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Gold/Mining/Energy : Strictly: Drilling and oil-field services -- Ignore unavailable to you. Want to Upgrade?

To: Ed Ajootian who wrote (82951)	12/28/2000 7:54:25 PM
From: Big Dog	Read Replies (1) \| Respond to of 95453

Ed, That's a little off my beaten path. Sorry. big

To: Ed Ajootian who wrote (82951)	12/28/2000 9:33:33 PM
From: Razorbak	Read Replies (1) \| Respond to of 95453

SEC PV10 Adjustments (Long!) Ed: <<< The SEC PV10 figures for 12/31/00 will be totally meaningless this year, since they will have to reflect what current natgas prices are (i.e., ~ $10) vs. what they will more likely average out to for the time it would take to produce out the reserves (you make the call). As we all know, SEC PV10 is a key metric used to corroborate values of E&P companies that might have been arrived at from a cash flow or other similar approach. Was wondering what you plan to do with respect to trying to somehow adjust the reported numbers for more realistic numbers, and if so, how one would do this. >>> Before I answer your question, allow me to provide a little background information for those on the thread who may not understand the terminology that you used. The SEC PV10 metric that you referred to is governed by "Financial Accounting Standards Board (FASB) Statement No. 69, Disclosures About Oil and Gas Producing Activities," which can be summarized as follows... Summary of Statement No. 69 Disclosures about Oil and Gas Producing Activities -- An amendment of FASB Statements 19, 25, 33, and 39 (Issued 11/82) -------------------------------------------------------------------------------- Summary This Statement establishes a comprehensive set of disclosures for oil and gas producing activities and replaces requirements of several earlier Statements. The requirement to disclose the method of accounting for costs incurred in oil and gas producing activities and the manner of disposing of related capitalized costs is continued for both publicly traded and other enterprises. None of the other requirements in this Statement is extended to enterprises that are not publicly traded, thereby eliminating existing requirements for them to disclose information about proved oil and gas reserve quantities, capitalized costs, and costs incurred. Publicly traded enterprises with significant oil and gas activities, when presenting a complete set of annual financial statements, are to disclose the following as supplementary information, but not as a part of the financial statements: - Proved oil and gas reserve quantities - Capitalized costs relating to oil and gas producing activities - Costs incurred in oil and gas property acquisition, exploration, and development activities - Results of operations for oil and gas producing activities - A standardized measure of discounted future net cash flows relating to proved oil and gas reserve quantities This Statement eliminates a previous requirement to disclose capitalized costs in complete sets of interim financial statements. In addition, this Statement permits historical cost/constant dollar measures to be used for oil and gas mineral interests when presenting current cost information under the provisions of FASB Statement No. 39, Financial Reporting and Changing Prices: Specialized Assets-Mining and Oil and Gas. rutgers.edu The "standardized measure of discounted future net cash flows relating to proved oil and gas reserve quantities" is often referred to as the "Standardized Measure", "SEC Value", or "SEC PV10" for short. The requirements of the SEC PV10 calculation that provide the basis for standardization are as follows: 1) Prices received at fiscal year end for products (oil, gas, coal, sulfur) sold 2) Prices are held constant (no escalation) 3) Costs are not escalated 4) A 10% discount rates is used (hence "SEC PV10) The following link contains an example of an SEC PV10 analysis presented by Total for the fiscal years 1994-96... calvacom.fr Now with that information as background, let's return to your question. Here is the crux of the problem: Since different market prices only affect the top line of the SEC PV10 calculation (i.e., future cash inflows), and not the middle and lower lines of the calculation (i.e., production costs, development costs, and income taxes), you can't accurately approximate the change in the bottom line number (i.e., future net cash flows) by simply multiplying the SEC PV10 by the ratio of actual price (say $10/mmscf) to your target hypothetical price (say $4.00/mmscf). So what can you do if you want to approximate the effect of different price scenarios on the SEC PV10 number? I recommend: (1) calculating the NPV@10% of the difference between the top line cash flow streams under the different price scenarios, and then (2) adding/subtracting that number to/from the SEC PV10. I hope that makes sense. It's not an easy calculation to make, but it's a good ballpark approximation. I wish there was a simpler answer, but I can't think of one. To the best of my knowledge, no industry organization or trade association has developed a table to simply this type of comparison of price change effects on SEC PV10 calculations because each company's revenue mix and cost structure is unique. To be honest, the complexity of the SEC standardized measure is exactly the reason that I don't use it on a regular basis for side by side comparisons. Hope this helps. Razor

To: Ed Ajootian who wrote (82951)	12/29/2000 1:36:30 AM
From: dfloydr	Read Replies (1) \| Respond to of 95453

Ed, the president of one small E&P Co. told me that they were required to mark reserve values down when prices went down, but they are not allowed to mark them back up when prices rise. Of course new finds will be tagged at present price levels. When buying reserves at today's prices, the buyer places them on the books at today's prices even though the seller was not allowed to do so. May be the motivation behind some of the buying and selling of reserves we have seen? Can anyone make a more definitive statement on what FASB rules will be doing to PV10 numbers?