Views
Notes
Folders
Reading List
Read
Seeing through the SMOG
An article by • Published Dec 31, 2020

SMOG Tutorial

Read below, then watch and learn how to re-strike SMOGs and approximate revolver capacity

SMOG, or Standardized Measure of Oil & Gas, is the present worth of estimated future oil and gas revenues less taxes, operating expenses and capital expenses, discounted at 10%. PV-10 is the pre-income tax version of SMOG. Given recent losses and NOL tax carry-forwards, SMOG and PV-10 will be one-in-the-same for many E&P's this reporting season.
Year-end 2020 reserves will begin to be disclosed in early 2021 and reserve reports will be released as exhibit 99.1 attachments to 10-Ks in February and March of next year. So lets take a look at what SMOGs are and how easy they are to re-strike at market prices.
A Standardized Measure of Discounted Future Cash Flows is required annually, at the end of the year for all publicly reporting E&P's under SEC regulatory oversight. All of the following must be disclosed.
1.
Future cash inflows
2.
Future development and production costs
3.
Future income tax expenses
4.
Future net cash flows
5.
Discount
6.
SMOG
SMOG is not an estimate of the market value of reserves, it is not a well-by-well analysis by 3rd party reserve engineers and is not a substitute for deep, well and asset-level analysis
Two sample SMOGs tables are shown below:
$NOG's 2019 reserve report

Latest
$REI's 2019 reserve report provided by

Latest

The Basics

Reserves for proved developed producing wells are typically estimated using production performance methods for the vast majority of properties
Newer properties with very little production history are forecast using a combination of production performance and analogy to offset production
Non-producing reserve estimates, for both developed and undeveloped properties are usually forecast using either volumetric or analogy methods, or a combination of both.
Data is furnished from E&P companies to 3rd party reserve engineering firms, with no on-site inspection of properties
Reserve engineers have only a basic duty to check assumptions and data integrity using public data and other available means
As specified by the SEC, a company must use a 12-month average price, calculated as the unweighted arithmetic average of the first-day-of-the-month price for each month within the 12-month period prior to the end of the reporting period
Netherland Sewell has a nice set of reserve accounting definitions here and calculates rolling 12-month average prices here

#Math

Undiscounted revenues are simply reserves x price
Assumed severance and ad valorem tax rate can be calculated
Per-unit operating and capital assumptions can be calculated and sniff tested
Discounted cash flow divided by pre-discount Operating Income = discount factor
Every E&P uses the same baseline prices, then adjusts for basis / locational difference
It's easy to re-strike SMOGs once you understand their construction
Re-struck SMOGs can have some relative value and help with evaluating revolver liquidity given most borrowing base calculations rely on math similar to what is shown

Model

Excel sheet to download (
) and play with for your own use case