Replies to post #137741 on ERHC Energy Inc (ERHE)

[RKT989]

and the oil during production is valued at market price and not the lower proven reserve in the grounprice.

Makes for BIG numbers..

[midtieroil]

Let's ignore all costs other than taxes just for the purpose of this discussion and let's say 14 billion is an acutal recoverable reserves number. All I am saying is that on an economic basis that the net reserves available to the partners is 7 billion becasue 50% is going to taxes. The partners will get revenues equivalent to 7 billion bbls of oil and that 7 billion bbls will not be encumbered by any more taxes. I really don't see how you can argue with that becasue it's a fact. Some people here are completely ignoring the taxes when doing their calculations and you can't do that.

This remaining 7 billion is actually worth MORE than $15 per bbl BECAUSE it is unencumbered by additional taxes which have already been paid.

Now to do the actual calculation of the bbls attributable to ERHE in addition to taxes you have to subtract out cost oil from that 7 billion figure, you have to subtract out royalty oil from that 7 billion figure and then you come up with the net bbls that ERHE has the revenue rights to. These net bbls are then unencumbered by any additional taxes or costs and as such are worth more than the $15 or whatever value you chose to assign to proven reserves. This does not represent the proven reserves booked by ERHE according to GAAP but what it does represent is the amount bbls ERHE will receive revenue from. Then all you have to do is multiply that number by the price of oil and you have your cash flow. No further reduction is needed for taxes, royalties or costs because they have already been "paid".

The moral of the story here is you can't determine value based on GAAP proven reserves alone because the costs associated with those proven reserves can vary widely from company to company depending on tax rates and other costs. You need to base value on discounted net cash flows which incorporate those costs into the equation. Taking a reserve number and multiplying it by an estimated value per bbl just doesn't cut it because the costs associated with those reserves vary so widely.