The best way to try and value troubled oil companies like Afren (LSE: AFR) and Gulf Keystone Petroleum (LSE: GKP) is to try and place a value on their assets.
In particular, a sum-of-the-parts analysis provides a range of values for a company’s assets, debt and other interests, giving a definitive net present value figure.
This figure can then be used by investors to assess whether or not a company is cheap, or expensive. Moreover, the net present value figure a good idea of how much a company could be worth if it is either taken over, or goes out of business.
Sum of the parts
According to analysts, Gulf Keystone’s Shaikan field alone, in its current state, after deducting debt is worth in the region of 20p to 30p per share. This valuation assumes that the price of oil returns to $90 per barrel by 2016.
Additionally, Gulf Keystone’s other assets, including the full development of the Shaikan field, could be worth up to 79p per share, or 132p per share in a best case scenario. So, in total, analysts believe that Gulf Keystone’s net asset value, including the value of the Shaikan field, as well as other developments and intangible assets stands at 119p in the base case, or 190p per share in the best case.
However, these figures are slightly dated and don’t reflect the level of cash burn Gulf Keystone has reported over the past few months. A back-of-the-envelope calculation suggests that this cash burn could have reduced Gulf Keystone’s net asset value by 10p to 20p per share.
Still, even after factoring in cash burn, in the base case Gulf Keystone’s net asset value stands at just under 100p per share, a full 100% above current levels.
Dilution
Unfortunately, Afren’s net asset value per share is not that easy to calculate.
Afren’s shareholders are facing significant dilution as the company restructures its debt to try and survive. City analysts estimate that in the worst case scenario, Afren’s existing shareholders will only receive 5% of a potentially restructured company. This figure is based on the amount of cash that will need to be raised following a restructuring.
As a result, any per share calculation will have to be adjusted to reflect this figure.
Nevertheless, Afren’s assets do have some value left in them. After deducting debt, analysts estimate that Afren’s oil producing assets, and reserves are worth in the region of $600m with oil at $60/bbl. If the price of oil returns to $80/bbl, analysts estimate that Afren’s assets will be worth a grand total of $1.4bn.
These figures look impressive but they do not reflect the dilution from restructuring. After adjusting for dilution, the net asset value for Afren’s current shareholders is between $30m and $70m, or in sterling terms £19.7m to £46m. With 1.1bn shares in issue, Afren’s adjusted net asset value per share is in the region of 1.8p and 4.2p.