Real Option Approaches for Oil and Gas Company Valuation
Brattle Principals Jake Zahniser-Word and Anul Thapa draw on their extensive expertise in oil, gas, and energy sector finance to discuss the critical role of real options in valuing exploration and production (E&P) companies. With backgrounds in corporate finance, valuation, and commercial and regulatory disputes, Jake and Anul discuss how real-option valuation incorporates forecast uncertainty and recognizes the additional value of flexibility to capitalize on new information and market conditions over time.
Specifically, the episode explores the importance of real options in scenarios where E&P firms face market uncertainty, especially during bankruptcies and restructuring. Jake and Anul explain the limitations of traditional valuation methods, define real options, and detail how incorporating flexibility – such as the ability to defer or expand projects – can significantly impact valuation outcomes. The discussion also features a case study of Chesapeake Energy’s bankruptcy, illustrating the real-world consequences of properly accounting for (or neglecting) real options in asset valuation.
The article referenced in this episode can be found here.
