ABSTRACT
This paper defines two new economic valuation criteria, or desirability quotients, that are shown to be especially useful in screening potential oil and gas producing property acquisitions candidates. Both quotients have been derived to provide comprehensive measures of the quality of the reserves production stream, in that they are direct functions of both the magnitude and time-distribution of reserves recovery. In addition, both quotients are unique to any previously defined valuation criteria in that they are direct, quantitative functions of simple payout time. It is demonstrated that, given a value for either desirability quotient and a value for maximum payout time, a preliminary estimate of a potential project's present worth can be generated without computing a cash flow projection.
The development of the desirability quotients parallels that of the deferment factor introduced by Brons and McGarry in the late 1950's. However, several differences have been incorporated into the derivation of the desirability quotients; namely, (1) whereas the deferment factors of Brons and McGarry were to be applied to declining rates of income, the desirability quotients are functions of production stream characteristics, thus precluding the necessity for predicting future product prices, and (2) specifically, the desirability quotients are functions of the after payout production stream; thus, opposite of most common economic valuation criteria, they are independent of the time distribution of reserves recovery during the pre-payout years, and (3) the two desirability quotients introduced in this paper, DQA and DQT, have as their denominators the acquisition cost and the total (acquisition plus lifting) cost, respectively. Hence, the desirability quotients are direct measures of the acquisition's magnitude and time distribution of after-payout reserves recovery per acquisition (or per total) dollar invested.
The application of the desirability quotients to a field of twenty hypothetical acquisitions is presented and discussed, as well as a comparison of the investment ranking behaviors of the desirability quotients to those of commonly used economic criteria. Specifically, it is shown that in the evaluation of certain types of projects under certain economic assumptions, the ranking behaviors of both desirability quotients will be virtually identical to that of the discounted profit to investment ratio, DPR. In addition, discussion of how the desirability quotients can be utilized as investment screening criteria (without the requirement of a cash flow projection) is presented.
