Oil&GasModeling

QuickReferenceProduction,Reserves&UnitsofMeasurement

http://breakingintowallstreet.com

WhyShouldICareAboutUnitsofMeasurement?ThatsBoring!!!

BecausewhenyourMDaskswhyyourmodeliscompletelywrong,
youlllookstupidandgetbottomtierbonusifyousheepishlyadmit
thatyouscrewedupandforgottomultiplyeverythingby6,or1,000,
or10,000,orwhatevertheconversionfactoris.

Fornormalcompanies,unitsofmeasurementareanafterthought
becauseyourealwaysworkingindollars,Euros,yen,andsoon.

Butfornaturalresourcecompaniestheyarecriticalbecause
companiesmeasuretheirProductionandReservesindifferentwaysandyouhavetomakesureyoure
comparingapplestoapples.

Productionishowmuchinoil,gas,gold,silver,copper,etc.youreextractingfromthegroundandselling
measuredinBarrelsofOil,CubicFeet,Ounces,Tons,andsoon.

Reservesarethetotalamountofoil,gas,gold,silver,copper,etc.thatyouhaveinthegroundinthefirstplace.
Asyouproducemore,yourreservesdecreaseandsoyouhavetoreplacethemconstantly.

UnitsofMeasurement

Herearetheunitsthatoil,gas,andmineralsarenormallyreportedin(seethenotesonthenextpage):

ResourceType
DailyProduction
AnnualProduction&Reserves
Oil,NaturalGasLiquids,
ThousandsofBarrels
MillionsofBarrels(MMBbls)orBillionsof
SyntheticOilandBitumen
(MBbls)
Barrels(BBbls)
NaturalGas
MillionsofCubicFeet
BillionsofCubicFeet(Bcf)orTrillionsof
(MMcf)
CubicFeet(Tcf)
IronOreandCoal
ThousandTonnes(kt)
MillionTonnes(Mt)
Aluminum,Copper,Lead,Zinc, Tonnes(t)
ThousandTonnes(kt)
Nickel,andManganese
Uranium
Tonnes(t)
Tonnes(t)
Diamond
Carats
ThousandCarats
GoldandSilver
Ounces(oz)
ThousandOunces(koz)orMillionOunces
(moz)

1BarrelofOil=42GallonsofOil=5.8MillionBritishThermalUnitsofEnergy(5.8MMBtu)
1,000CubicFeetofGas=1MillionBritishThermalUnitsofEnergy(1.0MMBtu)
1Tonne=1MetricTon(1,000kg)
1Carat=200milligrams(200mg)

Oil&GasModeling
QuickReferenceProduction,Reserves&UnitsofMeasurement

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TheseUnitsAreCrazyWhyAreWeUsingtheMetricSystemANDtheUSSystem?

Sorry,theresnoclearanswercompanieshavetraditionally
usedamixofbothunits.Sometimesyoullseeouncesrather
thangramsandsometimesyoullseeUStonsandpounds(1
ton=2,000pounds)inadditiontometrictons(tonnes)where
1tonneis1,000kg.

Youneedtoreadthenotescarefullytherearealways
exceptionsandstrangeunits.

Thetableabovegivesyouaroughideaofwhatyoullsee
butyouneedtopayattentionoryoullendupmeasuring
DiamondProductioninBarrelsofOil.

Theexactunitsdependnotonlyontheregion,butalsoonhowmuchthecompanyactuallyproduces.If
billionsaretoobig,theymightusemillions;ifmillionsaretoobig,theymightusethousands,andsoon.

Evenifthecountryusesthemetricsystem,thecompanyitselfmaystilluseUSunitsofmeasurementfor
example,BritishPetroleumreportsenergyinBarrelsofOilandThousandsofCubicFeetdespitebeingUK
based.

ConvertingtoEquivalentUnits

Youdonotseemineralunitsconvertedinacompanysfilingsmostofthetime.Sometimesyouwillseea
referencetocopperequivalentsorgoldequivalentsyoucancalculatethosebysummingupthedollar
amountforallmineralproductionandthendividingbydollarsperounce,gram,ortonneforthemineralyou
wanttoconvertinto.Theexactformuladependsonwhichmineralsthecompanyproduces.

Forenergy,itsmucheasier:since1BarrelofOil=5.8MMBtuand1,000CubicFeetofGas=1MMBtu,you
roundtheunitsandalwaysassumethat:

1BblofOil=6McfofNaturalGas
1MBblofOil=6MMcfofNaturalGas
1MMBblofOil=6BcfofNaturalGas
1BBblofOil=6TcfofNaturalGas

YouconvertintoBarrelsofOilEquivalent(BOE)orThousandCubicFeetEquivalent(Mcfe).

Ifacompanyhasover50%gasproduction,normallyyouconvertintoMcfe;ifitsover50%oilproduction,
youconvertintoBOE.

Oil&GasModeling
QuickReferenceProduction,Reserves&UnitsofMeasurement

http://breakingintowallstreet.com
Example:Acompanyhas6,000Bcfofnaturalgasproductionand200MMBblsofoilproduction.Whatisits
productioninCubicFeetEquivalentandinBarrelsofOilEquivalent?

6,000Bcf+200MMBbls*6=7,200Bcfe
6,000Bcf/6+200MMBbls=1,200MMBOE

Whenlistingpubliccompsandprecedenttransactionsfornaturalresourcecompaniesyouneedtolist
ProductionandReservesinthesameunits,soyouusetheseconversionfactorsallthetime.

ItdoesntmakesensetoshowonecompanysReservesinBarrelsofOilandanothersReservesinThousands
ofCubicFeeteverythingshouldbeinBOEorMcfe.

Reserves

TheReservestellushowmuchacompanyhasintheground,readytoextract.Butextractionisnevera
certainty,soreservesarecategorizedbasedonprobabilities:

>90%

>=50%

<50%

Proved

Probable

Possible

Proved
Developed

Proved
Undeveloped

Proved
Developed
Producing
(PDP)

Proved
Developed
NonProducing
(PDNP)

1P=Proved
2P=Proved+
Probable
3P=Proved+
Probable+Possible

ProvedReserveshaveagreaterthan90%chanceofbeingextractedfromtheground;ProbableReservesareat
least50%likely,andPossibleReservesareunder50%.

Naturalresourcecompanieshavesophisticatedtechnologytomeasuretheseprobabilitiesandtoestimatethe
likelihoodofextractionasabankeryounevergetintothislevelofdetail.

YoumostlycareabouttheProvedReservesbecausethatswhatyouuseinmodelsandinvaluations.

TheProvedDevelopedReservesarealsoimportantbecauseyouusethemtoassesshowmuchacompanycan
producefromthegroundwith100%certainty.

Oil&GasModeling
QuickReferenceProduction,Reserves&UnitsofMeasurement

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EvenReservesareProved,thereisstillasmallchance(<10%)thattheycouldhavenothing.Butifthe
companyhasactuallydevelopedthosereserves,therearedefinitelyresourcestheresoProvedDeveloped
Reservescanbemorereliable.

Bothoil&gascompaniesandminingcompanieshavereservestofindtheminthefilingsyoucansearchfor
ProvedReservesorgototheOil&GasProducingActivitiesorOil&GasSupplementalInformation
sections(similarnamesforminingcompanies).

Heresanexampleforanoil&gascompany(XTOEnergy):

Andheresanexampleforaminingcompany(Goldcorp):

Itsindifferentunitsandislaidoutdifferentlybecauseminingcompaniesonlyrecoverafractionofthe
minerals(hencethegramsofSilverpertoncolumn),buttheideaisthesame.

Oil&GasModeling
QuickReferenceProduction,Reserves&UnitsofMeasurement

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Goldcorpproducesseveralotherminerals(notshownabove),butunlikeXTOtheydonotconverteverything
intoanequivalentunitsuchasgoldequivalents.

ProvedReservescanbeusedasavaluationmultipleEnterpriseValue/ProvedReservesandarealsoused
toselectpubliccompsandprecedenttransactions.

TheyalsoconstrainProductionifacompanyhas10BcfofProvedReserves,youcantassumethatthey
suddenlyjumpfrom1Bcfofannualproductionto5Bcf,ortheirreserveswouldbedepletedin2years.

Production

Productiontellsushowmuchinresourceswereextractingfromtheground.Itmightbeonadaily,quarterly,
orannualbasis;oil&gascompanieslookatitonadailybasisandvaluationmultiplesarebasedonDaily
Productionwhereasminingcompaniesfocusonlongertimeperiods.

Youfindthesenumbersinthesamesectionofacompanysfilingsthathasinformationonthereserves.
ExampleforXTO:

NoticehowtheyaregettinglessthantheNYMEXmarketprices,andarealsousinghedgingtofurtheralter
theiraveragerealizedsaleprices.

HeresanexampleofProductionforGoldcorp:

Oil&GasModeling
QuickReferenceProduction,Reserves&UnitsofMeasurement

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ProductiontoRevenue&Expenses

Revenue=ProductionofCommodity*RealizedCommodityPrice

YouprojectProductionbasedonhistoricalnumbersandcompanyguidanceiftheyhavebeengrowingat
10%peryearandexpecttogrowat8%nextyear,youmightuse8%andthenmakeitdeclineby1%peryear.

Ifthecompanyproducesmultipletypesofresources,youmakedifferentassumptionsforeachoneandadd
themalltogether.

Forminingcompaniesyouassumethatanumberoftons/tonnesaremined,butthatyoucanonly
recoveracertain%ofwhatyourelookingfor,orthateachton/tonnecontainsonlyacertainamount.
Soyouneedtomakeafewmoreassumptionstogetthefinalnumbers.

Oil&GasModeling
QuickReferenceProduction,Reserves&UnitsofMeasurement

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Ontherealizedpriceside,thereareafewcomplications:

Youhavetoincludescenariosforexample,an
upsidescenarioforgasmightbe$10.00/Mcf,a
basescenariomightbe$7.00/Mcfanda
downsidescenariomightbe$4.00/Mcf.You
alwaysneedtolookatarangeofvalues.
Youneedtoincludeapricedifferentialbetween
marketpricesandwhatthecompanygets;this
variesalotformineralsbutforoilandgasits
usuallyaround90%(e.g.theyrealize90%of
marketprices)andfornaturalgasliquids(NGLs)
itscloserto50%.
Thecompanymayusehedgingsoifmarket
pricessuddenlydrop,theirrealizedpricesmaybe
acertainpercentagehigher,andifmarketprices
shootup,theirpricesmaybeacertainpercentage
lower.

MostexpensesfornaturalresourcecompaniesarelinkedtoProductionandareprojectedonaperunitbasis.
XTOmakesthisobvious:

Commonperunitexpenses:

Production(howmuchitcoststoproduceindividualresourceunits,similartoCOGS)
SalesTaxes
Transportation
Depreciation,Depletion&Amortization(DD&A)
AccretionofAssetRetirementObligation

Expensesthatcouldbeperunitorcouldbebasedongrowthratesorcompanyguidance:

General&Administrative(G&A)

Oil&GasModeling
QuickReferenceProduction,Reserves&UnitsofMeasurement

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Exploration
CapitalExpenditures(bothAcquisitionsandDevelopment&Exploration)

ExpensesthatshouldnottrendwithProduction:

StockBasedCompensation
DerivativeFairValueGain/(Loss)
Impairment/Restructuring/OtherNonRecurringCharges
InterestExpense

CompaniessometimesshowInterestExpenseonaperunitbasis;ProductionandInterestExpenseareloosely
linked(toproducemore,theyneedtoraisemoredebt),butinmodelsyoucreatedebtschedulesandcalculate
theinterestexpensebasedonthat,justasyouwouldforothercompanies.