Exploration and production companies will soon be releasing oil and gas proved reserve reports for 2010. Here are some things for an investor to look out for as they analyze the important data in these releases.
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The Securities and Exchange Commission (SEC) mandates very specific standards for the commodity prices that are used to calculate the value of proved reserves. The SEC requires that energy companies use the average of oil and natural gas prices on the first day of each of the last 12 months.
SM Energy (NYSE:SM) just reported proved reserves of 984.5 Bcfe, up 27% from the 772.2 Bcfe at the end of 2009. The company used SEC pricing of $4.38 per mmbtu of natural gas and $79.43 per barrel of oil to calculate a PV-10 value of $2.3 billion for its proved reserves. The PV-10 value is the present value of the expected future cash flows from those proved reserves.
Some companies will present the value of proved reserves under different pricing scenarios, usually ones that reflect greater optimism on future commodity prices or higher futures prices in the market place.
EXCO Resources (NYSE:XCO) reported 1.5 Tcfe of proved reserves with a PV-10 value of $1.4 billion at the end of 2010. The company used standard SEC pricing for these calculations. EXCO Resources also presented its proved reserves and PV-10 value at the end of 2010 using the five-year strip price for oil and natural gas. Since these prices were higher than SEC pricing, the new totals were higher as well with proved reserves of 1.6 Tcfe and a PV-10 value of $2.1 billion.
Range Resources (NYSE:RRC) presented the PV-10 value of its proved reserves in a similar fashion at the end of 2010. The company reported a PV-10 value of $4.6 billion using SEC average end of month prices, but after using the 10-year strip pricing, the value moved up to $7 billion.
Another item for investors to note is that the PV-10 is a non-GAAP measure that is calculated before the impact of taxes. An exploration and production company will also report the standardized measure of discounted estimated future net cash flows from its proved reserves, which is calculated after taxes.
The bottom line is that if you are comparing the proved reserves and values of two different exploration and production companies, verify that the reserve value is calculated in the same manner or the comparison will be invalid.
Finding and Development Costs
Many exploration and production companies will report their finding and development costs for the year calculated per unit of proved reserves added. These costs can be reported differently based on what is included in the calculation.
Comstock Resources (NYSE:CRK) reported that the company spent $402 million on drilling in 2010, and an additional $135 million to acquires properties for future development. The company reports its costs in two different ways in its press release. The first is an "all in" finding and development cost of $1.26 per Mcfe, which includes the cost of the acquisition of exploratory acreage, and the second is 94 cents per Mcfe without the extra $135 million.
Once again, comparisons between different operators shouldn't be made without understanding the different sets of costs presented.
Proved reserves for oil and gas companies seem straight forward enough but they are anything but that as exploration and production companies report a deluge of information in year end releases. Examine these reports carefully. (For related reading, also take a look at our Oil And Gas Industry Primer.)
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