Casto Petroleum Engineering prepares third-party reserve reports for owners of oil and gas properties throughout the United States. Normally, these clients have a reserve-based lending relationship with an energy bank, but some clients request a reserve report primarily for their own internal accounting.
In reserve-based lending, the loan facility or borrowing base made available to the borrower is a function of the value of the collateralized assets, consisting primarily of ownership interests in producing oil and gas wells. For example, the bank may lend up to 60% of the PV9% (future cash flow discounted at 9%) of the proved developed producing (PDP) properties. There are a number of other metrics which go into borrowing base determination, such as debt-to-EBITDA ratio, and the reserve report is only one important part of the equation. Wells in less developed reserve categories may be factored into the borrowing base determination but to a much lesser extent.
Updated reserve reports are required by the bank periodically (once or twice per year) to account for changes in the portfolio of collateralized wells and locations, commodity prices, production decline, or other underlying assumptions. The reserve report itself documents the assumptions, methods, and results of analysis. The process is a collaboration between the client and the third-party consultant. The client’s role is to provide accurate and up-to-date well information including the list of properties, producing status, ownership interests, production data, realized pricing, expenses, etc. The net production, revenue, prices, and expenses are best summarized in a lease operating statement (LOS) generated directly by the client’s accounting software. Lenders have more confidence in a reserve report if the input assumptions can be “tied-back” to a lease operating statement.
The consultant uses a petroleum software package to store the provided data, create production forecasts, and generate outputs of reserves and economics. Casto Petroleum Engineering uses the Aries Petroleum Economics software from Halliburton/Landmark. There are other reliable software packages on the market (e.g. PHDWin) but Aries is the most widely used and respected, in our opinion. In Aries, the consultant creates production forecasts using decline curve analysis. The oil, gas, and NGL volumes projected into the future are coupled with assumptions for product pricing, expenses, ownership interests, etc. to generate a forecast of cash flow into the future. This cash flow stream is discounted at a variety of rates for the reader’s convenience. The forecasted reserves and economics are summarized at the reserves category level. As mentioned above, the most important output to the lender is often the PV9% or PV10% of the PDP wells. Reserves (the estimated amount of oil and gas economically recoverable in the future) are also presented in the report.
Once a bank receives the reserve report, they will often have their internal engineers review the report, accompanying Aries database, and lease operating statement for reasonableness and a good “tie”. It is important for owners of oil and gas properties to hire a trusted consultant to prepare the reserve report so that unreasonable assumptions or methods are not used, which could slow down or prevent the bank from providing funds to the client.
Contact us at wes@castope.com if you are in need of a reserve report and visit www.castope.com to learn more about our services.