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Quick Start for:
Discounting Oil and Gas Income
    Basis of the Manual
    Introduction
    Discounting
    Discounted Cash Flow Appraisal
    Discount Rate Components
    Using the Three Techniques
    Market Surveys
    Developing a Discount Rate From Sales
    Weighted Average Cost of Capital
Summary
Appendix 1: Discounted Cash Flow Method (Working Interest Portion Only)
Appendix 2: Estimation of Weighted Average Cost of Capital (WACC)
Appendix 3: Standard Deviation
Appendix 4: Property Specific Risk Factors
References
Appendix 1
Discounted Cash Flow Method
(Working Interest Portion Only)
Year (1)
Net Oil
Production
(bbls)		 (2)
Oil
Price
($/bbls)		 (3)
Gross
Income
($)		 (4)
Op Exp+
SevTaxes
($)		 (5)
Net
Income
($)		 (6)
Discount
Factor
@16.7%		 (7)
Discounted
Cash Flow
($)
1 31,938 $ 19.75 $ 630,776 $ 159,015 $ 471,761 .925688 $ 436,703
2 25,550 20.54 524,797 159,341 365,456 .793220 289,887
3 20,440 21.36 436,598 160,692 275,906 .679709 187,536
4 16,352 22.22 363,341 162,946 200,395 .582441 116,718
5 13,081 23.10 302,171 165,982 136,189 .499093 67,971
6 10,465 24.03 251,474 169,733 81,741 .427671 34,958
7 8,372 24.99 209,216 174,115 35,101 .366471 12,863
  Subtotal $ 1,146,636
  Salvage $ 10,000 .339238* 3,392
  Total $ 1,150,028
* End of year seven factor=1/(1+.167)7

Calculation Procedures:
  1. Net Oil Production is Gross Oil Production times Net Revenue Interest (NRI). NRI equals 87.5%.

  2. Starting Oil Price, $19.75/bbl with an escalation rate of 4%/yr

  3. Gross Income equals Net Oil Production multiplied by Oil Price

  4. Op. Exp. + Sev. Taxes: Operating Expenses escalated at a rate of 4%/yr; severance tax on oil is 4.6%/yr

  5. Net Income equals Gross Income less Op. Exp. and Sev. Taxes

  6. Discount Factor (mid-year) @16.7% equals:

    Year 1 1/((1+.167)(1-.5)) = .925688
    Year 2 1/((1+.167)(2-.5)) = .793220
    Year 3 1/((1+.167)(3-.5)) = .679709
    Year 4 1/((1+.167)(4-.5)) = .582441
    Year 5 1/((1+.167)(5-.5)) = .499093
    Year 6 1/((1+.167)(6-.5)) = .427671
    Year 7 1/((1+.167)(7-.5)) = .366471
     
    NOTE: The discount factor of 16.7% includes 1.7% for property taxes. Some appraisers handle property taxes as a deduction from gross income.

  7. Discounted Cash Flow equals Net Income multiplied by the Discount Factor

    Other factors that should be considered in the DCF method include capital expenditures, environmental remediation costs, and the present worth of the salvage value of equipment less well plugging costs.