Thanks for replying on the reserves issue. I now see that your cash flow is based on NDO’s working interest share of total production.
I offer the following in the spirit of adding to your work that your have so generously and courageously given to this forum. Apart from my comments below I support your statement that this work is subjective and that individuals must make their own decisions on the assumptions used.
Reserves I, believe that your reserves are not quite correct. It reads as if you’ve added the 1P and 2P numbers together. I understand that 1P is Proved reserves and that 2P is the sum of Proved plus Probable, hence the Galoc 2P initial reserves are 24.6 MMbbl.
Tindal and Yakal are resources and are typically not used in DCF as they are unproven. I’ve added some reference material below to highlight the difference between reserves and resources. The most important distinction is that a proved reserve has flowed oil to surface and has a well ready to produce. Tindal and Yakal have neither at this point in time.
Some do use resource STOOIP figures but they need to account for the portion of the resource that may be produced. This is done by multiplying the STOOIP by a recovery factor (RF) and then accounting for risk. Using a 40% RF and an 80% chance of success Tindalo P50 would look like 11 MMbbl * 40% *80% = 3.5 MMbbl. Yakal = 1.6 MMbbl
Production I must say that I do not agree with your assumption that production will increase in Galoc. Oilfields typically decline in production and they do so at an exponential rate. Using a rate of 5% per year the forecast for NDO’s share of Galoc would look like:
(the formula for this is expressed as qn=qi*(1-d)n where qi is the initial production rate, d is the annual decline rate expressed as a fraction and n is the number of years after initial production.)
I agree that Australian reporting standards are lax and not support in the best interests of the investor. I offer the following humorous analogy as my understanding of how reserves reporting works:
Reserves are like Fish
Proved Developed – The fish is in your boat. – You have weighed it, you can smell it and you will eat it.
Proved Undeveloped – The fish is on your hook in the water by your boat and you are ready to net it. – You can tell how big it looks (they always look bigger in the water).
Probable – There are fish in the lake and you may have caught some yesterday. – You may even be able to see them, but you have not caught any today (yet).
Resource – There is water in the lake and someone may have told you that there are fish in the lake. – You have your boat on the trailer but you may go golfing instead.
The more technical may like the detailed explanation from the Society of Petroleum Engineers (SPE)
Differences in Classes The four major recoverable resources classes defined by the PRMS are production, reserves, contingent resources, and prospective resources. There is also a distinct class for unrecoverable petroleum. These classes are shown on the vertical axis of the PRMS framework.
Production is the quantity of oil and natural gas that has been recovered already (by a specified date). This is primarily output from operations that has already been produced for use by consumers.
Reserves represent that part of resources which are commercially recoverable and have been justified for development, while contingent and prospective resources are less certain because some significant commercial or technical hurdle must be overcome prior to there being confidence in the eventual production of the volumes.
Contingent resources are less certain than reserves. These are resources that are potentially recoverable but not yet considered mature enough for commercial development due to technological or business hurdles. For contingent resources to move into the reserves category, the key conditions, or contingencies, that prevented commercial development must be clarified and removed. As an example, all required internal and external approvals should be in place or determined to be forthcoming, including environmental and governmental approvals. There also must be evidence of firm intention by a company’s management to proceed with development within a reasonable time frame (typically 5 years, though it could be longer).
Prospective resources are estimated volumes associated with undiscovered accumulations. These represent quantities of petroleum which are estimated, as of a given date, to be potentially recoverable from oil and gas deposits identified on the basis of indirect evidence but which have not yet been drilled. This class represents a higher risk than contingent resources since the risk of discovery is also added. For prospective resources to become classified as contingent resources, hydrocarbons must be discovered, the accumulations must be further evaluated and an estimate of quantities that would be recoverable under appropriate development projects prepared.
Some petroleum will be classified as “unrecoverable” at this point in time, not being producible by any projects that the company may plan or foresee. While a portion of these quantities may become recoverable in the future as commercial circumstances change or technological developments occur, some of the remaining portion may never be recovered due to physical or chemical constraints in the reservoir. The volumes classified using the system represent the analysis of the day, and should be regularly reviewed and updated, as necessary, to reflect changing conditions.
A project may have recoverable quantities in several resource classes simultaneously. As barriers to development are removed, some resources may move to a higher classification. One of the primary distinctions between resources and reserves is that while resources are technically recoverable, they may not be commercially viable. Reserves are always commercially viable and there is intent development them.
Differences in Categories Within any resource class other than production, volumes are placed into different categories based on their certainty of eventually coming out of the ground. Decisions to upgrade volumes to any category within a class are generally based on the technical certainty of recovering the volumes. In this discussion, the focus is on the reserve class, as these volumes are commonly the focus of public discussions of oil and gas company producing assets.
The highest valued category of reserves is “proved” reserves. Proved reserves have a “reasonable certainty” of being recovered, which means a high degree of confidence that the volumes will be recovered. To be clear, reserves must have all commercial aspects addressed. It is technical issues which separate proved from unproved categories. “Probable” or “possible” reserves are lower categories of reserves, commonly combined and referred to as “unproved reserves,” with decreasing levels of technical certainty. Probable reserves are volumes that are defined as “less likely to be recovered than proved, but more certain to be recovered than Possible Reserves”. Possible reserves are reserves which analysis of geological and engineering data suggests are less likely to be recoverable than probable reserves.
The term 1P is frequently used to denote proved reserves, 2P is the sum of proved and probable reserves and 3P the sum of proved, probable and possible reserves. The best estimate of recovery from committed projects is generally considered to be the 2P sum of proved and probable reserves. Note that these volumes only refer to projects that are currently justified for or already in development. Total value of any resource base must include an assessment of the contingent and prospective resources as well as reserves.
In order for volumes to move from one category to the next, the technical issues which cause them to be placed in less certain categories must be resolved. In the majority of cases, this requires that additional data must be obtained before any greater certainty can be recognized. This may include, among other things, the drilling of additional wells, the monitoring of current production to better understand performance or the implementation of a pilot to have greater confidence in the volumes that full scale development projects may eventually produce.
NDO Price at posting:
19.0¢ Sentiment: LT Buy Disclosure: Held
(20min delay)