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Natural Gas and Oil Reserves
The following table presents our estimated proved natural gas and oil reserves and the PV-10 value of our interests in net reserves in producing properties as of December 31, 2006 based on reserve report prepared by our Engineers. The PV-10 values shown in the table are not intended to represent the current market value of the estimated oil and natural gas reserves we own. These reserves are estimated reserves of crude oil (including condensate and natural gas liquids) and natural gas that geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved undeveloped reserves are those expected to be recovered through drilling of new wells using existing operating methods.
December 31, 2006
Estimated Proved Undeveloped reserves
Net natural gas reserves (Bcf): 13,026
Net oil reserves (Bcfe)): 4,044
Total Proved Natural Gas & Oil Reserves (Bcfe) 17,070
Estimated Value of Proved Reserves(in thousands)
Future Net Revenues $117,835
PV-10 Value (discounted at 10% per annum): $ 58,122
Prices Used in Calculating December 31, 2006
Proved Undeveloped Reserves:
Oil (per Bbl) $60.00
Gas(per Mcf) $ 5.00*
Gas price of $8.00/MCF was used for Brennan Bottoms reserves.
There are numerous uncertainties in estimating quantities of proved reserves and in projecting future rates of production and the timing of development expenditures, including many factors beyond our control. The reserve data set forth in this registration statement are only estimates. Although we believe these estimates to be reasonable, reserve estimates are imprecise and may be expected to change as additional information becomes available. Estimates of natural gas and oil reserves, of necessity, are projections based on engineering data, and there are uncertainties inherent in the interpretation of this data, as well as the projection of future rates of production and the timing of expenditures. Reservoir engineering is a subjective process of estimating underground accumulations of natural gas and oil that cannot be exactly measured. Therefore, estimates of the economically recoverable quantities of natural gas and oil attributable to any particular group of properties, classifications of the reserves based on risk of recovery and the estimates are a function of the quality of available data and of engineering and geological interpretation and judgment and the future net cash flows expected therefrom, prepared by different engineers or by the same engineers at different times, may vary substantially. There also can be no assurance that the reserves set forth herein will ultimately be produced or that the proved undeveloped reserves will be developed within the periods anticipated. Actual production, revenues and expenditures with respect to our reserves will likely vary from estimates, and such variances may be material. In addition the estimates of future net revenues from our proved reserves and the present value thereof are based upon certain assumptions about future production levels, prices and costs that may not be correct.
We emphasize, with respect to the estimates prepared by our petroleum engineers that PV-10 value should not be construed as representative of fair market value of our proved natural gas and oil properties since discounted future net cash flows are based upon projected cash flows which do not provide for changes in natural gas and oil prices or for the escalation of expenses and capital costs. The meaninfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they are based. Actual future prices and costs ma differ materially from those estimated. You are cautioned not to place undue reliance on the reserve data included in this registration statement. Under SEC guidelines, estimates of the PV-10 value of proved reserves must be made using oil and gas sales prices at the date for the valuation, which prices are held constant throughout the life of the properties. Commodity prices used were unusually high at December 31, 2006.
The standardized measure of discounted future net cash flows is computed by applying the December 31, 2006 prices of oil and natural gas (with changes only to the extent provided by contractual arrangements) to the estimated future production of proved oil and gas reserves, less estimated future expenditures (based on December 31, 2006 costs) to be incurred in developing and producing the proved reserves, less estimated future production taxes (based on December 31, 2006 statutory tax rates, with consideration of future tax rates already legislated) to be incurred on pretax net cashflows and assuming continuation of existing economic conditions. The estimated future net cash flows are then discounted using a rate of 10% per year to reflect the estimated timing of the future cash flows.
As of December 31, 2006 natural gas at the company’s properties was being marketed at approximately $6.00 per thousand cubic feet while crude oil at companies properties was being marketed at approximately $60.00 per bbl. (Gas price was $8.00/MCF at Brennan Bottoms) There is no assurance that the price of natural gas will remain at or near $8.00 in the near future. The market for natural gas fluctuates, however the past year the market has been steady at the above rate, while market for crude oil has reached new highs during the current year. There is no assurance that the price of crude oil will be at the December 31, 2006 level.
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