Question 2 - Cost Centers to Assets Match - Part of the 10 Questions An Oil and Gas Company Should Ask Their Auditors

This is the second question in the list of ten questions to ask your auditor if you are a Canadian based oil and gas company. The original post can be found here.

The question was:

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

Cost centers allow companies to put the appropriate expenditures against the appropriate budget. This question can probably be best answered by asking a few more questions.

How can you auditors tie up cost centers to assets if they can’t create an authentic asset list or well list?

If your auditor cannot tie up cost centers, then how can they authenticate expenditures?

If you cannot tie up expenditures, then how do you know exactly what your company is spending?

Pretty straight forward, no match to an asset, then there is a possibility that errors can creep in.

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