- 12 -
report typically states the discounted net present value of the
specified reserves. The discounted net present value is
dependent upon three factors: (1) An estimate of the proved,
developed, and producing reserves, (2) an estimate of the
anticipated future net revenue using price forecasts provided by
the oil and gas company, and (3) a range of discount rates used
to determine the net present value of the future net revenues
expected to be received upon the recovery and sale of the
reserves. Petitioner's standard practice was to rely on the
seller's reserve report if it was prepared by a reputable outside
engineer.11 Petitioner's standard practice also included
engaging the seller's reserve engineer to update or "roll
forward"12 his earlier projections using petitioner's oil and gas
price forecasts.13 Petitioner would then perform an in-house
review of the updated reserve report in connection with its
evaluation of the prospective acquisition. Petitioner adopted
11 The "major" oil and gas companies typically do not rely on
outside engineers. Thus, in acquisitions involving reserves
owned by major oil and gas companies, it is common for a buyer to
rely on the seller's in-house reserve report.
12 A reserve report is "rolled forward" or updated by revising
the previous projections to take into account the intervening
production and the buyer's oil and gas price forecast.
13 Petitioner also used rollforwards in connection with the
evaluation of its own reserves. Petitioner typically evaluated
its reserves midyear and then rolled its projections forward at
the end of the year.
Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 NextLast modified: May 25, 2011