“…the coming recession…” —- after listening to David Akin today talk about the Federal budget, the Federal government is now calling it a “slowing of the economy.” When will the declaration that we are in a recession come to fruition? Hasn’t there been two consecutive quarters of slowing economic numbers?
Is NPV of Future Development Costs (4.542B) already factored in NPV of total reserves (8,156B)?
And where can I get 28 years of reserves life? I see in corporate presentation they are planning to extract ~90 Mboe/year during next 27 years, but if I take their reserves (844.965Mboe) and divide by 90 Mboe/year I get just 9+ years... I'm puzzled.
I think you are confusing 90,000 Boe/day with annual output. Current production is 80,000 Boe/day or 29.2 million Boe/year and 844/29=~28 (we are partly through one year so I rounded down). Yes the FDC are already deducted in arriving at the NPV which is standard for DCF.
Thank you, Mike! Indeed I took wrong number (daily) instead of yearly.
The biggest problem I'm seeing now is that reserves are moving target - their reported size depend on oil price assumed to be "economical". So not sure if valuing current reserves at current price has much of predictive power... their size may shrink if oil is falling and rise if oil is rising... this amplifies oil price change effect. Not sure how to factor this in... It should depend on geology for every specific company (sigh).
BTW, I tried to make reserve estimations for MEG and OXY and got an impression that Canadian companies are better at declaring their reserves than US - OXY reports only Proved reserves, which is not helpful enough. Trying to dig why it is so loved by Buffet, saw a hint that OXY has a big undeveloped acreage with big probable reserves, but no estimate of their potential value.
How would you comment on simplified approach: instead of using probabilities and finding “likely” cost of reserves I may just use historical data and pick the oil price low enough (my data shows it’s near $50) to say “usually the price is higher in 70% of the time” and then calculate value of reserves based on this low-end price? Then if the math shows I’m still profitable - I can assume I already took care of downside, and upside will take care of itself. I won’t have any “target price” this way but not sure it is that important.
I understand limitations. As I see from the last 22 years of history: average (yearly) inflation-adjusted price of oil was <40 only in two years (2001,2002), plus 4 years it was between 40 and 50 (2000, 2003, 2016, 2020). All of the rest years it was >50, so if history has any meaning and if value of oil reserves at $50 is attractive - I may say that I have 70% chance of being right on the stock. Good enough for me.
Of course it's for pure-oil plays, bcs gas and liquids will need own stats.
The piece of the puzzle still to be uncovered (I’m rookie and I admit it) is to understand how to factor in FUTURE costs of extraction, royalties and asset replenishment since I guess they affect profitability a lot and we cannot know them in advance (can we?)
“…the coming recession…” —- after listening to David Akin today talk about the Federal budget, the Federal government is now calling it a “slowing of the economy.” When will the declaration that we are in a recession come to fruition? Hasn’t there been two consecutive quarters of slowing economic numbers?
A question about Deloitte model:
Is NPV of Future Development Costs (4.542B) already factored in NPV of total reserves (8,156B)?
And where can I get 28 years of reserves life? I see in corporate presentation they are planning to extract ~90 Mboe/year during next 27 years, but if I take their reserves (844.965Mboe) and divide by 90 Mboe/year I get just 9+ years... I'm puzzled.
I think you are confusing 90,000 Boe/day with annual output. Current production is 80,000 Boe/day or 29.2 million Boe/year and 844/29=~28 (we are partly through one year so I rounded down). Yes the FDC are already deducted in arriving at the NPV which is standard for DCF.
Thank you, Mike! Indeed I took wrong number (daily) instead of yearly.
The biggest problem I'm seeing now is that reserves are moving target - their reported size depend on oil price assumed to be "economical". So not sure if valuing current reserves at current price has much of predictive power... their size may shrink if oil is falling and rise if oil is rising... this amplifies oil price change effect. Not sure how to factor this in... It should depend on geology for every specific company (sigh).
BTW, I tried to make reserve estimations for MEG and OXY and got an impression that Canadian companies are better at declaring their reserves than US - OXY reports only Proved reserves, which is not helpful enough. Trying to dig why it is so loved by Buffet, saw a hint that OXY has a big undeveloped acreage with big probable reserves, but no estimate of their potential value.
Now I get it. Optionality on reserves incorporates changing volume off economically feasible reserves as well as changing price of commodity.
Hi Mike
How would you comment on simplified approach: instead of using probabilities and finding “likely” cost of reserves I may just use historical data and pick the oil price low enough (my data shows it’s near $50) to say “usually the price is higher in 70% of the time” and then calculate value of reserves based on this low-end price? Then if the math shows I’m still profitable - I can assume I already took care of downside, and upside will take care of itself. I won’t have any “target price” this way but not sure it is that important.
Would work fine unless the oil price is already at $40. "Target prices" are nonsense.
Thanks, Mike.
I understand limitations. As I see from the last 22 years of history: average (yearly) inflation-adjusted price of oil was <40 only in two years (2001,2002), plus 4 years it was between 40 and 50 (2000, 2003, 2016, 2020). All of the rest years it was >50, so if history has any meaning and if value of oil reserves at $50 is attractive - I may say that I have 70% chance of being right on the stock. Good enough for me.
Of course it's for pure-oil plays, bcs gas and liquids will need own stats.
The piece of the puzzle still to be uncovered (I’m rookie and I admit it) is to understand how to factor in FUTURE costs of extraction, royalties and asset replenishment since I guess they affect profitability a lot and we cannot know them in advance (can we?)