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.
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.
Stock AnalysisA summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
Chart AdvisorCopper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
Options & FuturesInvesting during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
Active TradingCompanies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
MarketsLearn how this simple calculation can help you determine a stock's earnings potential.
Stock AnalysisLearn about large changes to Berkshire Hathaway's portfolio. See why Warren Buffett has invested in a commodity company even though he does not usually do so.
Investing BasicsHeld onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
InvestingWe look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
EconomicsWill remaining calm and staying long present significant risks to your investment health?
Stock AnalysisIs DKS a bargain here?
Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
Working capital as current assets cannot be depreciated the way long-term, fixed assets are. In accounting, depreciation ... Read Full Answer >>
While working capital funds do not expire, the working capital figure does change over time. This is because it is calculated ... Read Full Answer >>
There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
The amount of working capital a small business needs to run smoothly depends largely on the type of business, its operating ... Read Full Answer >>
If a company has high working capital, it has more than enough liquid funds to meet its short-term obligations. Working capital, ... Read Full Answer >>