For a major oil and gas company to meet its production growth targets, it takes a lot of capital and a little luck. If it can’t meet those production goals through exploration, the company may go out and buy a company or two. For example, when ExxonMobil wanted to get in on the shale plays in Alberta last year, it bought Celtic Exploration for $2.6 billion. The deal bolstered the company’s holdings in the area by about 139 million barrels of oil equivalent of proved and probable reserves, a much-needed boost for a company that has struggled to meet its production goals as of late.

Like investors, major oil companies are always looking to get value out of their purchases. Today, let’s look at a way to value a company for an acquisition and see if there are any companies that could be on he block for potential buyout.

Getting bang for your buck
While there are certainly some very complicated methods for evaluating an energy company, a quick and dirty method is to see how the enterprise value of the company (all equity and debt minus cash) compares to the total proved reserves on the company’s books. For example, Berry Petroleum , which was just acquired by LINN Energy for a final price tag of $4.3 billion, had just over 274 million barrels of oil equivalent in proved reserves. This means that the company paid about $15.33 per barrel of oil equivalent for the company’s reserves. Based on an S&P Capital IQ screen of exploration and production companies with a total enterprise value between $4 billion and $45 billion, an average company in this space would have an enterprise value per barrel of oil equivalent of $21.53. So based on this metric, it appears that LINN didn’t overpay for this asset.

There is also one thing to consider when using a metric like this. Companies evaluate barrel of oil equivalents based on a BTU equivalency, but gas and oil spot prices trade at very different rates than this basis. For example, a gas-heavy company like Ultra Petroleum would have a value of about $9.69 per barrel of oil equivalent. This is misleading because over 95% of its reserves are in gas. Keep this in mind if you do this kind of calculation on your own.

Using this method for evaluating companies, let’s take a look at a couple companies that could be selling at a deep discount.

Devon Energy
Some people might see Devon’s $11 billion in debt as a little too much bulk for a $28 billion. But with an enterprise value of $8.97 per barrel of oil equivalent, Devon could be a great deal for someone who wants a well-diversified portfolio. Overall, Devon itself is pretty well-diversified, with about 47% of proven reserves in oil and natural gas liquids. One of the possible reasons for the lower price tag may be that the company has 68% of all its proven …read more
Source: FULL ARTICLE at DailyFinance