Thanks very much for reading and making a comment: it is very useful to consider a problem from all angles, to be sure. Therefore, could you please tell me how you arrived at the number of $49.40/boe as three year cost. Do you know for sure that it doesn’t include interest and G&A–and can you prove that point?
On your own blog (“PetroBakken – 2010 Annual Review“), you wrote:
In conclusion, it is vital that potential investors calculate returns on a per share basis and avoid the headlines in most press releases. I could have spent more time getting into how the PDP reserves (the BOE’s actually on production) cost $64.47/boe to find, develop or acquire, but why bother? The company nets around $42/boe for each barrel produced (Revenue less cash costs). Usually you want to find the barrel of oil for less than you can sell it for.It appears to me that the production cost per barrel, between Q4 2010 and today (presumably Q2 2011) has dropped (by your calculation) 64.47-49.40 =$15.07 boe. That is a very dramatic difference. Could it possibly be explained by the metrics in the chart above, which makes it clear that initial production will be much more costly and as more wells come online, the legacy production will continue at a lower rate for many years. Thus we would expect that number (cost per barrel) to come down regularly in the months to come.
This is the last free analysis, and my last discussion on this subject. I don't want to beat a dead dog.
How did I arrive at my number, it is calculated using the net change in proven reserves over the last three years divided by the capital spent.
Do I know for sure that it doesn't include interest and G&A? This is a silly question... Yes I know for sure and No it doesn't include those items. You want proof? Go to PBN's website, and download the Q2 financials. Go to page 2. Revenue less royalties less production expenses is your operating netback (transportation should also be deducted). This is the cash left over after you produce a barrel of oil and sell it. With that money you have to pay normal business expenses and hopefully find another barrel. You need a recycle ratio of around 1.3 to just breakeven.
Next problem. The $64.47/boe is for a proven developed producing (PDP) barrel. These are the reserves at are actually on production (producing oil or gas) as of the date of the reserve report. The $49.40/boe is for a Proven (1P) Barrel. Proven reserves (1P) are ones that are very highly likely to be recovered. However 1P reserves includes PDP reserves (already mentioned) + proven developed non-producing + proven undeveloped reserves (PUDs). Proven developed non-producing are wells that are drilled but need to be tied in to production. PUDs are wells that are not drilled but planned on being drilling usually within a year. PUDs are typically wells that are drilled in-between two known wells in a field (infill drilling) and therefore have a very high likely hood of containing the estimated reserves.
Further, 2P reserves included 1P reserves plus fringe wells that haven't been drilled and may or may not be economic.
The PDP cost of $64.47/boe is very high but can't be taken in isolation. The three year average proven reserves is a good number but not as conservative as PDP for the reasons mentioned above. You have to understand the proven reserves contain a number of assumptions. These assumptions include what the reserves of the PUDs will be and what the actual capital cost will be to bring the well into production. When the PDP is consistently higher than 1P reserves cost over a 3 year period you can know one of two things is happening. One is either the reserves are not what they forecasted or the capital cost have been much higher than estimated. For PBN I would guess it's a combination of both.
If you don't understand these things I would strongly recommend consulting a professional for investment advice.