Hi Rob, Whatever works for you - but like lots of things, there...

Hi Rob,
Whatever works for you - but like lots of things, there are rules that must be followed - although I agree the subjective nature of O&G accounting can at times muddy the waters.

Just in case not everyone understands why DD&A is really important (take that I disagree with you on usefulness) lets go back to simple fundamentals:

a. The Income Statement (Profit & Loss) - show net income over time (usually Qtrly & Annually). Looking for typically recurring items and highlight anything non recurring in adjustments.
• Recurring Revenues from sale of oil & gas
• Less recurring Expenses
– Costs and operating expenses
– Taxes
– Depreciation, Depletion, and Amortization (DD&A)
Some wiggle room on write-offs/impairments and finance charges (if debt is utilized I always include finance)

b. Now "Property" is an asset and belongs on the Balance Sheet (simply what the company owns and owes) - but how do you get "Property" - well an O&G acquires acreage (not the person), explores, hopefully discovers hydrocarbons and then develops the discovered Reserves to extract and sell them (or buy something developed). But you can't put Bbls on a Balance sheet. So instead a "capitalized book value" is basically substituted.

c. Now Magic#1 happens. What is "capitalized" (recorded as long term asset on the balance sheet) and what is "expensed" (maintaining the value of the property and overhead costs which are charged against earnings in the current period). SSN has adopted the "Successful Efforts" method for its O&G accounting (the other method is Full Cost). Effectively Successful Efforts is limited to a single property/group of properties related by a common geology (e.g. Bakken) and Expenses geologic evaluation costs and exploratory dry holes but capitalizes successful wells and development dry holes. And we know that capitalized costs get added to the book value on the balance sheet.

d. Now Magic#2 happens. What do you do about the subtraction of book value through the removal of some portion of the reserves through production, and the usage of the necessary equipment? That is called Depreciation, Depletion, and Amortization or DD&A for short. More explicity, Depreciation is the reduction to the book value of the equipment as it is used up /wears out, Depletion is the reduction of the book value of the mineral assets as they are removed from the reservoir and Amortization is the process of making these adjustments over time. DD&A is a “non-cash” item.

There are specific formulas that MUST be followed (e.g. Depletion Rate is BookValue/Reserves) and then DD&A is Depletion Rate times Production.

Higher reserve volumes translates to a lower depletion rate, which yields higher net income.

e. For a successful efforts company like SSN, it is typical for Reserves and equipment to be amortized over the life of the proved developed reserves and Proved property acquisition costs are amortized over the life of the total proved reserves. Adjustments though get made all the time - such as impairments and asset sales.

So DD&A has two real variables:
Capitalized costs which are objective – the accountants can easily add up the costs. and reserves.
&
Reserves which are subjective.


So, DD&A as a number in isolation or as a peer comparison benchmark I agree is not at all useful. It is however essential to understanding how a company will earn a return and make a real profit.