On Markets & Investing

How to value a business that sells its products below the price of mineral water?

18 June 2023
I have opened two new positions recently: one in Barrick Gold and another in a small oil & gas producer. Next week I will share my thesis on the oil & gas company. In today’s post, I will try to debunk some myths about investing in oil & gas, one of the most controversial sectors at the moment. In particular, I will discuss why traditional valuation metrics do not work in the oil sector and how best to evaluate an oil company.

I. Who am I to talk about Oil
II. Oil & gas is not a great business
III. But investing is also about prices and odds
IV. When odds are high
Y. Be careful with valuation
YI. So what matters?
YII. Conclusion

I. Who am I to talk about Oil

Before I proceed, let me address one obvious question. Who on earth am I, and am I qualified to talk about such a complex sector?

Let me tell you that I have been dealing with oil since 2003. That year, as a fresh member of the Ernst & Young Valuation team, I was sent to Siberia to evaluate the gasoline stations of Russia’s second-largest oil producer, Yukos. The following year I was building my first DCF model of an independent oil company and discussed with engineers their assumptions for the hydrodynamic models of the field development.

Later, as a buy-side analyst in a London-based hedge fund, I was responsible for a position in Imperial Energy, acquired by ONGC in late 2008.

The following year, I took my oil & gas experience to the next level, joining one of the leading oil & gas research teams on the sell side. The opportunity gave me a chance to make about 30 site visits to places like North Caspian, Niger Delta, Yamal, West Siberia, Texas, Turkey, Serbia and Germany (I was part of a small group of analysts who visited Nord Stream facilities in 2018).