Zion Oil & Gas Inc (ZNOG)

[KyOil]

Benchmark of Oil & Gas Exploration Co Valuation

The best way to estimate Zion's value (market cap) and share price is by comparing to other companies that explore for oil and gas that are "independent" like Zion. Meaning they are focused on finding and producing hydrocarbons, not refining crude oil nor retail gas stations.

Perhaps a good example is Apache, which trades under the symbol APA. There are others that could be added to the list if someone has an interest. APA is about the size that Zion would need to be in order to fulfill their goal of supplying Israel with oil.

A primary metric in determining value is the Proven Reserves. Proven is above Probable which is above Possible. For illustration of their meanings, MJ had Possible reserves after MJ01, had Probable reserves after 3D, and will have Proven reserves only after extensive testing and some production. So, Zion will not have Proven reserves for some time, likely a couple of years.

Notice that APA has 5 years of reserves for their given production rate. Most exploration companies like to keep 5 years or more in Proven reserves, with continuing exploration to replace the drawdown of the Proven reserves. Hence Probable reserves and Possible reserves are an important part of an independent's portfolio, even though Probable and Possible are often not public info. So, the key to establishing an exploration's company's value via a PE is the company's ability to keep their reserves replenished. If a venture only has one discovery, then its value is #barrels x netback x discount factor. As the barrels come out of the ground, then the value goes down. Individual projects with private investment are undertaken this way, but all publicly traded companies depend on reservoir replacement to support their PE.



Turning our attention to ZNOG, if it has a similar reserve, similar production rate, and similar ability to replenish the reserves, then its market value should be similar. Assuming ZNOG's shares are 800 million when that occurs, then ZNOG would be trading at $10/share ($8 billion value divided by 800 million shares). But, the pps will not be constant over time; it will jump up and down depending on many factors such as the price of oil and reservoir size expectations.