The ratio of EV/2P

The definition of ‘EV/2P ratio ‘

The ratio of EV/2P is the ratio of the cost of oil and gas companies. It consists of the enterprise value (EV) divided into proved and probable (2P) reserves. Enterprise value reflects the total value of the company, not just capital. Proven and probable (2P) refers to the energy reserves such as oil, which are likely to be restored.

Breaking down ‘the ratio of EV/2P ‘

The ratio of EV/2P is comparable to other more common ratios used in the evaluation. These ratios Express the value of the company in some income or assets. For example, the ratio of price-earnings expresses the value of the company, in terms of stock price compared to its earnings per share. The price of the book expresses the ratio of price as a multiple of its book value per share. In addition, the ratio of EV/EBITDA and describes the value of the company as the product of its EBITDA. The value of the company can be expressed in relation to its sales price-the ratio of sales of or in connection with its cash flow using the price-cash flow ratio.

Such coefficients can be changed according to the specific industry. In real estate, for example, real estate investment trusts (REITs), as a rule, is estimated using the ratio of stock price to funds from operations (ffo). This ratio is preferred, that the ratio of price-earnings (P/E), as it excludes the depreciation costs. Companies are allowed depreciation on the assets, including real estate. Thus, net income Wright, reflecting a large depreciation expense, provides an inaccurate picture of its real profitability. In addition, if Wright is competent, his estate must be increasing in value.

All of these factors and others like them used in the cost analysis. That is, by comparing the performance of the company with similar companies and with historical values of these coefficients, the analyst can judge whether the company is undervalued, overvalued or fairly valued.

Example of calculation of the ratio EV/2P

Oil company, with the company worth $2 billion and proved and probable reserves of 100 million barrels would be EV/2P multiple of 20. Whether it’s high, low, or about right would depend on how he compares the ratio of similar companies in its historical value was appreciated.

The ratio is best used together because each of them has its own weaknesses. For example, a small oil company with annual production but the large reserves, it would seem that nothing is using the production ratio of EV/, for example, but will be set through the ratio s/2P.

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