A:

Oil reserves are estimated quantities of crude oil that have a high degree of certainty, usually 90%, of existence and exploitability. In other words, they are estimated quantities of crude oil that oil companies believe exist in a particular location and can be exploited. According to the Securities Exchange and Commission (SEC), oil companies are required to report these reserves to investors through supplemental information to the financial statements. It is important to note oil still in the ground is not considered an asset until it is extracted/produced. Once the oil is produced, oil companies generally list what isn't sold as products and merchandise inventory.

Oil companies can value their reserves by finding their net present value less extraction costs (also known in the industry as "lifting costs"). Depending on the method of accounting for exploration, full cost versus successful efforts, certain costs of finding reserves are capitalized. Only if the cost is capitalized is that cost considered an asset that is depreciated over time. It is important to note that before the companies can list oil reserves through supplemental information to the financial statements, the SEC requires them to prove their claims and file appropriate documents with the SEC.

To learn more, see our Oil And Gas Industry Primer.

This question was answered by Chizoba Morah.

RELATED FAQS
  1. How does analyzing an oil and gas's financial statements differ from companies in ...

    Oil and Gas Price Volatility Financial statements for companies in the oil and gas sector are different from those of companies ... Read Full Answer >>
  2. What items are considered liquid assets?

    A liquid asset is cash on hand or an asset that can be readily converted to cash. An asset that can readily be converted ... Read Full Answer >>
  3. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  4. What is the formula for calculating the debt-to-equity ratio?

    Expressed as a percentage, the debt-to-equity ratio shows the proportion of equity and debt a firm is using to finance its ... Read Full Answer >>
  5. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  6. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
Related Articles
  1. Economics

    4 Countries Pleading for Higher Commodity Prices

    Discover what countries are struggling the most from the price collapse in commodities and what these countries require to return to economic growth.
  2. Economics

    3 Reasons Iran is Important in 2016

    Learn about how the global economy and Iran will be affected by the recently lifted trade embargo and sanctions from Iran, and what it means for 2016.
  3. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  4. Stock Analysis

    Glencore Vs. Noble Group

    Read about the differences between Glencore and Noble Group, two companies in the commodities business. Learn about accounting accusations facing Noble Group.
  5. Stock Analysis

    The Top 5 Platinum Penny Stocks for 2016 (PLG, XPL)

    Examine five penny stocks in the platinum mining business that investors may wish to consider adding to their investment portfolios for 2016.
  6. Stock Analysis

    The Top 5 Oil and Gas Stocks for 2016 (XOM, BP)

    Read detailed analyses of the top five oil and gas stocks, and learn why they may be poised to rise in 2016 after a dismal 2015.
  7. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  8. Investing News

    5 Stocks to Buy Before Oil Rebounds

    Here are five oil related stocks that you might want to own before oil rebounds.
  9. Investing News

    Obama Wants to Double Wall Street Regulation

    President Obama wants to double the budgets of the SEC and the CFTC over the next five years.
  10. Taxes

    Why People Renounce Their U.S Citizenship

    This year, the highest number of Americans ever took the irrevocable step of giving up their citizenship. Here's why.
RELATED TERMS
  1. Nonrenewable Resource

    A resource of economic value that cannot be readily replaced ...
  2. Short-Term Debt

    An account shown in the current liabilities portion of a company's ...
  3. Audit

    An unbiased examination and evaluation of the financial statements ...
  4. Profit and Loss Statement (P&L)

    A financial statement that summarizes the revenues, costs and ...
  5. Discounted Payback Period

    A capital budgeting procedure used to determine the profitability ...
  6. Contribution Margin

    A cost accounting concept that allows a company to determine ...
Hot Definitions
  1. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments have a lower yield than short-term debt instruments of the ...
  2. Socially Responsible Investment - SRI

    An investment that is considered socially responsible because of the nature of the business the company conducts. Common ...
  3. Presidential Election Cycle (Theory)

    A theory developed by Yale Hirsch that states that U.S. stock markets are weakest in the year following the election of a ...
  4. Super Bowl Indicator

    An indicator based on the belief that a Super Bowl win for a team from the old AFL (AFC division) foretells a decline in ...
  5. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
Trading Center