Reserve life index

The reserve life index turns a reserve figure into a duration. Divide proved and probable reserves by annual production and the answer is the number of years the company could produce at today's rate before the identified volumes are exhausted. It is the simplest way to see what a conventional multiple cannot.

Its value in an interview is that it exposes an assumption hiding inside EV/EBITDA. A multiple treats the earnings stream as continuing, which is a defensible default for a manufacturer and an unexamined claim about future capital spending for a producer. Two companies on the same multiple with reserve lives of fifteen years and six years are not priced the same way at all.

It is a rate, not a forecast. Production profiles decline field by field rather than running flat and then stopping, so a fifteen year index does not mean fifteen flat years followed by nothing. Read it as a comparability measure and let a production profile do the actual work in a net asset value.

A short index is not automatically bad. It can indicate a business built around short cycle onshore development where reserves are replaced continuously and cheaply. What it does mean is that more of the value depends on additions nobody has yet made, so the reserve replacement ratio and the cost of those additions carry more weight.