The value that consistent reserves and resources measures brings to M&A transactions

Transcription

1 Oil & Gas and Mining The value that consistent reserves and resources measures brings to M&A transactions October 2007 Michael Lynch-Bell Partner in Charge, Global Oil & Gas Transaction Advisory Services Ernst & Young LLP Extractive industries M&A activity Objectives of M&A activity in extractive industries include: increasing reserves and resources portfolio diversification/rationalisation realisation of value created by exploration activity seeking of value through synergies and efficiencies acquisition of technology and expertise access to markets Reserves and resources is typically the primary driver of value Range of value relevant information that informs investment decision 1

2 Possible benefits of comparable reserves and resources information? Transparency? Comparability of assessments of asset or company value? Better data and therefore investment decisions? Efficiency in investment decisions? BUT does the current lack of comparability hinder investment decisions? can there be comparability? is there one answer that meets the needs of all users? 2 Users of reserves & resources information Internal users investment decisions for current portfolio (including allocation of resource and divestment) assessment of external investment opportunities financial reporting External users investor community lenders competitors government/public interest bodies interested public 3

3 User characteristics A number of aspects of the nature of users were noted by recent Extractive Industries Project Team research varied ability to command tailored financial reporting information sophisticated users industry specialists use of information as inputs to own analysis using own assumptions use of full range of value relevant information less sophisticated users greater reliance on financial statements information needs vary with the nature of activity 4 How does an investor obtain information on which to make investment decisions? Financial statements, interim results, prospectuses (including management commentary) Analysts reports Management statements, press releases, web sites Site visits Quality of management, track record and overall reputation Comparable company and sector issues Long term forecasts and projections Company performance measures Market protection and regulation 5

4 Financial reporting for resource companies Accounting is historic cost-based (in the main) accounts do not necessarily reflect the current value of the underlying reserves and resources Balance sheet value based on any or all of: historic cost of licence acquisition, exploration and development historic fair value at the time of acquisition of exploration and producing interests adjusted by depletion and reassessment for impairment Reserves and resources a key driver for financial reporting DD&A, impairment, decommissioning 6 Net assets and market capitalisation Total BP Shell Exxon Net Assets 31 March 2007 $m 43,734 85, , ,110 Market Capitalisation 15 June 2007 $m 188,216* 222,933* 257,474** 484,123 Sources: Market Capitalisation Thomson Datastream, Net Assets Company reports * Converted to US dollars at the rate of 1 GBP = USD ** Shell's B shares converted to US dollars at the rate of 1 GBP = US$ and Shell's A listed shares converted to US Dollars at the rate of 1 EURO = US$ 7

5 Financial reporting & disclosures Variety in financial accounting and disclosure requirements proved/proven & probable reserves volumes pricing assumptions scope of other disclosures management commentary NPV style calculations additional information 8 BP 2005 crude oil reserves Crude Oil Proved Developed Proved Undeveloped Total Applied price assumption SEC SORP 3,201 3,060 3,159 4,101 6,360 7,161 (million barrels) $58.21 $25.00 To what degree is there consistency? Reserves volumes disclosure Pricing assumptions SEC/US GAAP Proved Period-end price Canada Proved, probable, (possible) Constant & forecast price UK SORP Proved or proven and probable Management view IFRS No guidance No guidance NPV disclosure? Additional information? 10% disc. rate, period-end price Including: Capitalised costs Costs incurred Results of ops Suspended wells Operational & statistical info 10% disc. rate, constant price 5%,10%,15%,20 %, forecast price Including: Disclosure re new reserves Costs incurred Properties & wells Properties with no attributed costs No Capitalised costs Pre-production costs incurred Results of operations No guidance No guidance 9

6 Useful information? Do published reserves and resources information reflect management s decision making process or that of an investor? published information likely to be different to management s view often not the full resource base/potential different assumptions (price/discount rate) optimistic view? may in turn be different to an investor s view different views on risk (eg, discount rate assumptions) different views on sources of value (eg, portfolio fit) Financial reporting and disclosures is only one source of information 10 BP Resources Extract from BP Full Year 2006 Results and Strategy Update 11

7 Further consistency through fair value? Fair value an alternative approach being considered by the IASB BUT requires consistency of reserves and resources being valued volatile prices with changing price comes changing value how would such volatility be reflected in the financial statements? would this volatility be understood? highly dependant on assumptions made disclosure of assumptions made is fundamental to understanding risk of reliance by less sophisticated users with standardised assumptions (eg, price), divergence between financial reporting and management s assessment of value/investment appraisal would the inputs be used, rather than the fair value itself? 12 Information most useful to M&A? Consistent reserves/resources definitions implementation of a single framework UNECE? Proved plus probable reserves range of volumes based on a range of assumptions PSA/PSC versus tax and royalty? Range of fair values based on a range of assumptions to supplement HC Transparent and full disclosure of assumptions used: method and assumptions for determining reserves/resources future expected capital and operating costs pricing assumptions and source (eg, long term planning price etc) uncertainties and key drivers impacting value life of field/licence expiry taxation 13

8 Information most useful to M&A? Additional information relating to the status and expected timing of asset development Independent audit? 14 Conclusion There would likely be some benefits of consistency if the consistent information meets the needs of users However: disclosing the basis of reserves and resources and key financial accounting estimates is fundamental the tools for a valuation a consistent framework would be a major step forward the nature of reserves and resources would continue to be highly judgmental relying on assumptions and estimates consistency of reserves and resources does not bring consistency in complimentary information sources many users are sophisticated and use financial reporting merely as inputs risk of over reliance if a single number is reported 15

9 Questions? 16 SEC/US GAAP reporting requirements Oil and gas reserves volumes proved reserves price at the balance sheet date Capitalised costs relating to oil and gas producing activities Costs incurred in acquisition, exploration and development activities Results of operations Suspended exploration well costs Operational and statistical information production, drilling activities, productive wells and acreage Standardised measure of discounted net cash flows price at the balance sheet date 10% discount rate 17

10 Canada s National Instrument Proved reserves using constant prices and costs volumes NPV of future net revenue 10% discount rate Proved and probable reserves using forecast prices and costs volumes NPV of future net revenue 5%, 10%, 15%, 20% discount rates Additional information including: five year history of new classification of current proved undeveloped & probable reserves properties and wells information properties with no attributed reserves costs incurred 18 UK SORP Oil and gas volumes proved or proven and probable price based on management assumptions Capitalised costs Pre-production costs incurred Results of operations 19