yes
8 respondents did not answer
© Wood Mackenzie
No
Other Tax
balances
and losses
Asset in different
stages of their
life cycle
Opportunities
with different
risk profiles
Countries
with different
risk profiles
4
OIL PRICE ASSUMPTIONS
Relatively wide spread of long term oil price assumptions amongst
respondents
What is your current base case long term oil price assumption?
Independent
Bank
NOC
Integrated
Major
Is this oil price assumption real or nominal?
Other
14
13
12
12
11
11
10
10
9
9
# of Responses
# of Responses
13
14
The survey was launched in September with
Brent averaging ~$50/bbl
8
7
6
8
7
6
5
5
4
4
3
3
2
2
1
1
0
0
$50-$60/bbl
>$60/bbl
- $70/bbl
8 respondents did not answer
© Wood Mackenzie
>$70/bbl
- $80/bbl
>$80/bbl
- $90/bbl
Currently
reviewing due
to uncertain
environment
A mixture of real
and nominal terms
Nominal
Real
8 respondents did not answer
5
OIL PRICE ASSUMPTIONS
Most companies have reduced their long term oil price assumptions
significantly in light of the recent fall in oil prices
In $/bbl how much has your long term price assumption changed since
mid-2014?
Independent
Bank
NOC
Integrated
Major
Other
14
12
# of Responses
14
13
Is a short term price used that is calculated separately from the longer
term assumption?
The survey was launched in September with
Brent averaging ~$50/bbl
12
11
8
6
4
2
10
0
9
# of Responses
10
No
Yes - 2 years
Yes - 3 years
8
8 respondents did not answer
7
What drives the price assumption forecast?
6
14
# of Responses
5
4
3
2
1
12
10
8
6
4
2
0
0
Unchanged
Decreased by
>$5-10/bbl
8 respondents did not answer
© Wood Mackenzie
Decreased by
>$10-20/bbl
Decreased
by >$20/bbl
External Price Forecast
Forward Curve
Internal Price Forecast
8 respondents did not answer
6
LONG TERM ASSETS
No companies reported varying discount rates to account for longer life
assets
For upstream assets that will generate cash flow over a prolonged period, how are the cash flows treated in arriving at the discounted net cash
flows?
Independent
Bank
NOC
Integrated
Major
Other
15
14
13
12
11
# of Responses
10
9
8
7
6
5
4
3
2
1
0
Standard approach applied to both
long term and short term assets
Subjective adjustment made (by
management?) in valuing long term assets
Different mechanistic approach to valuing long
term assets (e.g. lower discount rate used)
9 respondents did not answer
© Wood Mackenzie
7
LONG TERM ASSETS
IRR is the primary metric considered when undertaking valuations with
discounted P/I and value/bbl metrics supplementing the analysis
What primary financial metric is considered when undertaking an
asset or corporate transaction?
Independent
Bank
NOC
Integrated
Major
Secondary financial metrics are considered when undertaking an asset
or a corporate transaction?
Other
Includes multiple responses from same clients
14
7
13
6
12
11
# of Responses
5
10
8
7
4
3
2
6
1
5
4
0
Cost/bbl
Discounted P/I
9 respondents did not answer
© Wood Mackenzie
IRR
Value/bbl of
reserves
ROCE
Payback
Value/bbl of reserves
1
Maximum exposure
Cost/bbl
2
IRR
0
3
Discounted P/I
# of Responses
9
9 respondents did not answer
8
LONG TERM ASSETS
Relatively wide spread of long term oil price assumptions amongst
respondents
“Yes” Answers
Is there an 'acid test' of hurdles that must be achieved?
Independent
Bank
NOC
Integrated
Major
Other

» “capex/boe, opex/boe - in top quartile across
company universe sufficient cashflow over
the next 5-10 years low payback period
affordability”
14
13
Independent 1
The survey was launched in September with
Brent averaging ~$50/bbl
12
11
10

# of Responses
9
Independent 2
» “IRR threshold at $50 per barrel”
8
7

6
Major
» “discounted profitability, internal rate of
return”
5
4
3

2
Other
» “PI>0.3”
1
0
No
Yes
9 respondents did not answer
© Wood Mackenzie
9
FUTURE COST MOVEMENTS
Most companies inflate costs – either in line with oil price inflation or via
bespoke inflation factors
What is the basis for future cost increases/decreases?
Independent
Bank
NOC
Integrated
Major
Other
14
13
12
11
10
# of Responses
9
8
7
6
5
4
3
2
1
0
Costs are assumed to be flat in nominal terms
Costs are assumed to move in
line with the inflation in oil prices
Specific metrics are developed to
determine how costs will move in the future
9 respondents did not answer
© Wood Mackenzie
10
APPROACH TO VALUATIONS
Deterministic approach to valuations with a range of sensitivities is most
common
What is your current base case long term oil price assumption?
Independent
Bank
NOC
Integrated
Major
What is the influence of senior management on asset value?*
*Abridged – see footer for full question
Other
14
8
13
7
12
6
# of Responses
11
# of Responses
10
9
8
7
5
4
3
6
2
5
1
4
0
3
A little – sometimes
senior managers
will apply their own
thinking to make
value adjustments
2
1
0
Deterministic, but with
a range of sensitivities
10 respondents did not answer
© Wood Mackenzie
Deterministic
& Probabilistic
Always – the
quantitative work is
just one input to
senior management,
who then take a view
of the 'real value(s)'
Significantly – senior
managers will often
make quite significant
adjustments to the
raw numbers
Part deterministic/part
probabilistic
10 respondents did not answer
* ”To what extent is your company's perception of an asset's value affected by judgements and
opinions of senior management which are applied separately to the quantitative valuation work?”
11
DEAL ACTIVITY
Respondents believe 2016 will be the year of renewed deals in the upstream
sector with consensus in buyer and sellers valuations required to facilitate
deals
When do you expect deal activity to pick up from the current low
What do you consider to be the most significant impediment to deal
levels?
Independent
Bank
NOC
activity returning to more normal levels?
Integrated
Major
Other
14
14
13
13
12
12
11
11
10
# of Responses
10
# of Responses
9
8
7
6
9
8
7
6
5
5
4
4
3
3
2
2
1
1
0
Lack of funding
available for buyers
0
During 2015
10 respondents did not answer
© Wood Mackenzie
2016
2017 or later
Misalignment of
valuation
expectations between
buyer and seller
Reluctance of
companies to sell
10 respondents did not answer
12
DEAL ACTIVITY
Respondents believe a pick up in deal activity with be driven by onshore US
deals in the corporate, uncons oil and conventional space
What type of deals do you expect to be at the forefront of any increase
in activity levels?
Other
Major
Integrated
NOC
Bank
What geography do you expect to be at the forefront of any increased
activity levels?
Independent
# of Responses
0
1
2
Corporate
Uncons Gas
3
4
5
# of Responses
6
7
8
0
1
2
3
4
5
6
7
8
Asia Pacific
Latin America
MENA
Uncons Oil
Oil Sands/Heavy Oil
North America
Offshore
North America
Onshore
LNG
North Sea
Deepwater
Russia/Caspian
Other Conventional
No thematic distinction
10 respondents did not answer
© Wood Mackenzie
Sub Sahara
No geographical
distinction
10 respondents did not answer
13
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~US$300bn of potential upstream deals identified – but market gridlocked
Key drivers: widely divergent views in mid-term price outlook and lack of cash-buyers. Evidence of
seller price expectations falling ($10/bbl decline in ILTOP), is $60 ILTOP needed to clear deal backlog?
Implied Long Term Oil Price
US$Bn
# of deals
200
800
173
700
150
135
130
600
500
100
400
300
50
200
100
0
0
2013
Deal Count (right-axis)
2014
2015 YTD
Deal Spend (left-axis)
WoodMac Implied Long-term Oil Price (US$/bbl) @10%
Upstream M&A transaction spend and deal count
140
Avg. 2013 =
$83.1/bbl
Avg. 2014 =
$84.2/bbl
Avg. 2015 =
$73.7/bbl
120
100
80
60
40
20
0
2013
2014
Deal
2015
Average
Shell/BG deal accounts for $US82Bn of deal spend in 2015
© Wood Mackenzie
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
This discussion document has been prepared by Wood Mackenzie. The document is
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Mackenzie’s prior written permission.

The information upon which this document is based comes from our own survey of
clients, experience, knowledge and databases. The opinions expressed in this report
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