Evaluation of Oil and Gas Companies

Abstract

Abstract Acquisition plays an important part for most companies in their continued growth, expansion and diversification. Oil and gas companies are no exception. There are numerous methods and yardsticks for evaluation of oil and gas properties and/or companies. The aim, in each case, is to arrive at a fair market value of the properties based on the information available. A systematic approach is presented here for a quick, easy and accurate evaluation of an oil and gas company. The criteria of profitable acquisitions lie in understanding the basic concepts of discounted cash flow, rate of return, etc. Two computer programs are described - one to evaluate oil and gas properties and the other to analyze financial state of the company. Income tax, write-offs, cost of money, etc., should also be considered before reaching a final value. Introduction Very few papers have been published on the evaluation of oil and gas companies from the engineer's point of view. The papers cover only a general outline of the procedure to be followed. The details are not spelled out. This paper presents a brief discussion into all aspects of engineering and financial evaluations of oil and gas companies. One does not have to have a strong financial background to understand, to interpret and to make intelligent use of the financial data available on a company. The subject matter is described in three parts, namely, engineering evaluation of the properties, financial analysis of the company and consideration of some of the other factors. PROPERTY EVALUATION This is the first step of any evaluation of an oil and gas company. To arrive at a fair market value of its properties, the reserves of oil and gas are estimated and a reasonable production forecast is made. The geological production forecast is made. The geological and engineering considerations take into account location of the field, type of structure, net pay, type of formation, past performance, pay, type of formation, past performance, productive capacity of the wells, recovery productive capacity of the wells, recovery schemes, e.g., waterflood, gas injection, different types of solvent flood, thermal recovery methods, etc. The future production forecast depends on domestic demand, exports, etc. For example, in Alberta, Canada, the Energy Resources Conservation Board sets the allowable based on demand for oil in Canada and exports to the U. S.