October 17, 2019 - AW.UN
New! A&W Revenue Royalties Income Fund -Q3-2019 Results, Price Target Forecast .....
October 17, 2019 - ADN
New! Acadian Timber Corp. 1H-2019 Earnings, Price Target .....
October 16, 2019 - PLZ-UN
Plaza Retail REIT- 1H-2019 Earnings, Price Target Update .....
October 13, 2019 - PEGI
Pattern Energy Group -1H-2019 Earnings & Price Target Update .....
October 12, 2019 - LIF
Labrador Iron Ore Royalty Corp. 1H-2019 Earnings, Price Target Update .....
October 11, 2019 - NPI
Northland Power Inc. Q2-2019 Earnings & Price Target .....
October 10, 2019 - AQN
Algonquin Power & Utilities Corp. Q2-2019 Earnings & Price Target .....
October 8, 2019 - CNQ
Canadian Natural Resources Ltd. Q2-2019 Earnings, Price Target .....
Recommendation Changes
Valuing Oil and Natural Gas Production Companies
Profit per BOE/MCF
Energy trust market prices move daily, largely in response to changes in spot prices. Energy trusts distributions are often rumored to be distributions from capital rather than true profits. The profit/boe or mcf approach solves the lack of clarity caused by both of these issues. Measuring cash flow on a barrel of oil equivalent provides a clearer picture of energy trusts distribution paying ability. The key issues with energy trusts are to determine if they have adequate cash flows to fund replacing reserves and payment of distributions which together comprise 70% of their costs. We provide the following definitions to clarify our approach to calculation of profits on a barrel of oil or mcf equivalent basis. For energy trusts that have 70% or more of their production from natural gas we use mcf as the basis to avoid the inherent inaccuracies from the 6:1 ratio.

Barrel of Oil Equivalent(boe) or MCF
A method of equating oil, gas and natural gas liquids. Natural gas volumes are converted to oil based on it's relative energy content at the rate of six Mcf (6000 cu. Ft) of gas to one barrel of oil. Natural gas liquids are converted based upon volume where one barrel of natural gas liquids equals one barrel of oil. Each energy trust produces different levels of natural gas, oil and natural gas liquids so boe’s allow comparison of financial data. The 6:1 ratio is a general measure that does not consider quality or price differences. The ratio assumes standard quality (heat content) of the gas and oil. Natural gas can be sweet or sour and oil can be light, heavy or medium grade which have differing heat content. The relative prices of natural gas and oil also vary from the 6:1 ratio. ie $US55/barrel oil equates to $11/mcf(Cdn) of natural gas. As of July/05 the natural gas market price is $7.30(CDN) The ratio does provide for reasonable estimates based on heat content only, and has been accepted as the industry standard. Each of the following amounts are divided by the barrels of oil produced to arrive at $/boe. For energy trusts that have 70% or more of their production from natural gas we use mcf as the basis to avoid the inherent inaccuracies from the 6:1 ratio. For the following descriptions MCF is inter-changeable with BOE.


Revenues per boe are obtained by dividing total revenue for a given period by total boe production. If a portion of production has been hedged then the gain or loss from hedging maybe be included in the revenues. This hedging amount may also be stated separately, it depends on the accounting policies method applied.

Hedging Gains/Losses per BOE -(if stated separately)
If the hedging gains/losses are stated separately this amount is identified. New accounting rules effective January/1/05 require the recording of both realized and unrealized hedging gains/losses on the financial statements. The unrealized losses are future period costs and we exclude them from the calculations.


The cost of provincial crown royalties, generally 20% on average of the selling price divided by boe produced.

Depletion Charges/BOE
These are the cumulative total costs to find, develop or acquire reserves, also known as FD&A costs. These costs can be incurred over several years or in a lump sum as in the case of an acquisition. Based on production, a portion of these costs are allocated as expenses for the quarter/year depending on the period being reported. The timing of the cash disbursement to pay for FD&A costs is different than the amount charged as expense to the income statement. Depletion charges must be adequate enough to fund the capital costs of replacing production. If not, the trust will be depleting their reserves and will eventually require additional funds to make up the shortfall.

Operating & Transportation Costs/BOE
Costs to operate and maintain the wells including a provision for eventual well shut-in costs.

General & Administrative Costs/BOE
Includes cost for office, admin, wages and effective January 1/05 the cost of stock options issued.

Interest Costs
Cost of borrowed money including interest cost on convertible debentures. Prior to January 1/05 convertible debentures were not considered debt and the associated interest expense was not charged to the income statement.

The cost of cash taxes payable. Does not include deferred income taxes which are non-cash costs applying to future periods.

Amounts paid to unitholders net of amounts received for distribution reinvestment plans.(DRIPs). Some trusts have high levels of distribution reinvestment by unit holders which will understate the distributions/boe. The difference between the revenues, plus or minus the hedging gains/losses less costs provides a reliable measure of profit on a boe basis. Energy trusts with low payout ratios also have positive profits on a boe basis.

Produced by H.C. Levant, – Reproduction of this material in part or it’s entirety is subject to copyright licensing agreements and is forbidden except only with the express written consent of the author.

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