A couple of weeks ago we looked at Exon Mobil Corp.’s lack of asset write-downs to understand different values placed on oil and gas reserves in a GAAP, Non-GAAP, and IFRS context. This week we explain how to find the fair market value of oil and gas reserves.
This is the first of two posts in which we will investigate the different values placed on oil and gas reserves in a GAAP, Non-GAAP, IFRS, and fair market value context. As an example we will consider Exxon Mobil Corp., the nation’s largest energy company, which is under investigation for its lack of asset write-downs amid falling oil and gas prices.
In the oil and gas industry, standardized reporting and industry analysts typically use a 10% discount rate on projects’ future cash flows. In this post we explain how such a discount rate is calculated and its effects on valuation; and then discuss a model that provides the discount rates that exploration and production companies face in the current market.
