Operational Costs

When analysing the cost structure of Oil & Gas companies, its important to understand there are different types of operational costs and some are far more important when determining the company's efficiency. With that said, SYRG operational costs are divided in 1) Lease Operating Expenses (LOE); 2) Depletion, Depreciation and Amortization (DDA); 3) General and Administrative (G&A).

Lease Operating Expenses (LOE) 

These are the operating costs incurred to operate and maintain wells and related equipment and facilities (lifting costs) and severance tax - which is a a state tax levied against both royalty and working interest owners upon their pro rata share of oil and gas production. Labor to operate the wells, repair and maintenance and well workovers (procedure to restore or stimulate production from a particular well) are examples of lifting costs.

We can see LOE have increased exponentially but when considering the increase in production (LOE per BOE) it seems to have stabilized in the past couple of years at around $8.7. When comparing efficiency with other firms its important to exclude taxes, as that isn't a controllable factor by the company.

Depletion, Depreciation and Amortization (DDA)

In financial accounting, tangible property and equipment is depreciated, intangible property is amortized and natural resources are depleted. The term DDA is commonly used in practice when refering to Oil & Gas companies.

As SYRG uses the full cost method of accounting for costs related to its oil and gas properties (vs successful efforts), all costs associated with acquisition, exploration, and development of oil and gas reserves (including the costs of unsuccessful efforts) are capitalized into a single full cost pool. These costs include land acquisition costs, geological and geophysical expense, carrying charges on non-producing properties, costs of drilling and overhead charges directly related to acquisition and exploration activities.

Capitalized costs are depleted using the unit-of-production method based upon estimates of proved reserves but investments in unevaluated properties and major development projects are not amortized until proved reserves associated with the projects can be determined or until impairment occurs.

There are other two particular accounts specific to this industry: Asset Retirement Obligations and Long-lived Asset Impairments. The first is related to the company's requirements regarding future decomissioning and environmental remediation costs (at the time of its disposal). For asset impairments, companies using full cost method follow the ceiling test rules (regular evaluation of the asset's fair value).

SYRG depletion expense more than doubled in 2012, primarily as a result of growth in production and producing properties and for the same reason ARO also increased. The company reported no impairment since 2010.

General and Administrative (G&A)

This seems like a neglected area as it respects to cash and stock-based compensations to employees and directors and professional fees. It is assumed natural that the company's expenses grow and the firm grows. Still, in 2012 SYRG reported a significant increase in professional fees due to certain accounting and investment banking fees related to the acquisition of assets. In addition, the progression from smaller reporting company to accelerated filer required additional professional services related to its compliance with the rules and regulations of Sarbanes–Oxley.

No comments found.