Oil & Gas Underwriting Analyzing the Return Potential.
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Transcript of Oil & Gas Underwriting Analyzing the Return Potential.
Oil & Gas UnderwritingAnalyzing the Return
Potential
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
Oil & Gas Underwriting – Analyzing the Return
BCS Energy Services 4
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
BCS Energy Services 5
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 100% Expense• Royalty (20%)• ORRI ( 5%)• Revenue Interest 75% Revenue
– Mineral rights• 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
• Working interest (expense bearing)• Revenue interest• Overriding royalty interest• Changes in ownership due to deal terms
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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
• 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
• 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
BCS Energy Services 10
Oil and Gas Price EnvironmentNymex 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• 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
fundamentalsPrice 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
Actual I Projected
Actual I Projected
Reference Nymex Oil Prices
Reference Nymex Gas Prices
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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 900Total Operating Expense (per month) $6,400 Range <$1,000 to >$25,000
– Production/ad valorem taxes • Oil production/severance tax Varies by State, percentage of revenue or unit of production• Gas/NGL production/severance tax Varies by State, percentage of revenue or unit of production• Ad Valorem property taxes Varies by State, County, tax jurisdictions
– Capital investment – direct costs to drill wells (vary by type, depth and operating environment)
• Drilling and completion cost• Production facilities• Pipeline• Leasehold• Authority for Expenditure (AFE) – Operator’s pre-drill cost proposal for working interest owners participation
election
BCS Energy Services 12
Reserves & Economic Cash Flow Projection
Cash Flow Projection - Property Level EUR = 155 MBONet
Oil Vol Oil Price Oil Rev Prod Tax Ad Val Tax LOE Oper CF Capital Net CF Cum CF CashYear (MBO) ($/Bbl) (M$) (M$) (M$) (M$) (M$) (M$) (M$) (M$) Yield
(2,750) (2,750) (2,750) 2014 25.0 93.00 2,325 163 70 60 2,033 2,033 (718) 74%2015 15.0 87.00 1,305 91 39 61 1,113 1,113 396 40%2016 10.5 82.00 861 60 26 62 712 712 1,108 26%2017 8.4 80.00 672 47 20 64 541 541 1,649 20%2018 7.6 80.00 605 42 18 65 479 479 2,129 17%2019 6.8 80.00 544 38 16 66 424 424 2,552 15%2020 6.1 81.00 496 35 15 68 379 379 2,931 14%2021 5.5 82.00 452 32 14 69 338 338 3,269 12%2022 5.0 83.00 412 29 12 70 300 300 3,569 11%2023 4.5 84.00 375 26 11 72 266 266 3,835 10%
Remaining 22.3 85.00 1,897 133 57 500 1,208 1,208 5,043 Total 116.6 9,944 696 298 1,157 7,793 5,043
Economic ParametersIRR 38%ROI 2.83 Payout 1.64 Cost per MBOE 23.58
Property Level Economics (Pre-Tax)
BCS Energy Services 13
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 Sponsor mark-up on leasehold, D&C AFE, acquisition or capital costs– Administrative Costs Annual fee of ~1% of capital contributions– Third-party Expenses Annual costs of ~0.25-0.5% of capital contributions
• Sponsor return (sharing arrangement)– Partnership sharing arrangement
BPO APO1 APO2Sponsor 10% 20% 30%Investor 90% 80% 70%
– Carried working interest Investor pays disproportionate amount of capital costs for development
BCS Energy Services 14
Reserves & Economic Cash Flow Projection
Cash Flow Projection - Fully Loaded, Net to Investor Level EUR = 155 MBO Investor pays Capital Cost + 10% to earn 90% BPO, 80% APONet
Oil Vol Oil Price Oil Rev Prod Tax Ad Val Tax LOE Oper CF Capital Net CF Investor Inv CF Admin Fees Net CF Cum CF CashYear (MBO) ($/Bbl) (M$) (M$) (M$) (M$) (M$) (M$) (M$) Capital (M$) (M$) (M$) (M$) Yield
(2,750) (2,750) (275) (3,025) (3,025) (3,025) 2014 25.0 93.00 2,325 163 70 60 2,033 2,033 1,829 38 1,791 (1,234) 59%2015 15.0 87.00 1,305 91 39 61 1,113 1,113 1,002 38 964 (269) 32%2016 10.5 82.00 861 60 26 62 712 712 636 38 598 329 20%2017 8.4 80.00 672 47 20 64 541 541 433 38 395 724 13%2018 7.6 80.00 605 42 18 65 479 479 383 38 346 1,070 11%2019 6.8 80.00 544 38 16 66 424 424 339 38 301 1,371 10%2020 6.1 81.00 496 35 15 68 379 379 303 38 265 1,636 9%2021 5.5 82.00 452 32 14 69 338 338 270 38 232 1,869 8%2022 5.0 83.00 412 29 12 70 300 300 240 38 202 2,071 7%2023 4.5 84.00 375 26 11 72 266 266 213 38 175 2,246 6%
Remaining 22.3 85.00 1,897 133 57 500 1,208 1,208 906 303 603 2,849 Total 116.6 9,944 696 298 1,157 7,793 5,043 3,530 681 2,849
Economic Parameters Property Level Economic Parameters Offering LevelIRR 38% IRR 23%ROI 2.83 ROI 1.94 Payout 1.64 Payout 2.45 Cost per MBOE 23.58 Cost per MBOE 31.45
Fully Loaded, Net to Investor Economics (Pre-Tax)
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Oil & Gas UnderwritingAnalyzing the Return Potential
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 -
500
1,000
1,500
2,000
2,500
Net Cash Flow ProjectionLOE Fees Net Revenues Revenues
Net to Investor EL
Property Level EL
Economic life of Net to Investor cash flow impacted by level of fees and expenses
BCS Energy Services 16
Reserves & Economic Cash Flow ProjectionReserve Reports and Reserve Definitions
Reserve Reports
Typically prepared by Sponsor or third-party independent petroleum engineersIndependent Firms
Large international – Netherland, Sewell; Ryder Scott; Cawley Gillespie; othersMid-size domestic – manySmall domestic – many
Reserve Categories
PROVED RESERVES Reasonable certainty to be commercially recoverable from known reservoirs, defined economic conditionsProved Developed 90% probability actual quantities > 1P estimate Producing Non-Producing Developed: Quantities expected to be recovered from existing wells and facilitiesProved Undeveloped Undeveloped: Quantities expected to be recovered from through future investmentsTotal Proved (1P)
PROBABLE RESERVES Geoscience and engineering data indicate to be probably recoverable from reservoirs (mid case)Probable Developed 50% probability actual quantities > 2P estimateProbable UndevelopedProved + 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 UndevelopedProved + Probable + Possible (3P)
RESOURCESContingent Discovered, sub-commercialProspective Undiscovered
BCS Energy Services 17
Reserves & Economic Cash Flow Projection
Generalized Risk Assessment
Exploration HIGH Drilling HIGH
Undeveloped MineralAcquisitions
ProductionAcquisitions
LOW LOW
Producing Proved Undeveloped Probable Possible
Retu
rn P
oten
tial
Gen
eral
ized
Ris
k As
sess
men
t
Recovery Operations
Field ExtensionDrilling
Secondary/Enhanced
DevelopmentDrilling
BCS Energy Services 18
Oil & Gas UnderwritingAnalyzing the Return Potential
Understand the relationship between:– Cost of investment– Expected return– Risk assessment
QUESTIONS?