This year-end reporting cycle that is coming up is gonna be pretty interesting. The big fireworks will be the full cost ceiling writedowns. If oil & gas prices were to end the year at the current level, and did not recover by the point that the companies put out their year-end numbers, I believe such writedowns would be enormous.
I believe the majority of E&P companies operating in North America will have to take writedowns of some amount, assuming sub $6 gas. With a $6 gas price you probably would need to have enjoyed F&D costs under $2/mcfe to avoid being in a writedown situation. Per Exhibit 14 of that recent Credit Suisse piece about E&P liquidity, only about 15 of the 50 or so companies in their universe have seen their F&D costs average under $2/mcfe for the last 3 years.
Many PUDs that are on the books would be rendered worthless at gas prices under $6. This is because drilling the wells to access those PUDs would not be economic at $6 gas. This would mean that, in addition to lowering the value of the reserves, for a given quantity of reserves, the low commodity prices will also cause huge drawdowns in the quantity of a company's reserves, especially if that company has a lot of PUDs.
One question I have, by any chance does anybody know how they come up with the estimate of future development costs in calculating the PV-10 value? Meaning, is it literally what you thought they would be as of midnight 12/31/08, or can you revise those estimates if you find out, say a month later (but before you have issued your numbers) that those estimates were too high because drilling costs have come down further? |
