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Oil & Gas Accounting 101 – Revenue Accounting

One of the main tasks in oil & gas accounting is accounting for the revenue being produced by the wells and paid out to the owners. Here is where we start talking about debits and credits.

Before we get into debits and credits, let’s talk about the challenges of accounting for revenue in the oil & gas industry. In most other industries, the product is made, the price is set, then it’s sold and cash is received. The transaction is booked as a simple two-sided accounting entry debiting cash and crediting revenue.

revenueIn the oil & gas industry, we have to manage booking revenue for a product who’s price is a moving target and who’s inventory is mostly unknown. Oil and gas producers’ main assets are the minerals in place on the developed and undeveloped properties it holds. Most of these properties have been leased by the producers. These minerals in place are known as reserves. The accounting for oil and gas reserves requires the use of estimates made by petroleum engineers and geologists. Reserves estimation is a complex, and imprecise process.

Once properties are producing, the oil and gas reserves related to the producing properties will deplete resulting in a decline in production from the properties.

An independent oil and gas producer’s revenue consists primarily of:

  • Oil and gas revenue
  • Operating revenue
  • Income from the sale or sublease of property
  • Income from hedging transactions.

Let’s take a look at each of these.

Oil and gas revenue

For producers the majority of the oil and gas revenue will be in the form of working interest. Overriding royalties are also common, while landowner royalties are less common for exploration and production companies. Oil and gas revenue might also be in the form of a net profits interest and production payments.

Operating revenue

Some operators generate income from operating wells, supervising drilling, transporting gas, hauling and disposing salt water, and other activities incidental to their operations. Sale or sublease of property.Producers frequently sell or sublease property. Transactions include both developed and undeveloped property. Distinguishing between a sale and a sublease is critical for tax purposes.

Hedging transactions

Some exploration and production companies use derivatives in their operations to hedge risk associated with oil and gas prices. Derivatives are financial instruments whose values are derived from the value of an
underlying asset. Typically, oil and gas companies use futures, options and swaps.

Accounting 101 E-Book

Source: SherWare Blog

3 Reasons to Integrate Oil & Gas Software with QuickBooks

When considering accounting software for your oil and gas company, what makes the decision to integrate your internal software with Quickbooks® accounting software a good one?

A Quickbooks integrated software solution makes sense for your business when your accountant or bookkeeper uses Quickbooks, when Quickbooks is required for governmental reporting, or when key players use Quickbooks for their accounting needs.integration

Increase Communication

Integrating your software systems with other software programs or systems should be done when it increases communication internally (between departments, employees, etc.) and externally (between your business and your outside accounting firm). Integrating your business critical oil & gas software with QuickBooks helps with communication between you and your accountant since most accountants are familiar with QuickBooks and can actually restore your data and run the reports they need.

Increase Quality Control

The most important reason to integrate your internal accounting software with Quickbooks is to facilitate quality control processes between your business and your bookkeepers and accountants. With automatic integration, you reduce the chance of data errors or information loss between different wells, different departments and your final financial reporting for the month/quarter/year.

With the increased communication available through a Quickbooks and accounting software integration between your company and your accountant, communication gives your management tools to have accurate and real-time financial reports, manage long-term accounting problems and build predictive algorithms to predict financial returns.

Decrease Costs

Decreasing costs is every business owner’s quest. Costs are usually more under the business’s control than revenues are, so that makes cutting costs a priority. The first way that integrating your oil & gas software with QuickBooks reduces costs is in hiring. Bringing on a new employee is much easier if the accounting system is easy to learn or probably already known by the new hire. This has already been mentioned, but costs are lower when the information provided to your accountant at year-end is organized and in a format they can readily use. QuickBooks helps with this tremendously.

When to Integrate

Since the most important part of using internal software which integrates with external Quickbooks programs is improving your communication processes and systems, the most important question to ask is “Who needs the integration?”

Any software integration should promote communication, increase efficiency and decrease costs. If serving the right relationships, a Quickbooks integrated software system for your oil and gas software firm can increase quality communications.

SherWare’s Disbursement and JIB Manager Integrated Edition is the only oil & gas software that integrates directly with QuickBooks. It handles all the wells, owners and division of interests and let’s QuickBooks handle the accounting. Click the link below to learn more!

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Source: SherWare Blog

Oil & Gas Accounting 101 – Chart of Accounts

Accounting for Oil & Gas requires a good set of accounts which are used to keep track of all accounting activities. This list of accounts is called the “Chart of Accounts” and will be every account needed for oil & gas operations accounting. There are two main sections of the chart of accounts, which are, Balance Sheet accounts and Income Statement or Profit & Loss accounts.

Balance Sheet accounts consist of categories such as Assets, Liabilities and chart_of_accounts Equity. Assets are items of value owned by the company. Liabilities are obligations of the company to transfer something of value, like an Asset, to another party. Equity is the value of the assets contributed by the owners of the company.

Income Statement accounts consist of categories such as Revenue, Cost of Goods Sold and Expenses. Revenues are the result of the sale of production, oil & gas, from the wells. Revenues can also result from services provided or the gains on equipment sold. Cost of Goods Sold are the costs related to the sales of production or services provided. Expenses are the costs incurred in order to operate the wells and company.

The accounts in the chart of accounts are crucial to good accounting. For every transaction in your accounting system, one account will be debited and one account will be credited. This keeps the accounting system in balance. For example, when you pay your telephone bill, you will take money from your cash account (credit) to pay the bill and you’ll recognize the telephone expense by debiting the telephone expense account for the same amount.

Account Date Debit Credit
Cash 04/23/2015 $385.90
Telephone Expense 04/23/2015   $385.90

The chart of accounts is the heart of the accounting system. Every transaction entered has to be tagged with an account so it knows where to post. Once the accounts are set up. They can be used to build the accounting system.

Accounting 101 E-Book

Source: SherWare Blog

Oil & Gas Accounting 101 – Accounts

Oil & Gas accounting isn’t that difficult to understand. Accounting is accounting, so the first step in learning oil & gas accounting is to understand accounting.


The basic element in accounting is an account. Accounts are how transactions are grouped and collected. For instance, Cash could be an account. This account could reprecheckbooksent a checking or bank account where a business’s cash or money is kept. Accounts Receivable is another example of an account. This is where money owed to the business is kept. An account called Wages is used to keep track of the wages paid to employees.

Accounts are grouped together according to the type of account. Some of the account groupings are:

  • Assets – this is what the company owns. Includes accounts such as Cash, Inventory, Wells and Land
  • Liabilities – this is what the company owes to others. Includes Accounts Payable, Payroll Taxes and Loans
  • Equity – this is what the company has after all liabilities are paid
  • Income – this is the revenue or economic gains recieved for items sold or services provided. Includes Oil & Gas Revenues, Administration Revenue and Service Revenue
  • Expense – this is the costs the company incurs doing business. Includes Rent, Telephone, Well Expenses and Taxes

Debits and Credits

Every transaction in accounting has at least two parts, a debit and a credit. This is the essence of what’s called double-entry accounting. Because of the two-fold effect of transactions, the total effect on the left, or debit, side will always be equal to the right, or credit, side. All the debits in a transaction must equal all the credits in a transaction.

Here’s a posting example using the cash method: On February 1st, 2015 you receive $25,500 of oil revenue.

Account Date Debits Credits
Cash – Operating 2/1/2015 $25,500
Revenue Payable 2/1/2015 $25,500

Cash is debited and Revenue Payable is credited creating a balanced transaction.

Here are the rules for debiting and crediting accounts. To increase an asset, you debit it; to decrease an asset you credit it. The opposite applies to Liabilities and Equity.

 Accounting Element To Increase To Decrease
 Asset Debit Credit
 Liability Credit Debit
 Equity investment Credit Debit
 Equity withdrawal Debit Credit
 Income Credit Debit
 Expense Debit Credit

Once you have a basic understanding of accounting, understanding a specific type of accounting, such as Oil & Gas Accounting is much easier.

Accounting 101 E-Book

Source: SherWare Blog

10 Steps For Picking the Best Oil & Gas Accounting Software For You

Picking oil & gas accounting software may be one of the most important decisions you make for your company. I mean, after all, how else do you make business decisions if you don’t know how much money is flowing in and out of your business each day? Here are 10 steps to helping you select the best oil & gas accounting software package for your company.

1. Make a list of your company’s needs. Talk to everyone who will be using the software to get their input. Discuss everything from your preferences and what all you need the software to do to what reports you need and end-of-year tasks.oil & gas accounting software

2. Make a list of all the potential oil & gas accounting software packages.This isn’t a list of just the best oil and gas accounting packages out there; it’s more of a collection of everything you can find so you have something to work with when you begin to get picky. List every software package you are aware of, have read about, seen online, heard from others, etc.

3. Set a timeframe for when you’d like to make a decision and for when you’d like to begin implementing a new solution. Being able to define how fast you’ll need to move through these research steps will help you in the long run when talking with software representatives and deciding when the best time to implement you system will be, depending on downtime at your office, end of year times, etc.

4. Decide what your budget range is and how flexible or inflexible it is.It’s never a good idea to eliminate products simply because of price unless it’s REALLY out of your range, but having a ballpark figure will help you as you begin narrowing down the oil and gas accounting packages.

5. Eliminate all oil and gas software packages that aren’t a good fit.This isn’t the first time you’ll see this step in here because of how important it is to keep evaluating throughout the entire process. Many eliminations will come easy at this point.

6. Collect information on your top 4 to 5 choices (or less if you’ve narrowed it down that far). You can get a wealth of information from the Internet by collecting and reading everything off of the company’s website, other user’s reviews and anything else you can dig up. Call or email the company to get any literature maybe not available online or to get any information you couldn’t find online. Talk to peers in your area to see what they use for their oil and gas accounting software and why.

Find out the answers to these questions during your research: Is the software user-friendly? Can it grow as our business grows? What after sale service and support is available? Will the software let me handle distributions and joint-interest billing the way I want to? Will I like how the reports look and how much data can be reported on?

7. Evaluate your choices again and eliminate any that don’t seem to be the best fit.

8. Review the software either through an evaluation or trial version of the software, or by going through an online demo of the software with the company. Make sure you have a list of any questions you want answered by the software company and get to see every aspect of the software that you’ll need to use. Seeing how the software works firsthand will help you determine if it’s user-friendly enough for your company as well.

9. Evaluate your choices again. At this point, you should have a pretty good idea of which oil and gas accounting software packages will work best for you.

10. Contact references for the software. Talk to a few of the clients in your area, similar to your profile or who use the same product to get an idea of what life is really like with the software.

After this step, you should be ready to take that next step with whichever software provider you’ve decided on. You’ve down your homework and all your research – so making the final decision should come easy.

Will U.S. soon reach natural gas storage capacity?

If forecasters are correct, the United States should run out of natural gas storage space by October – a short 5 months away. Thanks to the natural gas rush on the Eastern coast in the Marcellus shale, an unseasonably warm winter – and a mild summer predicted, there’s little chance for producers to unload some of that glut without further dropping the already low price of natural gas in the market.

A few weeks ago the Wall Street Journal ran an article predicting this gas storage problem. Chesapeake Energy has already determined it will be curbing production, (Big surprise move, right? thanks to Aubrey McClendon), following a trend producers are seeing across the country with natural gas drilling rig counts down nearly 20 percent already this year.

According to the Department of Energy, 120 gas storage operators maintain about 400 underground facilities made up of aquifers, depleted oil and gas reservoirs and salt caverns with a working gas capacity of nearly 4 trillion cubic feet. These storage facilities are mostly heavily concentrated near major eastern and mid-America markets, with some in Texas, Oklahoma, California, Colorado and surrounding areas.

Not only are we running out of space to store the gas glut, but nearly 25 percent of the existing pipelines used to deliver gas across the country are more than 50 years old. In 2004, it was projected that nearly $19 billion of investment would be needed to replace the current pipe simply to maintain existing capacity. That was before the Marcellus shale became a household name. Nearly $42 billion was estimated to be needed for new pipeline and storage projects on top of that.

Naysayers argue that the U.S. will never actually run out of natural gas storage, and data – while slightly outdated from the U.S. Energy Information Administration suggests that to be true. According to whom you talk to, and more importantly, what numbers and equations you use, you can get entirely different numbers for what “percent” full we are today. Back in 2003, with the data the U.S. Department of Energy used, that percentage ranged from 79 to 95 percent full with calculations differing based on the equation, not numbers used.

So which is it? Are forecasters merely presenting a doomsday approach to the natural gas market, much like we producers already see and feel? Or is there something to the idea that the market will soon be so saturated that space will run out?

Source: SherWare Blog

New technology may change fracking debate

New technology may change the face of hydraulic fracturing – and it couldn’t come at a better time. Amidst heated debates across the country regarding hydraulic fracturing, waterless hydraulic fracturing claims to offer oil and gas companies an alternative to traditional hydraulic fracturing that is environmentally friendly and cost-effective.

GasFrac, a Calgary-based company, is paving the way with a technique to fracture wells using LPG, short for liquid petroleum gas. LPG uses a mixture of propane that’s pressurized to make a gel. This gel is then injected into the rock formations like traditional hydraulic fracturing is done to break apart the shale and allow the trapped oil and gas below the earth to surface.

The benefits of using LPG is that instead of using millions of gallons of water to break apart the shale, which then have to return to the surface including the small percentage of chemicals added to boost the productivity, the propane will revert to a vapor while underground, which can then be collected when it comes to the surface.

While GasFrac is reported to charge a high premium for its services – something close to 50 percent – producers who have used the technology in states such as Texas, Colorado and Canada say it is worth it based on the money saved from not having to purchase, transport and truck all the water needed to fracture the wells, and then by not having to dispose of all the chemically-laden flow back water that returns to the surface once a well has been fracked.

By the end of the month, two test wells in northern Ohio in the Utica Shale are expected to be drilled and fractured using LPG, as some producers aren’t convinced water is necessary to extract from the Utica Shale.

The technique could also prove to be a boon for drillers in Tioga County, New York, where a moratorium has been in effect on hydraulic fracturing since 2010. A planned drilling site is expected to use LPG to fracture the well.

But, like anything else in the oil and gas industry, these new technology is not met without opposition from environmentalists who claim that while it may stop potential water pollution, it will instead create a greater threat with a high risk of explosions.

More than 1,200 wells have been drilled with GasFrac since its introduction to the oil and gas world with favorable results. With the rest of the country watching to see how these wells on out on the East Coast, it could soon turn this debate on a head.

What do you think of LPG technology? Would it benefit your company and be cost-effective and more safe for the environment?

Source: SherWare Blog

Future of oil and gas industry hinges on new generation

Who will take your job when you retire? Fill your shoes? Run your business? Work in the field? Is there anyone working at your office younger than 35? With an entire generation of oil and gas industry icons retiring soon – have we, in the United States, done enough to prepare our industry to move forward in the future to provide the country’s energy needs?

Last week the United Kingdom’s The Telegraph ran an interesting article called “Attracting ‘Generation Y’ to the Oil & Gas Industry.” The article was not the first on the topic that I’ve seen out of the UK — an interesting trend when you consider that the oil and gas industry in America – where the article is referring to – is doing largely nothing to attract a new generation.

This phenomenon of the main generation of oil and gas workers exiting the industry in the next five or so years is not a new one. Anyone in the industry could tell you this is one of the biggest challenges the industry faces next to regulations and hostile governments. What I found interesting in this article though – was how it defined who ‘Generation Y’ is and how the industry should be sold to them. While I suspect that this article was heavily slanted towards a specific oil and gas recruiting company – the information provided about the industry was enlightening.

An interesting challenge the oil and gas industry faces in recruiting ‘Generation Y’ workers (born between 1980 -1995) is that this generation has subliminally, and perhaps not so subliminally in recent years, grown up discussing the oil and gas industry primarily in regards to its failures and highly publicized disasters. New technologies and new discoveries in oilfields and shales rarely receive much time in the media like hydraulic fracturing and its often-claimed-but-not-proven link to water pollution, and air pollution do.

In a world where going green and renewable energy are the next big thing – seducing a generation that bounces from one fad to the next as quickly as Facebook updates its design – is not an easy task. Especially if those trying to do the seducing don’t understand how ‘Generation Y-ers’ think.

‘Generation Y’ is a generation that thinks on the go and makes decisions on the go. It’s a generation more generally aware of its surroundings and events than the previous generations – but also one that doesn’t dwell long on the details and facts.

Having grown up in the world of status updates, tweets, text messages and e-mails, everything they know, learn and process about the world can come in a 140 characters, a sound bite or be found on Google.

For this generation to fit into our industry, it also means that as the world and our country continues to diversify and be more inclusive, that the Good Ol’ Boys club that primarily runs the industry will reach out and become more inclusive as well.

The current oil and gas industry needs to promote itself not only as a necessity to the future of America’s energy (especially as renewable energy sources just won’t rise up to their hype for a long time) but also as a time-tested, stable, safe, environmentally conscious industry.

It’s time the oil and gas industry stopped only touting its need for a world with hydrocarbons and began imploring the future generation of workers ,including generations to come, that someone needs to take responsibility for the exploration, production, transportation and refinement of America’s energy. This will become more important as the political climate changes each season and the regulations get increasingly more stringent, and the oil and gas increasingly harder to obtain.

Help promote the industry to the future generation so that there will continue to be a future in energy development in this country.

What strides have you seen the industry make in regards to attracting a younger generation? What can they do better?


Source: SherWare Blog

Is Ohio’s proposed severance tax rate increase fair?

Ohio’s Governor John Kasich’s proposal to raise the state’s severance tax against the oil and gas industry 4 percent over the next three years is stalled at the Statehouse amidst heated debate between industry critics and those who support the oil and gas industry.

I’ve recently read articles and opinions on both sides of the spectrum and honestly, feel like I’m missing something to see the whole perspective correctly. Before we break down the two views here, understand the current severance tax rates in the state and what is proposed.

Severance taxes are collected based on extraction of natural resources from Ohio soil or water. Currently oil and gas producers pay $.03 per MCF of natural gas and $.20 per BBL of oil (which is currently around 1 percent).

Kasich’s proposal is to slowly raise the severance tax rate to 4 percent over the next three years – bringing in an estimated $973 million to be used for income tax cuts statewide.

Ohio Oil & Gas Industry view:

The Ohio Oil & Gas Association immediately came out swinging against the proposal when Kasich announced it, countering that it will make for a bad business climate in the state and drive away potential investors that could boost the state’s drilling in newly-discovered Utica shale.

The Association also released a fact sheet about Ohio severance taxes and included this chart comparing the severance taxes of four surrounding states to Ohio. You can see that Ohio falls in the middle in regards to the percentage or amount that producers have to pay based on the minerals extracted.According to OOGA’s fact sheet, both West Virginia and Michigan, who have higher severance tax rates, have seen decreased oil and gas investment and drilling in the past five years since, while Pennsylvania, which has no severance taxes and only an impact fee for drilling, has seen a 600 percent increase in drilling.

OOGA also counters that in 2008 Arkansas implemented a similar increase in state severance taxes and has since seen drilling activity decline by 50 percent.

While the Governor claims that the industry doesn’t pay enough in taxes and that this tax increase will boost the economy – the industry adamantly claims that’s not the case.

Because the Utica shale is in its infancy, it will take several years to determine the viability of the formation, said the Association. If the cost of doing business becomes too high before enough investors can invest in the new shale play, they will take their investments somewhere else.

The Governor’s view:

Kasich – who’s largely known for his ability to cut budget and close deficits – has proposed a fairly modest increase in the severance tax if you look at Texas and Oklahoma, which both have a 7 percent or higher rate, and Michigan and Pennsylvania, which both have 5 percent or higher.

At an Ohio Energy Jobs Summit a few weeks ago Kasich was quoted by the Associated Press as saying, “I don’t want all this money to escape Ohio. And our severance tax is going to be at a level that will allow us to be very competitive and it will allow us to reduce our income tax in the state and benefit all families.’’

This is how Kasich’s website describes the tax: “As Ohio oil and gas production increases, so will the income tax cut for Ohioans. Every cent – 100 percent – of new tax revenue from the high-volume horizontal wells like those used in Ohio’s Utica and Marcellus shale formations will be used to reduce income taxes the following year.”

From this perspective, it looks like it will only apply to new wells drilling with a horizontal well – which won’t affect smaller producers across the state that only use vertical wells when drilling. And from this quote – of him putting what he says the tax into perspective – it also seems like a fair tax he’s proposing:

“This is what the oil companies in Ohio are paying in tax on a $107 barrel of oil — 20 cents. I’m not kidding you. Do you understand what I just told you? This is what they pay for taking oil out of our ground and selling it to you, by the way, for $4.30 a gallon,” Kasich said.

My problem with hearing Kasich’s side of the story is that I seem to be missing where the truth lies. I understand that with extreme views you have to take them with a grain of salt. What I would like to hear from the Ohio producers is how this proposed severance tax will really affect you. Reading about it on paper it may not look so bad – but when you see how it works with real numbers, real wells, real lives, it can be a different story.

What will the proposed severance tax increase do for your company? If it passes, do you see it slowing down the drilling in the state?

Source: SherWare Blog

SherWare Clients offer predictions for oil & gas industry

Last November I asked our clients to give me three predictions for what would happen to the oil and gas industry and economy during 2012. The following 21 predictions are a compilation of the most popular prediction topics our clients sent in.

We will follow these predictions throughout the year to see how they pan out and how accurate you guys can see the industry’s future.2012 Oil & Gas Industry Predictions

General Oil & Gas Industry

  1. The industry will be stable for 2012. You will see more of the same from 2011. There will by more shale plays, more debate about hydraulic fracturing and more regulation. – Pete Clute
  2. Growth in the Marcellus drilling will be less than the growth in Utica drilling because of the liquids/gas ration being 30:1 in value. – Mark Swisher
  3. The gas industry will grow exceedingly fast with the Marcellus shale. I’m not sure wht they will do to the little guy and his vertical wells. – Carol Watkins
  4. I predict they will allow us to drill in Alaska in 2012. – Kimberly Ann


  1. Prices will increase for the general public. A combination of turmoil in other parts of the world and the backlash from the current administration’s clampdown of our own energy independence will drive the production, delivery and therefore user end costs up. – Tonya Aiken
  2. As shale production increases, gas prices will continue to decline. Pipeline capacity may become a problem. – Holly Clemens
  3. Oil prices will continue to creep up with a possible spike when Israel takes on Iran’s nuke program. Most of the creep will be declining dollar value and flight into commodities. – Mark Swisher

Hydraulic Fracturing

  1. I don’t anticipate any significant regulation change during an election year. While there is a lot of noise about hydraulic fracturing, it is essentially the same method that has been used for years. Some states may implement tighter controls or regulations, but most states will allow it to continue as is. It will ultimately be a state by state issue. – Guthrie Chamberlain
  2. Frac technology will contine to improve and also prove that it is NOT a danger to the environment. – Don Lindberg
  3. The hydraulic fracturing debate will continue. I don’t think a law will pass banning the practice, but it might be met with some debate on the topic of water conservation. We might see some new ideas and industries created to clean and reuse the water. – Tonya Aiken

Alternative Energy

  1. Most green energy initiatives will remain cost prohibited and an impractical alternative to current energy supplies. This will not change anytime soon as newer technologies in the exploration and extraction of current oil and gas supplies will allow the use of fields that were not previously cost effective. This is why the Bakken and Marcellus are available today and will play a significant role in the US energy supplies. – Guthrie Chamberlain
  2. Despite pushback from the liberals/environmentalists, there will be movement to establish more infrastruction for natural gas vehicles. – Don Lindberg

Miscellaneous Predictions

  1. Offshore drilling permits won’t increase as much as we’d like. Obama will be trying to appease the Democrats so he can be re-elected. – Pat Johnson
  2. The Bakken fields will produce as expected but the frenzy to drill will slow down and level off. – Juli Pierce
  3. The U.S. will continue to NOT have an effective energy policy by the end of 2012. – Kathy Pritchard
  4. Texas leads the nation in oil production, representing almost 50 percent. I predict this number will fall in 2012 because of the Bakken fields and Marcellus shale. – TJ Hunter
  5. Conventional drilling will slow to a record low number of wells due to gas prices and the Utica Shale frenzy. – Mark Sparr
  6. The regulations will force small independents out of business as only the huge companies will be able to comply. – Mark Stephenson

Ohio Oil & Gas Industry

  1. Despite continuing misplaced criticism of the industry and hydraulic fracturing, Ohio’s governor and ODNR will allow the industry to steadily improve our economy. The eastern half of the state will continue to benefit even though it might not be part of the media storyline. – Holly Clemens
  2. The Utica Shale will cause unprecedented hype and will commence the beginning of the end of the local oil and gas producer. – Tom Csapo
  3. Utica Shale exploration and development will dramatically increase in both the wet gas and oil areas of the state. – Ed Mack

What do you think about their predictions? Are there any others you would add about the industry now that you’ve seen how the first four months have played out?

Source: SherWare Blog