How to value non-producing acreage for E&P companies

[shan]

While trying to value E&P companies, one of the challenges is how to value non-producing acreage, and I've been putting E&P companies into "too-hard-to-value" pile due to this challenge.

 

What are some of the ways you've seen non-producing acreage being valued? I understand that this valuation might have wide range given the wide swings in shale gas spot prices and forward curves.

 

For producing acreage, value can be based on future cash flows.

 

But non-producing acreage presents lot more challenges:

 

1. Its a bit like non-income producing real estate / land holding - where there are no current cash flows that can be used to value it.

 

While this acreage can be sold, the price for sale is highly influenced by current gas prices. So the most recent sale prices might not be a good indicator. Also, contiguous acreage might be valuable to a buyer.

 

2. To get to production state, lot of capital is needed for drilling and completion of wells. But the company might not have easy access to capital when natural gas prices crater.

 

3. The company also has to rely on build up of takeaway capacity i.e. pipelines to be built.