The Valuation Of CNOOC:Based On Real Option Method

CNOOC is an upstream oil company.Thus,the value of the enterprise mainly comes from oil and gas reserves which are related with oil price.There are many kinds of options in the process of exploration,development and produce,such as delayed investment options,expansion options,give-up options,which can be valuable.There is such a principle in option valuation that the greater the volatility of the underlying assets,the greater the value of the options.Hereby,it is suitable to use real option method to estimate CNOOC’s valuation because of the fierce fluctuations in oil prices.The essay,firstly reviewed relevant literatures on enterprise value assessment,emphatically analyzed the basic theory and application of real option method and determined the principle and method of CNOOC’s reserves valuation.Then,the essay analyzed CNOOC from the aspects of operating,financial and market performance,setting the foundation for valuation.Secondly,the essay used Discounted Cash Flow Method(DCF)to assess value of developed reserves and used Real Option Method to assess value of undeveloped reserves to get CNOOC’s total value and equity value.Here was the result:at the end of 2016,the total value of CNOOC should be 86 billion dollars;the transaction of CNOOC in NYSE should be $ 144.40 per ADR,higher than$123.96 per ADR,the closing price at the end of 2016;and the transaction of CNOOC in HKSE should be HK$ 11.20 per share,higher than HK$9.70 per share,the closing price.So the conclusion is CNOOC’s value at the end of 2016 was underestimated.There may be two reasons to resolve it,the one may be insufficient investor confidence in the case of low oil prices in 2016,and the other may be hysteresis of market information.The essay suggests that investors should fully recognize the value of options for oil companies and avoid the short-sighted behavior of investment.