Drill Down On Finding And Development Costs

By Eric Fox | February 09, 2011 AAA

Finding and development costs in the exploration and production industry might seem to be a fairly straightforward metric to analyze how much it costs to discover oil and gas reserves. However, the industry reports many different versions of this metric, making it difficult to use without a careful review.
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Comstock's Positive Reports
Comstock Resources (NYSE:CRK) released its 2010 proved reserves report in January 2011, and reported an increase of 45% over last year. The company spent $536.7 million in capital in 2010, and added 430.5 Bcfe of proved reserves during the year through "extensions and discoveries". the company also reported two different finding and development costs for 2010. It reported all in finding costs of $1.26 per Mcfe, based on the full capital expenditures total of $536.7 million.

Comstock Resources spent $135 million, or 25% of its budget in 2010 to acquire future leasehold to explore. The company feels a better way to present the cost of finding and developing oil and gas would be to exclude this amount. If this lease acquisition costs are excluded, then finding and development costs drop to 94 cents per Mcfe.

One might conclude that if finding and development costs are overstated in 2010 at Comstock Resources due to the inclusion of the acquisition costs, then it follows logically that the finding and development costs would be understated the following year when the company adds proved reserves from this acquired acreage. This is why many analysts look at three- or five-year periods when looking at this metric.

Barrett's Three-Year Plan
Bill Barrett Corporation (NYSE:BBG) reported finding and development costs of $1.84 per Mcfe in 2010, as the company added approximately 254 Bcfe of proved reserves at a cost of $473.3 million. The company also disclosed its three-year average finding and development costs of $1.76 per Mcfe. Using a three-year average might help minimize the problem of a mismatch between spending and reserves adds.

Exxon Goes Into Detail
Exxon Mobil (NYSE:XOM) provides a high level of detail in its annual review on what the company calls finding and resource acquisition costs. The company discloses the most recent year, along with the five- and ten-year averages. This metric includes the acquisition costs of proved reserves along with the exploration portion of its upstream budget. Exxon Mobil also reports a second measure called the proved reserve replacement cost, which is more comprehensive.

Range Resources (NYSE:RRC) provided three different versions of finding and development costs in its year end release. The company's finding and development cost from all sources was 72 cents per Mcfe, and 74 cents per Mcfe, excluding price revisions. Range Resources also disclosed a drill bit development cost of 60 cents per Mcfe.

Investors that are comparing different companies in the exploration and production industry on metrics like these should make sure that they are using the same metric for comparison.

The Bottom Line
The exploration and production industry reports finding and development costs in many different ways, and this abundance of detail requires careful analysis by investors. (For related reading, take a look at How Does Crude Oil Affect Gas Prices?)

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