Mineral, Oil and Gas, and Extractive Resource Assets
This domain tests resource and reserve classification, the interest being valued, and a defensible DCF built from a production profile and a stated price deck.
Classification comes before valuation
- Under the Petroleum Resources Management System, reserves are commercially recoverable. Proved (1P) carries roughly 90% confidence, proved plus probable (2P) roughly 50%, and proved plus probable plus possible (3P) roughly 10%. Contingent and prospective resources are not reserves.
- Under JORC or NI 43-101, mineral resources are Measured, Indicated or Inferred; reserves are Proved or Probable only after modifying factors (mining, metallurgical, economic, marketing, legal, environmental, social and governmental) are applied.
- Value attaches to the interest held: working interest, overriding royalty, net smelter return, or net profits interest.
Income approach dominates
Build a production profile from decline curves or the mine plan, choose a price deck (flat, escalated, or forward curve, stated explicitly), deduct royalties, operating cost, capital cost, decommissioning and tax, and discount at a rate reflecting commodity and country risk. PV10 is a disclosure convention, not a market value.
Worked example
A field produces 200,000 barrels a year for five years at a flat $70 per barrel, with a 10% royalty, $12 per barrel operating cost, $20M capital at time zero, 25% tax and a 10% discount rate. Revenue is $14.0M; less royalty $1.4M gives $12.6M; less operating cost $2.4M gives $10.2M pre-tax; tax $2.55M gives $7.65M net. The five-year annuity factor at 10% is 3.7908, so present value is $29.0M, less $20M capital, giving $9.0M. At $60 per barrel the answer falls to about $3.9M, a 56% swing for a $10 price move, which is why price-deck sensitivity must be shown.
Traps
- Describing resources as reserves, or valuing 3P as though it were 1P.
- Discounting nominal cash flows at a real rate, or escalating prices while using a flat-rate deck.
- Omitting decommissioning and asset retirement obligations.
- Applying a production multiple to an unproduced resource.