Some exploration and production (E&P) companies have been forced to remove undeveloped natural gas reserves from the proved category at the end of 2011. This reclassification was caused by reduced drilling in dry gas areas, which has pushed the development of these reserves past the five-year time limit required by government reporting regulations. (To know more about oil and gas, read Oil And Gas Industry Primer.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Proved Undeveloped Reserves
In 2008, the Securities and Exchange Commission (SEC) issued revised regulations involving the disclosures that oil and gas companies are required to make when reporting reserves and other data.

One major change instituted by the SEC involved the handling of undeveloped reserves in the proved category. Oil and gas companies are now required to have a development plan to drill these proved undeveloped reserves (PUD's) within five years, or reclassify them to the probable category.

PUD's can stay more than five years only if "special circumstances" exist, according to the SEC. These circumstances include reserves in remote or urban areas, environmentally sensitive locations or associated with projects that involve the construction of offshore infrastructure.

The collapse in natural gas prices has led to reductions in dry gas drilling, which has caused many operators to revise the development of these PUD's past five years.

Operators
Cabot Oil & Gas Corporation (NYSE:COG) reported total proved reserve of 3 trillion cubic feet equivalent (Tcfe) at the end of 2011, up 12% over the end of 2010. This proved reserve total incorporated the removal of 190 billions of cubic feet equivalent (Bcfe) of legacy proved reserves that the company felt could not be developed within five years.

Cabot Oil & Gas Corporation offset some of these PUD's by increasing the estimated ultimate recovery (EUR) on undeveloped Marcellus Shale locations. The company now expects the EUR on these locations to be 7.5 Bcf per well.

CONSOL Energy (NYSE:CNX) also cut PUD's, removing 380 billion cubic feet at the end of 2011. The company has redirected capital away from its conventional and coal bed methane properties and towards the Marcellus Shale and Utica Shale, and no longer expects to develop these reserves within the next five years.

Plains Exploration & Production Company (NYSE:PXP) has shifted much of its capital spending towards crude oil and liquids development, expanding its activity in the Eagle Ford Shale over the last few years. The reduction in dry gas drilling has led the company to reclassify 44 million barrels of oil equivalent (BOE) of Haynesville Shale reserves from the proved to probable category.

Despite this reclassification, it still has an active program in the Haynesville Shale and in 2012 plans to spend 20% of its $1.6 billion capital budget on this play.

Range Resources (NYSE:RRC) also bumped up against the five year development rule and removed 112 Bcfe of PUD's at the end of 2011. The company attributed this to the reallocation of capital towards the Marcellus Shale and other plays that produce natural gas liquids in the production stream.

Noble Energy (NYSE:NBL) lost 45 million BOE of PUD's in 2011, as the company reduced the vertical development of properties in the Denver Julesburg Basin. The company is accelerating horizontal development in this basin, and plans to drill 170 horizontal wells into the Niobrara in 2012.

The Bottom Line
While an investor may frown on a company that loses proved reserves, the removal of these PUD's is not a major cause of alarm. Improved fundamentals and the strengthening of natural gas prices will lead to an increase in dry gas drilling, and the reclassification of these reserves back into the proved category at some later date. (For additional reading, check out A Guide To Investing In Oil Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Economics

    Understanding Cost-Volume Profit Analysis

    Business managers use cost-volume profit analysis to gauge the profitability of their company’s products or services.
  2. Fundamental Analysis

    5 Must-Have Metrics For Value Investors

    Focusing on certain fundamental metrics is the best way for value investors to cash in gains. Here are the most important metrics to know.
  3. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  4. Fundamental Analysis

    4 Predictions for Oil in 2016

    Learn four predictions for oil markets in 2016 including where prices are heading and the key fundamental factors driving the market.
  5. Fundamental Analysis

    Performance Review: Commodities in 2015

    Learn how commodities took a big hit in 2015 with a huge variance in performances. Discover how the major commodities performed over the year.
  6. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  7. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  8. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  9. Stock Analysis

    The Biggest Risks of Investing in SandRidge Stock

    Learn about the significant risks of investing in SandRidge. Read how the company may not be able to service its substantial debt load.
  10. Stock Analysis

    The Top 5 Micro Cap Alternative Energy Stocks for 2016 (AMSC, SLTD)

    Follow a cautious approach when purchasing micro-cap stocks in the alternative energy sector. Learn about five alternative energy micro-caps worth considering.
RELATED FAQS
  1. What is the formula for calculating EBITDA?

    When analyzing financial fitness, corporate accountants and investors alike closely examine a company's financial statements ... Read Full Answer >>
  2. How do I calculate the P/E ratio of a company?

    The price-earnings ratio (P/E ratio) is a valuation measure that compares the level of stock prices to the level of corporate ... Read Full Answer >>
  3. How do you calculate return on equity (ROE)?

    Return on equity (ROE) is a ratio that provides investors insight into how efficiently a company (or more specifically, its ... Read Full Answer >>
  4. How do you calculate working capital?

    Working capital represents the difference between a firm’s current assets and current liabilities. The challenge can be determining ... Read Full Answer >>
  5. What is the formula for calculating the current ratio?

    The current ratio is a financial ratio that investors and analysts use to examine the liquidity of a company and its ability ... Read Full Answer >>
  6. What is the formula for calculating earnings per share (EPS)?

    Earnings per share (EPS) is the portion of a company’s profit that is allocated to each outstanding share of common stock, ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center