Pipleline Entity Valuation

Purpose of Valuation

• Oil & Gas Related Company: Merger & Acquisitions, Financial Modeling, Asset Project Valuation, Feasibility Study
• Financial Institutions & Investment Firms: FASB Financial Reporting, Financing, Value of an asset in any entity
• Legal & Tax: Economic Damages, Bankruptcy & Restructuring, Litigation Support, IRS Compliance Tax Reporting for Donation, Estate, Gift
• Government: Eminent Domain, Federal & State Land, Easement or Right of Way Appraisal
• Property Owner: Royalty Rate, Estate, Gift, Trust Planning

Valuation Methodologies:

 The valuation of an operating pipeline operating holding entity assumes the transfer of ownership as of a particular date.   The fair market value (FMV) of an O&G property is essentially the present value measurement of the estimated prospective (declining) production volumes valued, based on volatile market wellhead pricing less the prospective economic cost of locating, extracting, and marketing possible prospective production. 

All appraisal approaches—asset, income, and market comparable—rely to some degree on assembling comparable economic and financial performance data for a peer group of the subject enterprise.  The transfer price is based on the concept of a willing seller and a willing buyer, neither being forced to participate in the transfer and, also, both being reasonably knowledgeable of the relevant facts associated with the operations and the business. To determine the transfer price or value of the pipeline entity, three approaches to value are available to review: the sales comparison approach (based on sales of similar entity), the income approach (based on projected cash flows), and the cost approach (based on the cost of construction, initial right of way acquisitions cost, startup engineering cost, less depreciation). 

Business Enterprise Valuation for Distriubtion Entity - Income Approach DCF Methodology:

This method is a popular means of establishing value for pipelines if they are generating or will generate a predictable cash flow. This method takes into account forecast income based on throughput volumes. Expenses based on the historical or projected income stream are discounted.  Oil and gas pipelines are excellent examples of fixed assets that lend themselves to valuation by Discounted Cash Flow (DCF) analysis.  The volume transported through a pipeline systems, known as "throughput," is a critical metric in determining the cash flows resulting from the pipeline's operation.  Given that revenue varying the projection for the quanity of oil or gas transported a pipleine will vary the projected revenue generated by the pipeline. Many factors can delay the expected in-service date for a pipleine, such as regulatory approvals, political oppositions, negative environemental studies, and construction delays.  The projection period can be anywhere from 5 years to 15 years, usually projecting a 10 years horizon.  Estimating the discount rate can be derived from the M&A data, public company 10-K data, or using the capital market investment yield data.  The terminal value derivation will be a big challenge to project the potential terminal value that can be estimated from the reasonable capital market data and risk analysis. 

Value Evaluation Criteria: 

In addition to the appraisal methods, several factors must be considered when assigning value to a pipeline. These criteria cover the more technical aspects of business, physical, property and commodity value. 

Some of these might include:

• Physical Pipeline Attributes

• Tangible Property Value, Right of Way

• Market Oil & Gas Commodity Value 

• Business Intangible Value

• Other Criteria - Size of pipe, Competenant Management, Interconnects, Environmental Concerns, Market Diversity, Proximity to Markets, Geography Terrain, Diversity of Suppliers, Interstate, intrastate, metering stations, compressor stations, separators, storage tanks, and right of ways all have to be considered in the valuation process. 

EPA regulations and pollution control exemptions also complicate matters. Our seasoned valuation advisors take deliberate steps to account for every variable and provide you with the most accurate valuation.

Whether regulated or non-regulated, oil, gas, or NGL's, our valuation advisors have an intimate knowledge of pipeline appraisal and use our extensive GIS database to accurately pinpoint pipeline mileage and locations.

New pipeline construction in North America ranges in the billions of dollars. While today's demand for energy makes shale and other deposits economically viable, they are not often located in areas where infrastructure exists or is necessarily adequate. The result is an increase in new pipeline construction.