In my last article, I explained why the LLR formula was extremely generous to licensees due to the overstated industry netback. The AER’s posted $37.61/bbl industry netback is nearly double the realized netbacks of the top performing producers in the basin.
Alberta’s LLR is calculated using a quick formula of assets divided by liabilities, but the major flaw in the equation is the use of three years in the numerator:
The governing agencies assess a valuation of each licensee by multiplying by three the annual production with the average industry netback. The implication is that in vague terms, the value of a licensee is three times cash flow. However, three times cash flow is drastically below what public companies currently trade at.
The average cash flow multiple of the five largest Canadian based oil and gas is 7.85. (1)
In reality, Alberta’s oil and gas companies are not just evaluated on their baseline production. Companies carry asset values based on many factors including future drilling locations, enhanced oil recovery upside, and infrastructure that generates third party processing fees. In the event that an oil and gas company needs to raise equity capital for an acquisition, capital program, or repay debt, a drastically higher multiple than three times cash flow would be used.
Lighthouse Liability Solutions Inc. is a team of professionals specializing in accurately evaluating liabilities and assisting companies in improving their LLR. We understand the regulatory system and are capable of cheaply reducing liabilities for companies seeking assistance. We currently are in the process of removing millions of dollars of unnecessary liabilities and assisting companies looking to divest/acquire assets.
(1) Data provided by BOE Report Finance
Patrick Gratton, P.Eng
587-999-0339
lighthouseliabilitysolutions.com
gratton@lighthouseliabilitysolutions.com