Market Update & Important Indicators
The Dow Jones Industrial Average fell 279.47 points, or 1.5%, to 17826.30, its biggest one-day percentage drop since March 25. The index snapped a two-week winning streak. The Stoxx Europe 600 index dropped 1.8%, its largest one-day decline since early January, mirroring declines in other major indexes across the continent. In the U.S., weakness in first-quarter U.S. corporate earnings also weighed on the market, traders said. The S&P 500 declined 23.81 points, or 1.1%, to 2081.18, and the Nasdaq Composite fell 75.98 points, or 1.5%, to 4931.81. Exacerbating Friday's selloff in equities and ballooning risk-aversion were fears surrounding China, with the world's second- largest economy allowing fund managers to lend stocks for short selling to increase the supply of shares, the Securities Association of China said on its website on Friday.
Jitters over the financial future of Greece roiled global markets on Friday, with equities falling sharply and demand surging for assets considered safest during times of stress such as German government bonds. Strategists said that a lack of progress in negotiations between beleaguered Greece and its international creditors had substantially increased the risk of Greece defaulting on its debt and even exiting the euro.
China shares finished the week on a volatile note, with Shanghai jumping more than 2% for the second day in a row, while Japan hit a two-week low amid concerns about earnings results. The Nikkei Stock Average lost 1.2% to 19652.88, on increased profit-taking and heightened concerns over forthcoming earnings results In Hong Kong, the Hang Seng Index slipped 0.3% to 27653.12, totalling a 1.4% gain for the week. Enthusiasm for Hong Kong shares was cooling after the Hang Seng rose nearly 8% last week, helped by record buying from mainland investors through a trading link with Shanghai.
China’s leaders swung into stimulus mode, cutting the amount of cash lenders must set aside as reserves by the most since the global financial crisis just days after a report showed the slowest economic growth in six years. The reserve-requirement ratio will be lowered 1 percentage point effective April 20, the People’s Bank of China said on its website Sunday, the second reduction this year and the largest since November 2008. The level will decline to 18.5 percent, still high by global standards, based on previous statements. The move puts China more firmly in the easing camp with the European Central Bank and the Bank of Japan and follows a vow by Premier Li Keqiang last month to step in if the economy’s slowdown hurts jobs as well as PBOC Governor Zhou Xiaochuan’s weekend comment that China has room to act. The cut will allow banks to boost lending, unleashing about 1.2 trillion yuan ($194 billion), and may spur another leg higher in the nation’s booming stock market.
Australia's equities market ended the week in the red as banking and mining stocks led broad losses. The market began trading Friday in negative territory on a mix of fears of a Greek default as the clock ticks down on a deal between the nation and its creditors, and following what traders said was a soft lead from Wall Street's overnight trading. Investor caution encouraged profit-taking in some big-name stocks, broker BBY Ltd. said. Energy stocks bucked the trend as oil prices continued to recover. The S&P/ASX 200 finished Friday down 1.7% at 5877.9, the fourth fall in the last five days. That left the index 1.5% lower for the week.
Metals on the LME were down with the exception of Copper which remained flat. Iron ore rose 2.3% to finish at US$50.93/t. Gold is trading at US$1,203.3/oz and Brent fell 0.8% overnight to US$63.45/bbl.
In This Issue
How the Price decline can affect companies’ proved reserves
According to annual reports for 75 global oil and natural gas companies, oil proved reserve additions totalled 10.4 billion barrels in 2014, the lowest since 2010 (Figure 1). Reported finding and lifting costs for these companies continued to rise. Benchmark prices averaged across the first trading day of the 12 months of 2014, which are used in characterizing existing economic conditions in the oil market for purposes of reporting proved reserves, were only slightly below their 2013 level despite the sharp decline in oil prices towards the end of last year. For 2015, the prices used for assessing proved reserves are forecast to be much lower.
Oil and natural gas companies are required to report their proved reserves every year. Proved reserves are defined as estimated quantities of oil and natural gas that analysis of geologic and engineering data demonstrates with reasonable certainty are recoverable under existing economic and operating conditions. Because prices affect the economics of exploration and production, price changes can have a significant effect on companies’ proved reserves and the amount of reserves they can claim as additions.
Companies must value proved reserves based on the average of the prices of a crude benchmark on the first day of each month for the year. Using, for example, front month West Texas Intermediate (WTI) futures closing prices for the first trading day in each month of 2014, this value was $94.42 per barrel (bbl), 3% below the average for 2013.
While adding to a company’s resource base may improve its long-term ability to maintain or grow the business, stakeholders also have an interest in the cost per barrel of adding these reserves as well as the costs of production from a company’s proved reserves. Costs incurred for exploration and development activity—that is, activity associated with finding new reserves—as well as the costs necessary to bring oil and gas to market, also called lifting costs, must be reported. Shows finding and lifting costs for this set of companies, with 2014’s finding costs increasing $2.92 per barrel of oil equivalent (boe) and lifting costs decreasing $1.13/boe. Finding costs are typically defined as the sum of expenditures on property acquisition with unproved reserves, exploration activity, and development activity divided by oil and natural gas reserve additions. Lifting costs are the ratio of production expenditures to the volume of annual production.
The total dollars spent on exploration and development activity declined in 2014 for the first time since 2009 as companies reduced capital expenditures in the second half of the year, but a steeper decline in reserve additions caused an increase in the finding cost per barrel of oil equivalent. A similar situation occurred in 2012 as low natural gas prices significantly reduced reserve additions for that year and contributed to a substantial increase in finding costs. Each year can show considerable differences because of volatile price movements or changing market conditions. Using a three-year moving average smooths out a single year’s effect and provides a better indication of the overall trend in the cost of finding and extracting oil and gas. The three-year moving average for finding and lifting costs has increased every year since 2011.
Nearly a third of the way through 2015, the price environment for valuing proved reserves is considerably different from recent years for oil and gas companies. The first-of-the-month average price for WTI in 2015 to date is $50.49/bbl, a 47% decline from the 2014 price. This could result in reduced proved reserve additions and possibly some reduction in previously identified proved reserves for 2015 because some projects would become uneconomic. Finding and lifting costs, however, could decrease, as companies are significantly reducing capital expenditures compared to previous years given the uncertain investment outlook.
Recent Contacts & Presentations
Saracen (SAR), Beadell (BDR), Fertoz (FTZ), Atrum (ATU), Doray (DRM), Austal (ASB), TFS Corporation (TFC), Buru Energy (BRU), Carnarvon Energy (CVN), Otto Energy (OEL), Empire Oil & Gas (EGO), Pura Vida Energy NL (PVD), Migme (MIG), Vmoto (VMT), Pioneer Credit (PNC), Minemakers (MAK), MZI Resources (MZI), High Peak Royalties (HPR)