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com
BecausewhenyourMDaskswhyyourmodeliscompletelywrong,
youlllookstupidandgetbottomtierbonusifyousheepishlyadmit
thatyouscrewedupandforgottomultiplyeverythingby6,or1,000,
or10,000,orwhatevertheconversionfactoris.
Fornormalcompanies,unitsofmeasurementareanafterthought
becauseyourealwaysworkingindollars,Euros,yen,andsoon.
Butfornaturalresourcecompaniestheyarecriticalbecause
companiesmeasuretheirProductionandReservesindifferentwaysandyouhavetomakesureyoure
comparingapplestoapples.
Productionishowmuchinoil,gas,gold,silver,copper,etc.youreextractingfromthegroundandselling
measuredinBarrelsofOil,CubicFeet,Ounces,Tons,andsoon.
Reservesarethetotalamountofoil,gas,gold,silver,copper,etc.thatyouhaveinthegroundinthefirstplace.
Asyouproducemore,yourreservesdecreaseandsoyouhavetoreplacethemconstantly.
UnitsofMeasurement
Herearetheunitsthatoil,gas,andmineralsarenormallyreportedin(seethenotesonthenextpage):
ResourceType
DailyProduction
AnnualProduction&Reserves
Oil,NaturalGasLiquids,
ThousandsofBarrels
MillionsofBarrels(MMBbls)orBillionsof
SyntheticOilandBitumen
(MBbls)
Barrels(BBbls)
NaturalGas
MillionsofCubicFeet
BillionsofCubicFeet(Bcf)orTrillionsof
(MMcf)
CubicFeet(Tcf)
IronOreandCoal
ThousandTonnes(kt)
MillionTonnes(Mt)
Aluminum,Copper,Lead,Zinc, Tonnes(t)
ThousandTonnes(kt)
Nickel,andManganese
Uranium
Tonnes(t)
Tonnes(t)
Diamond
Carats
ThousandCarats
GoldandSilver
Ounces(oz)
ThousandOunces(koz)orMillionOunces
(moz)
1BarrelofOil=42GallonsofOil=5.8MillionBritishThermalUnitsofEnergy(5.8MMBtu)
1,000CubicFeetofGas=1MillionBritishThermalUnitsofEnergy(1.0MMBtu)
1Tonne=1MetricTon(1,000kg)
1Carat=200milligrams(200mg)
Oil&GasModeling
QuickReferenceProduction,Reserves&UnitsofMeasurement
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TheseUnitsAreCrazyWhyAreWeUsingtheMetricSystemANDtheUSSystem?
Sorry,theresnoclearanswercompanieshavetraditionally
usedamixofbothunits.Sometimesyoullseeouncesrather
thangramsandsometimesyoullseeUStonsandpounds(1
ton=2,000pounds)inadditiontometrictons(tonnes)where
1tonneis1,000kg.
Youneedtoreadthenotescarefullytherearealways
exceptionsandstrangeunits.
Thetableabovegivesyouaroughideaofwhatyoullsee
butyouneedtopayattentionoryoullendupmeasuring
DiamondProductioninBarrelsofOil.
Theexactunitsdependnotonlyontheregion,butalsoonhowmuchthecompanyactuallyproduces.If
billionsaretoobig,theymightusemillions;ifmillionsaretoobig,theymightusethousands,andsoon.
Evenifthecountryusesthemetricsystem,thecompanyitselfmaystilluseUSunitsofmeasurementfor
example,BritishPetroleumreportsenergyinBarrelsofOilandThousandsofCubicFeetdespitebeingUK
based.
ConvertingtoEquivalentUnits
Youdonotseemineralunitsconvertedinacompanysfilingsmostofthetime.Sometimesyouwillseea
referencetocopperequivalentsorgoldequivalentsyoucancalculatethosebysummingupthedollar
amountforallmineralproductionandthendividingbydollarsperounce,gram,ortonneforthemineralyou
wanttoconvertinto.Theexactformuladependsonwhichmineralsthecompanyproduces.
Forenergy,itsmucheasier:since1BarrelofOil=5.8MMBtuand1,000CubicFeetofGas=1MMBtu,you
roundtheunitsandalwaysassumethat:
1BblofOil=6McfofNaturalGas
1MBblofOil=6MMcfofNaturalGas
1MMBblofOil=6BcfofNaturalGas
1BBblofOil=6TcfofNaturalGas
YouconvertintoBarrelsofOilEquivalent(BOE)orThousandCubicFeetEquivalent(Mcfe).
Ifacompanyhasover50%gasproduction,normallyyouconvertintoMcfe;ifitsover50%oilproduction,
youconvertintoBOE.
Oil&GasModeling
QuickReferenceProduction,Reserves&UnitsofMeasurement
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Example:Acompanyhas6,000Bcfofnaturalgasproductionand200MMBblsofoilproduction.Whatisits
productioninCubicFeetEquivalentandinBarrelsofOilEquivalent?
6,000Bcf+200MMBbls*6=7,200Bcfe
6,000Bcf/6+200MMBbls=1,200MMBOE
Whenlistingpubliccompsandprecedenttransactionsfornaturalresourcecompaniesyouneedtolist
ProductionandReservesinthesameunits,soyouusetheseconversionfactorsallthetime.
ItdoesntmakesensetoshowonecompanysReservesinBarrelsofOilandanothersReservesinThousands
ofCubicFeeteverythingshouldbeinBOEorMcfe.
Reserves
TheReservestellushowmuchacompanyhasintheground,readytoextract.Butextractionisnevera
certainty,soreservesarecategorizedbasedonprobabilities:
>90%
>=50%
<50%
Proved
Probable
Possible
Proved
Developed
Proved
Undeveloped
Proved
Developed
Producing
(PDP)
Proved
Developed
NonProducing
(PDNP)
1P=Proved
2P=Proved+
Probable
3P=Proved+
Probable+Possible
ProvedReserveshaveagreaterthan90%chanceofbeingextractedfromtheground;ProbableReservesareat
least50%likely,andPossibleReservesareunder50%.
Naturalresourcecompanieshavesophisticatedtechnologytomeasuretheseprobabilitiesandtoestimatethe
likelihoodofextractionasabankeryounevergetintothislevelofdetail.
YoumostlycareabouttheProvedReservesbecausethatswhatyouuseinmodelsandinvaluations.
TheProvedDevelopedReservesarealsoimportantbecauseyouusethemtoassesshowmuchacompanycan
producefromthegroundwith100%certainty.
Oil&GasModeling
QuickReferenceProduction,Reserves&UnitsofMeasurement
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EvenReservesareProved,thereisstillasmallchance(<10%)thattheycouldhavenothing.Butifthe
companyhasactuallydevelopedthosereserves,therearedefinitelyresourcestheresoProvedDeveloped
Reservescanbemorereliable.
Bothoil&gascompaniesandminingcompanieshavereservestofindtheminthefilingsyoucansearchfor
ProvedReservesorgototheOil&GasProducingActivitiesorOil&GasSupplementalInformation
sections(similarnamesforminingcompanies).
Heresanexampleforanoil&gascompany(XTOEnergy):
Andheresanexampleforaminingcompany(Goldcorp):
Itsindifferentunitsandislaidoutdifferentlybecauseminingcompaniesonlyrecoverafractionofthe
minerals(hencethegramsofSilverpertoncolumn),buttheideaisthesame.
Oil&GasModeling
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Goldcorpproducesseveralotherminerals(notshownabove),butunlikeXTOtheydonotconverteverything
intoanequivalentunitsuchasgoldequivalents.
ProvedReservescanbeusedasavaluationmultipleEnterpriseValue/ProvedReservesandarealsoused
toselectpubliccompsandprecedenttransactions.
TheyalsoconstrainProductionifacompanyhas10BcfofProvedReserves,youcantassumethatthey
suddenlyjumpfrom1Bcfofannualproductionto5Bcf,ortheirreserveswouldbedepletedin2years.
Production
Productiontellsushowmuchinresourceswereextractingfromtheground.Itmightbeonadaily,quarterly,
orannualbasis;oil&gascompanieslookatitonadailybasisandvaluationmultiplesarebasedonDaily
Productionwhereasminingcompaniesfocusonlongertimeperiods.
Youfindthesenumbersinthesamesectionofacompanysfilingsthathasinformationonthereserves.
ExampleforXTO:
NoticehowtheyaregettinglessthantheNYMEXmarketprices,andarealsousinghedgingtofurtheralter
theiraveragerealizedsaleprices.
HeresanexampleofProductionforGoldcorp:
Oil&GasModeling
QuickReferenceProduction,Reserves&UnitsofMeasurement
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ProductiontoRevenue&Expenses
Revenue=ProductionofCommodity*RealizedCommodityPrice
YouprojectProductionbasedonhistoricalnumbersandcompanyguidanceiftheyhavebeengrowingat
10%peryearandexpecttogrowat8%nextyear,youmightuse8%andthenmakeitdeclineby1%peryear.
Ifthecompanyproducesmultipletypesofresources,youmakedifferentassumptionsforeachoneandadd
themalltogether.
Forminingcompaniesyouassumethatanumberoftons/tonnesaremined,butthatyoucanonly
recoveracertain%ofwhatyourelookingfor,orthateachton/tonnecontainsonlyacertainamount.
Soyouneedtomakeafewmoreassumptionstogetthefinalnumbers.
Oil&GasModeling
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Ontherealizedpriceside,thereareafewcomplications:
Youhavetoincludescenariosforexample,an
upsidescenarioforgasmightbe$10.00/Mcf,a
basescenariomightbe$7.00/Mcfanda
downsidescenariomightbe$4.00/Mcf.You
alwaysneedtolookatarangeofvalues.
Youneedtoincludeapricedifferentialbetween
marketpricesandwhatthecompanygets;this
variesalotformineralsbutforoilandgasits
usuallyaround90%(e.g.theyrealize90%of
marketprices)andfornaturalgasliquids(NGLs)
itscloserto50%.
Thecompanymayusehedgingsoifmarket
pricessuddenlydrop,theirrealizedpricesmaybe
acertainpercentagehigher,andifmarketprices
shootup,theirpricesmaybeacertainpercentage
lower.
MostexpensesfornaturalresourcecompaniesarelinkedtoProductionandareprojectedonaperunitbasis.
XTOmakesthisobvious:
Commonperunitexpenses:
Production(howmuchitcoststoproduceindividualresourceunits,similartoCOGS)
SalesTaxes
Transportation
Depreciation,Depletion&Amortization(DD&A)
AccretionofAssetRetirementObligation
Expensesthatcouldbeperunitorcouldbebasedongrowthratesorcompanyguidance:
General&Administrative(G&A)
Oil&GasModeling
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Exploration
CapitalExpenditures(bothAcquisitionsandDevelopment&Exploration)
ExpensesthatshouldnottrendwithProduction:
StockBasedCompensation
DerivativeFairValueGain/(Loss)
Impairment/Restructuring/OtherNonRecurringCharges
InterestExpense
CompaniessometimesshowInterestExpenseonaperunitbasis;ProductionandInterestExpenseareloosely
linked(toproducemore,theyneedtoraisemoredebt),butinmodelsyoucreatedebtschedulesandcalculate
theinterestexpensebasedonthat,justasyouwouldforothercompanies.
