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Oil & Gas Reserves, Booking Standards, & E&P Performance:
Market & Debt Rating Perspectives*

By

Andrew Oram1

Search and Discovery Article #40193 (2006)

Posted May 17, 2006

 

*Oral Presentation at Reserves Previous HitForumNext Hit: Reserves -Now & in the Future, AAPG Annual Convention, Houston, Texas, April 9-12, 2006

 

Click to view presentation in PDF format.

 

1Vice President and Senior Credit Officer, Moody’s Investor Service

 

Reserves, Standards, Debt Ratings, Markets:
Presentation Outline

Moody’s E&P methodology & 1st thoughts on what markets value

The debate on oil & gas reserve booking standards & disclosures

–Would more flexible bookings aid E&P valuations?

–Reserve bookings: valuation catalyst or outcome of value drivers?

–Valuation drivers –what markets & Moody’s value

  • Expectations & what drives equity multiples

  • Cash-on-cash returns, capital intensity, & reinvestment efficiency

  • Is sector’s drive for booking flexibility matched quid pro quo by drive for increased & more user-friendly disclosures?

  • 3 issues: booking standards; disclosure standards; & how & when producers choose to book new provens (smoothing)

–Specific topics & disclosures that would aid market participants

 

Thoughts on E&P Success:
When E&P’s Consistently Meet/Exceed Expectations They Create 

Performance-driven equity value creation, not value transfer

Strong risk-adjusted propensity for internally-funded Previous HitproductionNext Hit growth at competitive unit full cycle costs & cash-on-cash returns

–Differential capital intensity/unit of Previous HitproductionNext Hit growth, differential capital productivity, repeatability differentiate E&P’s over time

–Differential access to quality properties & differential results

–Balanced capital allocation, diversified portfolios, diversifiedrisk suitable to capital base & to mitigate risk of gambler’s ruin

Not setting / straining to hit unrealistic growth targets; markets don’t like volatility in operating results or reserve data

Sound acquisition funding -avoid tapped-out capital structure, launch equity when reasonably can -> the dinner mints don’t always come around again

  

Sector Trends –Rated E&P’s (Estimated Average Rated E&P’s Metrics) 

Independent E&P Debt Rating Methodology. Strength of Existing Base & Accretion Catalysts vs. Leverage Burden & the Scale of Capital Needs, Exploration & Previous HitDevelopmentTop Mix, & Risk of Reinvestment Activity

 

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