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25 Cards in this Set
- Front
- Back
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Three Financial Profit Models |
- Net Cash Flow - Financial Net Income - Income Tax |
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Three Financial Regimes |
- Royalty/Tax - Production Sharing Contract or Production Sharing Agreement - Service Contract |
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Main Reasons for evaluating economics |
- Decision to invest - Choose among alternatives - Purchase Oil and Gas Property - Sale of Oil and Gas Property - Bank loans - Reporting to government |
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Revenue |
Money received for sale of goods or service |
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Costs |
Money spent to make revenue |
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Profit |
Profit = Revenue - Costs |
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Goods sold by oil and gas industry |
- Crude oil - Natural Gas - Oil Products - Gas Products |
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Categories all costs in profit models |
- Investment - Expenses |
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Depreciation of property conditions |
- Used business or held to produce income - Useful life longer than 1 year - Subject to wearing out or losing value - Improvements or repairs that increase property value |
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Property type for Depletion |
- Exhaustible natural resources - Leasehold costs - Capitalized geological and geophysical costs - Lease Bonuses - Capitalized intangible drilling costs |
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Amortization |
- Spreading out capital expenses for intangible expenses over a specific time period - Paying off debt with fixed repayment schedule in regular installments over period of time - Allows recovery of costs not regularly deductible (Start-up) |
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Depreciation, Depletion and Amortization
(DD&A) |
- Three methods for expensing capital assets over assumed life of asset
- Can be used in Financial Net Income + Income Tax Model |
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Difference between Operating Income BFIT and Operating Income AFIT |
AFIT = BFIT - Fed Income Tax |
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Difference between Operating Expenses AFIT and Net Cash Flow AFIT |
NCF AFIT = OperExp AFIT - (Investment + Loan Principle Payments) |
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Profit model for Generally Accepted Accounting Practices (GAAP) |
Financial Net Income |
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two requirements for Matching Principle and profit model |
- Matching Principle requires expenses be matched with revenues and that company follows the accrual basis of accounting - Used by Financial Net Income Model |
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Describe Revenues and Expenses matched with accrual basis of accounting |
- Revenues: Reported income statement when they are earned, not when paid - Expenses: Matched with related revenues and when the expenses occurred, not paid |
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Taxing agencies consider that a portion of the revenue is the return on the invested capital |
TRUE |
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When do you do Incremental Analysis and how to do it? |
- When we need to show true effect of doing a project (show value of project) - Incremental Analysis = Projected NCF w/out project - Projected NCF w/project |
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Modified Accelerated Cost Recovery System (MACRS) |
- Current tax depreciation system in USA
- Capitalized cost of tangible property is recovered over specific life by annual deductions for depreciation |
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Severance Tax
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Tax incurred when non-renewable natural resources are extracted within jurisdiction where land or minerals are privately owned |
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Ad Valorem Taxes |
- Tax based on the assessed value of an item like real estate or personal property - Most common: property taxes |
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Net Revenue Interest (NRI) |
Your company's portion of gross revenue |
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Working Interest (WI) |
Your company's cost (expense + investment) |
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Objectives when evaluating economics |
- Maximize present value profit - Retain AA bond rating - Longevity of organization - Increase oil and gas production - Increase oil recovery - Add reserves - Reduce risk |
