Overview
PV10 (Present Value at 10% discount) is the standard metric used by the SEC and oil and gas companies to value proved reserves. It represents the present value of estimated future net revenues from proved reserves, discounted at 10% per year, before income taxes. PV10 is the single most important number in reserves reporting, A&D transactions, and bank borrowing base calculations.
Theory
PV10 uses the SEC-mandated 10% annual discount rate applied to future net cash flows from proved reserves. Unlike NPV used for investment decisions, PV10:
- Uses SEC pricing rules (12-month average for proved reserves)
- Excludes income tax
- Includes only proved (1P) reserves
- Is reported in the annual 10-K filing
Formulas
PV10 (Annual)
PV10 = Σ [NCF_year / (1.10)^year]
Monthly Discounting
PV10 = Σ [NCF_month / (1 + 0.10/12)^month]
Net Cash Flow (Annual, Pre-Tax)
NCF = Gross_Revenue - Royalties - LOE - Production_Taxes - CAPEX
= (Oil_prod * Oil_price + Gas_prod * Gas_price) * NRI - LOE - Sev_tax - CAPEXStandardized Measure vs PV10
SEC requires the "Standardized Measure of Discounted Future Net Cash Flows" (SMOG) which includes income tax. PV10 excludes income tax:
PV10 = Standardized_Measure + PV_of_future_income_taxes
Reserve Life Index
RLI = Remaining_reserves / Annual_production (years)
Value per BOE
$/BOE = PV10 / Proved_reserves (BOE)
Typical A&D benchmark: $5–$25/BOE for PDP (proved developed producing).
Worked Example
Given: Proved reserves = 500,000 bbl, current rate = 200 bbl/d declining at 15%/year exponential, oil price = $70/bbl, LOE = $15/bbl, severance tax = 7%, NRI = 0.80, no future CAPEX.
Year 1:
Production = 200 * 365 * (1 - exp(-0.15)) / 0.15 = 73,000 * 0.929 = 67,800 bbl
(Or simply: avg rate ≈ 200 * exp(-0.075) = 185.6 bbl/d → 67,744 bbl)
Revenue = 67,744 * 70 * 0.80 = $3,793,664
LOE = 67,744 * 15 = $1,016,160
Sev_tax = 3,793,664 * 0.07 = $265,557
NCF_1 = 3,793,664 - 1,016,160 - 265,557 = $2,511,947
PV_1 = 2,511,947 / 1.10 = $2,283,588
Year 2:
Rate start = 200 * exp(-0.15) = 172 bbl/d
Production ≈ 57,600 bbl
NCF_2 ≈ $2,135,156
PV_2 = 2,135,156 / 1.21 = $1,764,591
Continue to economic limit (NCF < 0), sum all PV terms.
PV10 ≈ $9.5M, or $19/BOE.
Valid Ranges
| Parameter | Typical Range |
|---|---|
| Discount rate | 10% (SEC mandated) |
| PDP value | $5 – $25 /BOE |
| PDNP value | $3 – $15 /BOE |
| PUD value | $1 – $10 /BOE |
| Reserve life (PDP) | 3 – 15 years |
| LOE | $5 – $25 /BOE |
SEC Pricing Rules (Proved Reserves)
- Use unweighted arithmetic average of first-day-of-month prices for prior 12 months
- Adjust for differentials (location, quality)
- No price escalation or inflation assumed
References
- SEC Regulation S-X, Rule 4-10 — Financial Accounting for Oil and Gas Producing Activities.
- FASB ASC 932 — Extractive Activities — Oil and Gas.
- SPE-PRMS (2018). Petroleum Resources Management System.
- Thompson, R.S. & Wright, J.D. (1985). Oil Property Evaluation. Thompson-Wright Associates.