Intrinsic value of Erin Energy - ERN

Previous Close

$1.63

  Intrinsic Value

$0.00

stock screener

  Rating & Target

str. sell

-100%

Previous close

$1.63

 
Intrinsic value

$0.00

 
Up/down potential

-100%

 
Rating

str. sell

We calculate the intrinsic value of ERN 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

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

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, %
  14.71
  30.00
  27.50
  25.25
  23.23
  21.40
  19.76
  18.29
  16.96
  15.76
  14.69
  13.72
  12.85
  12.06
  11.35
  10.72
  10.15
  9.63
  9.17
  8.75
  8.38
  8.04
  7.74
  7.46
  7.22
  6.99
  6.79
  6.62
  6.45
  6.31
  6.18
Revenue, $m
  78
  131
  167
  210
  258
  314
  376
  444
  520
  602
  690
  785
  885
  992
  1,105
  1,223
  1,347
  1,477
  1,613
  1,754
  1,901
  2,054
  2,212
  2,377
  2,549
  2,727
  2,913
  3,105
  3,306
  3,514
  3,731
Variable operating expenses, $m
 
  96
  122
  153
  189
  229
  275
  325
  380
  440
  504
  574
  647
  725
  808
  894
  985
  1,080
  1,179
  1,282
  1,389
  1,501
  1,617
  1,738
  1,863
  1,994
  2,129
  2,270
  2,416
  2,569
  2,728
Fixed operating expenses, $m
 
  165
  168
  172
  176
  180
  183
  187
  192
  196
  200
  205
  209
  214
  218
  223
  228
  233
  238
  243
  249
  254
  260
  266
  271
  277
  283
  290
  296
  303
  309
Total operating expenses, $m
  207
  261
  290
  325
  365
  409
  458
  512
  572
  636
  704
  779
  856
  939
  1,026
  1,117
  1,213
  1,313
  1,417
  1,525
  1,638
  1,755
  1,877
  2,004
  2,134
  2,271
  2,412
  2,560
  2,712
  2,872
  3,037
Operating income, $m
  -129
  -129
  -123
  -115
  -106
  -95
  -82
  -68
  -52
  -34
  -15
  7
  29
  53
  79
  106
  134
  164
  196
  228
  262
  298
  335
  374
  414
  456
  500
  546
  593
  643
  694
EBITDA, $m
  -71
  -99
  -85
  -67
  -47
  -23
  4
  34
  68
  105
  144
  187
  233
  282
  333
  388
  445
  505
  567
  632
  700
  771
  845
  922
  1,002
  1,085
  1,171
  1,261
  1,355
  1,452
  1,554
Interest expense (income), $m
  10
  34
  -44
  -25
  -1
  25
  55
  89
  126
  167
  212
  260
  312
  367
  425
  486
  551
  618
  689
  763
  840
  920
  1,003
  1,090
  1,180
  1,273
  1,370
  1,471
  1,576
  1,686
  1,799
Earnings before tax, $m
  -143
  -163
  -79
  -91
  -105
  -120
  -138
  -157
  -178
  -201
  -227
  -254
  -283
  -313
  -346
  -380
  -416
  -454
  -494
  -535
  -577
  -622
  -668
  -716
  -765
  -817
  -870
  -926
  -983
  -1,043
  -1,105
Tax expense, $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
Net income, $m
  -142
  -163
  -79
  -91
  -105
  -120
  -138
  -157
  -178
  -201
  -227
  -254
  -283
  -313
  -346
  -380
  -416
  -454
  -494
  -535
  -577
  -622
  -668
  -716
  -765
  -817
  -870
  -926
  -983
  -1,043
  -1,105

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  7
  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
  289
  326
  415
  520
  641
  778
  932
  1,103
  1,290
  1,493
  1,712
  1,947
  2,197
  2,462
  2,742
  3,035
  3,343
  3,666
  4,002
  4,352
  4,716
  5,096
  5,490
  5,899
  6,325
  6,767
  7,227
  7,705
  8,203
  8,720
  9,259
Adjusted assets (=assets-cash), $m
  282
  326
  415
  520
  641
  778
  932
  1,103
  1,290
  1,493
  1,712
  1,947
  2,197
  2,462
  2,742
  3,035
  3,343
  3,666
  4,002
  4,352
  4,716
  5,096
  5,490
  5,899
  6,325
  6,767
  7,227
  7,705
  8,203
  8,720
  9,259
Revenue / Adjusted assets
  0.277
  0.402
  0.402
  0.404
  0.402
  0.404
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
  0.403
Average production assets, $m
  308
  303
  386
  483
  595
  723
  866
  1,024
  1,197
  1,386
  1,590
  1,808
  2,040
  2,286
  2,546
  2,818
  3,104
  3,403
  3,716
  4,041
  4,379
  4,731
  5,097
  5,478
  5,873
  6,284
  6,711
  7,155
  7,616
  8,097
  8,597
Working capital, $m
  -264
  -577
  -735
  -921
  -1,135
  -1,378
  -1,650
  -1,952
  -2,283
  -2,642
  -3,030
  -3,446
  -3,889
  -4,358
  -4,853
  -5,373
  -5,918
  -6,488
  -7,083
  -7,703
  -8,348
  -9,019
  -9,717
  -10,442
  -11,195
  -11,978
  -12,792
  -13,638
  -14,519
  -15,434
  -16,388
Total debt, $m
  217
  -181
  -101
  -6
  103
  226
  365
  518
  686
  869
  1,066
  1,278
  1,503
  1,741
  1,993
  2,258
  2,535
  2,825
  3,127
  3,442
  3,770
  4,112
  4,466
  4,835
  5,218
  5,616
  6,030
  6,460
  6,908
  7,374
  7,859
Total liabilities, $m
  515
  293
  374
  468
  577
  701
  839
  992
  1,161
  1,344
  1,541
  1,752
  1,977
  2,216
  2,467
  2,732
  3,009
  3,299
  3,601
  3,917
  4,245
  4,586
  4,941
  5,309
  5,693
  6,091
  6,505
  6,935
  7,382
  7,848
  8,333
Total equity, $m
  -225
  33
  42
  52
  64
  78
  93
  110
  129
  149
  171
  195
  220
  246
  274
  304
  334
  367
  400
  435
  472
  510
  549
  590
  633
  677
  723
  771
  820
  872
  926
Total liabilities and equity, $m
  290
  326
  416
  520
  641
  779
  932
  1,102
  1,290
  1,493
  1,712
  1,947
  2,197
  2,462
  2,741
  3,036
  3,343
  3,666
  4,001
  4,352
  4,717
  5,096
  5,490
  5,899
  6,326
  6,768
  7,228
  7,706
  8,202
  8,720
  9,259
Debt-to-equity ratio
  -0.964
  -5.560
  -2.420
  -0.120
  1.600
  2.910
  3.910
  4.700
  5.320
  5.820
  6.230
  6.560
  6.840
  7.070
  7.270
  7.440
  7.580
  7.710
  7.810
  7.910
  7.990
  8.070
  8.140
  8.200
  8.250
  8.300
  8.340
  8.380
  8.420
  8.460
  8.490
Adjusted equity ratio
  -0.823
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -142
  -163
  -79
  -91
  -105
  -120
  -138
  -157
  -178
  -201
  -227
  -254
  -283
  -313
  -346
  -380
  -416
  -454
  -494
  -535
  -577
  -622
  -668
  -716
  -765
  -817
  -870
  -926
  -983
  -1,043
  -1,105
Depreciation, amort., depletion, $m
  58
  30
  39
  48
  60
  72
  87
  102
  120
  139
  159
  181
  204
  229
  255
  282
  310
  340
  372
  404
  438
  473
  510
  548
  587
  628
  671
  715
  762
  810
  860
Funds from operations, $m
  71
  -133
  -40
  -43
  -45
  -48
  -51
  -55
  -58
  -63
  -68
  -73
  -79
  -85
  -91
  -99
  -106
  -114
  -122
  -131
  -139
  -149
  -158
  -168
  -178
  -189
  -199
  -210
  -222
  -233
  -245
Change in working capital, $m
  65
  -133
  -159
  -186
  -214
  -243
  -272
  -302
  -331
  -360
  -388
  -416
  -443
  -469
  -495
  -520
  -545
  -570
  -595
  -620
  -645
  -671
  -698
  -725
  -753
  -783
  -814
  -846
  -880
  -916
  -953
Cash from operations, $m
  6
  0
  118
  143
  169
  195
  221
  247
  272
  297
  320
  343
  364
  384
  403
  422
  439
  456
  473
  489
  506
  522
  539
  557
  575
  594
  615
  636
  659
  683
  708
Maintenance CAPEX, $m
  0
  -23
  -30
  -39
  -48
  -60
  -72
  -87
  -102
  -120
  -139
  -159
  -181
  -204
  -229
  -255
  -282
  -310
  -340
  -372
  -404
  -438
  -473
  -510
  -548
  -587
  -628
  -671
  -715
  -762
  -810
New CAPEX, $m
  -19
  -69
  -83
  -97
  -112
  -127
  -143
  -158
  -174
  -189
  -204
  -218
  -232
  -246
  -260
  -273
  -286
  -299
  -312
  -325
  -338
  -352
  -366
  -380
  -395
  -411
  -427
  -444
  -462
  -480
  -500
Cash from investing activities, $m
  -19
  -92
  -113
  -136
  -160
  -187
  -215
  -245
  -276
  -309
  -343
  -377
  -413
  -450
  -489
  -528
  -568
  -609
  -652
  -697
  -742
  -790
  -839
  -890
  -943
  -998
  -1,055
  -1,115
  -1,177
  -1,242
  -1,310
Free cash flow, $m
  -13
  -93
  5
  7
  8
  8
  6
  2
  -4
  -12
  -22
  -34
  -49
  -66
  -85
  -106
  -129
  -153
  -180
  -207
  -237
  -268
  -300
  -333
  -368
  -404
  -441
  -479
  -519
  -559
  -601
Issuance/(repayment) of debt, $m
  1
  -321
  81
  94
  109
  123
  138
  153
  168
  183
  197
  211
  225
  238
  252
  264
  277
  290
  302
  315
  328
  341
  355
  369
  383
  398
  414
  430
  448
  466
  485
Issuance/(repurchase) of shares, $m
  0
  559
  88
  101
  117
  134
  153
  174
  197
  222
  249
  277
  308
  340
  374
  410
  447
  486
  527
  570
  614
  660
  707
  757
  808
  861
  916
  974
  1,033
  1,095
  1,159
Cash from financing (excl. dividends), $m  
  6
  238
  169
  195
  226
  257
  291
  327
  365
  405
  446
  488
  533
  578
  626
  674
  724
  776
  829
  885
  942
  1,001
  1,062
  1,126
  1,191
  1,259
  1,330
  1,404
  1,481
  1,561
  1,644
Total cash flow (excl. dividends), $m
  -1
  145
  173
  203
  234
  265
  298
  330
  362
  393
  424
  454
  484
  513
  541
  568
  596
  623
  650
  677
  705
  733
  762
  792
  823
  856
  889
  925
  962
  1,001
  1,042
Retained Cash Flow (-), $m
  139
  -559
  -88
  -101
  -117
  -134
  -153
  -174
  -197
  -222
  -249
  -277
  -308
  -340
  -374
  -410
  -447
  -486
  -527
  -570
  -614
  -660
  -707
  -757
  -808
  -861
  -916
  -974
  -1,033
  -1,095
  -1,159
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
 
  2
  2
  3
  4
  5
  6
  7
  8
  10
  11
  13
  15
  17
  19
  21
  23
  26
  28
  31
  33
  36
  39
  42
  45
  48
  52
  55
  59
  63
  67
Cash available for distribution, $m
 
  -414
  85
  101
  117
  132
  145
  156
  165
  171
  176
  177
  176
  173
  167
  159
  149
  137
  123
  108
  91
  74
  55
  36
  15
  -6
  -27
  -49
  -71
  -94
  -117
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
 
  -397
  78
  88
  96
  102
  105
  105
  103
  98
  92
  84
  75
  66
  56
  47
  38
  30
  23
  17
  12
  8
  5
  2
  1
  0
  -1
  -1
  -1
  -1
  -1
Current shareholders' claim on cash, %
  100
  50.0
  13.5
  3.9
  1.2
  0.4
  0.1
  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
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0

Erin Energy Corporation is an independent oil and gas exploration and production company. The Company is focused on energy resources in Africa. It is focused on exploration for and production of hydrocarbons where commercial reserves have been found and developed. As of December 31, 2016, the Company's asset portfolio consisted of seven licenses across four countries covering an area of approximately five million acres (approximately 19,000 square kilometers). The Company's geographical segments include Nigeria, Kenya, The Gambia and Ghana. The Company owns producing properties and conducts exploration activities offshore Nigeria, conducts exploration activities offshore Ghana and The Gambia, and onshore Kenya. The Company has 100% interest in Oil Mining Leases 120 and 121; four Production Sharing Contracts in the Lamu Basin of Kenya; two exploration licenses offshore The Gambia, and interest in Expanded Shallow Water Tano (ESWT) block offshore Ghana.

FINANCIAL RATIOS  of  Erin Energy (ERN)

Valuation Ratios
P/E Ratio -2.4
Price to Sales 4.4
Price to Book -1.5
Price to Tangible Book
Price to Cash Flow 57.8
Price to Free Cash Flow -26.7
Growth Rates
Sales Growth Rate 14.7%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -77.4%
Cap. Spend. - 3 Yr. Gr. Rate 80.2%
Financial Strength
Quick Ratio 1
Current Ratio 0
LT Debt to Equity -90.7%
Total Debt to Equity -96.4%
Interest Coverage -13
Management Effectiveness
Return On Assets -38.6%
Ret/ On Assets - 3 Yr. Avg. -45.8%
Return On Total Capital -230.9%
Ret/ On T. Cap. - 3 Yr. Avg. -130.2%
Return On Equity 91.3%
Return On Equity - 3 Yr. Avg. -94.8%
Asset Turnover 0.2
Profitability Ratios
Gross Margin -19.2%
Gross Margin - 3 Yr. Avg. -41%
EBITDA Margin -96.2%
EBITDA Margin - 3 Yr. Avg. -236.6%
Operating Margin -165.4%
Oper. Margin - 3 Yr. Avg. -316.5%
Pre-Tax Margin -183.3%
Pre-Tax Margin - 3 Yr. Avg. -332.1%
Net Profit Margin -182.1%
Net Profit Margin - 3 Yr. Avg. -331.2%
Effective Tax Rate 0%
Eff/ Tax Rate - 3 Yr. Avg. 0%
Payout Ratio 0%

ERN stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the ERN stock intrinsic value calculation we used $101 million for the last fiscal year's total revenue generated by Erin Energy. The default revenue input number comes from 2016 income statement of Erin Energy. 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 ERN stock valuation model: a) initial revenue growth rate of 30% 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 ERN is calculated based on our internal credit rating of Erin Energy, 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 Erin Energy.
    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 ERN stock the variable cost ratio is equal to 73.1%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $161 million in the base year in the intrinsic value calculation for ERN 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 24.4% for Erin Energy.

Corporate tax rate of 27% is the nominal tax rate for Erin Energy. 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 ERN stock is equal to 1.9%.

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 ERN are equal to 230.4%.

Life of production assets of 10 years is the average useful life of capital assets used in Erin Energy 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 ERN is equal to -439.2%. 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 - $-363 million for Erin Energy - 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 214 million for Erin Energy 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 Erin Energy at the current share price and the inputted number of shares is $0.3 billion.

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Financial statements of ERN
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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