Project Ottermere — E&P Net Asset Value
A 2-hour Energy / E&P Net Asset Value case study with a complete model answer
Modeled After
Evercore
Special committee valuation for an ultra-deep E&P: net asset value built off the third-party reserve engineer's report, an expected-value prospect tree applying geologic probability of success, seven precedent pages split by basin and play each closed with its own valuation summary, and the overriding royalty interest valued risked and unrisked as mirrored pages
Structure and exhibit set are modeled after Evercore. The company, the financials and every figure in this case are entirely our own.
The Situation
Ottermere Resources, Inc. (NYSE: OTM) is a gas-weighted independent exploration and production company headquartered in Houston, with three asset areas that do not resemble one another.
Ottermere Resources, Inc.
- Sector
- Energy — gas-weighted upstream exploration and production, across shallow-water Gulf of Mexico shelf, onshore Gulf Coast development acreage and an unbooked sub-salt exploration play
- Size
- Geography
- United States — shallow-water Gulf of Mexico shelf and onshore Gulf Coast, with a US-listed equity and a US-dollar funding stack
- Ownership
- Situation
The Prompt
40 in cash plus one royalty trust unit per share. Build the net asset value.
Supporting Materials
What you are handed at the start of the case, in the format a real process would use.
What You Have to Produce
The deliverables, in the order the committee will read them. The exercise runs 120 minutes.
PART 1
The reserve report, totaled and read properly
PART 2
Price decks, realizations and unit costs
PART 3
Present value by reserve category
PART 4
Probable and possible reserves
PART 5
The ultra-deep expected-value tree
PART 6
The overriding royalty interest, risked and unrisked
PART 7
The net asset value bridge, and the sensitivity
PART 8
The market cross-checks
PART 9
Adequacy, the counter and the reservation price
How to Approach It
The order a strong candidate works in, and why. This is the shape of the answer — the finished answer deck and Excel model are in the solution set below.
- 01
Decide what kind of asset this is before you value it
- 02
Understand what PV-10 is before you use it
- 03
Risk once, discount once, and never both to the same category
- 04
Split revenue and cost across two different interests
- 05
Work out what the trust actually is
- 06
Print the arguments that go against you
Key Concepts
The ideas this case is built on. Know these cold and the case becomes a question of execution rather than knowledge.
Net asset value for an exploration and production company
The sector's primary valuation method, and a discounted cash flow, though not a corporate one. Value is built bottom-up from a third-party engineer's reserve report: each reserve category has its own production forecast, its own operating cost, its own development capital and its own risk, so each is discounted separately and then summed, before deducting debt, the asset retirement obligation and tax. There is no terminal value anywhere in it, because reserves deplete and the forecast ends when they do. A second discounted cash flow struck on consolidated EBITDA would be the same cash counted twice on a coarser basis, which is why one does not appear.
PV-10 and the standardized measure
PV-10 is the present value of estimated future net revenues from proved reserves, discounted at ten percent, before corporate income tax. The ten percent is fixed by Item 1202 of Regulation S-K so that one company's disclosure can be compared with another's, rather than to estimate anybody's cost of capital. The standardized measure is its after-tax twin, computed under ASC 932. Quoting both without saying which is which is how a valuation charges tax twice, and quoting PV-10 as though it were a cost-of-capital-based value is how a committee is told a friendlier number than the company's own hurdle rate would produce.
PDP, PDNP and PUD, and why they are not one number
Proved developed producing reserves are flowing from wells that exist. Proved developed non-producing reserves are behind pipe or shut in and need a recompletion. Proved undeveloped reserves need a well drilled and the capital to drill it. The three carry different capital requirements, different timing and different certainty, so a valuation that discounts total proved reserves as one stream has thrown away the information the reserve report exists to provide — and has almost certainly credited undeveloped volumes with wells nobody has paid for.
Probable and possible reserves, and what to mark them on
Probable and possible reserves are booked as volumes but carry no separate production forecast, which is ordinary practice. That leaves the valuer with a choice: mark them on the producing category's present value per Mcfe, or on the undeveloped category's. The undeveloped one is the right analogue, because those volumes are undrilled and carry development capital, and marking them at the producing unit value credits them with wells that do not exist and capital nobody has spent. The unit value is computed from the model rather than assumed, and the risk factors applied afterward are much lower than the proved ones — which is the whole reason the categories are kept apart.
Geologic probability of success and the expected-value tree
An unbooked exploration prospect is valued as a probability-weighted outcome rather than a forecast: the success case is the net revenue resource at an in-ground value less the development capital, weighted by the geologic probability of success, less the expected dry-hole cost weighted by the probability of failure. Two disciplines decide it. Revenue accrues on the net revenue interest and cost is borne on the larger working interest, and running both on the same interest overstates every prospect. And a prospect whose expected value is negative is carried at zero, not at a loss, because drilling is optional and an owner facing a negative expectation simply does not drill.
Overriding royalty interest, risked and unrisked
An overriding royalty is a share of production carved out of a working interest, free of both capital and operating cost. That is the entire reason a royalty Mcfe is worth more than a working-interest Mcfe, and it is why the two are read off two different sets of precedent transactions rather than one. It also produces an asymmetry: a prospect can be worth nothing to the working-interest owner, who has to pay for the well, and worth something to the royalty owner, who does not — which raises the question of whether a royalty on a well nobody drills is worth anything at all.
$/Mcfe of reserves versus $/Mcfe/d of production
Two per-unit statistics that measure different things and rank a set differently. Dollars per Mcfe of proved reserves prices the inventory in the ground; dollars per Mcfe per day prices the rate at which it is being converted to cash. A short-lived company converts faster, so each Mcfe in the ground is worth more and each Mcfe of daily production is worth less, and a candidate who ranks a set on one has discarded the other's information. The second statistic also carries the archetype's commonest unit error: enterprise value in millions over production in millions of cubic feet per day gives dollars per MMcfe per day, and the quoted convention is a thousand times smaller a denominator — an error no comparison against a peer median can catch, because the median is wrong the same way.
Why an EBITDA multiple is a cross-check here and never the answer
A peer's enterprise value contains whatever the market pays for that peer's own unbooked exploration inventory, so a peer multiple of proved reserves is not a clean price for proved reserves. Applying it to a company whose defining asset is unbooked either double-counts the play or, more usually, prices it at nothing — which is exactly what the trading price of a company like this already does. The multiple belongs in the book as a cross-check on the net asset value and as the buyer's best argument, and a valuation that leads with it has answered a different question from the one the committee asked.
What Makes It Hard
The specific traps in this case — the places candidates lose the assessment without noticing.
Check Your Answer
Type the figures you produced and find out how many are right before you open the worked answer. You get a verdict and, where you are off, a pointer to the part of the build to re-check — never the number itself. Everything you type stays on this device.
How to type a figure. Digits, with an optional unit: 1,234.5, $1,234.5, 2.6x, 21.4%. For a negative use (20.0) or -20.0. Enter as many decimals as you carried — precision is never penalised.
What the Case Asked For
The arithmetic is only half of it. Tick off what you actually produced — this half is yours to score, because nothing can grade a written recommendation from a checkbox.
The Model Answer
The worked answer in full: answer deck and Excel model, built the way a banker would actually build them. It is a reference, not a submission — a strong answer under the clock is far shorter.
What the Solution Covers
- —NAV built off a third-party reserve report
- —Proved, probable and possible categories
- —Geologic probability of success risking
- —$/Mcfe of reserves and $/Mcfe/d of production
- —Asset-level versus corporate precedent splits
- —Overriding royalty interest valuation
Answer Deck
Full model answer, banker-formatted
Upgrade to Diamond
Sign up and upgrade to Diamond to unlock the answer deck, the Excel model and the audio walkthrough.
Get StartedThe Excel Model
The model is linked and tied out end to end — every schedule, every formula and every check, in the file itself.
Downloads are available to Diamond members
Excel Model and PowerPoint Deck and Answer Deck (PDF) — yours to open, edit and rebuild
Walkthrough
A conversational walkthrough of how to approach the case under time pressure — where to start, what to cut, and how the recommendation gets defended.
Audio Walkthrough
How to approach Project Ottermere — E&P Net Asset Value
60-second preview — upgrade to Diamond for the full walkthrough
Frequently Asked Questions
What is an E&P net asset value case study in an investment banking interview?
It is a sector case in which the subject is valued bottom-up from a third-party reserve engineer's report rather than off an earnings multiple. You build a discounted cash flow per reserve category — producing, non-producing and undeveloped — on a stated commodity price deck, risk each category once, add whatever unbooked resource the company has at a probability-weighted value, then bridge to equity by deducting debt, the asset retirement obligation and tax. It appears in energy and natural resources groups and it tests something the generalist cases do not: whether you can value a depleting asset without importing a terminal value, and whether you know what the sector's ten percent discount rate actually is.
How should you allocate 120 minutes across this case?
A working budget that sums to 120: about 20 minutes reading the prompt and the raw extract and deciding which transactions belong in each of the four precedent sets before you type anything; about 75 minutes at the keyboard, split roughly 28 on the category cash flows and the present-value matrix, 17 on the precedent screens and the expected-value tree, 15 on the trust and the bridge, and the balance on the sensitivity, the market cross-check and the consideration pages; and about 25 minutes on the deck, which is the second deliverable. The template measures 726 cells to fill, which collapse to 149 distinct formulas once the fill-right and fill-down repetitions are counted properly — most of the workbook is one formula copied across ten forecast years, three price decks or four prospects. That arithmetic only works because two of the twelve tabs are handed over complete and sixty-five driver rows arrive already linked.
Why is there no terminal value in an E&P net asset value?
Because the asset runs out. A reserve report forecasts production until the booked reserves are produced, and the cash flow ends on the same date for the same reason. A terminal value assumes the business continues generating cash into perpetuity, which for a depleting inventory means assuming reserves the engineer has not booked and, usually, that nobody has found. If a company can replace reserves through drilling or acquisition, that shows up as unbooked resource valued explicitly — with a probability of success attached — rather than as a growth rate in a perpetuity formula. Putting a terminal value on a reserve report is the single clearest signal that the archetype has not been understood.
Is PV-10 a cost of capital?
No, and treating it as one is the most common unexamined assumption in the archetype. The ten percent rate is fixed by Item 1202 of Regulation S-K so that reserve disclosures are comparable across companies, in the same way a standard accounting policy makes financial statements comparable. It has no relationship to any particular company's weighted average cost of capital, its leverage or its risk. In practice a company whose own hurdle rate is above ten percent is flattered by the convention, and the way to handle it is to run the value across a range of rates, show where the company's own rate falls, and tell the committee which of the two numbers is the friendlier one.
How do you value reserves that carry no production forecast?
By marking them on a booked category's present value per Mcfe, and by being explicit about which one. Probable and possible reserves are booked as volumes without a separate forecast, so the valuer computes what a booked category is worth per unit and applies it, then risks the result. The choice of analogue is the judgment: undeveloped reserves are undrilled and carry development capital, which is what probable and possible volumes look like, whereas producing reserves are flowing from wells that exist and capital already spent. Marking unbooked-forecast volumes at the producing unit value credits them with both, and it is the sort of error that raises a valuation by a material amount while every subtotal still foots.
What does a royalty trust unit do to the consideration in a buy-in?
It converts part of the price into a security that has never traded, and that has to be valued rather than accepted at a headline. An overriding royalty carved out of the seller's own asset is a fraction of something the public shareholders already own, returned to them in a different wrapper. So the analysis has two steps. First, what is the underlying royalty worth, and on what basis: the risked expectation, or the unrisked success case? Second, what fraction of the asset it is carved from is actually coming back, measured after the corporate tax the company would have paid on that value and after giving the buyer credit for the fact that a trust is a pass-through and a corporation is not. There is a third question the valuation cannot answer, and a good answer names it: what the units will trade at is not the same number as what the royalty is worth.
Why do precedent transactions get split into four sets in this case?
Because a proved producing package, an unbooked acreage position, a minerals and royalty package and a whole company are four different purchases, and the price per unit of each says something different. A proved package trades on wells that exist. An acreage position is the only place you can observe what somebody paid in cash for resource no engineer had booked, which is exactly the input an exploration tree needs. A royalty package is free of capital and operating cost, so it prices higher per unit than a working interest, and using one median for both misprices whichever it was not struck for. And whole-company deals carry a control premium that asset deals do not. Blending them into one median produces a number that describes none of the four.
About This Energy / E&P Net Asset Value Case Study
Energy / E&P Net Asset Value case study for investment banking interviews. 120-minute format covering nav built off a third-party reserve report, proved, probable and possible categories, geologic probability of success risking. Includes the full prompt, a model answer deck, a tied-out Excel model and an audio walkthrough.
This case study sits in Investment Banking, under Energy, Power & Natural Resources. Every case ships with the full prompt, the supporting materials, a complete model answer and an audio walkthrough of the judgment behind the recommendation.
120-Minute Format
The time limit a real assessment would give you
Answer Deck
Included in the model answer
Excel Model
Included in the model answer
Audio Walkthrough
How to approach the case under time pressure
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