What is the best approximate measure for a buyer or seller of producing oil and gas properties to quickly estimate asset value in today's market? As a useful rule of thumb, many A&D professionals multiply a property's net daily production rate by a dollar-per-thousand-cubic-foot (Mcf) or -per-barrel multiple. But what is the appropriate rate multiple to use? Statistical analysis by Energy Spectrum Advisors Inc. (ESA) shows that a potential buyer or seller can use the property's "proved R/P" (total proved reserves divided by annualized current net daily production) to determine the appropriate multiple rate and, thereby, the approximate sale price. Therefore, one does not need to know other variables such as trailing-12-month cash flow, total proved PV-10 or even the location of the properties. Armed with ESA's proved R/P valuation formula, one needs only to know the current net daily rate of production and risk-adjusted (i.e. buyer-perceived) total proved reserves to quickly estimate the fair market value of a producing oil and gas property. This proved R/P valuation tool is an approximate measure of value and does not replace the rigorous technical analysis of ESA's standard valuation practices. However, with a few keystrokes of the calculator, one can quickly estimate the fair market value of a producing property, whether it is $10 million or $1 billion. This formulaic tool is compelling both because of its accuracy in predicting fair market value and its simple requirement of only two variables, total proved reserves and current net daily production, both of which are usually available in public announcements. For example, in April 2005, Fidelity Exploration & Production Co. announced its agreement to purchase certain South Texas properties from Smith Production Inc. for $145 million, or $5,686 per Mcf equivalent (Mcfe) of net daily production. Shortly thereafter, in June 2005, Range Resources Corp. announced an agreement to purchase certain Permian Basin properties in Lea County, New Mexico, from Plantation Petroleum Holdings II LLC for $117 million, or $16,643 per Mcfe of net daily production. Why did the Plantation assets trade for $16,643 per net Mcfe per day, or almost three times the net-production-rate multiple of the Smith Production assets? Most A&D professionals would agree that a South Texas property will generally trade for a lower multiple of current production than a Permian property, largely because South Texas assets have a steeper decline and a shorter reserve life than Permian production. But how much lower? Using publicly available data, ESA has quantified this axiom by identifying a statistical correlation between proved R/P and purchase price per unit of net daily production-either as dollar per net Mcfe or barrel of oil equivalent (BOE) per day. For this analysis, ESA defines proved R/P as total proved reserves (risk-adjusted) divided by annualized current net daily production. Of the 70 upstream asset sales between $10 million and $1 billion publicly announced in the 12 months through March 2006, both total proved reserves and current net daily production were announced for 57 of the 70 transactions, or 81%. The ready availability of this data for a large sample set of transactions contributes to the practicality and statistical reliability of the proved R/P valuation tool. Most sale data used in the ESA analysis is taken from press releases issued by the buyer, so most total proved reserves figures refer to the buyer's estimate, which may and often does vary from reserves figures advertised by the seller in its sale materials. In many cases, proved reserves announced by the buyer are risk-adjusted seller's reserves estimates. One must use careful judgment when estimating risk-adjusted proved reserves-the one subjective variable in this proved R/P valuation equation. To maintain statistical integrity of this valuation tool, the user should estimate proved reserves as they would be announced by the buyer by considering, "What total proved reserves would the buyer book or report to shareholders or partners at the time the acquisition is announced?" ESA divided these 57 transactions into two groups based on the primary phase, which resulted in 37 majority-gas transactions and 20 majority-oil transactions. For each transaction, ESA then calculated the proved R/P. Within the phase group, ESA then plotted each transaction, with proved R/P as the x-axis (independent variable) and dollar per net daily unit of production as the y-axis (dependent variable). Using statistical analysis tools in Microsoft Excel, ESA then calculated a trend-line formula and the corresponding coefficient of determination (denoted R2), a measure of statistical correlation that ranges from zero (no fit) to one (a perfect fit). Both the trend-line formula and the R2 are shown in the bottom right corner of each of the two graphs. In each chart, the point size is proportionate to the total price. Transaction points for the last quarter are in red (to show the most recent trend) while all other points are blue. The oil R2 of 0.86 is a very high coefficient of determination and indicates an excellent statistical correlation between proved R/P and dollar paid per net BOE of daily production. One should note that the majority-oil sample set excludes Denbury Resources Inc.'s $248-million acquisition of certain properties in Mississippi and Alabama that was announced in November 2005. The Denbury acquisition metric of $112,727 per net daily BOE is extremely high relative to its proved R/P of 17.8 years because the acquisition includes a significant amount of non-proved reserves that would be recovered via a CO2 flood. Since these reserves are not yet proved, they are not included in the numerator of the proved R/P ratio. Because of this idiosyncrasy, which would significantly lower the R2 of this sample set, ESA has excluded this transaction from the sample set. The sale in the top right corner of the oil graph is Swift Energy Co.'s $25-million acquisition of certain South Louisiana properties announced in September 2005. Swift paid $153,125 per net daily BOE for these properties with a proved R/P of 61.6 years. The gas R2 of 0.57 indicates an acceptable fit but is significantly less than the gas R2 of 0.78 for ESA's calendar year 2005 analysis. Several transactions during first-quarter 2006, which are in red, were less correlated than the average, as can be seen by their distance from the trend line, and this lowered the gas R2. As the sample set changes and the analysis is updated each quarter, the R2 changes, but for ESA's three-year history of this analysis, the R2 has always been in an acceptable range of 0.57 or greater. The majority-gas sample set excludes any transaction with an R/P greater than 70 years. For example, ESA has excluded Berry Petroleum Co.'s $159-million acquisition of certain Piceance Basin properties announced in January 2006. The Berry acquisition metric of $159,000 per net daily Mcfe and the proved R/P of 71.2 years are both high but not unusual for a resource play, where the buyer often considers non-proved reserves to have little or no additional risk compared with proved-undeveloped reserves. (In its press release, Berry identified 600 drilling locations based on 10-acre downspacing.) The transaction data table in ESA's published quarterly report includes all announced transactions, including those excluded from the R/P analysis due to an R/P greater than 70 years. Will your deal fall above or below the regression line? That depends, but generally properties with significant probable and possible reserves or significant undeveloped acreage in addition to proved reserves will fall above the line, since those non-proved reserves often increase the buyer's value for the properties but are not included in the proved R/P ratio. Deals lacking non-proved upside or deals with a large amount of high-cost proved-undeveloped reserves relative to proved-developed-producing reserves are more likely to fall on or below the line. In addition to the amount of non-proved upside, other factors such as lifting costs, finding costs and differentials (basis, transportation and/or quality) can also affect a given property's deviation from the trend line. Charles M. Lapeyre and Benjamin H. Davis are senior vice presidents with Dallas-based Energy Spectrum Advisors Inc., an investment-banking and M&A advisory firm. The firm's "Proved R/P M&A" analysis is updated weekly and published quarterly.