New, Fundamental Performance Measures of E&P Effectiveness and Efficiency
Authors: Randall Bruce L. 
Published: December 2007

This paper presents three new performance measures that quantify how effectively and how efficiently E&P companies both "E" and "P". These measures attempt to quantify just how well E&P companies simultaneously perform both of their two core activities: "E"=growing the reserves base; "P"=producing it.

The three new performance measures are as follows: #1.(DNp)CORP –– measures the firm's magnitude of time-discounted equivalent proved reserves, and the firm's ability to deliver them. (DMCFE's). Percentage or absolute growth in (DNp)CORP is, therefore, a single-parameter measure of the firm's effectiveness in growing both reserves and production#2.CDE=Δ(DNp)RES's/(year-$)–measures the firm's efficiency in deploying money (capital) towards reserves/production growth (DMCFE's/yr-$)#3.MDE=Δ(DNp)RES's/(year-person) – measures the firm's efficiency in deploying manpower towards reserves / production growth (DMCFE's/yr-employee)

The backbone of the three measures is that they are direct functions of both the magnitude of remaining proved reserves and current production rates. The measures utilize an exponential psuedotime distribution to time-discount the reserves themselves; not their resultant cashflows. The measures also utilize a firm-specific cost-of-capital (WACC) as the discount rate. The further refined term "(DNp)CORP" gives additional consideration to the particular firm's costs of production (i.e., "Lifting Costs") and costs of corporate overhead ("G&A"). These new measures are product price dependent only to the degree that the firm's proved reserves are so dependent. Even this effect is severely muted by "DNp": price-inflated or price-deflated reserves tend only to reduce or increase (respectively) the computed pseudodecline rate over the correlative pseudotime, highly discounting them. All three "DNp" measures' derivations provide the following characteristics: Each measure can be computed directly from data presented in a public company's annual report ("10K")Each measure specifically addresses one of the three main ‘limiting constraint’ cases regarding reserves/production growth (opportunity, capital, or manpower constrained)None of these measures are direct functions of oil and gas product pricesEach of the measures is a direct function of – the firm's remaining proved reservesthe firm's current oil and gas production ratesthe firm's specific psuedotime-distribution of remaining reservesthe firm's specific WACC, Lifting Costs, and (in the case of "(DNp)CORP") G&A Costs

In conclusion, the author suggests utilizing the "DNp" measures as the firm's "report card", to grade how effectively and efficiently they have added value in relation to their peers. Accordingly, trend analyses for three corporate size-classes (totaling 74 public, independent U.S. E&P companies) over a recent 8-year period have been compiled and are presented. Taken together, these class trends have been empirically fitted by a (DNp)CORP growth function that predicts what the average firm's (DNp)CORP growth should be over any given amount of time. This function demonstrates, and quantifies, two important observations long held by many in E&P management: (1) "bigger is better"; and, (2) "critical mass" points do exist.