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.