Question 1 - Authenticated Master Well List - Part of the 10 Questions An Oil and Gas Company Should Ask Their Auditors

In my last post, 10 Questions An Oil and Gas Company Should Ask Their Auditors, I listed off 10 questions that Auditors should be asked to get an understanding of how they approach auditing your financials. This is especially critical as TSX listed oil and gas companies are about to start the switch to International Financial Reporting Standards.

In the next few posts, I will look at each question in more detail and the importance behind the question. The first question is:

How do your auditors authenticate your master asset list or well list to ensure accuracy?

This is an important question to ask your auditor, as an oil and gas company’s primary asset typically will be their reserves. Hard to believe, but there are few companies that even have an accurate master wells list. Smaller companies typically do, if they have high ownership and few wells, but Argentis Group had one client with production of about 300 barrels a day who stated that they had 59 gross wells and 56 net wells in their Annual Information Form (AIF) when in fact we uncovered over 200 gross wells and 56 net wells. Of the 56 net wells that they claimed they had, we had 20% different wells then they listed. Another firm that Argentis Group worked with had just gone through a 3-month process of creating a master well list, but we were still able to identify 4% of their wells missing of the newly made master list and 2% of the overall proved reserves missing.

The reason that companies do not have an accurate master well list is that there may be several different departments that keep a well list (no two being the same in most cases) and no true owner of the well list. For example, the Land department and the reserves department may have a list, engineering might have a list and finance might say that their Asset Retirement Obligation (ARO) list might be the well list, but basically, there is no authentic master well list.

In order for an auditor to do their job thoroughly and to have a starting point, they should have a process to look at a master well list with meta data such as working interests, royalty rates, operatorship, etc. I know that in reality the auditor only has to take the information that you provide and authenticate it, but for the fees that they charges, they should at least be able to help with a master well list.

If your auditor doesn’t have a process for assisting you create a master well list, then how do they know that you ARO’s and the wells on the ARO List are accurate. If your auditor doesn’t have or can’t compile a master well list, then they don’t know your reserves and how do they know if all your reserves are being tied up to a cash generating unit?

If you look at a company having an inaccurate master well list, then they are more than likely understating or overstating Depletion, Depreciation and Amortization (DD&A) costs. For example, let’s say that a company has $100 DD&A costs overall and you have 10 BOE as reserves. This translates to $10/BOE in DD&A. If you find 2 more BOE in reserves that you didn’t know you had, then you end up with $8.33/BOE in DD&A, which is derived from $100 (total DD&A costs) divided by 12 BOE (the new amount of reserves). In this case, the oil and gas company is overstating their DD&A costs by 20%. In addition, this company will now be able to increase their Net Asset Value (NAV) by potentially 20% through the additional reserves that were found.

The bottom line is, if your auditors don’t have a master well list or have no way of providing you with a master wells list, then they are doing you a disservice. You should be demanding more from your audit firms and be asking for more rigor in their process. If they can’t provide you with an accurate well list and help boost your overall value of your company, then you should look for a firm that will help you. Argentis Group can help create the accurate well list for your company.

These opinions are mine and may not reflect your view. If you would like to contact me, then please feel free to do so at info@argentis-group.com. Argentis Group assists oil and gas companies with operational audits to identify areas to reduce costs, increase revenues and increase the overall asset value of an oil and gas company.

10 Questions An Oil and Gas Company Should Ask Their Auditors

With the introduction of International Financial Reporting Standards (IFRS) in Canada the financial landscape will be changing for publicly listed companies in January 2011 or just a little over a year. As such, companies would be wise to review not only how they are audited and how they will report, but also who is actually doing their financial audits for them.

Typical audits do have a lot of rigor built into them, but in most cases audit firms will use a spot check analysis (1 in every 5 or 1 in every 10 results for example) to determine if results are correct. Audit firms do this because they do not have the technology to perform a full verification of your financial results.

In fact, if the audit firms were to employ a more thorough approach and check all results, there are opportunities to uncover potential missed revenue and reserves, which would have a tremendous impact on the overall financial health of your company. On average, when my company Argentis Group performs an operational audit on a company, we expect to find 9% out on proved reserves. 9% out on reserves can have a significant impact on DD&A and thus the overall financials of an oil and gas company.

Listed below are ten questions that you should ask your auditor. I will go into more detail as to why you should ask these questions in subsequent posts.

Top 10 Questions An Oil and Gas Company Should Ask Their Auditors

1. How do your auditors authenticate your master asset list or well list to ensure accuracy?

2. How do your auditors tie up every cost center to your assets?

3. How do your auditors validate that your working interests are accurate in all your cost centers?

4. How do your auditors validate that you are receiving:

a. All revenue due to you?

b. All royalties due to you?

c. All transportation, processing fees and compression fees due to you?

5. How do your auditors validate that you are not overpaying:

a. Capital?

b. Operating expenses?

c. Royalties?

6. How do your auditors authenticate your Asset Retirement Obligation’s and Offset well liabilities?

7. How do your auditors tie up reserves to cash generating units?

8. Do your auditors authenticate well counts for Annual Information Form’s?

9. How can your auditors potentially make your IFRS conversion pay for itself and add asset value to your company?

10. How will your auditors ensure your Cash Generating Unit’s will be authenticated?

The numbers for the top 5 audit firms in Calgary are listed below.

Deloitte – 403-267-1700

E&Y – 403-290-4100

KPMG – 403-777-9999

PWC - 403-509-7500

MNP - 403-444-0150

Give your auditor a call and see if they can answer these questions for you. If they can not provide a thorough check against all results then you should ask them how they are going to do this to ensure accuracy as you move towards IFRS.

Argentis Group can perform a full array of operational audits to assist companies in identifying opportunities to help offset the costs of IFRS for oil and gas companies and also allow you to ensure financial accuracy. Typically, we will find enough value for your company to more that offset the costs and to make you transition to IFRS smoother and potentially allow for greater overall financial strength.

These opinions are mine and may not reflect your view. If you would like to contact me, then please feel free to do so at info@argentis-group.com. Argentis Group assists oil and gas companies with operational audits to identify areas to reduce costs, increase revenues and increase the overall asset value of an oil and gas company.

The High Cost of Natural Gas - Potentially Breaking the Bank

I have written quite a bit about natural gas, but I recently found some information that highlights some of the issues facing oil and gas companies who depend on natural gas as part of their business.

Here are some interesting numbers on Natural Gas production in Western Canada:

• Q2 2009 numbers that I have shown in the past show that the average sales price is $6.34/mcf
• The average price for natural gas since 1999 was $5.90/mcf Canadian
• The average price for natural gas since 2006 has been $6.44/mcf Canadian
• The average price for natural gas over the last 12 months has been $4.64/mcf Canadian
• In 2008, the National Energy Board of Canada claimed that the average cost per mcf for companies was $7.63 Canadian
• Intermediate oil companies (between 10,000 and 100,000 BOED) had an average cost of $7.07 Canadian (excluding royalties)
• Juniors (between 500 and 10,000 BOED) had an average cost of $9.27/mcf Canadian (excluding royalties)
• In US dollars the average price of natural gas on the NYMEX was $5.43/mcf and $4.67/mcf on the AECO - This represents a NYMEX premium of 14%
• In US dollars, since 2006, the average price of natural gas on the NYMEX was $6.77/mcf and $5.86/mcf for the AECO - This represents a NYMEX premium of 13%
• In US Dollars, over the last 12 months (Oct 08 to Sept 09), the average price of natural gas on the NYMEX was $4.54/mcf and $3.93/mcf for the AECO - This represents a NYMEX premium of 14%

Below shows a graph of the monthly price of natural gas in Canadian dollars since 1999.

Above shows the price of natural gas since 2006 on a monthly basis in Canadian Dollars.

So no matter how you cut it, Western Canadian Gas is at a significant price and cost disadvantage. If we are pulling a mcf of gas out of the ground for $7.63 on average and we are getting a significantly lower price, $4.64/mcf (based on an average of the last 12 months), then you are losing $2.99/mcf and this isn't much of an economic business model. This example represents a 39% difference in price just to break even.

Over the long term the price of natural gas is, on average, lower than the current costs to extract it. Something has to be done to reduce the cost per mcf as we have very little impact over price of natural gas since it is market driven.

These opinions are mine and may not reflect your view. If you would like to contact me, then please feel free to do so at info@argentis-group.com. Argentis Group assists oil and gas companies with operational audits to identify areas to reduce costs, increase revenues and increase the overall asset value of an oil and gas company.

No Two Companies are the Same - Cash Flow Analysis on Canadian Oil and Gas Companies

When you look at companies, a typical measure of a companies financial health is done via cash flow. It is basically the incoming cash vs. the outgoing cash or do you have enough cash to pay your bills.

A lot of times, people will look at cash flow per share as a financial benchmark, but in the oil and gas industry, if you use barrels of oil equivalent per day (BOED), or even better barrels of oil equivalent (BOE), then you get a better gauge of a companies overall financial health.

The follow information shows the cash flow per BOED and BOE for some select Junior and Intermediate companies:

Company	Size	Cash Flow	Cash flow/ Share	Cash flow/ BOED	Cash flow Per BOE
CrescentPoint	Intermediate	$137,960,000	$0.92	$3,339	$36.29
ParamountEng	Intermediate	$88,718,000	$0.78	$3,216	$34.96
Freehold	Junior	$21,884,000	$0.44	$3,000	$32.97
West	Junior	$12,063,000	$0.15	$2,948	$32.40
Peyto	Intermediate	$46,063,000	$0.43	$2,562	$27.84
Fairborne	Intermediate	$35,742,000	$0.41	$2,335	$25.38
NAL	Intermediate	$52,972,000	$0.52	$2,298	$24.98
Zargon	Junior	$21,325,000	$0.92	$2,240	$24.62
Baytex	Intermediate	$86,661,000	$0.82	$2,146	$23.32
Enerplus	Intermediate	$199,815,000	$1.18	$2,114	$22.98
Daylight	Intermediate	$48,459,000	$0.45	$2,103	$22.85
Culane	Junior	$3,032,000	$0.13	$2,049	$22.51
Bonterra	Junior	$9,780,000	$0.55	$1,951	$21.43
Bonavista	Intermediate	$101,655,000	$0.85	$1,964	$21.34
Pengrowth	Intermediate	$160,095,000	$0.62	$1,948	$21.18
ARC	Intermediate	$120,500,000	$0.51	$1,884	$20.48
Galleon	Intermediate	$29,605,000	$0.39	$1,842	$20.02
Delphi	Junior	$12,371,000	$0.16	$1,817	$19.97
Arcan	Junior	$2,764,000	$0.07	$1,815	$19.94
Celtic	Intermediate	$20,008,000	$0.46	$1,834	$19.94
Birchcliff	Intermediate	$20,026,000	$0.18	$1,770	$19.24
EagleRock	Junior	$916,000	$0.02	$1,738	$19.10
Fairwest	Junior	$1,388,000	$0.01	$1,716	$18.85
Advantage	Intermediate	$51,590,000	$0.36	$1,662	$18.06
NuVista	Intermediate	$41,779,000	$0.53	$1,621	$17.62
Rock	Junior	$5,195,000	$0.20	$1,561	$17.15
BlackPearl	Junior	$8,013,000	$0.03	$1,550	$17.03
Seaview	Junior	$3,076,000	$0.05	$1,489	$16.36
Stonefire	Junior	$2,037,000	$0.08	$1,488	$16.35
Crew	Intermediate	$20,036,000	$0.27	$1,488	$16.17
Zapata	Junior	$3,853,000	$0.23	$1,461	$16.05
Painted Pony	Junior	$1,826,000	$0.06	$1,391	$15.28
Diaz	Junior	$822,000	$0.01	$1,218	$13.38
NuLoch	Junior	$601,000	$0.02	$1,185	$13.03
Angle	Junior	$8,539,000	$0.21	$1,143	$12.56
Great Plains	Junior	$1,486,000	$0.02	$1,142	$12.55
Open Range	Junior	$2,508,000	$0.09	$1,117	$12.28
TRUE	Junior	$10,765,000	$0.14	$1,102	$12.11
Trilogy	Intermediate	$21,857,000	$0.22	$1,104	$12.00
Breaker	Junior	$7,493,000	$0.16	$1,064	$11.70
Storm	Junior	$8,460,000	$0.18	$1,038	$11.40
Buffalo	Junior	$2,743,000	$0.04	$1,011	$11.11
Cequence	Junior	$1,541,000	$0.04	$995	$10.94
Cinch	Junior	$2,569,000	$0.05	$982	$10.79
Redcliffe	Junior	$747,000	$0.01	$944	$10.38
Twin Butte	Junior	$2,691,000	$0.06	$940	$10.33
Crocotta	Junior	$1,884,000	$0.04	$939	$10.32
Midnight	Junior	$2,054,000	$0.04	$938	$10.31
ProspEx	Junior	$2,864,000	$0.05	$927	$10.19
Wrangler West	Junior	$1,034,000	$0.16	$926	$10.17
Berens	Junior	$3,866,000	$0.04	$925	$10.16
Yoho	Junior	$2,475,000	$0.12	$923	$10.14
Terra	Junior	$4,930,000	$0.07	$911	$10.01
Arsenal	Junior	$2,032,000	$0.02	$909	$9.99
ParamountRes	Intermediate	$12,236,000	$0.19	$916	$9.95
Questerre	Junior	$717,000	$0.004	$890	$9.78
Progress	Intermediate	$29,619,000	$0.18	$876	$9.52
Anderson	Junior	$6,692,000	$0.06	$859	$9.44
Enterra	Intermediate	$8,561,000	$0.14	$851	$9.25
Vero	Junior	$5,767,000	$0.15	$819	$9.00
Petro-Reef	Junior	$619,000	$0.02	$731	$8.03
Ironhorse	Junior	$877,000	$0.04	$717	$7.88
Midway	Junior	$673,000	$0.05	$687	$7.55
Intl Sovereign	Junior	$593,000	$0.04	$622	$6.83
Orleans	Junior	$2,326,000	$0.04	$604	$6.64
Sure	Junior	$372,000	$0.01	$570	$6.26
Bellamont	Junior	$394,000	$0.01	$454	$4.99
Triton	Junior	$420,000	$0.01	$447	$4.92
Fortress	Junior	$557,000	$0.02	$435	$4.79
Compton	Intermediate	$9,214,000	$0.07	$430	$4.67
Twoco	Junior	$511,000	$0.03	$403	$4.43
Monterey	Junior	$844,000	$0.03	$362	$3.98
Insignia	Junior	$273,000	$0.02	$353	$3.88
Canext	Junior	$347,000	$0.004	$349	$3.83
Iteration	Intermediate	$5,464,000	$0.03	$319	$3.47
DeeThree	Junior	$95,000	$0.01	$176	$1.93
Canadian Phoenix	Junior	$149,000	$0.0001	$169	$1.86
Argosy	Junior	$78,000	$0.01	$83	$0.92
Second Wave	Junior	$(26,000)	$(0.001)	$(26)	$(0.29)
Result	Junior	$(32,000)	$(0.0004)	$(52)	$(0.57)
Dejour	Junior	$(243,000)	$(0.003)	$(439)	$(4.82)
One	Junior	$(355,000)	$(0.01)	$(529)	$(5.81)
Action	Junior	$(855,000)	$(0.01)	$(880)	$(9.67)
Average		$18,687,410	$0.19	$1,180	$12.91

If you look at the low end of the cash flow per BOE, you will notice that one company, Action Energy, has been put into CCAA and most of their assets have been sold off and Result Energy was just recapitalized taken over by the former management team of Tristar Oil and Gas (watch Result Energy, this team has done wonders in the past).

On the upper end, it is good to see that there is a mix of intermediates and juniors, but heavily weighted to the intermediates. Towards the lower end, you see mostly the juniors.

It looks as if a lot of these companies still have pretty decent cash flow, even if we are in a period where gas prices are low. In the long run though, companies are going to have to look at ways to reduce their operating costs, particularly on the natural gas side of their business, to keep their cash flow strong.

These opinions are mine and may not reflect your view. If you would like to contact me, then please feel free to do so at info@argentis-group.com. Argentis Group assists oil and gas companies with operational audits to identify areas to reduce costs, increase revenues and increase the overall asset value of an oil and gas company