I have been following MMR, GBA, BUY and their PEP11...

I have been following MMR, GBA, BUY and their PEP11 announcements for some time (and trading in BUY shares both for Wakefield and PEP11 potential).

I am intrigued that MMR in particular only seems to use P10 16.3 Tcf estimates in most of its' announcements (i.e. only a 10 percent chance of achieving the estimate) when most of the industry reports P50 recoverable estimates (i.e 50/50 percent chance of achieving/ exceeding the estimate). Advents net share is P50 4.315 Tcf which may be further diluted by farm-in. I think using only P10 estimates in its' announcements is misleading.

I decided to do some research on resource estimation and reporting standards. I came across a paper presented by Mike Scott (BSc., MEng. (Petroleum Engineering), SPE, AICD) at the Good Oil Conference 2009, titled "Reserves Classification: The truth, the whole truth…", which is a good read.

I have included some relevant excerpts about reporting resource estimates from the paper below:

“Reported estimates of future production (to be recovered hydrocarbons)gives Investors a second order indication of a company’s value.”

“Recoverable hydrocarbons are an estimate of production that is expected to be sold at some point in the future for an economic gain.”

P50 is the best number as it is the true 50:50 estimate. P90 and P10 if used together shows uncertainty itself.

“P50 is the number to focus on, P90 and P10 the range in the uncertainty.”

Australian Legal Requirements
• ASX Listing Rules Chapter 5: Additional reporting on mining and exploration activities
• 5.11-5.13 Person compiling information about hydrocarbons (competence)
• 5.15-5.17 Hydrocarbon reports (not a classification guideline)
• ASX Listing Rules Chapter 3: Continuous Disclosure (keep investors informed)
• ASX Listing Rules Chapter 19: Defined Terms (proved, probable and possible referred to)
• ASX Listing Rules Appendix 5A: JORC is a mining industry code that applies only to solid minerals. It has no application in oil and gas.
• Corporations Act contains no guidance for oil and gas classification.
• VALMIN Code published by Australasian Institute of Mining and Metallurgy relates to practices for independent expert reports and is binding on members of AusIMM only.

“Subject to the over-riding requirement not to mislead investors, an Australian listed company is free to adopt whatever standard best suits the company’s circumstances, which is a pragmatic and flexible solution.”

Companies may report MEAN estimates because it is usually the big number (equal to or bigger than P50 but smaller than P10 - but the confidence level of the MEAN estimate is usually unreported)

• Companies should use P50 or P90-P50-P10 or
P90-P50-P10-Mean
• Let investors make their own mind up about the Oil Company, how size of the prize and the uncertainty affects a company’s value.
• P50 is the important number.
• For those that argue the MEAN is the volume weighted average so we should use it: why not use the MODE as it’s the number that occurs the most frequently.
• In addition, for those that only report P10…not good.

“Use of Mean estimates without reporting the other confidence levels is potentially misleading – we need P50 at a minimum.”

Summary

• Reserve classification categories and terminology only pertain to the standard that is being used.
• A company should chose a standard that best suits their circumstances but may be driven by law to use another standard (i.e. SEC or NI-101)
• Companies must report clearly the maturity category and uncertainty level of the recoverable hydrocarbon estimate.
• Investors should be wary of companies that inflate estimates, do not disclose the maturity category or disclose a cumulative probability level other than P50.
• However, recognise that the calculation of recoverable hydrocarbons can vary between companies because at the end of the day it is only an estimate – different evaluators can validly come up with different estimates.
• The final produced volume can be less, more or the same as the P90, P50 or P10 estimates but hopefully it will lie somewhere around P50.

“Recoverable hydrocarbon estimates must be related to a code and reported with the maturity and uncertainty indicators.”