Value the company, not the asset
In preparation for a new oil cycle, we believe investors should re-examine the critical components of the valuation of oil companies to ensure lessons are learnt from the last cycle. We think investors should look at fundamental company valuations (rather than asset values in isolation) to price investment opportunities. By this, we mean take into account all the risks and costs that companies run into when progressing assets that may negatively affect the asset value. We primarily look at examining the costs to equity investors of holding E&P stocks in the last cycle and the associated equity and asset dilutions required to fund operations; we conclude that this effect may be larger than many currently assume.
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