- Discount rates are a cornerstone of modern valuation methods for discounting the value of expected future cash flows.
- Upstream valuation professional systemically utilize elevated discount rates well in excess of rational expectations for long-run capital growth.
- The use of elevated discount rates may have roots in Modern Portfolio Theory, heuristics regarding the aggregation of well-level economics, and as proxies for high expected rates of depletion.
- Re-calibration of investors’ rational expectations indicates that lower discount rates may be more appropriate for evaluating long-run returns.
- Discount rates are simply a means by which to equate dollars in different time-periods — any further deliberation is likely to suffer from diminishing returns.
Figure 1: Sunburst – Pumping UntSource: Greg Evans. Sunburst – Pumping Unit. Art Gallery of Greg Evans