Refineries are generally highly-valued assets, worth in the hundreds of millions to multiple billions of dollars. This reflects both the high capital cost of building a refinery and the high cash flows that an operating refinery will typically generate.
There are a number of ways a refinery’s value can be measured, depending upon the decision being considered:
- Replacement cost – replacement costs estimate the cost of constructing a refinery at current construction market conditions. This is typically built up based on the cost of each individual process unit, plus land, and a scale up for infrastructure, tankage, and location adjustments
- Net-Present Value of cash flows (NPV or DCF) – The value of a refinery as a continuing business is best estimated based on a forecast of future cash flows, discounted to the present. This method is the most transparent, but also highly sensitive to forecasts of future market conditions, which is fraught with uncertainty
- EBITDA multiples – Using reported financial data from peer companies (pure play refiners) allows for an estimate of a refiners value based on its current or recent profitability. Comparing the peer companies’ ratio of company value to recent EBITDA gives a ratio that can then be applied to a specific refiner or refinery’s current EBITDA to get a value. This provides a good estimate of how the financial market would value the business if publicly listed. However, this method is limited by the availability of truly comparable peers, and of a good estimate of the target refinery’s current/recent EBITDA.
- Transaction values - Refineries are bought and sold frequently, either entirely or through partial ownership. It is not unusual to have up to a dozen transactions globally in a single year. Reported transaction values give an indication of what the market is willing to pay for a refinery. However, adjusting for comparability can be tricky. Capacity and complexity number can be used to adjust for differences in size and configuration, but this can still leave a big difference if market location and operations performance is unaccounted for. Also, it is important to take into account how the value of hydrocarbon inventories was accounted for, given the large impact these can have on overall transaction value