Analysis of Q3 Results for Junior Oil and Gas Companies on the TSX: Part One

As Q3 numbers have now been released, I will now analyze of the Q3 results for Junior and Intermediate Oil and Gas companies that are TSX listed and producing predominantly in the Western Canadian Basin.

In this post I will focus on the Junior Oil and Gas companies, which means companies with production between 500 and 10,000 barrels of oil equivalent per day (BOED). Most of this information comes from the Brian Mills Iradesso Quarterly Report. You can find access to this report here. This is an excellent free report that provides comparisons on key metrics of oil and gas companies.

There are 54 companies that fit the Junior classification and they have production between 517 BOED and 9,907 BOED.

Here are the averages:

Productions: 2,690 BOED

% Gas: 66%

Market Cap per BOED: $63,446

Netback: $9.99/BOE

Operating Expense: $12.60/BOE

General and Administrative Expense: $5.23/BOE

Depletion, Depreciation and Amortization Expense: $27.09/BOE

Royalty Expense: $5.02/BOE

Op Ex + G&A + DD&A + Royalty Expenses: $49.95/BOE

Sell Price: $34.66/BOE

The main point to look at here is that the expenses are higher than the sell price (or revenue per BOE) by $15.29/BOE. Not a great place to be in. In my opinion, the junior oil and gas companies have to look at ways to reduce the costs that they can, such as Operating expenses, G&A costs and DD&A costs. I have excluded interest costs in this analysis.

Since the biggest costs are DD&A costs, oil and gas companies should find ways to reduce these costs per BOE. DD&A costs are costs that are associated with adding reserves to an oil and gas company. One of the easiest ways that reducing DD&A costs can be accomplished is by buying existing reserves for less than the companies current DD&A costs/BOE. Since the average DD&A cost is $27.09/BOE and the average Reserve life Index is 10.4 years, then the cost to replace one Barrel of Oil Equivalent per Day (BOED) is $102,833. All you have to do is find a way to purchase pre-existing production for less then that (give it has 10.4 years as a RLI) and you will reduce your DD&A costs. This is marginalizing the acquisition process, but it is for illustrative purposes.

Another way to reduce DD&A costs is to identify reserves that are missing on the reserves report, which Argentis Group can help with with a service we offer. With this service, a company can add reserves for as little as $.05 per BOE as opposed to the industry average of $16 per BOE for Find and Develop (F&D) costs for oil and gas.

Another way of looking at how to reduce the DD&A costs would be as follows:

If the average oil and gas company has a daily production of 2690 BOE and has a reserves life index of 10.4 years, then the DD&A costs associated with this company would be $276,622,492. This is derived by 2690 BOED X 10.4 years X 365 Days X $27.09 DD&A costs. By adding 9% reserves that a company does not know about, then your overall DD&A costs for the company have now shrunk on a BOE basis (assume that the cost to add the additional 9% is not included, and this cost is minimal). The new DD&A costs per BOE are $24.85. For the average Oil and Gas company, this would be a reduction of $602,183 per quarter (or $2.4M per year) on DD&A costs, which is amazing.

So the above example is one way to help reduce the costs per BOE. There are others expense reduction strategies that can be look at to reduce the overall costs per BOE. All you have to do is find some more (email me and I can work with you).

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.