Nick Antill is a Director of EconoMatters, an energy consultancy offering an extensive range of skills to clients involved with gas markets worldwide. Prior to this, Nick was responsible for Morgan Stanley's European team, and personally produced most of its research on the integrated oil companies.
He spent 16 years in the City as a financial analyst covering the oil and gas sector and also has a background in the downstream oil business. Nick is an associate of the City financial training firm, BG Training, for whom he specialises in equity valuation and related subjects.
EconoMatters is an energy consultancy whose consultants have held senior positions inside companies involved with the world's major natural gas and LNG projects. The company services include strategic and contract advice, project assistance, economic analysis, market overviews, pricing information and commercial advice on liberalising markets.
The most often-repeated mistake in finance is 'It doesn't matter - it's only a non-cash item'.
While it is true that the value of a company is the discounted value of its future free cash flows, it does not follow that non-cash items do not matter. There is a clear difference between provisions for deferred taxation that are unlikely ever to be paid, and provisions for decommissioning a nuclear power station - a large future cost that will certainly be incurred.
It is easy to get to a high value for a company - just underestimate the capital investments that it will need to make.
There are three components to a cash flow forecast: profit, which is often analysed quite carefully; depreciation and other non-cash items, which are usually analysed adequately; and capital expenditure, which is often a banged-in number that is quite inconsistent with the other two, and generally much too low.
Valuations must be based on realistic long term assumptions - at best GDP growth rates and barely adequate returns.
It is tempting, when valuing fast growing companies with strong technical advantages over their rivals, to assume that these conditions will continue forever. They will not. As the saying goes, 'In the end, everything is a toaster'. If this means that the forecast needs to be a very long one, so be it - it will be less inaccurate than running a valuation off an accurate five year forecast, and then extrapolating this to infinity.
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