Everyone, for the record, I called ZEI and spoke with a IR representative about this. He stated that the 673 million on the balance sheet was ONLY THE COST ZEI PAID FOR THE LAND & MINERAL RIGHTS, NOT THE ESTIMATED VALUE OF THE RESERVES. NO PER TON RELATIONSHIP between the 1.2 B tons and 673 million exist. But don't take my word for it - call ZEI IR at (618) 394-2627, I spoke with Mr. Francis Canovan (nice guy and informative). BTW Wireless, if you call him, I would not mention that you've been posting on the internet that ZEI's reserves are worth only 673 million dollars, people these days get sued for less."
Of course it was only the cost ZEI paid for the land and mineral rights, and not the "estimated value of the reserves." A company can only show these items at book value if they're purchased, because that's the "arms length" valuation. It's what they were willing to pay for the assets, based upon an educated decision, and what someone was willing to sell them for. If the company wants to restate these assets at a higher valuation in the asset column, there are a lot of severe restrictions regarding the issue of "proved reserves." The reason is to guard against arbitrary inflation of asset values.
To illustrate, let's take an example transaction recently concluded by Noble Affiliates, a midcap O&G producer. From Noble Affiliates' (NBL) Mar 31 98 10Q: "The Company purchased oil and gas properties from New England Energy Incorporated, a wholly owned subsidiary of New England Electric System, for $50 million, effective as of January 1, 1998. The Company estimates net proved reserves of the properties to be 1 million barrels of oil/condensate and 50.2 billion cubic feet of gas as of the effective date."
The following data is from the same 10Q for their average prices obtained for oil and gas during the same period:
Average Gas Price, MCF: $2.24
Average Oil Price: $13.37
This would produce the following arbitrary "value" for these assets (qty X market price).
Oil reserves estimate: $13,370,000
Gas reserves estimate: $110,448,000
Total estimated "value" of the underlying reserves that they purchased for $50 million is therefore about $124 million (note: these are actively producing properties, not "rights" in a place where they haven't sunk wells or the price they paid would be a lot lower). So the question here is: why would any idiot sell something for $50 million that has a "value" of $124 million? Several reasons. First, it costs something to get it out of the ground. In the above case, if they pay $50 mil for it, and can get maybe around $125 mil for the total proved reserves, then what happens if it costs them $75 mil to get it out of the ground and into the market? The asset is worth nothing until the prices of oil and gas go up. On the other hand, if it only costs them $20 million to extract, then it's worth a good bit. Second, if the assets are valued by reference to constantly changing oil and gas prices, the book value of the company will whipsaw constantly. This makes for some very difficult accounting. In general, when companies purchase producing properties, they are carried on the books at cost. This changes in the event that the estimate of reserves decreases (in which case a charge is taken to reduce the value shown in book value), or sometimes, if the value of the property proves to be dramatically higher than the "arm's length" valuation that was used in the purchase.
Note the expression: "net proved reserves." In order for these to be used in any conceivable calculation of book value, as opposed to using the price they paid ($50 mil), the S.E.C. requires that the reserves have to be clearly delineated in an active production situation (for example, in the case of O&G, close to an adjacent producing well) and recoverable at an economical cost. Otherwise there is lots of room for inflating the value of a company.
For example, if you have a 500,000 BBL field in the North Sea, it's probably not even worth looking at, and can't be considered "proved reserves." The reason is that it would cost more than it's worth to get it out of the ground. However, if you have the same size field in the west Texas Permian Basin, onshore drilling three thousand feet down, it's a nice little property because it doesn't cost too much to recover it.
So, if you look at this "$200 million reserves" being bandied about, the key question is, what exactly does that mean? Is that the total value of the minerals if they were extracted and delivered to the market? Is it the net estimated value remaining after all the extraction costs? Something else? MTEI paid a certain amount of money for the "option" to develop these assets. How much did they pay? Look at how much they paid, and you're likely to get at least a good starting point for the issue of reasonable asset values, because that's the price someone sold it at. It's probably pretty much the price they would get if MTEI decided to sell these same "options." You have to assume that the seller is not a total nincompoop, and sold it at that price for a semblance of a good reason. Then, if you're going to value these assets even to yourself at a much higher price, you have to find the justification. What will it cost to get that $200 million of stuff to the market (including all costs such as marketing, reclamation etc.)? And what's left after that?
This is not any attempt to attack MTEI. It is, however, a note of caution is using some arbitrary number like $200 million to try to come up with a "valuation" of MTEI of a couple of bucks a share. This is just basic oil and gas stuff, rudiments that you'll see if you peruse a few annual reports from actively producing O&G companies. |
