ENRG Modeling Midterm 1 (Well Economics)

What are the two main categories of E&P spending?

Capital spending and operating costs.

How are capital costs treated in the financial statements?

They are capitalized and recorded as assets on the balance sheet.

How are operating costs treated in the financial statements?

They are expensed through the income statement.

How do capitalized well costs eventually flow through the income statement?

Through DD&A.

What are the main variables used in well economics?

Capital costs, production, commodity prices, operating costs, ownership, decline rate, abandonment cost, and discount rate.

What are the two main drivers of E&P revenue?

Production volumes and commodity prices.

Are E&P companies price takers or price setters?

Price takers.

Why can a producer's realized price differ from WTI or Henry Hub?

Because of the pricing differential between the wellhead and benchmark location.

What is LOE?

Lease Operating Expense, the field-level cost of producing oil and gas.

What are production taxes?

Taxes levied on oil and gas revenues.

What is the time value of money?

Money today is worth more than the same amount received in the future.

What discount rate is commonly used in oil and gas well economics?

10%.

What is PV10?

The present value of oil and gas reserves using a 10% discount rate.

What is the formula for the present value of a future cash flow?

PV = CF / (1 + r)^n.

What is Working Interest (WI)?

The ownership percentage that determines the company's share of costs.

What is Net Revenue Interest (NRI)?

The ownership percentage that determines the company's share of production and revenue.

What is the formula for Net Revenue Interest?

NRI = WI × (1 − royalty rate).

Why are shale well cash flows generally front-end weighted?

Production is highest early and declines rapidly over the life of the well.