PV10

What is 'PV10'

PV10 is the current value of approximated oil and gas revenues in the future, minus anticipated expenses, discounted using a yearly discount rate of 10%. Used primarily in reference to the energy industry, PV10 is helpful in estimating the present value of a corporation’s proven oil and gas reserves.

To calculate PV10, reservoir engineers create a reserve report for existing wells and proven undeveloped well locations, taking into account every well’s present production rate, individual production costs and expenses for reserve development, and the forecast decline rate.

BREAKING DOWN 'PV10'

A company’s reservoir engineers estimate future gross revenues by applying a suitable escalation rate or by using prevailing energy prices. Indirect expenses, such as debt service, depletion, amortization and administrative overhead, as well as expenses not related to property, are not factored in when calculating PV10.

Even though the PV10 calculation is widely used by investors and market analysts, it is not a financial metric that is calculated in accordance with generally accepted accounting principles (GAAP) because it does not factor in the effect that income taxes will have on future earnings. It typically differs from the standardized measure, a metric that is a directly comparable GAAP financial measure.

PV10 and Enterprise Value

The PV10 calculation is often written as the EV/PV10 calculation. Enterprise value (EV) is a company’s market cap plus debt, minority interest and preferred stock, minus all cash and cash equivalents. Essentially, EV can be thought of as a hypothetical takeover price; if the company is bought out, the acquiring corporation takes on the company’s debt, but it gets to keep its cash. If a company’s PV10 value is higher than its EV, the stock is theoretically priced below the value it will generate in time. If the EV is less than the PV10, the company’s stock is cheap and appealing to value investors.

Example

For example, consider Exxon Mobil in 2012. The corporation’s EV at that time was $449 billion. By the end of 2012, Exxon had just over 25 billion oil-equivalent barrels of guaranteed reserves. The goal for the corporation is to replace all of its yearly production with new reserves, so this figure remains a constant. With these figures, Exxon Mobil’s EV/reserve was $17.80, which indicates that its value can be approximated at roughly $18 times the company’s proven barrels of oil reserves. Considering all of Exxon Mobil’s 2012 figures, the corporation’s PV10 was $176 billion.

Bottom Line

In general, it is difficult to place a value on oil and gas reserves and future earnings. The PV10 metric is useful in determining an approximate value in an industry that is arguably one of the most difficult to for investors to understand and evaluate accurately.