Industry professionals have published various texts addressing the valuation and appraisal of O&G properties. Traditional appraisal/valuation methods assume that public market trading statistics are applicable to non-public operating enterprises. This assumption is statistically and economically invalid. An investment in an O&G property is not synonymous to an investment in an operating enterprise, whether public or private.

There are three traditional business approaches discussed in SSVS
a.Income Approach
b.Asset Approach
c.Market Approach

There are three approaches discussed in USPAP
a.Sales comparison Approach to value
b.Cost approach to value
c.Income approach to value

The primary valuation approach for oil and gas is the income approach and the preferred methodology is the discounted cash flow (DCF) model. The DCF model converts prospective production volumes to market unit prices, bbls (barrels) and Mcf (thousand cubic feet) and the associated costs through the life cycle of the well.

Yield capitalization (DCF)
A projection of economic benefit is estimated for a discrete future projection period. Reduced to a present value by multiplying each period’s projected benefit by the yield capitalization rate. A terminal value of the enterprise is calculated as of the end of the finite projection period. The rate should include consideration of risk/probabilities inherent to economic projections and forecasts. The yield capitalization rate must be consistent with the selected measure of economic income.