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bdahl385

08/09/08 1:32 PM

#38433 RE: gqmixmaster #38432

From Wikipedia: http://en.wikipedia.org/wiki/Oil_exploration

Reserves and resources

Resources are hydrocarbons which may or may not be produced in the future. A resource number may be assigned to an undrilled prospect or an unappraised discovery. Appraisal by drilling additional delineation wells or acquiring extra seismic data will confirm the size of the field and lead to project sanction. At this point the relevant government body gives the oil company a production licence which enables the field to be developed. This is also the point at which oil reserves can be formally booked.

Definition of oil reserves

Oil reserves are primarily a measure of geological risk - of the probability of oil existing and being producible under current economic conditions using current technology. The three categories of reserves generally used are proven, probable, and possible reserves.

* Proven reserves - defined as oil and gas "Reasonably Certain" to be producible using current technology at current prices, with current commercial terms and government consent- also known in the industry as 1P. Some Industry specialists refer to this as P90 - i.e having a 90% certainty of being produced.
* Probable reserves - defined as oil and gas "Reasonably Probable" of being produced using current or likely technology at current prices, with current commercial terms and government consent - Some Industry specialists refer to this as P50 - i.e having a 50% certainty of being produced. - This is also known in the industry as 2P or Proven plus probable.
* Possible reserves - i.e "having a chance of being developed under favourable circumstances" - Some industry specialists refer to this as P10 - i.e having a 10% certainty of being produced. - This is also known in the industry as 3P or Proven plus probable plus possible.

Reserve booking

Oil and gas reserves are the main asset of an oil company - booking is the process by which they are added to the Balance sheet. This is done according to a set of rules developed by the Society of Petroleum Engineers (SPE). The Reserves of any company listed on the New York Stock Exchange have to be stated to the U.S. Securities and Exchange Commission. In many cases these reported reserves are audited by external geologists, although this is not a legal requirement. The U.S. Securities and Exchange Commission rejects the probability concept and prohibits companies from mentioning probable and possible reserves in their filings. Thus, official estimates of proven reserves will always be understated compared to what oil companies think actually exists. For practical purposes companies will use proven plus probable estimate (2P), and for long term planning they will be looking primarily at possible reserves.
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Big Mur

08/09/08 2:24 PM

#38435 RE: gqmixmaster #38432

If by speed you mean how fast the oil can be pulled from the ground.... as in the flow rate... that MAY matter. But it's subjective because a bigger company will very likely have a different way of approaching production as opposed to a smaller company with limited access to resources.

But if you mean speed as in the pace the company maintains... then I would disagree that it matters at all.

There are too many factors that would vary even between one management team and another. But more importantly, what might effect Hemi's pace now, like the availability of equipment, etc. would be much less of a factor for a bigger company who has greater resources already available going in.
Even the difference in goals can help determine the pace.
I would say "pace" is totally irrelevant.

The buyers would be experts, or would have access to experts who know and understand the industry completely, and they will easily be able to discern what the potential is when they go over all facets of the company. There would be no value in evaluating Hemi as an independent entity, since if it's bought by a bigger fish, it's just going to be absorbed and become part of that bigger fish's operation, where no doubt it will be utilized in accordance with their way of doing things.

If someone were to buy Hemi with the intent to maintain it as a stand-alone entity, including continuing to operate in the same way it has... a simple change in ownership only... that might be different, but also isn't very likely to ever occur.
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USC Cowboy

08/11/08 4:24 PM

#38464 RE: gqmixmaster #38432

Quick valuation lesson here...for any business.

Companies primary value is based upon cash flow, i.e., rate at which product can be sold to generate cash.

Secondary value is in inventory,i.e., the value of that which is stored.

The cash flow of current sales must be present valued, the more risky the business the higher the discount rate, for O&G companies it is common to use a discount rate of 10-20%, the value of the inventory must also be present valued to reflect today's value of a future conversion from inventory to sale.

Prepare a spreadsheet of estimated annual net revenue and then apply the chosen discount rate to that estimated revenue stream.

For O&G operations a company would be conservatively be valued based upon four years of present worthed net cash flow.

Hope this helps.

USC