Valuation Review

May 10, 2013

Oil & Gas Company Valuation

Primary Valuation Methodology

Secondary Valuation Methodology

Discounted Cash Flows: Net Asset Value

(applicable for all assets)

Price / Cash Flow Multiple

Enterprise Value / Resource Multiple

(most applicable for pre-production assets)

Price / Earnings Multiple

Enterprise Value / EBITDA Multiple

Enterprise Value / Production Multiple

Discountedcash
cashflow
flowanalysis
analysisused
usedfor
forall
alloil
oiland
sands
Discounted
gasvaluation
valuationprojects
projects

Primary Valuation Methodologies

Most net asset values (NAVs) are calculated by taking the present value (using an appropriate discount
rate) of after-tax cash flows and adjusting balance sheet items such as other assets and hedges, and
deducting reported net debt
Financial forecast developed based on existing reserves plus a reasonable expectation of reserve additions

Discounted
Cash
Flows
(NAV)

Discount rates of 7% to 10% typically employed depending on operational, development and geopolitical risk
A risk factor (0-100%) can be applied to the net present value to reflect the projects chance of success using
parameters such as the geological and geophysical interpretation

NAV also includes other assets and liabilities

Other assets can include cash and early-stage development assets (which cannot be valued on a DCF basis)
Liabilities can include debt, environmental obligations and other off balance sheet liabilities

NAV approach is the preferred methodology to value long-term projects

Market-observed NAV trading multiple reflects operational and financial risks from an investors perspective

Attempts to measure the value of barrels still in the ground

Although ubiquitous, EV / Resource multiple does not account for key considerations such as timing of
production, cash costs, capex, etc. which are all essential value drivers
Enterprise Value /
Resources

Considerable judgment must be applied

This metric is often used to value early-stage exploration assets / companies and/or as a crude value
benchmark in preliminary analyses
Primary metric used to benchmark pre-production oil sands and shale play transactions where resources estimates are
available

Secondary Valuation Methodologies

Price / Cash Flow multiple is more important for established, producing companies
However, Price / Cash Flow focuses on near-term performance only

Price / Cash
Flow

Trading multiple to Cash Flow reflects a number of cash flow characteristics

Sustainability, growth, risk, capital efficiency, etc.

This methodology does not explicitly account for the value of development assets as they do not provide near-term
cash flow
NAV methodology explicitly accounts for the value of these assets

EV / EBITDA is similar to Price / Cash Flow but is capital structure neutral and does not reflect the differing tax
status of companies
Enterprise
Value / EBITDA

Important metric for companies that have large cash or debt balances
Must use caution when comparing companies across differing tax jurisdictions

Like Price / Cash Flow, this methodology does not explicitly account for the value of development assets as they do
not provide near-term EBITDA

Price / Earnings

Price / Earning multiple is more important for large, diversified companies that are valued as a whole (as opposed
to asset-by-asset)
Similar to Price / Cash Flow but generally viewed as inferior from a valuation perspective because it reflects
accounting impacts rather than cash flow impacts
Includes DD&A and other non-cash items which do not reflect underlying cash flow generation ability of assets

Like Price / Cash Flow, this methodology does not explicitly account for the value of development assets as they do
not provide near-term Earnings
EV / Production multiple is more important for established, producing companies with reasonably long-lived assets
Enterprise
Value /
Production

Benchmarks how expensive the company is with respect to current production

Must use caution when comparing companies with different future production profiles and per-barrel profitability

Like Price / Cash Flow, this methodology does not explicitly account for the value of development assets as they do
not provide near-term Earnings

Other Valuation Considerations

Commodity Price
and Exchange Rate
Assumptions
Stage of
Development
Reserve / Resource
Quality
Recovery
Technology

The forward looking commodity price and exchange rate assumptions employed by a particular acquirer are
important drivers in establishing value
Trading multiples reflect the inherent risk associated with exploration, permitting, development, and the
transition to full-scale production
Companies with higher-quality reserves / resources are more likely to trade at premium multiples due to their
ability to produce at lower cash costs and to survive throughout the commodity price cycle
Reservoir quality drives capex and opex and therefore project economics

Matching the right extraction tool with the right reservoir

Certain combinations are more economic than others

Growth /
Upside
Potential

Companies with strong growth profiles are often awarded premium multiples
Exploration potential (above existing reserves and resources) attracts premium valuations
Scalable assets are also afforded higher multiples

Financing
Risk

A company exposed to significant financing risk (e.g., for development capex) will typically trade at a discount
to peers that are fully-financed or more likely to receive funding

Management
Experience /
Expertise

Companies with proven management / executive teams attract higher valuations on the basis of past track
records
Credible operating teams attract significant value in the currently competitive market for talent

Oil Sands SAGD Example

z

In the following pages we undertake a simplified example valuing of a pure-play oil sands company
operates in Canadian oil sands
single asset company
SAGD project in the Athabasca fairway representing generic project parameters
average annual production and cash costs as compared to current views of costs

In a bidding scenario, the purpose of completing the valuation analysis as contemplated in these slides is to establish a market value
bid price
this does not reflect acquirers views on several factors which may affect the acquirers ability to pay including:

commodity prices and other forecasts

synergies (e.g., operating, tax, economies of scale, etc.)
upside

Oil Sands Asset Market Value Over Time

Typical Life Cycle of an Oil Sands Company

Resource
Estimate

Engineering

Regulatory
Approval

Development /
Construction

Ramp Up

Production

Value

Exploration

Key Value Drivers

Time
z

Drilling success /
excitement
Prospectivity /
scale of land
package

Resource scale &

quality
Degree of
delineation
Reservoir properties
and mapping

z
z
z
z
z
z

Environmental studies
Regulatory application
Build out of team
Facilities design
Project economics
Ability to book reserves

z
z
z

Execution within budgets & timelines

Continued build out of team
Expansion and optimization plans /
studies
Resource expansion / upgrades

Performance vs.
expectations
Efficient / effective
logistics

Macro Factors (Commodity Price, FX Rates, Inflation, Taxes/Royalties)

Early stage excitement is followed by a recognition of development realities;

successful progression to production provides value step change
6

Operational
performance
Next leg of growth

Oil Sands Project Illustrative Economics

(30,000 bbl/d SAGD) (1)
Production

Cash Flow After-Tax

Annual Cash Flow and Capex (C$ mm)

30,000
25,000
20,000
15,000
10,000
5,000
0
2013

2016

2019

2022

2025

2028

2031

2034

2037

$600

$6,000

$300

$3,000

$0

$0

($3,000)

($300)

($600)

AT IRR

($900)
2013

2040

2016

2019

2022

2025

AT NPV10

(C$ mm)

$869

AT NPV10

(C$/bbl)

$2.90

2028

2031

2034

($6,000)

19%

(%)

2037

Cumulative Free Cash Flow (C$ mm)

Bitumen Production (bbl/d)

35,000

($9,000)

2040

1. Sample 30,000 bbl/d SAGD project with 300 mmbbl of recoverable resource in the Athabasca region and a 3.0x SOR. GLJ January 2013 Price deck, $40,000/bbl/d initial capital intensity and $9/bbl non-energy opex (2%/year inflation).

Cumulative Operating Netback

(C$/bbl)

Project Netbacks (C$/bbl)

NPV Sensitivity (100%)

$100.00

Assumption

$15.79 $2.04

$80.00

After-Tax NPV Sensitivity (C$ mm)

$1.80

$89.65
$70.02

After-Tax NPV: C$869 mm

$10.08

$11.70

$60.00
$40.00

Sensitivity

Discount Rate

+/- 2.00%

WTI

+/- 10.00%

Exchange Rate

+/- 5.00%

Light-Heavy Differential

+/- 10.00%

Initial Capex

+/- 10.00%

Phase 1 Delay

- 2 years

Non-Energy Operating Costs

+/- 10.00%

Energy Operating Costs

+/- 10.00%

$14.55
$58.32

$20.00

$33.69

$0.00

Note: Cash flow and netbacks on real basis; netbacks over the life of the project
2. Bitumen value at site is calculated as bitumen blend value less cost of condensate at site.

$566

$1,283

$611

$1,120
$748

$1,002

$753
$792
$742
$822
$840

$985
$946
$869
$916
$898

Oil Sands Company Trading Metrics

Primary Valuation Methodology
Price / Street NAV (x)
1.0x

Integrated

EV / Resources (C$/bbl)
$3.50

Pure Play

0.9x

Integrated

0.9x

$3.00

0.8x

$2.89

0.8x

0.8x

Pure Play

$3.29

0.9x

$2.60

0.8x

$2.37

0.7x

$2.50

0.7x

$2.17

0.6x

$2.08

0.6x

$2.00
0.5x

0.5x

$1.50
$1.27

0.4x
0.3x

0.3x

0.3x

$1.01

$1.00

$0.83

0.2x
$0.50

0.1x

$0.20

$0.00

0.0x
D

C
F
Company

A
F
Company

Producing projects command a P / NAV premium over projects under development

Oil Sands Company Trading Metrics

Secondary Valuation Methodology
Price / Cash Flow (x)
12.0x

Integrated

8.0x

18.0x

Pure Play
9.8x

10.0x

Price / Earnings (x)

5.8x
4.8x

Pure Play

9.9x

10.7x

14.0x

12.0x

7.3x

6.0x

14.8x

15.0x

9.5x

7.5x
6.1x

Integrated
14.9x

9.8x

9.0x
4.7x

4.0x

6.0x
nmf

nmf

2.0x

3.0x

0.0x

0.0x
B

C
I
Company

EV / EBITDA (x)
30.0x

Integrated

B
F
Company

EV / Production (C$000s/boe/d)
$420

Pure Play

Integrated

Pure Play
$362

25.8x

25.0x

$350

20.0x

$280
$236

$210

15.0x
10.0x

9.2x
7.0x
5.8x

5.0x

$140
6.6x

5.4x

5.4x

6.5x

$167
$133
$98

nmf

4.4x

$96

$108

$94

$75

$63

$70
$0

0.0x
B

A
G
Company

C
H
Company

Oil Sands Sector Trading Performance

Oil Sands P / Street NAV Multiples (2011 to Date) (1)

Relative Trading Performance (2011 to Date)

150.0

Senior Oil Sands Index

S&P 500

TSX Oil & Gas Index

WTI
Senior Oil Sands

140.0

Long Run Average (Since 2003)

1.20x

128.4
130.0

1.10x

120.0

1.00x

Long Run
Average = 0.93x

0.90x

110.0

104.6
0.80x

100.0
0.70x

Current =
0.76x

90.0
0.60x

85.7

80.0

US$120/bbl

0.50x

70.0

Spot
WTI

0.40x

68.4

60.0

US$60/bbl

0.30x
0.20x
Jan-11 Apr-11

50.0
Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13

Jul-11

Oct-11 Jan-12 Apr-12

Jul-12

Source: FactSet
Note: Senior Oil Sands Index is an equally weighted index, including COS, CVE, CNQ, IMO, MEG and SU; Senior Oil Sands Index within the relative trading performance chart excludes COS and MEG
1. Based on BMO Capital Markets Equity Research estimates.

P / NAV multiples are below the long-term average;

Strong correlation between oil price and share price movements
10

Oct-12 Jan-13 Apr-13

Oil Sands Transactions Metrics

In Situ Transactions > $300 mm
$2.50
$3.97

Producing Average:
$1.72/bbl
$2.00
$1.71

Pre-Production Average:
$0.98/bbl
$1.50
$1.24
$1.08

$1.02

$1.07
$1.00

$0.91

$1.00
$0.81

$0.81

$0.81

$0.79

$0.46

$0.50

-Shell / BlackRock ConocoPhillips /

EnCana
Transaction Date
Transaction Size (C$ m m)
WTI (US$/bbl)

Nexen / OPTI

CNOOC / OPTI KNOC / Newmont

Statoil / NA Oil
Sands

BP / Husky

PetroChina /
AOSC(1)

CIC / Penn West - CNRL / Enerplus - PTTEP / Statoil Devon / BP - Kirby

BP / Value
Seal
Kirby*
Kai Kos Dehseh
Assets
Creation - TDG
40%(2)*
Interest*

May-06

Oct-06

Dec-08

Jul-11

Jul-06

Apr-07

Dec-07

Aug-09

Mar-10

Mar-10

May-10

Sep-10

Nov-10

$2,400

$3,692

$735

$1,973

$310

$2,208

$1,304

$3,950

$668

$919

$817

$405

$2,124

$71

$60

$40

$98

$75

$66

$87

$70

$82

$80

$74

$74

$82

Note: Recoverable Resource defined as 2P Reserves + best estimate of contingent resource where disclosure available; * denotes transactions that include only 2P + contingent resource
1. $1.9 bn initial deal at $0.63/bbl; transaction value and multiple include the right of the option to acquire remaining 40% interest in MacKay and Dover for C$2 bn; does not include rate of attractive PetroChina financing terms.
2. Transaction value adjusted for BMO estimate of C$200 mm in CAPEX attributable to the acquired share in pilot project.

Variance in transaction values depends on stage of development of the assets and other asset-specific factors;
$/bbl metrics often used by buyers to assess market value for pre-production assets
11

Oil Sands Company Illustrative Value Range

Pre-Production Pure Play ($/share)
Fundamental
Analysis
DCF

Producing Pure Play ($/share)

Fundamental
Analysis

En Bloc Perspectives
P / NAV + 30%
Premium

EV / bbl
EV / bbl
Trading +
Precedent
30% Premium Transactions

DCF

En Bloc Perspectives
P / NAV + 40%
Premium

EV / bbl
EV / bbl
Trading +
Precedent
40% Premium Transactions

$13.55

$13.83

$12.81
$10.08
$10.75

$9.69
$6.07

$6.10

$4.12

$3.40

$9.03

$7.60

$8.25

$6.30

Selected
Metrics

Discount Rate: 0.5x - 0.8x +

10% - 8%
30% premium

$0.80/bbl $1.30/bbl +
30% premium

$5.33

Selected
Metrics

$0.80/bbl $1.70/bbl

Discount Rate: 0.6x - 0.9x +

10% - 8%
40% premium

$1.50/bbl $2.00/bbl +
40% premium

Triangulation of valuation using multiple methodologies drives better decision making

12

$5.00

$2.00/bbl $3.00/bbl

Disclaimer
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information that may be required to evaluate, and do not constitute a recommendation with respect to, any transaction or matter. Any
recipient of these materials should conduct its own independent analysis of the matters referred to herein.
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