Real options valuation in oil and gas10/30/2022 ![]() The final chapter includes numerical examples from the petroleum industry and analyses the advantages and disadvantages of real options. The most common types in the E&P industry are the wait-to-invest, the termination, the temporarily shut in and the operational options. After selecting a model the projects inherent flexibility is then estimated and the types of options are selected. Whereas the classical methods solely rely on market information, recent developments not only focus on market uncertainties but also on private uncertainties. At first the thesis discusses some important real option input parameters and valuation techniques including the classical and recent sophisticated approaches and compares them to create a clear insight. This new technique is intended to incorporate not only the value of information but also the value of flexibility and should therefore be able to enhance the valuation process and improve the strategic decision making. The objective of the master thesis was to define the input parameters, the models and types used in the real options approach to evaluate E&P related projects and compare the results with the traditional discounted cash flow analysis. Over the last decades numerous real option models are developed. This new approach is not a replacement of traditional methods, it is rather a logical advancement and can be thought as an “addon” to the net present value method. Real options use the mathematical principles of financial options to evaluate the value of flexibility. As a consequence the real options approach was introduced by Stewart Myer in 1977. But in today’s world these methods typically fail to represent the real economic value. ![]() Even if companies are aware of the dynamic and risky environment the discounted cash flow analysis is the most commonly used tool to evaluate the economics of projects in the industry. Hence, the process of evaluation is crucial and has to be representative. After analyzing the technical feasibility and determining the economic value, projects are ranked and only the most promising ones get funded. Oil and gas companies need to allocate resources in order to maximize their shareholder value. ![]()
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