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.

RELATED TERMS
  1. Present Value - PV

    The current worth of a future sum of money or stream of cash ...
  2. Barrel Of Oil Equivalent (BOE)

    A term used to summarize the amount of energy that is equivalent ...
  3. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative ...
  4. Price Per Flowing Barrel

    A metric used to determine the value of a oil and gas company. ...
  5. Discounting

    The process of determining the present value of a payment or ...
  6. Integrated Oil & Gas Company

    A business entity that engages in the exploration, production, ...
Related Articles
  1. Trading

    Natural Gas Industry: An Investment Guide

    Investors looking into this industry are faced with a confusing amount of information. We explain the important concepts and terms.
  2. Managing Wealth

    Chesapeake Energy Sees History Repeating Itself

    Chesapeake was on the wrong side of natural gas when its price plunged in 2012, and it appears to be repeating itself after the price of oil plummeted.
  3. Markets

    Exxon Mobil Stock: An Earnings Case Study (XOM)

    Explore the recent earnings history of Exxon Mobil. What factors are influencing profits and what do analysts expect for coming years?
  4. Markets

    Exxon Mobil Stock: Capital Structure Analysis (XOM)

    Investigate Exxon Mobil's capital structure and understand how equity, debt capitalization and enterprise value interact with each other.
  5. Managing Wealth

    Top 5 Companies Owned by Exxon Mobil (XOM)

    Learn more about some of the biggest subsidiaries and joint-venture companies in the Exxon Mobil family, including both domestic and international businesses.
  6. Markets

    5 Common Trading Multiples Used In Oil And Gas Valuation

    Before you decide to invest in oil and gas, you should understand these multiples.
  7. Managing Wealth

    5 Reasons Why Private Equity Investors Like Oil and Gas Companies

    Oil and gas companies may look like a risky industry on the outside, but private equity investors have found reasons to regularly invest in these firms.
  8. Markets

    Exxon Mobil Stock: A Dividend Analysis (XOM)

    Learn about Exxon's strong history of paying and growing dividends. Understand how the company's revenues are hurt by low commodity prices.
  9. Markets

    Why Exxon Mobil Is Selling $12bn in Bonds (XOM)

    As many energy companies struggle to survive the low oil price environment, Exxon Mobil looks to secure liquid funds through $12 billion debt sale.
  10. Investing

    What to Expect in Exxon Q2 Earnings?

    Wall Street expects both revenue and earnings to remain under pressure, thanks to weak oil prices.
RELATED FAQS
  1. How does analyzing an oil and gas's financial statements differ from companies in ...

    Learn how financial statements for oil and gas companies appear different from companies in other sectors, and discover how ... Read Answer >>
  2. How do you use a financial calculator to determine present value?

    Learn how to utilize a financial calculator to calculate present value. Understand the necessary data, why it is important ... Read Answer >>
  3. What developed countries have the greatest exposure to oil & gas drilling?

    Find out which countries have the largest proven reserves of oil and gas, and learn how the energy landscape has changed ... Read Answer >>
  4. What metrics can be used to evaluate companies in the oil and gas sector?

    Learn how to analyze oil and gas sector companies using the same metrics and analytical techniques as professional investment ... Read Answer >>
  5. How is NAV used for oil, gas, and energy investments?

    Find out how net asset value, or NAV, can be useful for evaluating mutual funds with oil, gas and energy investments or valuing ... Read Answer >>
  6. What is the difference between proven and probable reserves in the oil and gas sector?

    Learn how those in the oil and gas sector classify oil reserves and the specific differences between proven and probable ... Read Answer >>
Hot Definitions
  1. Quantitative Trading

    Trading strategies based on quantitative analysis which rely on mathematical computations and number crunching to identify ...
  2. Bond Ladder

    A portfolio of fixed-income securities in which each security has a significantly different maturity date. The purpose of ...
  3. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  4. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  5. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  6. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
Trading Center