Oil & Gas Underwriting
Analyzing the Return
Potential
Oil & Gas Underwriting –
Analyzing the Return
Develop an understanding of cash flow
economic models used to analyze the return
potential for investing in oil and gas
opportunities
• Input parameters (key drivers of results)
• Output parameters (cash flow and economic
metrics)
• Proper application of cash flow economic models
• Property Level – before financing or deal structure
• Offering Level - fully loaded, net to investor
• Risk assessment
Acreage Position
•
Sponsor submits project for due
diligence review
•
Identify type of project
– Drilling project
– Producing property acquisition
– Mineral rights acquisition
•
Identify acreage position and
ownership rights of Sponsor
•
Review acreage position
– Identify producing and prospective
formations from offset wells
– Determine if oil, natural gas or both
•
Ownership details
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Acreage Position
• Ownership
– Surface ownership
– Leasehold (subject to terms of OGL)
•
•
•
Working Interest (expense bearing interest)
Revenue Interest (Working Interest less royalty)
Overriding Royalty Interest (non-expense
bearing interest)
– Mineral rights (minerals owned directly)
•
Royalty Interest
• Examples – Property Level
– Leasehold
•
•
•
•
Working Interest
Royalty
ORRI
Revenue Interest
100% Expense
(20%)
( 5%)
75% Revenue
– Mineral rights
•
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Royalty
20%
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Reserves & Economic Cash Flow Projection
Property Level Economics
Input Parameters
• Revenues
– Oil, Gas, NGL volumes
(adjusted from production to sales volumes)
– Oil, Gas, NGL prices
(adjusted from reference prices to wellhead realized prices)
•
Expenses
– Operating expenses
– Production/ad valorem taxes
– Capital investment
•
•
D&C , facilities, pipeline, leasehold
Ownership
– Interests to be evaluated
•
•
•
•
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Working interest (expense bearing)
Revenue interest
Overriding royalty interest
Changes in ownership due to deal terms
6
Develop Production Profile for Well(s)
Type Curve Development - Offset Wells
•
•
•
•
•
Typically used in unconventional and
repeatable conventional reservoirs
Evaluate reserves and production profile for
offset producing wells to determine range of
expected results for future drilling
Select offset wells producing in target
reservoir
Review drilling and completion operations for
analogy to planned development
Consider impact of multiple factors:
– Type of reservoir
– Type of reservoir fluid
– Type, vintage of offset wells drilled
– Location and orientation of wells drilled
– Distance from planned development
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Develop Production Profile for Well(s)
Decline Curve Analysis
•
•
•
•
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Normalize production
from offset wells to time
zero
Calculate average
production based on
composite volume and
no. of wells vs. time
Use decline curve
analysis on normalized
average production to
generate type curve
Compare type curve IP,
decline profile, EUR to
min/max offset
performing wells for
reasonableness
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Type Curve Projection
•
•
•
•
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Type curve projection
represents estimated
production profile and
reserves for single well
Modify application of
type curve for
development plan
May have multiple type
curves and applications
Production profile
developed from type
curve on undeveloped
acreage or from
decline analysis of
historical production
for producing wells
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Oil and Gas Price Environment
Reference Nymex Oil Prices
Actual I Projected
Nymex Oil Prices
•
•
•
•
Historically high oil price environment
Market in backwardation with long term average prices
~$80-85 per barrel
Supported in near-term by oil supply/demand, fiscal
policy and geopolitical issues
Potential upside/downside risk will track economic
conditions with continued volatility in market prices
Nymex Gas Prices
•
•
Reference Nymex Gas Prices
Actual
I Projected
•
•
Lowest gas price environment since early 2000’s
Excess supply with large inventory and deliverability due
to shale gas development suppressing natural gas prices
Expect near-term prices in $4.00/MMBtu range with
seasonal or weather related spikes at times
No significant near-term increase in pricing due to
fundamentals
Price Realization
•
•
•
Oil: Adjust for gravity, quality, transportation
differentials
Gas: Adjust for BTU, gathering, transportation,
processing and marketing
NGL: Adjust for liquids composition, transportation and
marketing
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Reserves & Economic Cash Flow Projection
•
Expenses
–
Operating expenses – direct costs to produce wells (vary by type, depth and operating environment)
• Pumper
$ 500
• Utilities
1,000
• Chemicals
750
• Field and well expenses
750
• Repair and maintenance expenses
500
• Salt water disposal
2,000
• Operator administrative charge – fixed cost per well/month
900
Total Operating Expense (per month)
$6,400 Range <$1,000 to >$25,000
–
Production/ad valorem taxes
•
•
•
–
Oil production/severance tax
Gas/NGL production/severance tax
Ad Valorem property taxes
Varies by State, percentage of revenue or unit of production
Varies by State, percentage of revenue or unit of production
Varies by State, County, tax jurisdictions
Capital investment – direct costs to drill wells (vary by type, depth and operating environment)
•
•
•
•
•
Drilling and completion cost
Production facilities
Pipeline
Leasehold
Authority for Expenditure (AFE) – Operator’s pre-drill cost proposal for working interest owners participation election
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Reserves & Economic Cash Flow Projection
Property Level Economics (Pre-Tax)
Cash Flow Projection - Property Level
Net
Oil Vol Oil Price Oil Rev
Year
(MBO)
($/Bbl)
(M$)
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Remaining
Total
25.0
15.0
10.5
8.4
7.6
6.8
6.1
5.5
5.0
4.5
22.3
116.6
Economic Parameters
IRR
ROI
Payout
Cost per MBOE
93.00
87.00
82.00
80.00
80.00
80.00
81.00
82.00
83.00
84.00
85.00
2,325
1,305
861
672
605
544
496
452
412
375
1,897
9,944
EUR = 155 MBO
Prod Tax Ad Val Tax
(M$)
(M$)
163
91
60
47
42
38
35
32
29
26
133
696
70
39
26
20
18
16
15
14
12
11
57
298
LOE
(M$)
60
61
62
64
65
66
68
69
70
72
500
1,157
Oper CF
(M$)
2,033
1,113
712
541
479
424
379
338
300
266
1,208
7,793
Capital
(M$)
(2,750)
Net CF Cum CF
(M$)
(M$)
(2,750)
(2,750)
2,033
(718)
1,113
396
712
1,108
541
1,649
479
2,129
424
2,552
379
2,931
338
3,269
300
3,569
266
3,835
1,208
5,043
5,043
Cash
Yield
74%
40%
26%
20%
17%
15%
14%
12%
11%
10%
38%
2.83
1.64
23.58
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Reserves & Economic Cash Flow Projection
Fully Loaded, Net to Investor Economics
•
Property level economics LESS Sponsor deal structure
– Sponsor deal structures vary depending on
• Type of oil and gas investment – drilling, acquisition, other parameters
• Sponsor cost structure (administrative costs and third-party expenses)
– Investment mark-up
– Administrative Costs
– Third-party Expenses
Sponsor mark-up on leasehold, D&C AFE, acquisition or capital costs
Annual fee of ~1% of capital contributions
Annual costs of ~0.25-0.5% of capital contributions
• Sponsor return (sharing arrangement)
– Partnership sharing arrangement
BPO APO1 APO2
Sponsor
10% 20% 30%
Investor
90% 80% 70%
– Carried working interest Investor pays disproportionate amount of capital costs for development
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Reserves & Economic Cash Flow Projection
Fully Loaded, Net to Investor Economics (Pre-Tax)
Cash Flow Projection - Fully Loaded, Net to Investor Level
EUR = 155 MBO
Net
Oil Vol Oil Price Oil Rev Prod Tax Ad Val Tax LOE
Oper CF
Year
(MBO)
($/Bbl)
(M$)
(M$)
(M$)
(M$)
(M$)
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
Remaining
Total
25.0
15.0
10.5
8.4
7.6
6.8
6.1
5.5
5.0
4.5
22.3
116.6
Economic Parameters
IRR
ROI
Payout
Cost per MBOE
93.00
87.00
82.00
80.00
80.00
80.00
81.00
82.00
83.00
84.00
85.00
2,325
1,305
861
672
605
544
496
452
412
375
1,897
9,944
163
91
60
47
42
38
35
32
29
26
133
696
70
39
26
20
18
16
15
14
12
11
57
298
60
61
62
64
65
66
68
69
70
72
500
1,157
2,033
1,113
712
541
479
424
379
338
300
266
1,208
7,793
Investor pays Capital Cost + 10% to earn 90% BPO, 80% APO
Capital
(M$)
(2,750)
Net CF Investor
(M$)
Capital
(2,750)
(275)
2,033
1,113
712
541
479
424
379
338
300
266
1,208
5,043
Property Level
38%
2.83
1.64
23.58
Inv CF Admin Fees
(M$)
(M$)
(3,025)
1,829
38
1,002
38
636
38
433
38
383
38
339
38
303
38
270
38
240
38
213
38
906
303
3,530
681
Economic Parameters
IRR
ROI
Payout
Cost per MBOE
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Net CF
Cum CF
(M$)
(M$)
(3,025)
(3,025)
1,791
(1,234)
964
(269)
598
329
395
724
346
1,070
301
1,371
265
1,636
232
1,869
202
2,071
175
2,246
603
2,849
2,849
Cash
Yield
59%
32%
20%
13%
11%
10%
9%
8%
7%
6%
Offering Level
23%
1.94
2.45
31.45
14
Oil & Gas Underwriting
Analyzing the Return Potential
Net Cash Flow Projection
LOE
Fees
Net Revenues
Revenues
2,500
2,000
Economic life of Net to Investor cash flow
impacted by level of fees and expenses
1,500
Property Level EL
Net to Investor EL
1,000
500
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
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Reserves & Economic Cash Flow Projection
Reserve Reports and Reserve Definitions
Reserve Reports
Typically prepared by Sponsor or third-party independent petroleum engineers
Independent Firms
Large international – Netherland, Sewell; Ryder Scott; Cawley Gillespie; others
Mid-size domestic – many
Small domestic – many
Reserve Categories
PROVED RESERVES
Reasonable certainty to be commercially recoverable from known reservoirs, defined economic conditions
Proved Developed
90% probability actual quantities > 1P estimate
Producing
Non-Producing
Developed:
Quantities expected to be recovered from existing wells and facilities
Proved Undeveloped
Undeveloped: Quantities expected to be recovered from through future investments
Total Proved (1P)
PROBABLE RESERVES
Geoscience and engineering data indicate to be probably recoverable from reservoirs (mid case)
Probable Developed
50% probability actual quantities > 2P estimate
Probable Undeveloped
Proved + Probable (2P)
POSSIBLE RESERVES
Geoscience and engineering data indicate may be possible to recover from reservoirs (high case)
Possible Developed
10% probability actual quantities > 3P estimate
Possible Undeveloped
Proved + Probable + Possible (3P)
RESOURCES
Contingent
Discovered, sub-commercial
Prospective
Undiscovered
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Reserves & Economic Cash Flow Projection
Generalized Risk Assessment
Exploration
Drilling
Generalized Risk Assessment
HIGH
HIGH
Return Potential
Undeveloped Mineral
Acquisitions
Secondary/Enhanced
Recovery Operations
Field Extension
Drilling
Development
Drilling
Production
Acquisitions
LOW
LOW
Producing
Proved Undeveloped
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Probable
Possible
17
Oil & Gas Underwriting
Analyzing the Return Potential
Understand the relationship between:
– Cost of investment
– Expected return
– Risk assessment
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18
QUESTIONS?