Valuation By Discounted Cash Flow Analysis

	Valuation By Discounted Cash Flow Analysis
	Evaluating a property using discounted cash flows (DCF) is a two-step process: we must create a production forecast (predict the amount and schedule of future production) then predict the financial performance of the property (including expected future product prices and expenses). The steps are:
	1) Make a production forecast which is a prediction of the amounts of future production of oil, gas, NGL, etc. from the property projected over time. 2) Perform a discounted cash flow analysis of those expected production streams. That is, determine the present value of the net dollars that will be generated in the future from the production and sale of the forecasted amounts of oil and gas less the operating expenses, royalties, and taxes incurred as the production streams are produced. The resulting cash flow stream is discounted to a reference date.
	Property evaluation is a sequential process: we must first create the production forecast (predict the amounts) before we can calculate the discounted cash flow.