Exploration and production companies have begun reporting reserves for 2009, under the new Securities and Exchange Commission (SEC) rules implemented last year. The reports highlight several large differences between the old and new calculations. Despite this, the changes don't actually mean an increase in value, as the total resources the company owns doesn't really change.
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Changes In Reporting
Most companies are reporting reserves this year under both the old and new rules so investors can gauge the difference in methods. The major changes include using an average of month-end prices for oil and gas rather than the prices on December 31st, the booking of non-traditional sources of oil like oil sands and the use of the standard of "reliable technology" to determine if offset locations to a successful well should be booked as reserves.
This last change is fairly important for exploration and production companies that are operating a manufacturing business model in shale plays. Under the old rules, only a limited number of offset wells to a successful horizontal or vertical well could be booked as proved reserves.
The new rules allow additional offsets to be booked as proved reserves if, "reliable technology exists that establishes reasonable certainty of economic producibility at greater distances." When operating in a shale play that has a 100% success rate on new wells, this allows a greater growth of proved reserves at the beginning of development.
Comstock Resources (NYSE:CRK) reported a 25% increase in proved reserves for 2009 using the new rules by the SEC. This was composed of 682 billion cubic feet of natural gas and 7.2 million barrels of crude oil, which converts to 726 billion cubic feet equivalent.
The company also presented reserves using end of year pricing as if the old rules were still in effect. Proved reserves under this method would have been 800 billion cubic feet equivalent. The company's reserves were impacted by a change in how proved undeveloped reserves are calculated as well. The net effect of this was to reduce total proved reserves by 18 billion cubic feet equivalent.
Petrohawk Energy (NYSE:HK) reported proved reserves of 2.75 trillion cubic feet equivalent (Tcfe) at the end of 2009. Under the old method, which required the use of year-end prices of $5.79 per MMBtu for natural gas and $79.36 per barrel for oil, the proved reserves total was 3.1 Tcfe.
Marathon Oil (NYSE:MRO) benefited from the new rules as it was permitted to book its reserves in the oil sands as proved reserves for the first time. This led to the addition of 603 million barrels oil equivalent (BOE) for the company in 2009.
Other companies that have operations in the oil sands will benefit from higher proved reserves, although the market should look right through this data because the resources were always there. Devon Energy (NYSE:DVN) has its Jackfish Project in Canada and estimates the reserves of its first phase to be 300 million BOE.
The Bottom Line
New rules on reporting of reserves by energy companies are in place, and although differences will result, investors will probably look through them as the changes are just cosmetic and don't change the actual amount of resources the companies own. (Learn more about the oil and gas industry, see: Oil And Gas Industry Primer).
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