How to read an oil and gas company's annual report

Which reports exist

• The annual report contains the financial statements with notes, the board of directors' report and the auditor's report. Companies with shares listed in Norway must publish it no later than four months after the end of the financial year, and the half-year report no later than two months after the half-year (Securities Trading Act sections 5-5 and 5-6). Many also publish quarterly reports.
• The reserves report (Annual Statement of Reserves): Oslo Børs requires oil and gas companies to publish their reserves every year, using the SPE PRMS classification system, no later than the annual report (Oslo Børs, circular 1/2013).
• Presentations from quarterly results and capital markets days show plans and targets. They are useful but not audited.

The reports are on the company's investor pages and in the stock exchange announcements on Newsweb. OESA has its own pages for, among others, Equinor, Aker BP, Vår Energi, OKEA and DNO, with their stakes on the shelf.

Production: barrels of oil equivalent per day

• Production is usually given in barrels of oil equivalent per day (boe/d, or kboe/d for thousands). Oil, NGL and gas are added together, with gas converted to barrels.
• The conversion for gas is not the same everywhere. The Norwegian Offshore Directorate counts 1,000 Sm³ of gas as 1 Sm³ o.e.; companies state their factor in a footnote. Check it before comparing.
• Net or gross? The company reports its share (net). The OESA field pages show the whole field's production, so multiply by the ownership share to get the company's part.
• In countries with production sharing contracts, a company can receive a different share of production than its ownership share suggests.
• Look at the realised price per barrel or per unit of gas as well. It can differ a lot from Brent and TTF, for example because of quality, timing and contracts.

Reserves: 1P, 2P and how long they last

Under SPE PRMS, reserves are split into three estimates:

• 1P (proved reserves): the low estimate. If probabilistic methods are used, there should be at least a 90 % probability that the quantities actually recovered will equal or exceed it.
• 2P (proved plus probable): the best estimate, with at least a 50 % probability.
• 3P (proved, probable and possible): the high estimate, with at least a 10 % probability.

(Oslo Børs, circular 1/2013, annex II.) Companies listed on Oslo Børs report both 1P and 2P, while companies reporting to the US Securities and Exchange Commission (SEC) emphasise proved reserves. The figures cannot be compared directly.

• Reserve life is reserves divided by annual production: how many years the reserves last at today's production.
• The reserve replacement ratio is the year's new reserves – from discoveries, revisions and acquisitions – divided by what was produced. Above 100 % means reserves are growing. Check whether the increase comes from the company's own discoveries or from purchases.
• Contingent resources have been discovered but not yet sanctioned for development, and are not reserves. See the resource classes.

Cash flow, capex, dividends and debt

• Cash flow from operations is in the cash flow statement and is after tax paid. On the Norwegian shelf tax is large and tax payments are not spread evenly, so cash flow can swing a lot between quarters.
• Capital expenditure (capex) is under investing activities. Separate development, existing fields and exploration. Companies account for exploration costs differently, so read the accounting policies.
• Free cash flow is usually cash flow from operations minus capex, but definitions vary.
• Dividends and buybacks: compare them with free cash flow. If the company pays out more than it earns, the money comes from cash or borrowing.
• Net interest-bearing debt is borrowings minus cash. Check whether leases are included.
• Decommissioning obligations: the balance sheet has provisions for removing installations when fields shut down. They can be large for companies with old fields.

Cost per barrel and breakeven

• Production cost per barrel (opex per boe) is operating costs divided by volume produced. Companies include different costs, so only compare figures with the same definition.
• Breakeven is reported by many companies for the portfolio or for single projects. Definitions vary a lot, see breakeven.
• Tax changes the picture: with a 78 % combined tax rate on the shelf, the state carries a large share of both revenue and costs. See petroleum tax.

Alternative performance measures and the notes

Many key figures in the reports are not accounting line items but alternative performance measures (APMs): adjusted earnings, free cash flow, net debt, cost per barrel. Guidelines from the EU securities regulator ESMA require companies to define them and show how they reconcile to the financial statements. Find the reconciliation, often at the back of the report, before using the figures.

• Impairments: the notes show which oil and gas prices the company assumed when testing the value of its fields. Price assumptions higher or lower than peers are worth noting.
• The segments show where the result comes from, for example countries or business areas.
• Events after the balance sheet date can change the picture before the report is published.

A worked example

Checklist

1. How much is produced, and how much is oil and how much gas?
2. How large are the 2P reserves, how long do they last, and were they replaced last year?
3. Does cash flow from operations cover both capex and dividends?
4. How much debt does the company have, and when does it mature?
5. What is the cost per barrel, and how is it defined?
6. Which prices do the impairment tests and plans assume?
7. Which new projects will keep production up, and when do they start?

The guides are not investment advice; they explain how the figures are put together.

Sources

• Securities Trading Act sections 5-5 and 5-6 – Lovdata (in Norwegian) – deadlines for annual and half-year reports
• Oslo Børs: Listing and disclosure requirements for oil and natural gas companies, circular 1/2013 – reserves report, deadline and 1P/2P/3P with probabilities (annex II)
• PRMS FAQs – Society of Petroleum Engineers
• ESMA Guidelines on Alternative Performance Measures (2015)
• Petroleum tax – norskpetroleum.no
• Newsweb – Oslo Børs announcements

The guides are written by OESA students to explain concepts and how things fit together. They are not investment advice. Figures that are not definitions carry a source and a date; if you find an error, let us know at styret@oesa.no.