How is NAV used for oil, gas, and energy investments?

Net asset value, or NAV, is an important figure for any kind of investment, including oil, gas and energy shares. Equity investors should understand how to manipulate NAV numbers to differentiate mutual funds within the same sector. NAV can also be used in the analysis of specific oil, gas and energy firms instead of investment companies. Many oil and gas investors use these NAV models to project cash flows; estimate weighted average cost of capital, or WACC; and analyze different business segments.

What Is Net Asset Value?

Simply put, NAV is equal to a company's assets less its liabilities. It is often the case that NAV is close to or equal to the book value of a business. Companies considered to have high growth prospects are traditionally valued more than NAV might suggest. In the context of a mutual fund, NAV is also equal to the price per share. To find a mutual fund's NAV, take assets less liabilities and divide by the total number of shares.

Using NAV for Oil, Gas and Energy Companies

Even though NAV is an important number, open-end mutual fund investors should not gauge the performance of an oil, gas or energy fund on the basis of changes in NAV. This is because funds tend to pay out a huge percentage of their income and capital gains. Real returns are rarely captured by changes in NAV.

In terms of measuring the performance of individual firms, not mutual funds, NAV is most frequently compared to market capitalization to find undervalued or overvalued investments. There are also several financial ratios that use multiples of NAV or enterprise value for analysis.

Net asset valuation models are a nice alternative to traditional discounted cash flow, or DCF, models because energy companies cannot assume perpetual growth. The amount of reserves an oil or gas company currently has, for example, can significantly affect its net asset value per share, or NAVPS. This method allows investors to assume a production decline rate and calculate revenue until reserves run out.