Professional Documents
Culture Documents
com
WhyShouldICareAboutUnitsofMeasurement?ThatsBoring!!!
BecausewhenyourMDaskswhyyourmodeliscompletelywrong, youlllookstupidandgetbottomtierbonusifyousheepishlyadmit thatyouscrewedupandforgottomultiplyeverythingby6,or1,000, or10,000,orwhatevertheconversionfactoris. Fornormalcompanies,unitsofmeasurementareanafterthought becauseyourealwaysworkingindollars,Euros,yen,andsoon. Butfornaturalresourcecompaniestheyarecriticalbecause companiesmeasuretheirProductionandReservesindifferentwaysandyouhavetomakesureyoure comparingapplestoapples. Productionishowmuchinoil,gas,gold,silver,copper,etc.youreextractingfromthegroundandselling measuredinBarrelsofOil,CubicFeet,Ounces,Tons,andsoon. Reservesarethetotalamountofoil,gas,gold,silver,copper,etc.thatyouhaveinthegroundinthefirstplace. Asyouproducemore,yourreservesdecreaseandsoyouhavetoreplacethemconstantly.
UnitsofMeasurement
Herearetheunitsthatoil,gas,andmineralsarenormallyreportedin(seethenotesonthenextpage): ResourceType DailyProduction AnnualProduction&Reserves Oil,NaturalGasLiquids, ThousandsofBarrels MillionsofBarrels(MMBbls)orBillionsof SyntheticOilandBitumen (MBbls) Barrels(BBbls) NaturalGas MillionsofCubicFeet BillionsofCubicFeet(Bcf)orTrillionsof (MMcf) CubicFeet(Tcf) IronOreandCoal ThousandTonnes(kt) MillionTonnes(Mt) Aluminum,Copper,Lead,Zinc, Tonnes(t) ThousandTonnes(kt) Nickel,andManganese Uranium Tonnes(t) Tonnes(t) Diamond Carats ThousandCarats GoldandSilver Ounces(oz) ThousandOunces(koz)orMillionOunces (moz) 1BarrelofOil=42GallonsofOil=5.8MillionBritishThermalUnitsofEnergy(5.8MMBtu) 1,000CubicFeetofGas=1MillionBritishThermalUnitsofEnergy(1.0MMBtu) 1Tonne=1MetricTon(1,000kg) 1Carat=200milligrams(200mg)
Oil&GasModeling QuickReferenceProduction,Reserves&UnitsofMeasurement http://breakingintowallstreet.com TheseUnitsAreCrazyWhyAreWeUsingtheMetricSystemANDtheUSSystem? Sorry,theresnoclearanswercompanieshavetraditionally usedamixofbothunits.Sometimesyoullseeouncesrather thangramsandsometimesyoullseeUStonsandpounds(1 ton=2,000pounds)inadditiontometrictons(tonnes)where 1tonneis1,000kg. Youneedtoreadthenotescarefullytherearealways exceptionsandstrangeunits. Thetableabovegivesyouaroughideaofwhatyoullsee butyouneedtopayattentionoryoullendupmeasuring DiamondProductioninBarrelsofOil. Theexactunitsdependnotonlyontheregion,butalsoonhowmuchthecompanyactuallyproduces.If billionsaretoobig,theymightusemillions;ifmillionsaretoobig,theymightusethousands,andsoon. Evenifthecountryusesthemetricsystem,thecompanyitselfmaystilluseUSunitsofmeasurementfor example,BritishPetroleumreportsenergyinBarrelsofOilandThousandsofCubicFeetdespitebeingUK based.
ConvertingtoEquivalentUnits
Youdonotseemineralunitsconvertedinacompanysfilingsmostofthetime.Sometimesyouwillseea referencetocopperequivalentsorgoldequivalentsyoucancalculatethosebysummingupthedollar amountforallmineralproductionandthendividingbydollarsperounce,gram,ortonneforthemineralyou wanttoconvertinto.Theexactformuladependsonwhichmineralsthecompanyproduces. Forenergy,itsmucheasier:since1BarrelofOil=5.8MMBtuand1,000CubicFeetofGas=1MMBtu,you roundtheunitsandalwaysassumethat: 1BblofOil=6McfofNaturalGas 1MBblofOil=6MMcfofNaturalGas 1MMBblofOil=6BcfofNaturalGas 1BBblofOil=6TcfofNaturalGas YouconvertintoBarrelsofOilEquivalent(BOE)orThousandCubicFeetEquivalent(Mcfe). Ifacompanyhasover50%gasproduction,normallyyouconvertintoMcfe;ifitsover50%oilproduction, youconvertintoBOE.
Oil&GasModeling QuickReferenceProduction,Reserves&UnitsofMeasurement http://breakingintowallstreet.com Example:Acompanyhas6,000Bcfofnaturalgasproductionand200MMBblsofoilproduction.Whatisits productioninCubicFeetEquivalentandinBarrelsofOilEquivalent? 6,000Bcf+200MMBbls*6=7,200Bcfe 6,000Bcf/6+200MMBbls=1,200MMBOE Whenlistingpubliccompsandprecedenttransactionsfornaturalresourcecompaniesyouneedtolist ProductionandReservesinthesameunits,soyouusetheseconversionfactorsallthetime. ItdoesntmakesensetoshowonecompanysReservesinBarrelsofOilandanothersReservesinThousands ofCubicFeeteverythingshouldbeinBOEorMcfe.
Reserves
TheReservestellushowmuchacompanyhasintheground,readytoextract.Butextractionisnevera certainty,soreservesarecategorizedbasedonprobabilities:
>90% Proved
>=50% Probable
<50% Possible
Oil&GasModeling QuickReferenceProduction,Reserves&UnitsofMeasurement http://breakingintowallstreet.com EvenReservesareProved,thereisstillasmallchance(<10%)thattheycouldhavenothing.Butifthe companyhasactuallydevelopedthosereserves,therearedefinitelyresourcestheresoProvedDeveloped Reservescanbemorereliable. Bothoil&gascompaniesandminingcompanieshavereservestofindtheminthefilingsyoucansearchfor ProvedReservesorgototheOil&GasProducingActivitiesorOil&GasSupplementalInformation sections(similarnamesforminingcompanies). Heresanexampleforanoil&gascompany(XTOEnergy):
Andheresanexampleforaminingcompany(Goldcorp):
Itsindifferentunitsandislaidoutdifferentlybecauseminingcompaniesonlyrecoverafractionofthe minerals(hencethegramsofSilverpertoncolumn),buttheideaisthesame.
Production
Productiontellsushowmuchinresourceswereextractingfromtheground.Itmightbeonadaily,quarterly, orannualbasis;oil&gascompanieslookatitonadailybasisandvaluationmultiplesarebasedonDaily Productionwhereasminingcompaniesfocusonlongertimeperiods. Youfindthesenumbersinthesamesectionofacompanysfilingsthathasinformationonthereserves. ExampleforXTO:
ProductiontoRevenue&Expenses
Revenue=ProductionofCommodity*RealizedCommodityPrice YouprojectProductionbasedonhistoricalnumbersandcompanyguidanceiftheyhavebeengrowingat 10%peryearandexpecttogrowat8%nextyear,youmightuse8%andthenmakeitdeclineby1%peryear. Ifthecompanyproducesmultipletypesofresources,youmakedifferentassumptionsforeachoneandadd themalltogether. Forminingcompaniesyouassumethatanumberoftons/tonnesaremined,butthatyoucanonly recoveracertain%ofwhatyourelookingfor,orthateachton/tonnecontainsonlyacertainamount. Soyouneedtomakeafewmoreassumptionstogetthefinalnumbers.
Youhavetoincludescenariosforexample,an upsidescenarioforgasmightbe$10.00/Mcf,a basescenariomightbe$7.00/Mcfanda downsidescenariomightbe$4.00/Mcf.You alwaysneedtolookatarangeofvalues. Youneedtoincludeapricedifferentialbetween marketpricesandwhatthecompanygets;this variesalotformineralsbutforoilandgasits usuallyaround90%(e.g.theyrealize90%of marketprices)andfornaturalgasliquids(NGLs) itscloserto50%. Thecompanymayusehedgingsoifmarket pricessuddenlydrop,theirrealizedpricesmaybe acertainpercentagehigher,andifmarketprices shootup,theirpricesmaybeacertainpercentage lower.
MostexpensesfornaturalresourcecompaniesarelinkedtoProductionandareprojectedonaperunitbasis. XTOmakesthisobvious: