Compustat Data Navigator White Paper: Oil and Gas Exploration and Production Industry-Specific Data March 2008
Data Navigator: Oil and Gas Exploration and Production Industry-Specific Data An E&P company s reserve base indicates the ability, when produced, to generate positive cash flow. With the recent price of oil trending upward, many oil and gas production companies will benefit from the higher prices of oil as a driver of revenues. Money managers and investors may do well to consider investments in the industry given the favorable demand for oil and gas. In addition to data on refining and marketing companies, Compustat offers industry-specific data for oil and gas exploration and production companies (covering GICS 10102020 and 10102010). It includes key statistics on measures like reserves, production and costs: data that helps define the overall health of exploration and production companies in fundamental analysis. This guide will help explain what the data means and how it might be used (a complete listing of the data is available at the end of this paper for reference). When beginning to analyze an exploration and production (E&P) company, it is important to consider its available resources. It is of primary importance that E&P companies have a continuous source of oil and gas to lift out of the ground. Without development and acquisition of resources, an oil and gas production company will deplete its reservoirs and eventually cease to produce. For this reason, analysts closely watch an E&P company s reserves the amount of oil and gas a company anticipates recoverable from their reservoirs. A company s reserve base is a key asset in valuation and indicates the ability, when produced, to generate positive cash flow. Compustat provides several data items that represent the reserves of an E&P company s three main products: oil, natural gas and natural gas liquids. * Each of these reserves are categorized as proved developed reserves or total proved reserves * In addition to crude oil, production companies extract natural gas and natural gas liquids. When natural gas is initially lifted out of the ground, it is wet with larger-molecule natural gas liquids such as propane, butane and ethane. These natural gas liquids are removed and the residual natural gas is mostly methane (the natural gas we use in our homes). 1
The reserve replacement ratio indicates how effective an E&P company is at replacing its reserves. (see the data list at the end of this paper). All reserve data involves some degree of uncertainty, but analytics are focused on those reserves categorized as proved estimated quantities of oil and gas that geological and engineering data show with reasonable certainty to be recoverable from known reservoirs. Proved developed reserves are reserves that are expected to be recovered on drilled acreage from existing wells and equipment. Proved undeveloped reserves are expected to be recovered from new wells on undrilled land, or from existing wells where a relatively major expenditure is required for completion. So for our data, Total Proved Reserves for Oil (OGTPROIL) represents the total developed and undeveloped proven oil reserves. Proved Developed Reserves for Oil (OGPDROIL) represents just the portion of total reserves that is developed. Proved developed reserves do not require additional capital investments (drilling new wells, gas compression installation, etc.) and signify a more conservative figure when considering a company s reserves. Proved developed reserves can be looked at in relation to total proved reserves to see what percentage of reserves are already developed, and what percentage are undeveloped. Analysts look at both over time and relative to other companies as an indication of a company s ability to produce future revenues. Compustat provides Reserve Replacement Ratio (OGRRR) as another way of considering reserves. The total reserve replacement ratio is commonly reported in the annual financial statements and is defined by the amount of proven reserves a company annually adds to its total reserves (through both acquisitions and drilling), divided by total production for the year. The ratio indicates how effective an exploration and production company is at replacing its reserves. For example, if a company has a 200% reserve replacement ratio, it will have replaced twice as much reserves as its total production for the year. Some analysts also consider looking at the proved reserveto-production index, which is defined by taking the annual total proved reserves and dividing it by total production for the year (see 2
An E&P company s resources can also be thought of in terms of acreage. Analysts examine whether production levels are increasing over time to indicate profit potential. the data example on page 6 for calculating this figure). This metric estimates the number of years an oil and gas company might continue to produce at its current rate given its amount of proven reserves, not taking into account new additions. The proved reserve-to-production index is a snapshot of a company s reserves indicating how well-stocked companies are for the future. An E&P company s potential resources can also be thought of in terms of the amount of acreage they have acquired through leases and purchase. Compustat provides figures for the annual developed and undeveloped acreage on which companies have production rights. As with reserves, developed acreage is land that has been drilled and has production equipment on it, while undeveloped acreage has not yet been drilled and generally requires significant future investment. Compustat breaks out these categories into gross and net, giving four categories: Gross Developed Acreage (OGGDACR), Net Developed Acreage (OGNDACR), Gross Undeveloped Acreage (OGGUACR), and Net Undeveloped Acreage (OGNUACR). The distinction between gross and net acreage has to do with a company s working interest in the land they drill on. Working interest entitles a company to all or a fraction of the oil and gas produced on a property. For example, a company may have 50% working interest on 100 acres. They would be said to have 100 acres gross and 50 acres net. Net acreage is therefore a more conservative figure when estimating a company s acreage resources. Each of these acreage figures can be looked at over time to determine whether a company is expanding its resource base through new acquisitions, leases and joint ventures. In addition to considering the potential resources a company possesses, the actual production levels of oil, natural gas and natural gas liquids are an equally important measure. Production levels are regularly reported on financials, and analysts examine whether an E&P company s production of oil and gas is increasing over time to indicate profit potential. We offer both quarterly and annual production data on a total or daily basis for 3
Calculating total production in Boe or Mcfe is useful for analytic comparison across companies. oil, natural gas and natural gas liquids (see the data table at the end of this paper for a complete listing). For example, Production of Oil per Day (OGPOILD) and Production of Oil Total (OGPOIL) can be tracked quarterly or annually to examine trends in production levels. To determine total production levels, oil, natural gas and natural gas liquids figures can be added together. Because oil and natural gas liquids are reported in thousands of barrels (MBbls), while natural gas is reported in thousands or millions of cubic feet (Mcf or MMcf), E&P companies may calculate total production in either thousand cubic feet of natural gas equivalent (Mcfe) or in barrel of oil equivalent (Boe). For an example of how to calculate Boe, see the data example on page 6. Determining total production is useful because different metrics can be divided by total production for comparison across companies. Revenues, earnings (usually at the EBIT line), and expenses (production and development) can be divided by total production to determine how much a company is earning or expensing per Boe or Mcfe. In terms of expenses, Compustat provides Exploration Expense (OGXPX). Exploration expense is representative of exploration costs (geological studies, equipment and facilities, depreciation, drilling costs, etc.) incurred for unsuccessful exploration activities. The reason exploration expense is not inclusive of all exploration activities has to do with how a company accounts for its efforts. There are two common methods of accounting used by E&P companies the successful efforts method and the full-cost method. Under the successful efforts method, the costs for unsuccessful exploratory wells are expensed and written off, while the costs for successful exploratory wells are capitalized and amortized over the length of production. Under the full cost method, all costs in exploration, including dry holes, are capitalized and amortized. Exploration Expense (OGXPX) is therefore only applicable to those companies that use the 4
Average Sales Prices include the effects of hedging and can be compared to market prices to determine how well hedging efforts have paid off. successful efforts method of accounting, and represents expense toward unsuccessful ventures. Dry Hole Expense (OGXDH) is a portion of exploration expense, and represents expenses in the actual drilling of unsuccessful wells. Considering a company s exploration and dry hole expense is a way of gauging how much is being written off on unsuccessful ventures. If companies can minimize their exploration expense, they are able to maintain a better margin on the oil they sell. Compustat also provides annual and quarterly sales price data: Average Sales Price of Oil (OGASPOIL), Average Sales Price of Natural Gas (OGASPNG), and Average Sales Price of Natural Gas Liquids (OGASPNGL). These figures represent the average realized price a company sells its products for, including the effects of hedging. E&P companies sometimes hedge part of their production by selling oil and gas on the futures market. In this way they can contract to sell some of their oil or natural gas at a set rate in the future and avoid some of the adverse effects of lower oil and gas market prices. The average sales price figures include the effects of hedging, and so can be compared to average market prices for oil, natural gas and natural gas liquids to determine whether a company s hedging efforts have paid off over a period. Let s take a look at an example of some of the data we discussed taken from Compustat. The following represents the last three fiscal years for two E&P companies with comparable market capitalization, Quicksilver Resources and Forest Oil Corp.: To determine if a company uses the successful efforts method of accounting within Compustat, the data item PP&E (Net) - Total - Note (PPENTF) can be used. A code of TG means they use the successful efforts method of accounting while a code of TH means they use the full cost method of accounting. 5
For simplicity, we ve focused on data for reserves and production, two central metrics when analyzing E&P companies. Considering the Quicksilver reserves data, we note that they have managed to increase their total proved reserves in oil, natural gas and natural gas liquids for the last few years, apart from an apparent dip in oil reserves from 2004 to 2005. Overall, their total proved reserves has steadily increased, the most significant jump being between 2005 and 2006, when they gained 75 million Boe in proved reserves, a 40% increase. Forest Oil Corp. has not seen similarly significant increases in the last two years. While their oil and natural gas liquid reserves has increased (note that @CF denotes a combined figure natural gas liquids was combined with oil), their reserves for natural gas dropped off from 2005 to 2006. Reflective of this, their total reserves dropped about 2 million Boe between those years. We can see a similar trend in terms of production. While Quicksilver has increased total production in Boe over the last three years, Forest Oil has let production levels 6
drop, particularly between 2005 and 2006 when production declined by 7 million Boe. Analysts would benefit from examining Forest Oil s 10-K to determine why their production saw a decline. The reserve-to-production index for both companies has increased over the years, yet Quicksilver s index is consistently higher, with over twice the number of years of reserve remaining compared to Forest Oil. In terms of earnings, we see that Quicksilver has sustained a higher EBIT per barrel of production in the last two years relative to Forest Oil. In a complete analysis, it would also be helpful to compare these ratios to 5-year and industry peer averages. Although not inclusive of every metric one might consider, Compustat s industry-specific data for oil and gas exploration and production provides a broad look at data points that are key to fundamental analysis. The data has been selected according to its significance in the oil and gas industry it is widely meaningful within the industry, and production companies commonly report the data in 10-K s, 10-Q s, newswires or website data sources. Compustat s industry-specific data has been further standardized so analysts can be assured of its consistency; the data is comparable across companies and time, and is a reliable indicator of trends in the industry. We hope that this guide has served as a primer to understanding the E&P industry and how our data might be used in analysis. For more information on analysis of the oil and gas exploration and production industry, see Standard & Poor s Oil & Gas: Production & Marketing Industry Survey. The survey is available with subscription to Standard & Poors Market Insight. 7
Oil and Gas Exploration and Production Industry-Specific Data Items Mnemonic Data Item Name Units Expenses OGXDH (Q) Dry Hole Expense Thousand $ OGXPX (Q) Exploration Expense Million $ Acreage OGGDACR Gross Developed Acreage Thousand Acres OGGUACR Gross Undeveloped Acreage Thousand Acres OGNDACR Net Developed Acreage Thousand Acres OGNUACR Net Undeveloped Acreage Thousand Acres Reserves OGPDRNG Proved Developed Reserves-Natural Gas Million Cubic Ft. (MMcf) OGPDRNGL Proved Developed Reserves-Natural Gas Liquid Thousand Barrels (MBbls) OGPDROIL Proved Developed Reserves-Oil Thousand Barrels (MBbls) OGTPRNG Total Proved Reserves-Natural Gas Million Cubic Ft. (MMcf) OGTPRNGL Total Proved Reserves-Natural Gas Liquid Thousand Barrels (MBbls) OGTPROIL Total Proved Reserves-Oil Thousand Barrels (MBbls) OGRRR Reserve Replacement Ratio Percent Production OGPNGD (Q) Production-Natural Gas/Day Thousand Cubic Ft. (Mcf) OGPNG (Q) Production-Natural Gas (Total) Thousand Cubic Ft. (Mcf) OGPNGLD (Q) Production-Natural Gas liquid /Day Thousand Barrels (MBbls) OGPNGL (Q) Production-Natural Gas Liquid (Total) Thousand Barrels (MBbls) OGPOILD (Q) Production-Oil /Day Thousand Barrels (MBbls) OGPOIL (Q) Production-Oil (Total) Thousand Barrels (MBbls) Sales Price OGASPNG (Q) Average Sales Price-Natural Gas $ per Thousand Cubic Ft. (Mcf) OGASPNGL (Q) Average Sales Price-Natural Gas Liquids $ per Barrel OGASPOIL (Q) Average Sales Price-Oil $ per Barrel (Q) signifies the item is available quarterly as well as annually. 8
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