Pros: Only book of its kind out there to the best of my knowledge
Cons: It's an introduction, and a good one at that, but it lacks the fine details
The Bottom Line:
This is the best book to learn the basic principles behind oil companies valuation. It is not the perfect book, but it is also the only book of its kind.
icio's Full Review: David Johnston and Daniel Johnston - Intorduction ...
Who is this book for? There are three large groups of people when it comes to how they approach the subject of oil and oil companies:
- group A: I don't give a fu**; - group B: oil companies are evil, there is no more oil, etc... - group C: how does an oil company really works and how can I find out how much it is worth?
This book is definitely for group C, although let me be clear from the start, this is such a complex topic that the simple notion that a book could bring a reader from a vague idea of oil companies valuation at best to a deep knowledge of the subject is without hope from the start.
Table of contents: Chapter 1: Introduction Chapter 2: Fundamentals of Valuation Chapter 3: Accounting Sytems for Oil & Gas Chapter 4: Financial Statement Analysis Chapter 5: Valuation of Common Stock Chapter 6: Competitive Comparisons Chapter 7: Segment Valuation Chapter 8: Value of Reserve-in-the Ground Chapter 9: Corporate Restructuring Chapter 10: Legal and Tax Environment for Mergers Chapter 11: Valuation of Bonds and Preferred Stock Appendix 1 - 19 (about 100 pages)
Background required... in order to tackle this book, one must have had at least some exposure to accounting and an ability to read and understand basic facts about financial statements. Lacking this background the book would be too technical.
The good and the bad news. - The bad news is that this book falls short if you really were hoping to become an expert in the art of finding the value of oil companies. - The good news is that, despite its limitation, this is arguably the best book out there. Put it this way: it might sound that the book falls short of what one would expect to learn when he or she buys it, but that would be too harsh a judgement. You are going to acquire an appreciation for the complexity of the sector, gain some proper terminology, and you will start to understand how a valuation of an oil company should be conducted in principle. What you are not going to learn is how to do it in the details. But one needs to learn how to walk before learning how to run. There are other books out there, but they are truly superficial or go after the politics of oil more than the valuation of oil companies.
A complex subject, but you will tackle a good chunk of it. Oil companies are complex creatures, the large integrated oil companies like Exxon, BP, ConocoPhillips, etc.. even more so. First of all there is an upstream sector (exploration and production) and a downstream sector (where oil is refined and gasoline and other distillates are produced) and they are two different beasts altogether. You will start to understand about reserves (proven reserves, probable reserves, etc).. you will learn about acreage (the land or the water where an oil company has the rights but is not currently exploring and/or producing from it) and other facts. For example, if a company owns oil tankers, refineries, gas stations (and perhaps the gas stations also have grocery stores on the premises), these are all things one needs to evaluate in order to arrive at a value for say a giant the like of Exxon or BP.
Best approach: KISS! (Keep It Simple, Stupid!) In reading this book it helps if you put your mind on simple issues first. For example, do not think Exxon right away. Imagine a small company exploring for oil and that has reserves. How much would that company be worth based on those reserves alone? Then, add the pieces.. Oh.. it has also some acreage. How much would the acreage be worth on top of their reserves? For instance acreage on the Gulf of Mexico might be worth more than some acreage in Wisconsin or in the middle of a fronzen land, 2 million miles from the nearest community, etc. And then, don't forget that the company might own refineries, gas stations, .. Then little by little imagine adding the value of businesses one by one. In the end, the valuation of a monster like Exxon comes down to some sum-of-the-parts analysis (SOTP in the financial analysts' jargon).
The book is an introduction... so do not expect to find the authoritative answer to any issue or question you might have. After you are done reading this book you will not be ignorant about the subject, but you are not going to be an expert either. This book is actually great to get started, but a lot of work is left (and, unfortunately, left to the reader alone) on the way to expertise.
The book is a disappointment for ... professional financial analysts. I am one of them. I do not cover oil companies for a living, but I am fascinated by the sector. Unfortunately, the book did little to help me expand my knowledge above what I already knew. I gained a few insights here and there, but the book did not help me to make it to the rank of a true oil companies analyst.
Lots of numbers, but they might be not up-to-date anymore.. the book is not old, mind that, as it was published in 2005/6. However, the price of oil has witnessed a ride the like of which it had never seen before and therefore if you would like to understand, let's say, how much a small E&P company with reserves is worth to one of the majors, you might not get the right figures. For example let's say that in the 1990s and early 2000s, a deal was done for a price that would translate into $20/barrel of proven or proven and probable (2P) reserves, in principle if you knew that a company has 1 mln barrels of oil equivalent in 2P reserves, you might value that company as $20*1 mln = $20 mln. Of course, when oil goes to $100+ per barrel, you might expect to pay more... In that sense, the book could be a little bit out of sync with current prices. But, the idea that you learn is right.
Core Chapter .. no doubt it is chapter 7: Segment Valuation. Here you will learn the ropes. All previous chapters to some extent should have prepared you for this. The good stuff is here. Unfortunately, it is done all pretty fast and examples are not discussed at lenght in the spirit of the "Introduction" part in the title. Chapter 8 is also important and relevant. .
The book is over after chapter 8. The chapters from 9 on, discuss issues that have more to do with corporate finance, legal aspects of mergers and acquisitions, but that really are not all that interesting and I have seen this kind of topics done better in other books In reality, Chapters 9, 10, and 11 are descriptive descriptive and you can find better and more complete books to study the material from. Still not a waste of time, but definitely not the best parts of the book. One can skip them without fear of losing anything important.
But save some of the appendixes... some of them contain terminology, statistics, special facts that might actually be as interesting as some of the core topics in the book.
Most noticeable feature missing in the book: a chapter with an example of how to value a company like, say, Exxon, with all the details worked out. That way the reader could get first-hand experience on the subject and how it is done in practice. It would have made the book worth 5 stars right away. I just hope the authors are reading this.
The book is published by PennWell, a company behind such industry journals as Oil & Gas Journal and more.. It is part of a series entirely devote to Energy and Oil topics. Usually, these books are well done and are readable by an audience not made up of specialists only. You might want to visit their website to see what other titles are available on these topics ( http://www.pennwell.com/ ).
Why 4 stars? I would have given 3, but this is also the only book that taught me something about oil companies valuation and that must count for something.
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