Valuation of Real Options
Course Description
Petroleum exploration, development and production investments involved a sequence of decisions over time as events unfold and learning occurs. Real Option Valuation is the state of the art valuation method for valuation and management of these types of strategic investment decisions.
In many upstream
oil and gas project settings, the firm is subject to irreversible investments
with widespread uncertainty and there may be a degree of flexibility that
allows managers to make changes to the project during its life. This project
flexibility is ignored in classical discounted cash flow (DCF) analysis and can
significantly increase the value of the project by taking into account the value
of being able to alter a project in response to unexpected market or technical
developments.
In this course we will present a combined Real Options method and use Decision Analysis tools such as binomial lattices to model the project uncertainties and flexibilities. The real options approach to valuing managerial flexibility and real options requires an understanding of both traditional DCF methods of valuation and option pricing techniques. We will begin with a brief review of the fundamental ideas associated with these areas before proceeding into decision analysis and real options.
The emphasize is on hands on experience and will use MS Excel and @RISKTM to build models of real options implementation. A number of oil and gas examples will be discussed.
Participants in this course will gain an
enhanced understanding of how different valuation methods model and value
uncertainty, and the implications of these choices. This will help them decide
which methods may be suitable for use in their organizations, and, if change is
needed, how those changes may be implemented at least cost with most benefit.
Who Should Attend
The course is designed for anyone involved
in asset valuation: executives, managers or technical experts; producers or
users of valuations. It is suitable for people with a range of technical
experience, from those who have not been exposed to advanced valuation methods
to those who may have explored the use of the latest in valuation ideas.
The course content is based on the
assumption that the participants have some basic understanding of traditional
valuation (discounted cash flow and CAPM) as well as basic decision analysis
(probability, decision trees, and