Comprehensively Valuing an Asset - SPE HEES Presentation Preview
Author: Caitlan Capps, PMP, Senior Solutions Consultant
At the SPE HEES conference, I presented the paper, “Comprehensively Valuing an Asset; how a Holistic Value Approach Aligns with Specific Corporate Goals.” This presentation addressed how too simple an approach in evaluating an asset can cause a distortion of results; for instance, a simple NPV calculation of one particular asset may not factor in a company’s overall cash flow, any present long-term investments or existing rig contracts.
So…how do you measure an asset’s value?
Valuing an asset is not simply taking total potential revenue and deducting from it the estimated cost to produce that revenue. Likewise, an asset with the highest NPV or IRR is not necessarily the best investment for a company to make. More important than its potential to generate revenue, defining the value of an asset depends on the context of the company portfolio to which the asset belongs as well as the current and future environment and infrastructure surrounding that asset.
Are your economic indicators too simplified?
A company must take into account market risk, current interdependencies of the complex network of getting product to market, and future infrastructural and environmental challenges before moving forward with a decision. By approaching the broad term “asset value” and demarcating it to fit a specific company based on the aforementioned items, the company can holistically value an asset. Valuing an asset requires having the ability to isolate specific variables, run several iterations of calculations, and analyze the results from multiple angles, all while using data that is a true reflection of the current state of the market and asset in question.
Do you understand these economic indicators in relationship to your corporate strategy?
There is a difference between taking a measurement of a metric and making a key decision using a combination of metrics and relating them to the strategic goal of a company as a whole, understanding that the value of an individual asset only plays a part in the portfolio of a company. In this way, any one asset’s value can differ from company to company. By utilizing a comprehensive approach, an asset’s true value can be measured for the company performing the evaluation.