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Drilling For Value, Appendix C: Discounting

Summary

  • 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

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