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Hi Yanis, you are spot on! Whichever cost figure we use it’s very profitable and at $85 oil the difference is less than 10% on the figures, which will be easily overshadowed both by changes in oil price and if we go for a higher production rate than 500 bopd - on which these figures were initially calculated. All the indicators at present suggest that we will be revising profitability further upwards. For me now the upside factors likely over the next few months easily (and significantly) outweigh downsides at the current 1.5 SP. I would be very surprised if we are not well north of here by early next Spring.
Hi Yanis. Many thanks for that. I thought Europa's older fields would have much higher operating costs per barrel than Wressle, but I also thought their historic capital costs might be largely or entirely written off by now. I'm not completely confident now that the latter is the case. Wressle will obviously be very profitable as it's apparently producing dry oil. The older fields are presumably not nearly as good so late in their lives since they will most likely have a very high water cut, and it costs a lot to dispose of produced water. In any event, I'm happy using a $17.60 break even, all-in cost for Wressle. I suspect the older fields were making very little until the price rise over the course of 2021, which is most welcome. It will be very interesting to compare the half year results, presumably in April 2022.
Serif/GP, you guys know more about accounting than I do. I am no expert in accounting lol.
My intention was to get an approximate net revenue estimate and compare that with the MCap to show that the SP is very undervalued (Friday 10:03 post). That I think we all agree on.
What ever figures we use the results are all the same – EOG is currently undervalued. By varying the figures, varies the degree of undervaluation.
Europa float 566,466,985 shares & MCap @ 1.50p = £8.5 mil
Oil revenue with Wressle flowing 500 bopd is:
150 bopd (Wressle) + 83 bopd (rest of UK onshore) = 233 bopd
Current oil price = $84.64
(1) At $17.6 break even cost, Profit per barrel = $84.64-$17.6 = $67.04 = £48.72
(2) At $9.0 break even cost, Profit per barrel = $84.64 - $9.0 = $75.64 = $54.98
Yearly revenue (considering 1, 5% downtime) = 0.95 x 233 x 48.72 x 365 = £3.9 mil
Yearly revenue (considering 2, 5% downtime) = 0.95 x 233 x 54.98 x 365 = £4.4 mil
Yearly revenue (1) = £3.9/£8.5 = 46 % of MCap @ 1.5p
Yearly revenue (2) = £4.4/£8.5 = 52 % of MCap @ 1.5p
Which is a yearly revenue of approximately half the MCap @ 1.5p
Even if we consider a higher cost for the rest of UK onshore operations, $25.95 calculated below & $17.6 for Wressle we get a yearly revenue of (5% downtime):
0.95x365x{150x(84.64-17.6) + 83x(84.64-25.95)} = $5.2 mil = £3.8 mil = 3.8/8.5 = 45 % of MCap, approx half
These simplified calculations are based on the minimum flow from Wressle of 500 bopd and the oil price is on the up so the actual revenue is expected to be more.
If Wressle is flowing at 600 bopd then there is another 30 bopd for EOG which equates to another £0.5 mil.
Conclusion – EOG is very undervalued.
GP, any particular reason you asked for a back calculation of rest of UK onshore break even cost?
Hi cloves. I probably haven't described the process very clearly, or at least how I understand it to work. The ultimately recoverable reserves (URR) at Crosby Warren, for example, will have increased over time since there's been a much longer than expected production history. When a company is using the "unit of production" basis for their write offs, the costs will usually be written off in proportion to the annual production divided by the URR. The remaining costs are usually written off in the year in which the field is abandoned. Does this make better sense?
Hi cloves. I don't entirely agree with Selfish 's comment. I'm not an accountant but what he says might not apply if a company is using the "unit of production" basis for their write offs, because the capex costs will be spread over the entire life of the field, and / or it might not apply if more capex was spent after the initial cost had been written down.
Some companies write their costs off as they go, on a year to year basis, and others use the "successful efforts" approach to form a cost pool which they write down as the reserves are produced.
You'll no doubt be pleased to hear that this is (probably) my last word on this vexed subject. There's a fairly significant accounting matter to consider if you want to estimating a company's project profitability. It will differ from company to company, even for Wressle, as it will depend on the costs that each company has "capitalised" so far. This will determine the future "write offs" in each company's Profit & Loss accounts once the field is producing. It's sometimes called DD&A, which stands for "depreciation, depletion and amortisement",and it makes things more a bit more complex. To estimate it properly, we would need to know what percentage of the capital expenditure (this will most likely include the successful well costs and all the development costs) will be written off each year by the company. This is usually done on a "unit of production basis". For example, if the expected recoverable reserves are 5 million barrels and they cost £15 million to find and develop to date, that's a development expenditure (devex) of £3 per barrel. So far so good, I hope. If, in a particular year, 1 million barrels of oil (which is 1/5 of the reserves) are produced, each company will most likely write off its percentage share of 1/5 of the £15 million development costs. This will be 1/5 of whatever costs they have "capitalised" so far. In my example this will be £3 million multiplied by the company's % interest in the project. There may, of course, be further capital expenditure once the field has started to produce commercially. This would have to be added in to the capital cost pool and it will have the effect of increasing the annual write off on a "per barrel" basis unless further reserves are found as a result of the additional expenditure.
Aren't you glad you're not an accountant? And my apologies if you are! GP
We clearly have different understandings of how you predict overall project breakeven points over a number of years - but no matter let’s move on! The key point is that the operational costs to extract and transport are $9 per barrel @500 bopd, so if we want to calculate revenue received which is the key point of interest at this stage, this is the figure we should use. Of course if production increases above 500 bopd, it will drop below $9 per barrel. Even better!
Serif, that figure cannot include Capex. Yes at some stage they may drill another well and add more Capex, But Capex is a fixed sum paid in the beginning to get the Project online.
You cannot include payback (capex) in that figure, Capex cost will be recovered after somer years and if the bopd and or price received per barrel is higher Capex will be recovered earlier.
17.6 is break even point - as far as production is concerned. You cannot assign Capex cost to the bopd. Profit made will not be taxed until capex is paid off.
If you look at the rns of 18th March 2020 first para, it makes very clear that the $17 figure is the PROJECT breakeven figure, so includes in its modelling all predicted expenditure both Capital and Operational (running) costs.
Yes Opex is $9 per barrel for all companies @500 bopd (it will be less if we produce at a higher rate).
Serif, Capex are the costs to build the plant. Accounting for that stops the moment you finish building it and start producing. Yes, is something to consider at the start of the project before you spend a penny; - is going to cost me so much to built it, I will produce that much, is going to take so many years to recover that Capex and from there on is profit.
The figure of $17.6 which Europa is quoting for and differs from what GP is stating that Egdon quoted (i.e. the $9) is Opex.
Opex is the one that is now in Wressle accounting every year, Capex is done and dusted with as it was accounted in previous years or at the start of production.
The $17.6 that Europa is quoting means that from year 1 (from the start) anything in oil price received over $17.6 is profit. Profit doesn’t start after Capex is fully paid, ofcourse Capex as well as this profit come in the Tax calculations.
So the cost of production (Opex) should be the same for all parties involved, Egdon as well as Europa, the way I see it.
As I’m reading it I think you may be just mixing up Capex $17 and Opex $9 @500 bopd for Wressle. Capex includes all Capital expenditure on (probably) the Licence, Planning permission, drilling and storage equipment - ie all one off significant payments to get the Well/production flowing which you need to take into account to assess the lifetime profitability of a project. Opex is just what it costs year in year out to extract the oil and transport it to the refinery. Which is why when calculating the money that EOG is now going to get from Wressle it is more helpful to use the Opex figure as most Capital expenditure has already happened and appeared in previous accounts.
I think looking at the EOG Annual.Report on their website that the heading Cost of Sales includes most if not all the corporate overheads and Administration includes other costs on portfolio such as licences, seismic, new analyses etc. It makes a specific reference to licence costs under this heading in this year’s report.
GP, There is no reason for them to have vastly different figures. Europa is clear on the cost and is stated in both 2020 & 2021 Final Results reports.
2021 Repot: With an estimated break-even oil price (excluding Europa's corporate overheads) of US$17.6 per barrel, Wressle production is highly profitable at current oil prices
2020 Report: Wressle Development granted planning consent on appeal First oil at Wressle set to commence at an estimated gross rate of 500bopd late 2020 Estimated break-even oil price (excluding Europa’s corporate overheads) of US$17.6 per barrel for Wressle.
This cost should only include operational costs, no corporate overheads and historical drilling costs should be excluded. It should only include cost of routing operational activities (operations, routine maintenance, transportation, license fees, etc).
Include only activities that purely relate to Wressle. As such, the production cost should be the same for all parties involved. I would expect the Wressle field to produce the oil, sell it, extract the production/sales costs and divide the net money received amongst the partners according to their percentage ownership. Do you agree? Or I am I missing something?
Thanks again Yanis, Both Egdon and Union Jack have previously quoted $9 /bbl for Wressle opex at the hoped for 500 bopd production rate. it's in an old RNS, I think.
Europa's $17.6 / bbl seems very high to me for this activity. Could this figure be their historic Wressle exploration cost plus the budgeted development expenditure? This would seem slightly more reasonable, IMO.
GP, I don’t know why Eldon quotes $9 for Wressle, Europa quotes $17.6 for Wressle, and $17.6 does not include administrative costs.
The $25.95 figure that I calculated is based on the 2019 Finals report statement “Net Cash Spent on Ops = £661,000” which excludes administrative costs. And you are right, this will be the average ops costs for all facilities in 2019.
Hi yanis2005. Thanks for the further calculations. These seem pretty clear, but I'm still slightly unsure about what you mean by the "cost of extraction" being $25.95 per barrel. I assume it's s the annual operating expenditure (opex) for all EOG's oilfields in 2019, but does it include anything else? If it doesn't, then your figure of $25.95 per barre is a lot higher than the $9 per barrel opex quoted by Egdon for Wressle. Thanks, GP
2019 Finals
Revenue = £1.7 mil
Average bopd = 91 barrels
Average oil price received = $66.7
Average exchange rate = US$ 1.29
Gives
Average Oil Price received = 66.7/1.27 = £51.7 per barrel
Therefore Days Run in a year = 1,700,00 / 91 / 51.7 = 361.3 days (this gives a downtime of a mere 1% - I assumed 10% in my calc)
Net Cash Spent on Ops = £661,000
Therefore, Cost of extraction = 661,000 / 361.3 / 91 = £20.1 = 20.1 x 1.29 = $25.95 per barrel
Not bad … cost of extraction for the other fields is only a little higher that Wressle … $25.95
GP/Serif, I found one more detail in the 2019 Final Report that enables a back calculation - coming in the next post
GP - as always the devil is in the detail! If you look at the full report on the EOG website you will see that the Administration heading does seem to included costs on licences and presumably other work forwarding the portfolio (eg Morocco). I think cost of sales probably includes most the overheads which is why it dropped following cost cutting last year. Also the last full year revenue figures included the £0.5m achieved during the COVID collapse (If I recall $44 a barrel from the interims), the revenue in the second half of the year looks much better £0.9m and should have covered all costs, and of course since then the price of oil has risen even further.
Mrbobbybere, $58 is far too high, far too high.
From the 2020 Final Results report the average oil price received in 2020 was $48.0 per barrel ($66.0 per barrel in 2019.
No point in spending $58 to extract it and then selling it for $48!
I think the cost is higher than Wressle, but not too high, I do not expect it to be higher than ~$25.
I'm no accountant, but if the "cost of sales" - which I take to be the oil production cost - exceeds the production income, as it seems to have done in the last full year and most recent half year, then I think it is correct to say that our fields weren't contributing anything to our profitability up to now. On top of the "cost of sales" we've also had considerable admin costs. These are presumably the cost of running the company, and include the staff and office costs, but not the licence costs. Please tell me if I've got this wrong. Thanks.
Surely the old wellsites have produced for far longer than anticipated, so the initial costs per barrel will already be written off?
I seem to remember from an old Proactive interview with Hugh that the older fields were around $58.00
GP, i have gone back through 2 previous Final reports and the production cost is not explicitly given. There is also not enough detailed information to enable a back calculation.
Yes, the older fields (83 bopd) very likely have much higher extraction costs than Wressle, but as a ballpark calculation my calculation below should not be far out - I allowed 10% downtime but in reality downtime should be less (for example, 3 weeks downtime in a year is 5.8%).
GP I think you are right to separate Wressle and non-Wressle production because of differing cost (Wressle is exceptionally profitable!). We can see from past accounts on revenue and costs of sales that this older production will now easily be covering EOG running costs with some to spare at current oil prices. So for ballpark calculations on company finance I think it is more helpful to think of just Wressle revenue (minus extraction costs) as the profit we are making.