Hi Richard,
...it will be "interesting" to see how some of the net asset values look in the 1998 Annual Reports...
...many n.a.v.'s last year were done using $18.50 - $20us WTI. Ceiling tests are going to (imo....) result in many previously proven oil reserves all of a sudden not being economic....
Yes, Richard, there certainly will be numerous NAV writedowns as a consequence of "ceiling tests" this year. With "light" oil revenues down ~40%, netbacks will be down maybe 55-60%. And, most "heavy" oil netbacks are nnn (i.e. negative, nil or negligible!!). So, the management of most public oil companies will necessarily write their oil assets down this year and look like a bunch of incompetent a**holes to their shareholders. But, that's o.k. because when oil prices do eventually move up again (in the next 12 - 18 months??), that same management will look like they walk on water (to their NEW shareholders !!).
Although oil industry investments (finding, development, acquisition) are of a long term nature and individual remaining reserve lives can be as much as 40 years, the oil industry is forced to evaluate its remaining reserves using a pricing that is nothing more than a "spot commodity price" no longer in effect!!! (I have no interest in debating the pros and cons of this accounting procedure, but I will express my personal opinion that this is not the most intelligent standard that could be adopted for a cyclical industry !!).
...your comment about many jrs. trading at more than 50% of n.a.v. may be using the rearview mirror (ie. last year's assumptions).
Are you building the forward-think into your statements or are we still looking backwards?
Richard, when I comment about NAV, my comments are based solely upon "rule of thumb" valuations, and NOT upon rigorous constant dollar economics employing year end commodity pricing and operating costs.
So given the current oil/gas pricing environment, my NAV's are both forward and backward looking !!! (i.e. They certainly do not look to December 31, 1998 !!!) <ggg>
Hopefully they look "reasonably" over the remaining reserve life of the assets being valued. To explain, I compute NAV using $7.00/bbl for proven "conventional" oil reserves, $3.00/bbl for most proven "heavy" oil, and $0.60/mcf for proven gas reserves. I discount all probable reserves by 50%. If the undeveloped land position is significant, I arbitrarily value it at $100/net acre.
As a reasonableness check, I will compare my reserve value derived as described above with that derived using $20,000/boepd of next years expected average production.
The NAV's I arrive at using the above approach will almost certainly exceed those that come out of most Dec 31, 1998 ceiling tests. But, I'd guess that they'd not be too far off those that were derived for most juniors as at Dec 31, 1997. The meaningful question is of course, How representative will the unit reserve values be over the remaining reserve life of the companies evaluated ? IMHO they will be much better than the extremely pessimistic valuations to be derived via December 31, 1998 ceiling tests (but then I do have confidence that the pricing of our non-renewable resources will increase modestly in the future).
For your information Richard, in the 10 years that I have ran my own private oil companies, the only rigorous cash flow projections and economic evaluations that I ever ran on my properties were carried out at the time of sale of the property/company. In evaluating an acquisition, exploration or development prospect, I did only what I call "cigarette pack" economics (i.e. using rule of thumb reserve values as described above). Why? Well, if the project economics could not be seen to be extremely attractive via only such cigarette pack economics, then the project risk was simply too great to be of any interest to me.
Just a tho't and no intent to slag......... appreciate views, etc. you/others add to the thread.
No problem. Have a nice evening.
Later,
grayhairs |
