PETE 403_12C_500 Quizz 2A

Name: FOR FULL CREDIT NAME ON FRONT AND BACK: Last Name, First Name Grade:

Synopsis: An IOC project involves production of crude oil with a 5-million barrel EUR. Time zero (effective date January 1, 2011) mineral rights acquisition cost (lease bonus) of $2 million is the basis for cost depletion. Intangible drilling expenses of $1.5 million will be incurred in 2011 and part is expensed in 2011 and part is amortized starting 2011. Tangible producing equipment costing $3 million in 2011 will go into service in 2012 and will be depreciated using the 7-year life MACRS depreciation with the half-life convention beginning in 2012. Production is estimated to be 350,000 barrels per year, starting in 2012. Wellhead crude oil value before transportation costs is estimated to be $42 per barrel in year one, $43 per barrel in year two, and $44 per barrel in year three. Royalties are 10 % of revenues (wellhead value) each year. Operating costs are expected to be $3 million in year one, $3.3 million in year two, and $3.6 million in year three. The allowable percentage depletion rate is 15.0%. The effective income tax rate is 40%. No other income exists against which to use deductions, so all negative taxable income will be carried forward until used against project income (stand-alone analysis). Determine the cash flows for years 2011 - 2014 without taking write-offs on remaining tax book values at the end of 2014

Assumptions: Company Type Federal Income Tax Rate Working Interest (WI) Net Revenue Interest (NRI) [Lease] Lease Bonus (LB),$ Intangible Drilling Cost (IDC), $ Tangible Completion Cost (CAPEX),$ Tangible Depriciation Rate (7 yr MACRS) Effective Date January 1, 2011

IOC 40% 100.00% 90.00% 2,000,000 1,500,000 3,000,000 1

a major uses cost depletion on the initial cost basis in lease, acquistion costs, etc. this is given to us by the federal government this is NorCo's ownership in the project net revenue to 100% WI lease bonus for a major will be subject to a depletion allowance on income statement. IDC for a major must amortized 30% over 60 months. 70% is expensed in the year spent. 2 3 4 5 6 7 14.29% 24.49% 17.49% 12.49% 8.93% 8.92% the depreciation schedule above of tangible assets is an accountant rule 2012 2 2013 3 2014 4 2015 2016 2017 8 8.93%

2011 1 Operating Cash Flow, BFIT Gross Production Reserves, bo Net Production, bo (after RI) Oil Price, $/bo Net Revenue, $

2018

0 5,000,000 42.0 -

calculating the before income tax cash flow 350,000 350,000 350,000 4,650,000 4,300,000 3,950,000 315,000 315,000 315,000 42.00 43.00 44.00 13,230,000 13,545,000 13,860,000

less: Lease Bonus (LB) Intangible Drilling Cost (IDC) Tangible Completion Cost (CAPEX) OPEX (lease expenses) Operating Cash Flow, BFIT Income Statement Operating Cash Flow, BFIT less: Tangible - depreciation IDC - expensed (70% expensed IOC, else 100%) IDC - amorization (integrated company) Cost - depletion (integrated or large) or Percent - depletion (small company) sub total allowed DD&A Carry forward loss Taxable Income Federal Income Tax (FIT) Operating Cash Flow, AFIT Operating Cash Flow, BFIT less: Federal Income Tax (FIT) Operating Cash Flow, AFIT Cummulative Cash Flow, AFIT

2,000,000 1,500,000 3,000,000 3,000,000 (6,500,000) 10,230,000 3,300,000 10,245,000 3,600,000 10,260,000

(6,500,000)

calculating taxable income starting with Operating Cash Flow, BFIT 10,230,000 10,245,000 10,260,000 428,700 734,700
90,000

524,700
90,000

1,050,000
45,000 90,000

140,000
1,095,000 (1,095,000) (1,095,000) 0 658,700

140,000
964,700

140,000
754,700

1,095,000 8,476,300 3,390,520 9,280,300 3,712,120 9,505,300 3,802,120

calculating the after income tax cash flow

(6,500,000) (6,500,000) (6,500,000) 10,230,000 3,390,520 6,839,480 10,245,000 3,712,120 6,532,880 10,260,000 3,802,120 6,457,880

339,480

6,872,360

13,330,240

se bonus) of $2 2011. Tangible ntion beginning rrel in year one, on in year one, s against which ars 2011 - 2014

spent. 9 4.46%

2019