Last week, I talked about that the Exploration & Production (E&P) spending budgets of oil majors contain the key to the recovery of most Oil & Gas (O&G) companies. Moreover, E&P companies will be the most immediate beneficiaries of the recent recovery in essential oil price among all O&G companies. This week, we will explore the economics of a little E&P company detailed on Singapore Exchange — Interra Resources. Interra was chosen because of this analysis as it offers a detailed break down of its Profit & Loss (P&L) declaration.
Interra is involved in the exploration and production of oil in several oil areas in Myanmar and Indonesia through creation sharing contracts. For Financial Year 2015, Interra’s sale of shareable oil was 0.64M barrels. It earned a revenue of USD23.5M from the sale of petroleum and oil products. The average value computes to be USD36.87 per barrel. The total cost of production was USD34.1M, which works out to the average cost of USD53.56 per barrel. Thus, for each barrel of essential oil sold in FY15, Interra lost USD16.69. For Interra to show a profit, the price tag on oil must go beyond USD53.56.
The current price of Brent is just about USD50. Assuming that the price tag on essential oil that Interra offers is comparable to that of Brent (a large assumption), Interra would be to turn a gross profit close. Aside from the total cost of production, Interra also breaks down the price into 2 components — creation amortization and expenditures of producing O&G properties. Interestingly, in FY15, Interra made an impairment lack of USD31.8M on its producing O&G properties and wiped out the entire item from its balance sheet almost. Which means that moving forward, there is not much depletion/ depreciation cost to be accounted for in the P&L statement and the only cost is the extraction cost.
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In 1Q16, Interra converted a small gross income of USD0.6M. The common selling price was USD22.29 as the average cost fallen to USD17.72, which was completely made up of extraction cost only almost. Even though oil production looks like a passive kind of investment, it is not the case. Oil production drops over time. In FY15, Interra’s share of oil creation slipped by 19.5% in comparison to FY14.
Thus, although Interra almost wiped out the entire value of producing O&G properties from its balance sheet, it requires to continue exploring and drilling for new oil wells to replenish the diminishing creation from existing essential oil wells. Even as it made an impairment loss of USD31. 8M on the existing oil wells and fields, it spent USD7.9M on drilling and discovering new essential oil wells. This cost is capitalized, meaning it does not arrive as a cost in today’s P&L statement but as a secured asset in the total amount sheet.
If oil is available from these new oil wells, this cost shall have to be amortized in future sale of oil products. Interra is an extremely small E&P company which can not represent the views and actions of major E&P companies like the oil majors. However, if right, its views and activities claim that the downstream oilfield services and equipment companies (e.g. Offshore Support Vessel companies and shipyards) that support the E&P companies will have a hard time navigating the essential oil slump. P.S. I am vested in Interra Resources, KrisEnergy (both lately) and a host of other O&G companies.
It has been approximated that 88% of health dollars go to Clinical Care despite the fact that it only impacts 20% of health results. While the most health systems are tax-exempt and their mission statements summarize that they make an effort to be stewards of their community’s health, the evidence is clear most are dropping considerably short. Next generation health market leaders know that items which fall beyond traditional healthIT are essential considerably. For those of us building population based startups and investment funds, we see as big or bigger opportunities in the “other” 80% of drivers of health outcomes. In the Slideshare construction, it outlines other categories beyond those from the sick-treatment system.