Why Value ARD Proved Reserves Based on NYMEX Prices?
One "investor" seemed offended at the thought of valuing ARD proved reserves based on the current NYMEX commodity prices. Most people probably feel the same as this "investor" in that it is "illegal" to value a company's proved reserves based on the spot price of oil and gas. The herd mentality of valuing proved reserves only serves to reduces ones ability to understand the fundamentals and intrinsic value of a company.
Valuing proved reserves at full value is helpful in determining the true value of reserves that will one day be produced. While it is true that if ARD sold a portion of their unproduced reserves they would receive far less income per BOE than if they actually produced the oil, it is important to keep in mind that ARD is in the business of PRODUCING their reserves....not selling their reserves prior to being produced.
Secondly, NYMEX market rates for crude oil provides superior transparency and visibility as to the value of produced oil due to both the frequency of the transactions and also the fact that transactions involve oil only and are paid in U.S. dollars.
On the other hand, there is far less visibility and transparency in valuing proved reserved based on what one would expect to recieve by selling the reserves that are still in the ground. Why? Transactions such as these are not only rare but almost always involve many other assets besides the proven reserves and the medium through which the deal is conducted often times involves both cash and stock. In other words, the additional variables involved in transacting proved reserves prior to production provide less visibility and transparency than that of oil of which is produced and sold on the open market.
Therefore, by using the market rate at which oil trades on NYMEX as a basis for valuing proved reserves, one can have a much clearer understanding of the intrinsic value of a company. This understanding is significantly enhanced when comparisons are made between the company being studied and that of a peer group. Ultimately we base the value of the proved reserves on net income the company can expect to generate as a result of producing the proved reserves on a per share basis.
This topic was blogged about on March 14, 2006.
One "investor" seemed offended at the thought of valuing ARD proved reserves based on the current NYMEX commodity prices. Most people probably feel the same as this "investor" in that it is "illegal" to value a company's proved reserves based on the spot price of oil and gas. The herd mentality of valuing proved reserves only serves to reduces ones ability to understand the fundamentals and intrinsic value of a company.
Valuing proved reserves at full value is helpful in determining the true value of reserves that will one day be produced. While it is true that if ARD sold a portion of their unproduced reserves they would receive far less income per BOE than if they actually produced the oil, it is important to keep in mind that ARD is in the business of PRODUCING their reserves....not selling their reserves prior to being produced.
Secondly, NYMEX market rates for crude oil provides superior transparency and visibility as to the value of produced oil due to both the frequency of the transactions and also the fact that transactions involve oil only and are paid in U.S. dollars.
On the other hand, there is far less visibility and transparency in valuing proved reserved based on what one would expect to recieve by selling the reserves that are still in the ground. Why? Transactions such as these are not only rare but almost always involve many other assets besides the proven reserves and the medium through which the deal is conducted often times involves both cash and stock. In other words, the additional variables involved in transacting proved reserves prior to production provide less visibility and transparency than that of oil of which is produced and sold on the open market.
Therefore, by using the market rate at which oil trades on NYMEX as a basis for valuing proved reserves, one can have a much clearer understanding of the intrinsic value of a company. This understanding is significantly enhanced when comparisons are made between the company being studied and that of a peer group. Ultimately we base the value of the proved reserves on net income the company can expect to generate as a result of producing the proved reserves on a per share basis.
This topic was blogged about on March 14, 2006.
posted by -Aztec- at 7:09 AM
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