Wall Street Journal: Aggressive Oil Reserves Due To Mediocre Output - Study
By JOHN M. BIERS
May 10, 2004 2:34 p.m.
Of DOW JONES NEWSWIRES
Posted 11 May 04
HOUSTON (Dow Jones) --Medium-sized energy companies have become more aggressive in booking proved undeveloped oil and gas reserves to compensate for their inability to achieve production growth, according to a report released Monday.
In 2003, energy companies reported 34.2% of their holdings as "proved undeveloped reserves," compared with 26.5% in 1994, according to a UBS analysis of 17 medium and large independents. Undeveloped reserves require companies to drill additional wells or to add major new infrastructure to bring on production. Developed reserves come from existing infrastructure.
The more "aggressive" approach to booking undeveloped reserves reflects "the companies' desires to post attractive reserve growth in an industry that has not been capable of generating production growth," UBS said.
The companies ranged from 13-68% in their percentage of undeveloped as a portion of their overall reserves. The study group included so-called "superindependents" like Burlington Resources Inc. (BR) and Devon Energy Corp. (DVN), as well as a number of smaller companies.
The use of undeveloped reserves has been a major factor in Royal Dutch/Shell's (RD,SC) huge reserve downgrade and in the recent revisions of a number of smaller companies. Shell booked reserves in cases where the company hadn't decided to invest in a project or lacked a clear market into which it could sell the energy.
The UBS report said investors should view proved undeveloped reserves "as somewhat higher risk than developed reserves" because they are more difficult to estimate, more subjective to categorize and more likely to be subject to downward revision if commodity prices fall.
While the booking of proved undeveloped reserves doesn't affect earnings, the report said the additional assets improves how companies perform on some important financial benchmarks. The cost of replacing production would have been 17% higher for the energy companies if the costs of the undeveloped reserves were included, UBS said. If a company reported a reserve replacement cost of $1.25 per million British thermal units, a 17% increase would shift the price to $1.42.
Spinnaker Exploration Co. (SKE) had the highest percentage of proved undeveloped reserves as a percentage of total reserves with 68%, UBS said. Both Unocal Corp. (UCL) and Kerr McGee Corp. (KMG) report 50% of their total reserves as proved undeveloped.
Newfield Exploration (NFX) had the lowest percentage of proved undeveloped reserves with 13%. After Newfield, came Pogo Producing (PPP) with 23% and Devon Energy Corp. (DVN) with 24%, according to the report, which ranks independents as their aggressiveness in booking reserves.
By John M. Biers, Dow Jones Newswires; 713-547-9214;