Oil & Gas – Hall, Kistler & Company http://www.hallkistlerblog.com Blog Wed, 27 Feb 2019 16:21:01 +0000 en-US hourly 1 http://www.hallkistlerblog.com/wp-content/uploads/2019/01/HK-logo-Twitter2.jpg Oil & Gas – Hall, Kistler & Company http://www.hallkistlerblog.com 32 32 Where do I account for Hedging Transactions? http://www.hallkistlerblog.com/where-do-i-account-for-hedging-transactions/ http://www.hallkistlerblog.com/where-do-i-account-for-hedging-transactions/#respond Wed, 27 Feb 2019 15:58:11 +0000 http://www.hallkistlerblog.com/?p=419 Risk management is an important part of any business, especially in the oil and gas industry. Because oil and gas is a commodity, one significant risk that oil and gas producers have to deal with is the risk related to …

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Risk management is an important part of any business, especially in the oil and gas industry. Because oil and gas is a commodity, one significant risk that oil and gas producers have to deal with is the risk related to the price of that product. There are many strategies that producers use to deal with this risk. One strategy is to enter into agreements called derivative instruments or hedge agreements. These agreements might be a swap agreement, where the producer pays or receives amounts based on the difference between the “hedged” price and a market price from NYMEX or another index. Another strategy is to enter into what’s called a costless collar arrangement, where call and put options are used to create a net-zero effect on commodity price and reduce downside risk.

Regardless of how a company chooses to deal with the risk of price fluctuation, any time derivative instruments or hedging agreements are present the next question becomes, “How do I account for these?”.

How Do I Account for Hedging Agreements?

Accounting standards require that if these arrangements are designated as “hedges” by an entity, and function as such, they are recognized on the balance sheet at fair value, but any unrealized gains or losses associated with the arrangements are deferred through accumulated other comprehensive income on the financial statements.

As an example, think of a hedging swap agreement. Every month, the hedge agreement price is compared to an index price, and the difference is paid to or paid by the company, depending on where the agreement price fell in relation to the index price for that month. However, the agreement can run from one to two or even three years. Thus, until the agreement is finished, there’s always what’s called an “unrealized” portion that might be based on futures prices, again from an index like NYMEX. As each month is “realized,” the gain or loss hits the bottom line through the income statement, but what remains going forward still has value. Current futures prices might dictate that the Company has an asset and an unrealized gain through other comprehensive income if their hedge price is better than the futures prices. Conversely, if the company’s hedge price is less than the futures prices, a liability will be recorded as well as an unrealized loss through other comprehensive income. The objective is to reduce earnings volatility by more closely matching gains or losses from a derivative with the underlying item being hedged (usually production revenue in this case).

As if This Weren’t Complex Enough…

An entity can elect NOT to designate its derivative instruments as hedges. If this occurs, the fair value is still recorded on the balance sheet, and the realized gain is still recorded on the income statement, but the unrealized gain is now also recorded as a current period gain or loss rather than being deferred through other comprehensive income. In this instance, the gains or losses from the derivative are recorded in the current period regardless of when the gains or losses on the underlying item being hedged are realized.

As you can see, hedging transactions and derivative agreements can create complex accounting and disclosure requirements. However, these arrangements can effectively mitigate risks related to commodity price and thus can potentially be an essential component of GAAP financial statements for oil and gas producers.

Wrapping up our series on GAAP for the oil and gas industry, our last blog will discuss financial statement disclosures commonly seen in the oil and gas industry and what they might mean for your company’s financial statements.

To read other blog posts on this topic, search under the Category “Oil & Gas.” You can also subscribe to our newsletter or contact us at 330-453-7633 for more information about your oil and gas accounting needs.

Hall, Kistler & Company has been helping producers in the oil and gas industry since we opened our doors in 1941. We know what it takes to produce proper GAAP financial statements for oil and gas companies and can provide guidance along the way. Let us help when you are coming off of the sidelines and BACK INTO THE GAME.

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Why You Need a Reserve Report http://www.hallkistlerblog.com/why-you-need-a-reserve-report/ http://www.hallkistlerblog.com/why-you-need-a-reserve-report/#respond Wed, 16 Jan 2019 15:23:38 +0000 http://www.hallkistlerblog.com/?p=386 By Andy Griffin, CPA, Supervisor and Keith A. Arner, CPA, CVA, Partner
“Do I really need to spend money to have an engineer prepare a reserve report for me?” As an oil and gas producer, you may have asked this …

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By Andy Griffin, CPA, Supervisor and Keith A. Arner, CPA, CVA, Partner
“Do I really need to spend money to have an engineer prepare a reserve report for me?” As an oil and gas producer, you may have asked this question before. Reserves are the most significant measure of the value of your company to an outside party. Whether you’re trying to obtain financing from a bank, attract outside investors to a drilling program, or buy or sell an oil and gas producer, the ultimate question that will have to be answered is ”What is the value of what you have in the ground?”

Some companies produce their own reports using the data they have on hand and pricing based on the situation (e.g., year-end NYMEX or possibly escalated pricing based on estimated future commodity prices); however, more common is the use of an outside petroleum engineer with experience in the field.

 One additional situation that often gets overlooked compared to the others listed above is the importance of reserve reports in producing statements that comply with generally accepted accounting principles (GAAP). 

Your calculation of depletion expense is a critical area where reserve reports play a part. One of the interesting and tricky parts of depletion is the fact that total reserves change every year. Factors such as how much you produced in the past year, and commodity price changes dictate the remaining reserves. Thus, an updated reserve report is essential in the calculation of this number. Remember, there is no way of knowing how much you depleted unless you know what you have left.

A second item that the reserve report is needed for is the calculation of your asset retirement obligation, which we have discussed in our blog in the series. Simply put, how are you going to calculate a retirement obligation or plugging liability on each well without estimating when that well is going to be plugged? Again, this is where the reserve report comes into play. The report should have an estimate of the remaining useful life of each well, or at a minimum the life remaining in each group of wells or field that you have.

Yet another important use of the reserve report is in calculating potential impairment of the value of your oil and gas properties. GAAP requires the evaluation of whether or not the fair value of an asset has fallen below the reported value on the financial statements. If the future value is less, an impairment has to be recorded, and the asset is written down to the fair value. The best way to calculate the value of your oil and gas properties to make this calculation is a reserve report using reasonable and supportable estimates of the future value of your wells/acreage/properties.

A unique twist we want to note that affects any companies following the full cost method of accounting (rather than the more common successful efforts method) is what’s called a cost ceiling test. Without getting into the intricacies of the calculation, it is similar in concept to the impairment calculation described above but is much more complex. So once again, the reserve report plays a significant role.

As you can see, it’s essential that your company has a solid and reasonable estimate of the value of “what you have in the ground.” A reserve report will allow you to make the calculations necessary to produce GAAP-compliant financial statements.

In our next blog post, we will discuss financial statement footnotes and disclosures related to oil and gas exploration and production companies.

For other blog posts on this topic, search under the Category “Oil & Gas.” You can also subscribe to our newsletter or contact us at 330-453-7633 for more information about your oil and gas accounting needs.


Hall, Kistler & Company has been helping producers in the oil and gas industry since we opened our doors in 1941. We know what it takes to produce proper GAAP financial statements for oil and gas companies and can provide guidance along the way. Let us help when you are coming off of the sidelines and BACK INTO THE GAME.

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E&P Estimating for Accrued Revenue and Related Expenses http://www.hallkistlerblog.com/ep-estimating-for-accrued-revenue-and-related-expenses/ http://www.hallkistlerblog.com/ep-estimating-for-accrued-revenue-and-related-expenses/#respond Mon, 10 Dec 2018 18:33:36 +0000 http://www.hallkistlerblog.com/?p=375 By Andy Griffin, CPA, Supervisor and Keith A. Arner, CPA, CVA, Partner 

In the world of oil and gas, we know that production cash receipts and income tend to lag a month or two (or sometimes three) behind when the …

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By Andy Griffin, CPA, Supervisor and Keith A. Arner, CPA, CVA, Partner 

In the world of oil and gas, we know that production cash receipts and income tend to lag a month or two (or sometimes three) behind when the volumes are produced. This is due to a variety of factors, including the time required to read meter charts, shipping to the marketer, and processing of the payments.

Generally Accepted Accounting Principles (GAAP) require that income be recognized when it is earned, not necessarily when it is paid, and also that related expenses need to be recognized when incurred, not when you actually write the check to pay for those expenses. If your company’s goal is to produce GAAP-compliant financial statements, it’s imperative that you have a good estimate of oil and gas produced but not yet paid at the end of the month/quarter/year.

There are several ways to estimate accrued revenue and related expenses. Some are very high-level; for example, you might take volumes produced in November and December of last year and apply current prices to those amounts to estimate this year’s revenue. For the related expenses, if those are consistent and there were no major changes, you could use amounts paid out by your company last year in January and February to represent November and December expenses of that prior year. Another quick method would be to use an average of the oil and gas revenue and related costs in the first 10 months of the year (or nine or 11, depending on your accrual period), and then multiply that amount times the months in your accrual period. These methods generally work best if your production is consistent year over year and throughout the year, but any large price swings must be taken into account at the end of the year.

Some companies prefer to use a more precise method. They might use detailed production reports to get a better estimate of what they will be paid on. They might factor various basis differences into the equation, or possibly an average of indexes (Dominion, TCO, NYMEX, etc.). Much of this will depend on the company’s ability to gather data and whether it is indeed paid on different indexes or has basis adjustments (Dominion vs. NYMEX price, for example). Other reasons to use a more precise method include when a company grows substantially during the year, making last year’s amounts outdated, or if there is a significant change in commodity prices toward the end of the year that may skew any averages used.

Another option, which depends on how quickly financial statements need to be produced for a bank or for shareholders, is to simply wait until actual cash is received for amounts produced at year-end but not paid. For example, if a company historically receives cash for November and December production by February 15, of the next year, it might be more practical to just wait until that point to record a final accrual adjustment.

As with other accounting estimates, it’s important to remember that this is just an estimate. Your calculation of accrued revenue and expenses is never going to be exact to the penny. However, it’s important to have a reasonable basis for any estimates made, one that can be supported by data and historical financial information. Critical thought and sound judgment are required for this essential part of GAAP-compliant oil and gas financial statements.

In our next blog post, we will discuss the importance of getting an official reserve report, specifically for calculating plugging costs on your financial statements.

For other blog posts on this topic, search under the Category “Oil & Gas.” You can also subscribe to our newsletter or contact us for more information about your oil and gas accounting needs.

Hall, Kistler & Company has been helping producers in the oil and gas industry since we opened our doors in 1941. We know what it takes to produce proper GAAP financial statements for oil and gas companies and can provide guidance along the way. Let us help when you are coming off of the sidelines and BACK INTO THE GAME.

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What’s This Asset Retirement Obligation I Keep Hearing About? http://www.hallkistlerblog.com/whats-this-asset-retirement-obligation-i-keep-hearing-about/ http://www.hallkistlerblog.com/whats-this-asset-retirement-obligation-i-keep-hearing-about/#comments Wed, 14 Nov 2018 19:51:23 +0000 http://www.hallkistlerblog.com/?p=363 By Andy Griffin, CPA, Supervisor and Keith A. Arner, CPA, CVA, Partner

As we’ve described previously, one of the components of “getting back in the game” for small independent E&P companies is producing financial statements that are compliant with Generally …

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By Andy Griffin, CPA, Supervisor and Keith A. Arner, CPA, CVA, Partner

As we’ve described previously, one of the components of “getting back in the game” for small independent E&P companies is producing financial statements that are compliant with Generally Accepted Accounting Principles (GAAP). One of the items required by GAAP is something called an asset retirement obligation liability.

So what does this mean? And how is it calculated?

To put it simply, an asset retirement obligation (ARO) liability represents your costs to plug a well. However, it does not necessarily mean the amount you’re laying out today in cash to have someone plug a well for you (or to do it yourself). What it really measures is your liability today for wells to be plugged in the future. Per GAAP, you can’t just wait to expense those costs as they occur.

GAAP dictates that liability is created once a legal obligation to retire an asset exists. So once you commence drilling a well (or acquire a well) you have already established a liability; in other words, once you’ve punched a hole in the ground, that hole has to be plugged at some point by state law. The questions now become:
1) How long is this well going to last and when are we going to plug it?
2) How much is it going to cost to plug the well, at the point that we’re
actually going to plug it?

One thing to remember when thinking about an ARO calculation: it’s an estimate. Obviously, we don’t know how long each well is going to last. We don’t know to the penny how much it’s going to cost to plug each well. And we don’t know where commodity prices are headed, which might have an effect on which wells get plugged and when. However, even though it’s an estimate, it’s still critical to calculate the amount using solid, reasonable assumptions that can be supported with evidence.

The best way to determine “well lives” is to obtain an engineer’s reserve report on all of your wells. This step may be expensive, but it is essential for a reasonable basis of determining the life of a well. Most companies have this report done every year, due to changes in the market that might change “well lives” and thus affect the calculation. For example, if price per MCF is $2, that might mean many more of your wells are going to be uneconomical to operate and may dictate candidates for plugging. If the price per MCF is $8, now those wells are economic and viable, and plugging is going to get pushed further into the future. An engineer will use estimates of future pricing and other factors such as the formation the wells are in to generate an estimated life for each well.

As mentioned above, the other question is how much is it going to cost? Remember, these wells might be plugged 30 years (or more) from now. Calculating an ARO involves inflation factors and also a present value factor to determine what the obligation in the future is valued at in today’s dollars. However, to do that correctly, you have to start with a sound, reasonable estimate that can be supported (sound familiar?). This might require an analysis by company engineers of the depth of a certain type of well, or how much cement might be needed, or the cost of labor to have a crew plug the well, or how much it would cost to do it internally vs. outsourcing, or vice versa. It might also require looking at the Department of Natural Resources filings. It might even be helpful to talk to other companies in the industry to get a feel for what they see regarding costs to plug their wells.

As you can see, calculating an ARO requires some critical thought and analysis, and good, conservative judgment. These are the most critical and essential steps for any accounting estimate. It may seem like a lot of work for something that just exists on paper, but remember, it’s a critical part of producing GAAP-compliant statements. Proper financial statements are going to be a necessity as your company grows.

For other blog posts on this topic, search under the Category “Oil and Gas.” You can also subscribe to our newsletter or contact us for more information about your oil and gas accounting needs.

Hall, Kistler & Company has been helping producers in the oil and gas field since we opened our doors in 1941. We know what it takes to produce proper GAAP financial statements for oil and gas companies and can provide guidance along the way. Let us help when you are coming off the sidelines and BACK INTO THE GAME.

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Get Back in the Game: E&P Financial Reporting http://www.hallkistlerblog.com/get-back-in-the-game-ep-financial-reporting/ http://www.hallkistlerblog.com/get-back-in-the-game-ep-financial-reporting/#respond Wed, 24 Oct 2018 14:28:24 +0000 http://www.hallkistlerblog.com/?p=333 By Keith A. Arner, CPA, CVA, Partner and Andy Griffin, CPA, Supervisor

During the mad dash for deep shale acreage, when exploration and production companies like Chesapeake, Gulfport, Ascent, and others were acquiring leases, many independent producers in the Utica …

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By Keith A. Arner, CPA, CVA, Partner and Andy Griffin, CPA, Supervisor

During the mad dash for deep shale acreage, when exploration and production companies like Chesapeake, Gulfport, Ascent, and others were acquiring leases, many independent producers in the Utica Shale region sold their deep acreage rights. For several years, these independent producers watched from the sidelines, sometimes just breaking even while operating their shallow wells in a very tough environment for commodity prices.

Now, time has passed and many of the larger exploration and production (E&P) companies, due to their large overhead, are unloading their acreage and wells because they are not able to economically produce in the current market. However, many independent smaller producers have found that they are able to produce economically — by observing and studying the processes of the larger companies and benefiting from the new technologies those companies developed over the years.

To use a football analogy, independent producers have studied the offense and watched the game film, and are now coming off the sidelines and getting back in the game.

At this point, any E&P company will find that, in order to obtain financing or enter into credit facilities with financial institutions, one of the requirements is usually going to be a set of financial statements that follow generally accepted accounting principles (GAAP). GAAP requires several items and adjustments that are somewhat unique to the oil and gas world. As we help producers with their financial statements, the following questions usually come up:

• What’s this “asset retirement obligation” I keep hearing about?

• Why do I need to record any accrued production? Payments are usually two to three months behind in the oil and gas world.

• Do I really need to spend the money to get a reserve report from an engineer?

• My banker told me we’ll need financial statements with footnotes and disclosures? What does that mean? Am I disclosing everything that needs to be in there?

• This is the first year we entered into any hedging transactions – where do these go on our books?

We are going to answer each of these questions in upcoming blog posts, so search our blog under the Category “Oil & Gas.” You can also subscribe to our newsletter or contact us for more information about our oil and gas services and experience.

Hall, Kistler & Company has been helping producers in the oil and gas industry since we opened our doors in 1941. We know what it takes to produce proper GAAP financial statements for oil and gas companies and can provide guidance along the way. Let us help when you are coming off of the sidelines and BACK INTO THE GAME.

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Credit for Production of Natural Gas from Marginal Wells – Why it’s not too late to claim! http://www.hallkistlerblog.com/credit-production-natural-gas-marginal-wells-not-late-claim/ http://www.hallkistlerblog.com/credit-production-natural-gas-marginal-wells-not-late-claim/#respond Wed, 29 Nov 2017 20:46:04 +0000 http://www.hallkistlerblog.com/?p=317 This past fall Notice 2017-51 was issued by the IRS to provide guidance on the marginal well production credit. The notice computed the credit amount for calendar year 2016 at $0.14 per mcf as well as provided guidance on claiming …

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This past fall Notice 2017-51 was issued by the IRS to provide guidance on the marginal well production credit. The notice computed the credit amount for calendar year 2016 at $0.14 per mcf as well as provided guidance on claiming the credit. This credit is computed on a taxpayers production from a marginal well as defined by the code in which the taxpayer holds an operating interest. The notice states that a taxpayer who filed a 2016 return on or before October 2, 2017, and either did not claim the credit or claimed the credit in an amount that differs from the amount determined using the applicable reference price stated in this notice may file an amended return.
Although the credit is not as high as was predicted, we have found this credit to be very beneficial to our conventional producers. If you need any assistance in amending returns or calculating the credit, please contact me at 330-453-7633 or keith@hallkistler.com.

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Hall, Kistler & Company: Oil and Gas Accounting Overview http://www.hallkistlerblog.com/hall-kistler-company-oil-gas-accounting-overview/ http://www.hallkistlerblog.com/hall-kistler-company-oil-gas-accounting-overview/#respond Tue, 29 Jul 2014 15:20:40 +0000 http://www.hallkistlerblog.com/?p=196 By Andy Griffin, CPA, Supervisor

Recently Mike Eberhart (also of Hall Kistler) and I were asked to present a webinar entitled “Overview of Oil and Gas Accounting.” The webinar was part of a series of oil and gas webinars sponsored …

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By Andy Griffin, CPA, Supervisor

Recently Mike Eberhart (also of Hall Kistler) and I were asked to present a webinar entitled “Overview of Oil and Gas Accounting.” The webinar was part of a series of oil and gas webinars sponsored by Bisk CPEasy, now part of Thomson Reuters, a national continuing professional education provider.

As we discussed during the webinar, the two methods used in oil and gas accounting are (1) successful efforts and (2) full cost.

Accounting in the oil and gas industry requires an analysis of the various costs incurred by oil and gas companies in the process of acquiring and leasing properties and also the drilling of the oil and gas property and producing oil and gas from that property.  The calculation of depletion and amortization also must be performed, as well as the calculation of potential impairment of oil and gas properties.  It is also necessary to calculate asset retirement obligation liabilities.

These are all topics Mike and I spoke about at length during the webinar.  If you have any questions about these issues (or any oil and gas related topic), give our team of accountants at Hall, Kistler & Company a call at 330-453-7633. We would love to meet with you and help work through them.

To learn more about the work Hall Kistler & Company does in the oil and gas industry, visit http://www.hallkistler.com/oil-and-gas

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Hall Kistler & Company: Determining Business Valuations http://www.hallkistlerblog.com/hall-kistler-company-determining-business-valuations-2/ http://www.hallkistlerblog.com/hall-kistler-company-determining-business-valuations-2/#respond Wed, 16 Jul 2014 19:15:40 +0000 http://www.hallkistlerblog.com/?p=181 By Seth Turner, CVA, Supervisor

At Hall Kistler & Company, we understand that valuing a business is part art and part science. Creativity, knowledge and experience are combined to derive business valuations. A lot of information is available, but …

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By Seth Turner, CVA, Supervisor

At Hall Kistler & Company, we understand that valuing a business is part art and part science. Creativity, knowledge and experience are combined to derive business valuations. A lot of information is available, but how does it apply to your business? What trends is your business adhering to or avoiding? Changes in the economy, software, internet information, tax law and reporting standards means it is now more important than ever to engage a business valuation professional to address the question “ How much is my business worth?”

With approximately 10,000 baby boomers reaching retirement age per day, questions about business valuations are getting asked more frequently. If you have not considered these questions, now is the time to do so. A business valuation can prepare your business for sale, gifting and other retirement planning. If owner expectations do not meet value, steps can be taken now to best prepare your business for its future.

As Valuation theory and practice continues to evolve, so too does Hall, Kistler and Company, LLP. We have access to the latest valuation, industry and economic data. Hall, Kistler retains three CVAs who have over 40 years of experience and are trained in new techniques in the art and science of business valuation.

To learn more about business valuations contact Hall Kistler & Company at 330-453-7633 and visit us on online at: http://www.hallkistler.com/business-valuations

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Hall Kistler & Company: Oil and gas producers in Ohio after the Utica shale discovery http://www.hallkistlerblog.com/hall-kistler-company-oil-and-gas-producers-in-ohio-after-the-utica-shale-discovery-3/ http://www.hallkistlerblog.com/hall-kistler-company-oil-and-gas-producers-in-ohio-after-the-utica-shale-discovery-3/#respond Fri, 14 Mar 2014 17:30:31 +0000 http://www.hallkistlerblog.com/?p=83 Insights from Hall Kistler & Company: What has happened to the legacy oil and gas producers in Ohio after the Utica shale discovery?

By Mike Eberhart, CPA, CVA, Senior Partner

I lead the Oil and Gas team at Hall, …

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Insights from Hall Kistler & Company: What has happened to the legacy oil and gas producers in Ohio after the Utica shale discovery?

By Mike Eberhart, CPA, CVA, Senior Partner

I lead the Oil and Gas team at Hall, Kistler & Company and have done extensive work in the Oil & Gas industry throughout my career. You might call the Utica shale discovery a “boom/bust” for the legacy oil and gas producers in Ohio (also known as the vertical well drillers). The “boom” has given them the ability to monetize their deep rights, namely the Utica, Point Pleasant and Marcellus shales. The “bust” for these Ohio producers is the inability to lease acreage, unless they want to pay $5,000 an acre, even if the landowner is allowed to retain their deep rights.  The lease boom in the last several years has educated the landowners that they can get around $5,000 per acre. Plus, the oil and gas companies drilling the horizontal wells do not want acreage with a shallow well on it. The other part of the “bust” is the increased costs for oil and gas services and equipment due to the shale boom.  The service companies and suppliers are busy with the horizontal wells and are able to charge the highest rates for services and equipment. Two questions remain going forward for these legacy producers: (1) how long will the shale boom last? And (2) will the technological advances be great enough that the cost of drilling a horizontal well is such that they can even consider getting into that business?

To learn more about the work Hall Kistler & Company does in the oil and gas industry, visit http://www.hallkistler.com/oil-and-gas

 

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