So Ritchie doesn’t understand net present value then either

This is rational in the face of massive doubt about future business earnings and in particular extractive industry valuations, where current reservs are hopelessly inflated in value terms as a large proportion of the reserves on which value has been placed will have to stay in the ground if we are as a race to survive here in earth.

What is actually the contribution of, say, Shell’s reserves to the current stock price? Those long term reserves that is, the one’s he’s talking about?

Excellent, well done all of you who said “fuck all”.

Jeebus, an NPV calculation is simple enough that even an accountant should be able to manage it.

31 thoughts on “So Ritchie doesn’t understand net present value then either”

  1. He’s never understood NPVs.

    I still remember when he said that “discounted value” meant that cash flows were ignored.

  2. Excellent, well done all of you who said “fuck all”.

    Not quite SFA. It depends how much of those reserves are going to be worth pulling out of the ground at some point in the future (yet to be determined by management) as to how much if anything they are worth.

    Certainly the share price is probably higher than it would be without the reserves, probably by more than f*** all.

  3. Not that I think Ritchie is anything but an idiot, but the reserves replacement rate does affect the share price. ExxonMobil took on a giant field in Iraq from which it could make little money purely because it allowed them to book the reserves.

  4. “the time value of money is pure neoliberal sophistry. By the way, what’s a ‘discount factor’? I ignored that part of my economics course as it was clearly a right-wing idea”

  5. Tim. that XOM Iraq deal was for a fixed buck or two a barrel extracted.. yeah may be booked as reserves, but actually good deal when the price is $28 bbl.

  6. When Shell overstated its reserves a dozen or so years ago, 3? directors had to resign and Shell had to pay out $500 million to certain shareholders. In terms of % of market cap., bugger all.

  7. “will have to stay in the ground if we are as a race to survive here in earth”

    Well we could try to mine all the silicon and iron….

  8. @ Tim W
    Sadly, many accountants seem unable to understand a NPV calculation, which is why actuaries were created.
    However, any half-intelligent accountant (a large minority) can understand it once it has been explained and another largeish minority are happy to use a computer calculation of NPV without fully understanding it.

  9. Tim. that XOM Iraq deal was for a fixed buck or two a barrel extracted.. yeah may be booked as reserves, but actually good deal when the price is $28 bbl.

    Yeah, we were talking about this at work today, these technical service contracts are suddenly looking quite nice!

  10. TN the problem used to be that US SEC only allowed reporting of reserves where oil was flowing, while IAS as allowed stuff in the ground that was not being pumped. Has anything changed? I think the Shell kerfuffle was about reserves not being pumped, which makes it more like activist nonsense rather than anything real – rather like the VW Nox “scandal”

  11. @ Diogenes
    The fuss was about how much of the resources (potential reserves) could be produced at a profit.
    Shell is an Anglo-Dutch company so SEC is irrelevant.

  12. “Shell is an Anglo-Dutch company so SEC is irrelevant.”
    But they trade ADRs on the NYSE – does that bring the SEC in, or do they have some sort of ‘foreign registrant’ exemption?

  13. TN the problem used to be that US SEC only allowed reporting of reserves where oil was flowing, while IAS as allowed stuff in the ground that was not being pumped.

    This is way outside my area so I might be talking shite, but I understand the SEC conditions stipulate that you must have drilled at least one appraisal well before you can book the reserves. Oil companies argued for years that this was outdated and should be revised to reflect the advances in 3D seismic surveying and reservoir modelling, but I’m not sure anything was changed (possibly for good reason: I could name a few projects where the appraisal well served up worse result than expected. Hell, I know a project where all 3 appraisal wells were gushers and when they came to drill the producers only a dribble came out).

    I’m not sure about the technicalities of the Shell scandal, but they knowingly broke whatever rules were in place and got caught. XOM has sailed close to the wind on their reserves replacement figures, but never crossed the line.

  14. But they trade ADRs on the NYSE – does that bring the SEC in

    Yes. Total is as French as they come, but because they trade on the NYSE the SEC rules apply.

  15. My corporate finance lecturer (who spent many years in the city in senior posts) had a good hearty chuckle at the textbook notion that share prices were relayed in some way to the NPV of all future profits.

    ‘Fear and greed drive the stock market, not financial calculations’ was her motto. Maybe a few exceptions, like shares pregnant with a dividend, but mostly true.

  16. @ diogenes
    The accounts in which reserves were overstated were IFRS. What the 20f reconciliation said (or didn’t) is irrelevant. The fuss was over IFRS accounts.

  17. @ Andy H
    After spending 40-odd years analysing accounts I can advise you that analysts’ recommendations are, or claim to be, based on quick-fix approximations to the NPV of future profits (a very few actually calculate their best estimate of NPV of future profits – I’ve had to do it a few times). Fear and greed, but *informed* fear and greed. Look at what happens when Morgan Stanley cuts its forecast of earnings growth.

  18. The Shell scandal was in 2003 before the SEC allowed companies that adhered to IFRS not to do a reconciliation to US GAAP. That ruling came out in 2007.

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