What is the Market Value of Long-Life Reserves?

This paper presents an examination of fair market value concepts as they pertain to producing petroleum properties. Conventional producing petroleum properties. Conventional petroleum economic theories of fair market petroleum economic theories of fair market value are examined in light of recent work on the market value of long-life reserves. Their work is expanded to show that sellers rely on comparable sales data for estimating FMV. Both results are used to suggest that current practices over-emphasize the discounted cash practices over-emphasize the discounted cash flow approach to estimating fair market value. Introduction The term "fair market value" is used by many petroleum economists as though it were an engineering concept with precise mathematical derivation and universally recognized definition. Some have even gone so far as to equate the determination of fair market value (FMV) to principles of engineering. In reality, however, economic markets are so complex they usually defy formulaic estimates or predictions. Traditional petroleum economic approaches to the determination of FMV have come under increasing scrutiny. Diggle and David observed in 1987 that oil and gas properties were selling at prices that could properties were selling at prices that could not be explained by most conventional FMV approaches. David and Hickman found similar results in 1990. In a 1991 article, Williams argued that engineers and petroleum economists were confusing the determination of value for investment purposes with a determination of an underlying economic fair market value. David and Hickman similarly concluded that petroleum economists have unnecessarily canonized a discounted cash flow analysis to FMV. This paper begins with a review of traditional practices for estimating. Concerns regarding the appropriateness of these practices are then discussed, followed by a presentation of data-suggesting that sellers of producing properties are typically disinclined to accept properties are typically disinclined to accept traditional petroleum economic valuation approaches. P. 297

Fair Market Value: Theory vs. Practice

Williams

1991

1990’s Applications of 1950’s Evaluation Technology

Campbell¹

1992

In the restructuring process of the petroleum industry let us not forget the basic decision methods which contributed to its current adversity.The emphasis to date has been on the elimination and/ or reorganization of personnel.Cutting costs may be expedient on a short-term basis but as a long term strategy, it is merely a step toward going out of business.As in any intelligent decision process, any examination of our evaluation methods requires understanding their origins, how they changed from then to now, and their current applicability. This paper is a summary of the authors view of these matters.Hopefully, it will catalyze some long overdue scrutiny of the conventional methods to better understand their current significance, which in turn will result in a new evaluation paradigm. b 1990's APPLICATIONS

Optimum Timing for Property Divestment

Rosiere

1993

An economic analysis technique has been developed to aid in determining optimum divestment time for oil and gas properties. This technique can be a useful planning tool in defining the operation and divestment portfolio of a maturing property base, and can be programmed within a computer spreadsheet using data extracted from only one economic forecast of continued operations.The technique identifies the optimum time to divest by comparing at each remaining year of economic life, "the net gain that would be realized from sale" to "the net present value (NPV) of continuing operations for one more year, plus the net discounted gain from sale at the end of that year." In other words, the analysis addresses at the beginning of each remaining year, "Is it more profitable to sell now, or operate for another year and then sell?"Optimum divestment time can be determined graphicaJly or from tabulated comparison values.Cumulative differences in comparison values for each year can show expected loss from divesting at times other than optimum. If property divestment is imminent, the comparison can be used to determine a minimum sales price that yields maximized economic gain compared to continued operations.