Cliff:
I believe these are Mr. White's important points, with thanks for such a full and dispassionate explanation.
exchange2000.com
...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....
...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....
...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....
...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.... [emphasis supplied in bold]
A wonderful topic for "DD" is the FASB rules regarding exactly these situations.
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