Ильбалиева А.Ш.

Астраханский государственный технический университет, Россия

Identification of the best evaluation method of cost of the oil and gas entity

In modern conditions in case of management of the oil and gas entity the value assessment of the company is very demanded. Cost is a key indicator of activities of the entity in the long-term period. This indicator characterizes enhancement and development of the company. The value addition of the entity leads to growth of investment appeal, and, therefore, and to growth of the capital invested by shareholders.

The company is investment goods, that is goods in which investments perform in hope for return in the future. The amount of the expected return – the income – has probabilistic nature therefore the buyer should consider risk of possible failure. If future income taking into account time of their obtaining appears less costs for acquisition of the company, it loses the attractiveness.

Strengthening of influence of market factors on a condition and prospects of development of the entities of an oil and gas complex and repeated complication of their activities (including growth of cost value of the extracted hydrocarbons, in connection with development of sea, superdeep and other capital-intensive fields) has demanded search of the management system based on the criteria capable most authentically to determine efficiency of these or those management decisions.

Efficiency of activities of the entity which provides competitiveness of oil and gas companies in many respects depends on its adaptation to conditions of constantly changing external environment and a capability to fixed enhancement and development. Therefore value maximization of the company for the benefit of the owner shall become a main objective of enhancement and development. It is possible to provide achievement of this purpose through creation of the effective controling mechanism by the company sensitive to fixed changes in an industry and in the market in general. The most efficient of such mechanisms is the management concept efficiency of the company on the basis of a cost index.

Management of the cost of the company allows to redistribute cash flows most effectively. The methodology allowing to compare various investment alternatives and to make the most rational decisions which will allow to increase cost is necessary for the solution of questions of management of cost.

The reliable assessment requires the correct application of the existing approaches. In economic literature allocate three main approaches to an assessment of the company which in a different measure correspond to this or that cost determination of the company: comparative, costly and profitable.

Comparative approach. Comparison of object of an assessment with similar objects concerning which there is price information of transactions with them. Benefits: Objectivity. Correctly estimated company reflects the most probable cost of business since similar business has been already estimated by the market and is sold in the recent past at determined price. Shortcomings: Cost determination is based on data on recently made transactions of purchase and sale by similar objects therefore in Russia in the conditions of the opaque market this method to apply extremely difficult. Lack of financial and market information, unreliability of the received data, need of introduction of adjustments, backwardness of the stock market.

Cost approach. Cost determination which are required for recovery or replacement of object of an assessment, taking into account its depreciation. Research of business using methods of a cost approach is performed proceeding from the size of those assets and liabilities which were purchased by the company for the period of the functioning on the basis of the principle of replacement. Benefits: Precisely determines a project cost, without application of assumptions and forecasting.

Calculations rely on financial and accounting records. Considers influence of production and economic factors on a change in value of assets. Shortcomings: Has a narrow focus. It is applied in the conditions of absence or backwardness of the market, and also determination of salvage value. Is not suitable for an assessment of profitable companies as the methodology of approach does not reflect the cash flows generated by the company. Any profitable company estimated by this approach will be significantly underestimated in cost. Impossibility of accounting of future benefits, problems of an assessment of intangible assets, depreciation.

Income approach. Determination of time and the sizes of the income which will be gained by the owner and to what risk it is integrated. Creation of the forecast of the income and expenses and their reduction to current value. Benefits: Profitability of the entity is considered that reflects a main objective of its functioning – income acquisition by the owner. Considers prospects of development of the entity. It is possible to constitute the authentic forecast of the income and expenses, to reasonably estimate expectations of the investor on a required return rate, proceeding from risk level of capital investments at object. Shortcomings: We will apply to an assessment of the companies bringing rather big positive size of the income. Because of an unstable economic situation in Russia inaccuracy of the forecast of a long-term flow of the income increases.

We will consider the main methods of traditional approaches to a value assessment of the company and we will reveal the most applicable for a value assessment of oil and gas company.

It is known that comparative approach is based on the principle of replacement: the buyer will not purchase a real estate object if its cost exceeds purchase costs in the market of the similar object possessing the same usefulness. Within comparative approach allocate three evaluation methods of the company:

1. Method of the companies analogs. It is applied when the amount of the estimated participation in the authorized capital is not control. Is based on use of the prices which are created by the public stock market.

2. Method of transactions. As it is based on use of the price of acquisition of the company analog in general or its controlling stock, those transactions with share blocks of the company analog which are characterized as transactions of merge and absorption are considered.

3. Method of industry coefficients. It is based on use of recommended ratios between the price of the company and certain financial parameters. Industry coefficients are calculated on the basis of long statistical supervision by special research institutes behind a selling price of various operating companies and their major production and financial characteristics.

The technique of an assessment of market value of the company in case of a cost approach is based on the assumption that the owner of property in case of implementation of object of property in the free market shall compensate completely own costs connected with creation or acquisition of the company and its input in action taking into account a factor of time and change of economic conditions. In case of cost determination of the company a cost approach apply the following evaluation methods:

1. Method of accumulating of assets or method of calculation of book value of assets. Determines the cost of the company as the cost of its property by the amount of net assets of the financial reporting.

2. Method of calculation of all-in replacement cost and replacement cost. Determines costs for reproduction of the exact copy of object.

3. Method of calculation of salvage value. Is based on summing of current values of cash flows from implementation of the estimated assets.

4. Method of calculation of net assets. Assets and liabilities which participate in calculation are determined. Net assets are calculated as a difference between assets and liabilities.

The income approach assumes establishment of cost of the company or its part by calculation of current value of expected profit. I.e. the income and profit of the company is considered as a fundamental factor which will determine the size of cost of the company. The profitable method is reasonable in case of a possibility of forecasting of future income.

The income approach is based on statement that the reasonable buyer will not pay for object more amount which the estimated object will bring in the future in the form of the net income corrected on investment risk. The methods of an income approach which are the most extended for the Russian companies are:

1. Income capitalization method. Is based on statement that ownership ratio cost is equal in the company to current value of future income which will be brought in by this property. In case of this method the estimated cost of the operating company is considered equal to the relation of a net profit to the chosen capitalization rate. Often use for a rough and preliminary express assessment oil and gas (the long-term companies).

2. A method of the discounted cash flows. Is based that the cost of the company depends on future benefits. This method performs an assessment of prospects of the company and assumes an assessment, first of all, not of property of the estimated object, but the income which this property can bring. Thus, the expectations connected with future value creation – play a special role in forming of cost of the company.

We will consider applicability of above-mentioned methods for a value assessment of oil and gas companies and degree of their accuracy for use for the purpose of management.

Within a cost approach any of four methods does not reflect all-in cost. Application of a liquidation value approach for an assessment of oil and gas companies is not actual for the large oil and gas enterprises since they are not on the verge of bankruptcy or liquidation. A big shortcoming is that all features of oil and gas companies are not reflected in balance, such as amounts of explored reserves, costs for development and search of new fields, therefore, in case of application of a method of accumulating of assets, as well as a method of net assets not all-in cost of oil and gas companies will be received. The method of replacement cost is applied generally to cost determination of real estate, its application for calculation of cost of oil and gas companies is very complicated by information search for the similar company.

The cost of the company determined by means of one of methods of comparative approach also will not be exact. So, when using a method of the companies analogs or a method of transactions difficulty consists in search and selection of the comparable companies. In case of all similarity of technologically interconnected productions, nevertheless it is impossible to call the oil companies similar. Their difference can be shown both in production amounts, and in sale scales. All this affects indicators of activities of the companies. For example, the Russian oil companies seeming at first sight similar have various indicators of amounts of production and sale and as a result various stock quotation and capitalization. In the Russian practice of an assessment of oil and gas companies the method of industry coefficients is not applicable due to the lack of necessary information which collection and generalization requires the long period of time and a certain economic stability.

The capitalization method of the income of an income approach gives not exact value of cost, however it it is possible to be used in case of an express assessment of the company. When calculating of the discounted cash flows the positive moment is an opportunity to reflect the expenses connected with exploration and with development of fields in costs. At the same time amounts of explored reserves of oil and gas, amounts of oil and gas extraction, production capacities, a sales network of gas station are considered as receipt according to the income. But in the conditions of an uncertain economic situation and uncertainty the calculated cost of oil and gas company will appear absolutely not the corresponding reality.

Most of foreign and domestic authors pay the main attention to theoretical reasons and use of traditional methods and models of an assessment for the purpose of increase of company performance. However, as we see from the stated above analysis, each method has the shortcomings for an assessment of the oil and gas entity. Therefore it should be taken into account modern methods which in view of the universality and an intermediate position have a number of advantages before traditional over three approaches to an assessment.

Black–Scholes Option Pricing Model determines the cost of the company as the cost of the call option, the company consisting of assets and liabilities. In case of this method for calculation of cost use a formula (1):

С=A×N(d1)-O×N(d2)×e(rfr) (1)

This method has the following shortcomings: complexity of practical application for the companies which are not open joint stock companies (for the majority of subsidiaries of oil and gas holdings); the high extent of influence of a market component complicating a measure definition of efficiency of the current activities.

Edwards-Bell-Ohlson valuation model uses statement about existence of the "abnormal" income determined by a difference between the return which is really received by the investor on the invested capital and the expected return. The cost is in that case determined by a formula (2).

С=С(bal)+Д(а)×а1+v×а2 (2)

However this model has the following shortcomings: an important condition of applicability of this model is need of availability of stability in the stock market within, at least, 10 years; a tsutstviye for the Russian companies of the sufficient statistical information necessary for calculation of the offered coefficients a1 and a2.

The method based on an indicator of joint-stock value added (SVA). The cost of the company by means of this method is determined as the amount of market value of the invested capital at the beginning of the period, the cumulative size of the added shareholder value of a forecast period and market value of securities and other investments. Complexity of application of this method for oil and gas companies is need for its calculation of determination of the period of competitive advantages.

The method based on an indicator of economic value added (EVA) which cornerstone the concept not of accounting, but economic profit is. In this case the indicator of economic value added is determined as a difference between net operating profit after the taxation and the size of the used equity corrected on its weighted average cost. The main strategic objective of management is the business value addition. Therefore the task of effective management of EVA is reduced providing stable non-negative values of this indicator. Its positive dynamics means that business of the company develops more effectively, than the market in general. Therefore, with a growth of EVA investment appeal of this company increases. To the contrary, if steady dynamics to decrease in an indicator of EVA is observed, then it is possible to speak about reduction of cost of firm and fall of interest of external investors in it. Oil and gas companies often require an efficiency evaluation of activities not only in general, but also separate divisions to determine at what production phase (or in what department) inefficient investment decisions are made that allows to carry out this method. The size EVA has close interrelation with share value of the company that is important for the entities of an oil and gas complex.

Thus, in case of implementation of cost approach to company management by the most acceptable the income approach since it fully considers features of oil and gas companies is and as a result gives more exact assessment to their cost. However traditional methods of this approach not in complete degree considers features of oil and gas companies. As a result of the conducted researches it has been revealed that the evaluation method based on an indicator of economic value added in view of the benefits is the most suitable for management of the cost of the companies of an oil and gas complex. This method allows to determine quickly deviations of cost of the company in response to change not only external (market), but also internal indicators.

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