Question 4 - How do your auditors validate that you are receiving what is owed to you?

This is the forth 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 third question(s) is/are:

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?

Basically, you should be asking your auditors these questions to ensure that they have a process in place to ensure that you are receiving all that should be owed to you. In most cases, auditors may not have the ability to correlate all the information that is required. This isn't their fault as they may not have the proper tools to do so.

If your auditors were to look at this information, they may be able to identify potential revenues for your company. Then again, they may find areas where you owe money to a partner. We have seen numerous cases where royalties are owed or a working interest isn't being collected.

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.

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

This is the third 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 third question is "How do your auditors validate that your working interests are accurate in all your cost centers?"

The importance behind this is to ensure that you are getting the revenue that you are entitled to and paying the expenses that you are suppose to.

Working Interest example:

If you were to take the average oil well which produces 40 barrels of oil a day and look at the forecasted price for oil over the next few years, which is close to $90 per BOE, then the average well would produce $1.3M in revenue per year.

For examples sake, if the working interest is 50% or 50/50 with ABC Co, then your yearly revenue would be $657,000. If, by human error, you were to hit the next digit down on your keyboard, a 4 instead of a 5, you enter your working interest as 40% of the revenue against total production on the well, then the new amount is $525,600 in revenue. That 10% difference in working interest actually has the impact of reducing your revenue by 20% since you would be out $131,400 on $657,000. 20% out on revenue on any well is significant.

29,000 BOED is the average production a TSX listed company with production between 1,000 and 100,000 BOED. Of this 30%,on average, is oil production, or 8,700 BOED. If there were a 10% error rate on the wells and a 10% error rate on the working interests entered (assume entered lower) then this will potentially cost a company $2.9M in revenue per year.

If your auditor is not authenticating your your working interests or royalty rates against their cost centers, then you could potentially be missing revenue.

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.

Analysis of Q2 Results for Junior Oil and Gas Companies on the TSX Part Two - Costs and Revenue

Further to the last post, I am going to show a comparison of the average sell price per BOE and the costs per BOE for 57 junior oil and gas companies with production in the Western Canadian Basin that are listed on TSX.

The average oil and gas company have Operating and Transportation Costs per BOE at $12.80, General and Administration Costs per BOE of $5.57 and DD&A Costs per BOE of $27.76. The total costs are $46.14 per BOE of oil or $7.69 per MCF of natural gas. Neither of these costs include royalties, which would probably add around 20% of the sell price per BOE.

Just to be clear, DD&A (depletion, depreciation and amortization) costs give a good representation of how much it costs to add reserves to the company. DD&A costs show the acquisition costs of proved properties and the costs of wells and equipment and are amortized over the life or proved reserves.

Here is a list of companies with their respective Operating and Transportation Costs, G&A costs and DD&A costs vs. their average selling price and the potential profit or loss per BOE.

Company	Op Costs / BOE	G&A/ BOE	DD&A / BOE	Total Costs BOE Oil	Average Sell Price/BOE	Profit/Loss per BOE
Fairwest	$15.55	$2.62	$88.45	$106.62	$37.88	$(68.74)
Action	$30.84	$11.54	$45.70	$88.08	$39.29	$(48.79)
Questerre	$12.18	$17.83	$53.65	$83.66	$40.56	$(43.10)
One	$24.69	$10.76	$32.71	$68.16	$31.27	$(36.89)
Canadian Phoenix	$16.81	$23.63	$45.04	$85.48	$53.27	$(32.21)
Result	$9.74	$7.34	$30.34	$47.42	$19.02	$(28.40)
Insignia	$15.44	$8.97	$31.73	$56.14	$28.18	$(27.96)
Dejour	$17.38	$19.30	$25.10	$61.78	$34.61	$(27.17)
Fortress	$18.07	$8.38	$31.74	$58.19	$37.35	$(20.84)
Monterey	$13.43	$3.46	$29.48	$46.37	$26.42	$(19.95)
Redcliffe	$17.63	$6.79	$24.71	$49.13	$30.04	$(19.09)
Culane	$12.48	$4.31	$33.56	$50.35	$31.81	$(18.54)
Bellamont	$13.31	$4.04	$30.63	$47.98	$29.99	$(17.99)
Great Plains	$23.06	$6.56	$31.42	$61.04	$43.35	$(17.69)
Second Wave	$27.42	$6.15	$25.86	$59.43	$42.30	$(17.13)
Twin Butte	$16.03	$5.15	$27.90	$49.08	$32.07	$(17.01)
Anderson	$9.58	$2.34	$29.65	$41.57	$24.70	$(16.87)
Crocotta	$13.41	$5.98	$32.10	$51.49	$34.82	$(16.67)
Midnight	$9.16	$5.35	$33.82	$48.33	$31.99	$(16.34)
Argosy	$6.90	$12.89	$22.73	$42.52	$26.21	$(16.31)
Petro-Reef	$12.32	$3.57	$27.07	$42.96	$26.85	$(16.11)
Sure	$10.41	$4.82	$23.83	$39.06	$23.54	$(15.52)
Prospex	$10.23	$3.03	$29.34	$42.60	$27.32	$(15.28)
Orleans	$12.39	$3.32	$26.29	$42.00	$27.03	$(14.97)
Canext	$11.80	$5.53	$23.98	$41.31	$26.49	$(14.82)
Triton	$9.94	$4.76	$22.75	$37.45	$23.62	$(13.83)
BlackPearl	$13.94	$4.58	$41.72	$60.24	$47.07	$(13.17)
Diaz	$15.23	$(0.90)	$30.17	$44.50	$31.53	$(12.97)
International Sov	$8.50	$4.14	$22.91	$35.55	$24.28	$(11.27)
Cinch	$3.23	$3.74	$25.19	$32.16	$21.90	$(10.26)
Nuloch	$11.36	$6.79	$26.87	$45.02	$35.50	$(9.52)
Midway	$9.33	$5.55	$23.07	$37.95	$28.67	$(9.28)
Painted Pony	$16.89	$4.61	$28.07	$49.57	$40.48	$(9.09)
Arsenal	$17.72	$5.31	$33.13	$56.16	$47.35	$(8.81)
TRUE	$14.83	$2.90	$30.80	$48.53	$39.85	$(8.68)
Wrangler West	$15.67	$2.72	$22.05	$40.44	$32.16	$(8.28)
Twoco	$7.32	$3.25	$25.07	$35.64	$27.49	$(8.15)
Cequence	$17.39	$13.37	$23.98	$54.74	$47.00	$(7.74)
Open Range	$5.97	$4.22	$25.18	$35.37	$28.03	$(7.34)
Yoho	$8.55	$1.70	$19.69	$29.94	$23.12	$(6.82)
Berens	$8.52	$3.55	$23.22	$35.29	$28.61	$(6.68)
Seaview	$14.35	$3.04	$26.79	$44.18	$39.26	$(4.92)
Vero	$9.99	$2.73	$19.50	$32.22	$27.49	$(4.73)
Delphi	$13.39	$1.97	$24.68	$40.04	$37.49	$(2.55)
Ironhorse	$2.98	$3.81	$14.85	$21.64	$20.85	$(0.79)
West	$11.06	$4.11	$38.95	$54.12	$54.08	$(0.04)
Terra	$7.42	$3.13	$12.72	$23.27	$24.47	$1.20
Rock	$12.40	$2.58	$22.10	$37.08	$38.37	$1.29
Angle	$4.56	$3.15	$15.57	$23.28	$25.60	$2.32
Storm	$7.12	$1.71	$14.43	$23.26	$25.81	$2.55
Zapata	$12.70	$4.21	$20.20	$37.11	$39.88	$2.77
Buffalo	$14.64	$4.81	$14.89	$34.34	$37.27	$2.93
Zargon	$13.08	$4.29	$18.09	$35.46	$40.92	$5.46
Stonefire	$5.86	$1.96	$17.26	$25.08	$31.70	$6.62
Arcan	$11.50	$6.92	$23.11	$41.53	$52.01	$10.48
Freehold	$5.39	$2.86	$23.87	$32.12	$42.99	$10.87
Bonterra	$16.12	$2.43	$10.76	$29.31	$44.44	$15.13
Average	$12.80	$5.57	$27.76	$46.14	$33.61	$(12.42)

Two companies have been omitted that were on the last post due to the fact that there was no way to determine their average sell price. They were Dee Three and Eagle Rock.

Based upon the above figures, only 11 companies (or 19%) actually make money when you take the average sell price and back out the Operating/transportation cost, G&A cost and DD&A costs.

If you add royalties at an average rate of 20% of the sell price, then only 4 companies can make money on each BOE. They are Bonterra at $6.24, Freehold at $2.27, Stonefire at $0.28 and just scraping by is Arcan at $0.08. That's only 7% of the sample companies.

Another approach is to remove the DD&A costs and use the industry standard of $16/boe for find and develop costs and add approximately 20% of the average sell price for royalty costs. If you do this, there are only 6 companies of the 57 that would turn a profit on each boe. They are Bonterra, Stonefire, Black Pearl, Arcan, Freehold and West.

In looking at the prices received and the costs, these junior companies may have problem in the future unless they can cut their costs. There is only so long that you can produce oil and gas at a loss before that catches up to 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.