Real Option Valuation vs. DCF Valuation - An application to a North Sea oilfield
Independent thesis Advanced level (degree of Master (One Year)), 10 credits / 15 HE creditsStudent thesis
We examine whether the value of an undeveloped oilfield is affected by using real option valuation. Applying a two-factor model dependent on the spot price of Brent and the convenience yield implies a premium over the certainty equivalent method ranging from 20-1000%, for reasonable spot prices. However, the premium over the risk-adjusted method can be negligible since values are dependent on the spot price forecasts of managers.This does not mean that the option criterion should be neglected, considering its implications for the strategic decision of when to optimally invest. The risk-adjusted approach suggests that investment is optimal whenever oil prices surpass $15.69 per barrel, whereas the real option analysis suggests production at prices above $26.72. Moreover, we find evidence of a positive market price of convenience yield risk on the IPE, strongly disagreeing with economic theory.
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IdentifiersURN: urn:nbn:se:su:diva-2960OAI: oai:DiVA.org:su-2960DiVA: diva2:192102