Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Evaluating The "e" in Mcfe and Boe

Seems like most oil and gas companies convert their reserves to oil and gas equivalents based upon the respective energy content of oil and gas.  This is okay for thermodynamics, but hardly realistic for economic purposes.  Six Mcf of natural gas has about the same energy content as one barrel of crude oil, but economic considerations are better served if the conversion factor is calculated by dividing the average price received for oil by the average price received for gas during a particular period.  At $85/bbl for oil and $3.80/Mcf for gas, the relative economic value is about 22 to 1; not the 6 to 1 commonly used.  In other words, you have to sell 22 Mcf of gas at $3.80/Mcf to match the revenue from the sale of a barrel of oil at $85/bbl.  Thus, a company that converts its gas reserves to equivalent oil using a factor of 6 to 1 is overstating its equivalent oil reserves by 366% (22 divided by 6).  Might be something to consider if a company talks a lot about volumetric reserves, but not much about specific current economic value and next to nothing about how accurate it has been in forecasting the cost to develop its PUD reserves.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.