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

This is the seventh 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.

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

This is important as companies move forward with IFRS. As an oil and gas company, you have to be able to identify where your revenue is coming from at a cash generating unit. Since an oil and gas companies future revenues come from their reserves, if you can not tie reserves to cash generating units, then how do you authenticate 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. If you would like to find out how to tie up reserves to a cash generating unit, then please contact us.

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

This is the sixth 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 is:

How do your auditors authenticate your Asset Retirement Obligation’s (ARO) and Offset well liabilities?

Let's say an oil and gas company will set aside $50K per well for your asset retirement obligations. For and average Junior Oil and Gas company with production being 2,690 Barrerl of Oil Equivalent per Day (BOED) and the average well producing 30 BOED, then they would have an asset retirement obligation of $4.5M. This is a significant amount. We have seen on different occasions where companies are carrying ARO's on royalty wells (where you shouldn't be). We have also seen where wells that were divested were still being carried as well as ARO's being applied to multiple events on the same well.

As of Offset well liabilities, this is extremely tough to identify. When a company has a lease agreement with a freehold land owner, there is typically a clause in the agreement that states that if a well is drilled within a section or quarter section basis (depending on oil or gas) on the adjoining section/quarter section, this would trigger a drill, drop or compensate mechanism. The leesee has to either drill a well, compensate for drainage or drop the lease. The legality behind this takes too long to go into, but if you want to find out more, I would suggest going to the Freehold Owners Association at www.fhoa.ca. Since an oil an gas company has to look at each freehold lease that they representing for the freehold land owner, it is a very long task to identify any offset well obligations. As an example, say an oil well is drilled on an adjoining quarter section and triggers a potential compensatory royalty. The average oil well produces 40 barrels of oil per day. Say the royalty rate for the freehold land owner is 5% and the average price is $80/barrel. This would mean that the oil and gas company would potentially have to pay the freehold land owner $160/day or $58,400 per year. This is a liability that is carried on the books that is often left un-actioned.

In both cases, more than likely your auditors are not identifying additional ARO's or offset well liabilities, which have impacts on the overall financials of an oil and gas 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.

Question 5 - How Do Your Auditors Validate Your Are Not Overpaying Capital, Operating Expenses or Royalties?

This is the fifth 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 questions is:

How do your auditors validate that you are not overpaying:

a. Capital?

b. Operating expenses?

c. Royalties?

On the flip side, you could also ask the same question on underpayment.

This is important since all of these can have a positive or negative impact on your overall expenses. Even though your auditors don't have to do a 100% check against all your capital and operating expenditures and your royalty payments, there is still a chance that any errors could have an impact on the financial viability of an oil and gas company. Costs in oil and gas companies can be extremely large and there is potential for error. If your auditor were to take a more through approach to looking at expenses, they might find ways to add to the bottom line.

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 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.

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.

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.