Intrinsic value of Advantage Oil & Gas Ltd. - AAV

Previous Close

$6.59

  Intrinsic Value

$1.63

stock screener

  Rating & Target

str. sell

-75%

Previous close

$6.59

 
Intrinsic value

$1.63

 
Up/down potential

-75%

 
Rating

str. sell

We calculate the intrinsic value of AAV stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  24.60
  60.00
  54.50
  49.55
  45.10
  41.09
  37.48
  34.23
  31.31
  28.68
  26.31
  24.18
  22.26
  20.53
  18.98
  17.58
  16.32
  15.19
  14.17
  13.26
  12.43
  11.69
  11.02
  10.42
  9.87
  9.39
  8.95
  8.55
  8.20
  7.88
  7.59
Revenue, $m
  157
  251
  388
  580
  842
  1,188
  1,633
  2,193
  2,879
  3,704
  4,679
  5,810
  7,104
  8,562
  10,188
  11,979
  13,934
  16,051
  18,326
  20,755
  23,335
  26,062
  28,933
  31,947
  35,102
  38,397
  41,832
  45,411
  49,134
  53,004
  57,028
Variable operating expenses, $m
 
  194
  299
  447
  649
  916
  1,259
  1,690
  2,220
  2,856
  3,608
  4,480
  5,477
  6,602
  7,855
  9,236
  10,743
  12,375
  14,129
  16,002
  17,991
  20,094
  22,307
  24,631
  27,063
  29,604
  32,253
  35,012
  37,882
  40,866
  43,968
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  177
  194
  299
  447
  649
  916
  1,259
  1,690
  2,220
  2,856
  3,608
  4,480
  5,477
  6,602
  7,855
  9,236
  10,743
  12,375
  14,129
  16,002
  17,991
  20,094
  22,307
  24,631
  27,063
  29,604
  32,253
  35,012
  37,882
  40,866
  43,968
Operating income, $m
  -20
  58
  89
  133
  193
  272
  374
  502
  659
  848
  1,072
  1,331
  1,627
  1,961
  2,333
  2,743
  3,191
  3,676
  4,197
  4,753
  5,344
  5,968
  6,626
  7,316
  8,038
  8,793
  9,580
  10,399
  11,252
  12,138
  13,059
EBITDA, $m
  96
  243
  375
  561
  814
  1,149
  1,580
  2,120
  2,784
  3,583
  4,525
  5,619
  6,870
  8,280
  9,852
  11,584
  13,475
  15,523
  17,722
  20,072
  22,566
  25,204
  27,981
  30,895
  33,946
  37,133
  40,455
  43,916
  47,516
  51,260
  55,150
Interest expense (income), $m
  9
  6
  13
  24
  38
  58
  84
  118
  160
  211
  274
  347
  432
  530
  640
  762
  897
  1,045
  1,204
  1,376
  1,559
  1,753
  1,959
  2,175
  2,402
  2,640
  2,888
  3,147
  3,417
  3,697
  3,989
Earnings before tax, $m
  -20
  51
  75
  109
  155
  214
  290
  385
  500
  637
  798
  983
  1,194
  1,431
  1,693
  1,981
  2,294
  2,631
  2,993
  3,377
  3,785
  4,215
  4,667
  5,141
  5,636
  6,153
  6,692
  7,252
  7,835
  8,441
  9,070
Tax expense, $m
  -4
  14
  20
  29
  42
  58
  78
  104
  135
  172
  215
  266
  322
  386
  457
  535
  619
  710
  808
  912
  1,022
  1,138
  1,260
  1,388
  1,522
  1,661
  1,807
  1,958
  2,115
  2,279
  2,449
Net income, $m
  -16
  37
  55
  80
  113
  156
  212
  281
  365
  465
  582
  718
  872
  1,045
  1,236
  1,446
  1,674
  1,921
  2,185
  2,465
  2,763
  3,077
  3,407
  3,753
  4,114
  4,492
  4,885
  5,294
  5,719
  6,162
  6,621

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,496
  2,392
  3,696
  5,528
  8,020
  11,316
  15,556
  20,881
  27,418
  35,281
  44,563
  55,337
  67,654
  81,546
  97,024
  114,083
  132,706
  152,866
  174,531
  197,665
  222,234
  248,206
  275,554
  304,256
  334,300
  365,682
  398,404
  432,482
  467,938
  504,804
  543,122
Adjusted assets (=assets-cash), $m
  1,496
  2,392
  3,696
  5,528
  8,020
  11,316
  15,556
  20,881
  27,418
  35,281
  44,563
  55,337
  67,654
  81,546
  97,024
  114,083
  132,706
  152,866
  174,531
  197,665
  222,234
  248,206
  275,554
  304,256
  334,300
  365,682
  398,404
  432,482
  467,938
  504,804
  543,122
Revenue / Adjusted assets
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
  0.105
Average production assets, $m
  1,449
  2,318
  3,581
  5,355
  7,770
  10,962
  15,070
  20,228
  26,561
  34,178
  43,169
  53,606
  65,539
  78,996
  93,990
  110,516
  128,556
  148,086
  169,073
  191,484
  215,285
  240,445
  266,937
  294,742
  323,847
  354,247
  385,946
  418,959
  453,306
  489,019
  526,138
Working capital, $m
  -19
  -30
  -47
  -70
  -102
  -144
  -198
  -265
  -348
  -448
  -566
  -703
  -860
  -1,036
  -1,233
  -1,449
  -1,686
  -1,942
  -2,217
  -2,511
  -2,823
  -3,153
  -3,501
  -3,866
  -4,247
  -4,646
  -5,062
  -5,495
  -5,945
  -6,414
  -6,900
Total debt, $m
  153
  327
  578
  932
  1,413
  2,049
  2,867
  3,895
  5,157
  6,674
  8,466
  10,545
  12,922
  15,603
  18,591
  21,883
  25,477
  29,368
  33,549
  38,014
  42,756
  47,769
  53,047
  58,586
  64,385
  70,442
  76,757
  83,334
  90,177
  97,292
  104,688
Total liabilities, $m
  288
  462
  713
  1,067
  1,548
  2,184
  3,002
  4,030
  5,292
  6,809
  8,601
  10,680
  13,057
  15,738
  18,726
  22,018
  25,612
  29,503
  33,684
  38,149
  42,891
  47,904
  53,182
  58,721
  64,520
  70,577
  76,892
  83,469
  90,312
  97,427
  104,823
Total equity, $m
  1,208
  1,931
  2,983
  4,461
  6,472
  9,132
  12,554
  16,851
  22,127
  28,472
  35,962
  44,657
  54,597
  65,808
  78,298
  92,065
  107,094
  123,363
  140,846
  159,516
  179,343
  200,303
  222,372
  245,535
  269,780
  295,105
  321,512
  349,013
  377,626
  407,377
  438,299
Total liabilities and equity, $m
  1,496
  2,393
  3,696
  5,528
  8,020
  11,316
  15,556
  20,881
  27,419
  35,281
  44,563
  55,337
  67,654
  81,546
  97,024
  114,083
  132,706
  152,866
  174,530
  197,665
  222,234
  248,207
  275,554
  304,256
  334,300
  365,682
  398,404
  432,482
  467,938
  504,804
  543,122
Debt-to-equity ratio
  0.127
  0.170
  0.190
  0.210
  0.220
  0.220
  0.230
  0.230
  0.230
  0.230
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
  0.240
Adjusted equity ratio
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807
  0.807

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -16
  37
  55
  80
  113
  156
  212
  281
  365
  465
  582
  718
  872
  1,045
  1,236
  1,446
  1,674
  1,921
  2,185
  2,465
  2,763
  3,077
  3,407
  3,753
  4,114
  4,492
  4,885
  5,294
  5,719
  6,162
  6,621
Depreciation, amort., depletion, $m
  116
  185
  286
  428
  622
  877
  1,206
  1,618
  2,125
  2,734
  3,454
  4,289
  5,243
  6,320
  7,519
  8,841
  10,284
  11,847
  13,526
  15,319
  17,223
  19,236
  21,355
  23,579
  25,908
  28,340
  30,876
  33,517
  36,264
  39,122
  42,091
Funds from operations, $m
  176
  223
  342
  508
  734
  1,033
  1,417
  1,899
  2,490
  3,199
  4,036
  5,006
  6,115
  7,364
  8,755
  10,287
  11,959
  13,768
  15,710
  17,784
  19,986
  22,313
  24,762
  27,332
  30,022
  32,831
  35,761
  38,811
  41,984
  45,283
  48,712
Change in working capital, $m
  1
  -11
  -17
  -23
  -32
  -42
  -54
  -68
  -83
  -100
  -118
  -137
  -156
  -176
  -197
  -217
  -237
  -256
  -275
  -294
  -312
  -330
  -347
  -365
  -382
  -399
  -416
  -433
  -450
  -468
  -487
Cash from operations, $m
  175
  234
  358
  531
  766
  1,075
  1,471
  1,967
  2,573
  3,299
  4,154
  5,143
  6,272
  7,541
  8,952
  10,504
  12,196
  14,024
  15,986
  18,078
  20,298
  22,643
  25,109
  27,697
  30,404
  33,230
  36,176
  39,244
  42,434
  45,752
  49,199
Maintenance CAPEX, $m
  0
  -116
  -185
  -286
  -428
  -622
  -877
  -1,206
  -1,618
  -2,125
  -2,734
  -3,454
  -4,289
  -5,243
  -6,320
  -7,519
  -8,841
  -10,284
  -11,847
  -13,526
  -15,319
  -17,223
  -19,236
  -21,355
  -23,579
  -25,908
  -28,340
  -30,876
  -33,517
  -36,264
  -39,122
New CAPEX, $m
  -127
  -869
  -1,263
  -1,774
  -2,415
  -3,192
  -4,108
  -5,158
  -6,333
  -7,617
  -8,991
  -10,437
  -11,933
  -13,457
  -14,994
  -16,526
  -18,041
  -19,530
  -20,987
  -22,411
  -23,801
  -25,160
  -26,492
  -27,805
  -29,105
  -30,400
  -31,700
  -33,012
  -34,347
  -35,713
  -37,119
Cash from investing activities, $m
  -127
  -985
  -1,448
  -2,060
  -2,843
  -3,814
  -4,985
  -6,364
  -7,951
  -9,742
  -11,725
  -13,891
  -16,222
  -18,700
  -21,314
  -24,045
  -26,882
  -29,814
  -32,834
  -35,937
  -39,120
  -42,383
  -45,728
  -49,160
  -52,684
  -56,308
  -60,040
  -63,888
  -67,864
  -71,977
  -76,241
Free cash flow, $m
  48
  -751
  -1,090
  -1,529
  -2,077
  -2,739
  -3,514
  -4,397
  -5,378
  -6,442
  -7,572
  -8,747
  -9,950
  -11,160
  -12,362
  -13,541
  -14,686
  -15,791
  -16,849
  -17,859
  -18,822
  -19,740
  -20,618
  -21,463
  -22,280
  -23,078
  -23,863
  -24,644
  -25,430
  -26,226
  -27,042
Issuance/(repayment) of debt, $m
  -39
  174
  252
  353
  481
  636
  818
  1,028
  1,262
  1,517
  1,791
  2,079
  2,377
  2,681
  2,987
  3,292
  3,594
  3,891
  4,181
  4,465
  4,742
  5,013
  5,278
  5,540
  5,799
  6,057
  6,315
  6,577
  6,843
  7,115
  7,395
Issuance/(repurchase) of shares, $m
  0
  685
  997
  1,398
  1,899
  2,503
  3,211
  4,016
  4,911
  5,880
  6,908
  7,977
  9,068
  10,166
  11,254
  12,321
  13,354
  14,349
  15,299
  16,204
  17,064
  17,882
  18,662
  19,410
  20,131
  20,833
  21,522
  22,207
  22,893
  23,589
  24,301
Cash from financing (excl. dividends), $m  
  -48
  859
  1,249
  1,751
  2,380
  3,139
  4,029
  5,044
  6,173
  7,397
  8,699
  10,056
  11,445
  12,847
  14,241
  15,613
  16,948
  18,240
  19,480
  20,669
  21,806
  22,895
  23,940
  24,950
  25,930
  26,890
  27,837
  28,784
  29,736
  30,704
  31,696
Total cash flow (excl. dividends), $m
  0
  108
  158
  222
  303
  400
  515
  647
  794
  955
  1,127
  1,309
  1,496
  1,687
  1,880
  2,072
  2,262
  2,449
  2,632
  2,810
  2,985
  3,155
  3,322
  3,487
  3,650
  3,812
  3,975
  4,140
  4,307
  4,478
  4,655
Retained Cash Flow (-), $m
  -86
  -723
  -1,052
  -1,478
  -2,012
  -2,659
  -3,422
  -4,297
  -5,275
  -6,345
  -7,490
  -8,695
  -9,940
  -11,211
  -12,490
  -13,767
  -15,029
  -16,269
  -17,484
  -18,669
  -19,827
  -20,959
  -22,069
  -23,163
  -24,246
  -25,325
  -26,407
  -27,501
  -28,613
  -29,751
  -30,922
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -614
  -894
  -1,256
  -1,709
  -2,259
  -2,907
  -3,650
  -4,481
  -5,390
  -6,363
  -7,386
  -8,444
  -9,523
  -10,610
  -11,694
  -12,767
  -13,820
  -14,852
  -15,859
  -16,843
  -17,804
  -18,747
  -19,676
  -20,596
  -21,513
  -22,432
  -23,361
  -24,306
  -25,273
  -26,268
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  -589
  -818
  -1,093
  -1,407
  -1,751
  -2,110
  -2,466
  -2,801
  -3,096
  -3,336
  -3,507
  -3,603
  -3,621
  -3,562
  -3,433
  -3,244
  -3,007
  -2,735
  -2,442
  -2,140
  -1,842
  -1,556
  -1,290
  -1,049
  -837
  -654
  -501
  -376
  -276
  -198
Current shareholders' claim on cash, %
  100
  64.1
  42.4
  29.0
  20.4
  14.8
  11.0
  8.3
  6.5
  5.1
  4.1
  3.4
  2.8
  2.4
  2.0
  1.8
  1.5
  1.4
  1.2
  1.1
  1.0
  0.9
  0.8
  0.8
  0.7
  0.7
  0.6
  0.6
  0.5
  0.5
  0.5

Advantage Oil & Gas Ltd. is an intermediate natural gas and liquids development and production company. The Company is engaged in the business of natural gas exploitation, development, acquisition and production in the Province of Alberta. The Company focuses on the development of Montney resource play at Glacier, Alberta in Western Canada. The Company has drilled over 10 Montney gas wells. The Glacier property lies along the Alberta side of the border with British Columbia between Grande Prairie, Alberta and Dawson Creek, British Columbia. The primary zones of interest are within the Triassic Montney and Doig formation siltstones. The Glacier property consists of over 90 net sections of land with Doig/Montney interests. It owns and operates a gas plant located at 5-02-76-12W6. It also holds interest in approximately 20 additional sections of Doig/Montney land rights in the Glacier, Valhalla and Wembley area proximal to its existing land holdings.

FINANCIAL RATIOS  of  Advantage Oil & Gas Ltd. (AAV)

Valuation Ratios
P/E Ratio -76.1
Price to Sales 7.8
Price to Book 1
Price to Tangible Book
Price to Cash Flow 7
Price to Free Cash Flow 25.4
Growth Rates
Sales Growth Rate 24.6%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -33.5%
Cap. Spend. - 3 Yr. Gr. Rate -2.9%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 12.7%
Total Debt to Equity 12.7%
Interest Coverage -1
Management Effectiveness
Return On Assets -0.6%
Ret/ On Assets - 3 Yr. Avg. 1%
Return On Total Capital -1.2%
Ret/ On T. Cap. - 3 Yr. Avg. 0.5%
Return On Equity -1.4%
Return On Equity - 3 Yr. Avg. 0.7%
Asset Turnover 0.1
Profitability Ratios
Gross Margin 87.3%
Gross Margin - 3 Yr. Avg. 88.4%
EBITDA Margin 66.9%
EBITDA Margin - 3 Yr. Avg. 88.8%
Operating Margin -12.7%
Oper. Margin - 3 Yr. Avg. 20.4%
Pre-Tax Margin -12.7%
Pre-Tax Margin - 3 Yr. Avg. 20.4%
Net Profit Margin -10.2%
Net Profit Margin - 3 Yr. Avg. 4.7%
Effective Tax Rate 20%
Eff/ Tax Rate - 3 Yr. Avg. 25.4%
Payout Ratio 0%

AAV stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the AAV stock intrinsic value calculation we used $157 million for the last fiscal year's total revenue generated by Advantage Oil & Gas Ltd.. The default revenue input number comes from 2016 income statement of Advantage Oil & Gas Ltd.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our AAV stock valuation model: a) initial revenue growth rate of 60% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for AAV is calculated based on our internal credit rating of Advantage Oil & Gas Ltd., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Advantage Oil & Gas Ltd..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of AAV stock the variable cost ratio is equal to 77.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for AAV stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 4.1% for Advantage Oil & Gas Ltd..

Corporate tax rate of 27% is the nominal tax rate for Advantage Oil & Gas Ltd.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the AAV stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for AAV are equal to 922.6%.

Life of production assets of 12.5 years is the average useful life of capital assets used in Advantage Oil & Gas Ltd. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for AAV is equal to -12.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $1208 million for Advantage Oil & Gas Ltd. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 185.596 million for Advantage Oil & Gas Ltd. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Advantage Oil & Gas Ltd. at the current share price and the inputted number of shares is $1.2 billion.

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Financial statements of AAV
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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