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Future cash flows are computed by applying
year-end prices of oil and natural gas to year-end quantities of
proved oil and natural gas reserves. Average prices used in computing
year end 2002, 2003 and 2004 future cash flows were $29.16, $30.29
and $41.18 for oil, respectively and $4.70, $6.19 and $5.68 for
natural gas, respectively. Future operating expenses and development
costs are computed primarily by the Company's petroleum engineers
by estimating the expenditures to be incurred in developing and
producing the Company's proved oil and natural gas reserves at the
end of the year, based on year end costs and assuming continuation
of existing economic conditions.
Future income taxes are based on year-end
statutory rates, adjusted for tax basis and availability of applicable
tax assets. A discount factor of 10% was used to reflect the timing
of future net cash flows. The standardized measure of discounted
future net cash flows is not intended to represent the replacement
cost or fair market value of the Company's oil and natural gas properties.
An estimate of fair value would also take into account, among other
things, the recovery of reserves not presently classified as proved,
anticipated future changes in prices and costs, and a discount factor
more representative of the time value of money and the risks inherent
in reserve estimates.
CHANGE IN STANDARDIZED MEASURE
Changes in the standardized measure of future
net cash flows relating to proved oil and natural gas reserves are
summarized below:
Sales of oil and natural gas, net of oil and
natural gas operating expenses, are based on historical pretax results.
Sales of oil and natural gas properties, extentions and discoveries,
purchases of minerals in place and the changes due to revisions
in standardized variables are reported on a pretax discounted basis,
while the accretion of discount is presented on an after-tax basis.
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