Rob et al...
First of all, my apologies as my comparison was over simplified re: Market Cap vs. Net Asset Value...
Now, lets look at it in more detail then. The main asset, say 90% of the assets, lay underground. That is to say.. RESERVES. So what are these reserves?
Well, that is now a contentious issue in the industry. In fact, the Canadian Securities Commission is in the process of adopting 150 new rules to help deal with this issue including the formation of totally independent reserve review committees for publicly traded companies to prevent "arm twisting" by publicly traded companies with respect to reserve reports. This is recent development, but a result of previous concerns raised by industry and others (see articles below).
Now, RESERVES... it is not enough to simply find reserves, and add them to the NAV equation. One must look at CAN THESE RESERVES BE RECOVERED ECONOMICALLY? Many gold producers, including RYO, had lots of reserves... yet RYO went bankrupt under their debt load. Why? Another O&G producer which comes to mind is Dome Petroleum who found lots of gas reserves in the Beaufort Sea but went under from large debt load.
Now, you can issue more shares, do more underwritings, pay off the debt and off you go to the races again. But this will only work for so long. In the end, positive cash flow must be able to sustain company growth.
Now, with everyones definition and evaluation of 'Reserves' potentially being so different and subject to interpretation, and yet it means so much in determining the NAV of a Company, how much value are you willing to place on those "reserves"? Perhaps you are also relying a bit too much on luck.
Not intending to get hostile, simply an exchange of ideas, opinions and information.
Study urges tightening of oil, gas reserve reports
Petroleum society paves way for greater disclosure
Tuesday, July 6, 1999
Calgary -- Corporate reporting of oil and gas reserves should be tightened,
says a draft engineering study that paves the way for Canadian securities
regulators to order greater disclosure from producers.
The 10-page summary report, prepared by the Petroleum Society of the
Canadian Institute of Mining, Metallurgy & Petroleum, provides guidelines
for engineering firms to assess a producer's reserves.
One key recommendation says that, in total, there must be "a 90-per-cent
probability that at least the estimated proved reserves will be recovered,"
compared with the current 80-per-cent probability for an individual reserve
That 80-per-cent guideline has been in place since 1993 in the society's
handbook, but neither the petroleum industry nor Canada's securities
commissions have specified any minimum requirements.
Harry Jung, a member of an Alberta Securities Commission (ASC) subcommittee
of petroleum engineers studying the issue of reserves, said the definitions
and guidelines will strengthen the industry by providing important
"There's a strong chance this report will be adopted by the securities
commissions," he said in an interview yesterday.
Guidelines for reserves are being reviewed amid controversy over Blue Range
Resource Corp., a natural gas producer that received bankruptcy protection
in March and is on the verge of being taken over by Canadian Natural
Resources Ltd. of Calgary.
Blue Range's current parent, Big Bear Exploration Ltd., alleges that 22
million barrels, or 37 per cent, of Blue Range's proved and probable
reserves have gone missing.
Former Blue Range executives deny the allegations that reserves were
inflated, countering that Calgary-based Big Bear mishandled a thriving
exploration and development program.
Mr. Jung said the draft study has been sent to oil and gas producers for
fine-tuning this summer, clearing the way for securities regulators to give
a preliminary go-ahead for the new rules as early as this fall.
Reserve evaluators will be required to reach the 90-per-cent threshold in
aggregate, meaning that "nine times out of 10, your corporate total reserve
estimates should stay the same or go up. That's a test you can put your
Mr. Jung is also executive vice-president of Calgary-based Gilbert Laustsen
Jung Associates Ltd. and chairman of the petroleum society's standing
committee on reserve definitions.
The draft report already has been endorsed by his engineering firm and
three others from Calgary on the ASC subcommittee -- McDaniel & Associates
Consultants Ltd., Sproule Associates Ltd. and Ashton Jenkins & Associates
The final report, which probably will run 40 pages and include technical
information and examples of various calculations, could be formally
introduced in the form of securities policies next year.
Those policies could result in expanded and improved information from
reserves disclosed in companies' information forms, prospectuses and annual
"Everything comes back to reserves," Mr. Jung said. "Reserves are the
foundation for oil and gas companies, and it's what ultimately will
generate their cash flow."
Under another proposed threshold, there must be "a 50-per-cent probability
that at least the sum of the estimated proved plus probable reserves will
be recovered" in aggregate, compared with the current 40-per-cent
probability for a "single reserves entity."
The complex analysis of reserves must be based on geological, drilling,
geophysical and engineering data, as well as "reasonable" economic
assumptions and "known technology," the study says.
Procedures for estimating reserves also have been outlined, helping to
demystify the complicated system of calculating what energy riches are
hidden beneath the ground, Mr. Jung said.
For instance, engineers using the so-called volumetric method must
calculate an oil and gas reservoir's rock volume.
"Oil and gas in the ground is found in the pore spaces between rocks. It's
not just a cavern. You have to know how much pore space there is, how much
other fluids are in the reservoir, like the water saturation," Mr. Jung
said. Another calculation called "material balance" involves computer
modelling of reservoirs to analyze pressure levels as fluids are taken out.
Once enough information is available, the production decline analysis looks
at depletion and other variables in oil and gas deposits.
A draft report by the Petroleum Society of the Canadian Institute of
Mining, Metallurgy & Petroleum provides the following definitions and
guidelines for calculating oil and gas reserves in aggregate:
Proved reserves: Remaining reserves that can be estimated with a high
degree of certainty to be recoverable. (There is a 90-per-cent probability
that at least the estimated proved reserves will be recovered.)
Probable reserves: Reserves that are less certain to be recovered than
proved reserves but that are more likely than not to be recovered. (There
is a 50-per-cent probability that at least the sum of the estimated proved
plus probable reserves will be recovered.)
Possible reserves: Reserves that are less certain to be recovered than
probable reserves. (There is a 10-per-cent probability that at least the
sum of the estimated proved plus probable plus possible reserves will be
Friday, June 04, 1999
Digging up the dirt in the oilpatch
Two former investment dealers have set up shop in Calgary providing an
independent research facility for institutional investors wanting due
diligence studies on prospective purchases