Reserves and the SEC

Energy Strategist (03/04/2010)
"Some analysts and pundits spend considerable time scrutinizing changes in a particular E&P outfit's reserves over time. This has led to considerable uncertainty heading into 2010 due to some changes in the Securities and Exchange Commission's (SEC) reserve reporting requirements that went into effect this year. These represent the first major changes to SEC rules governing reserves since 1982.

Without going into all the gory details, suffice it to say that under the old rules companies could only establish proved reserves through well flow data and production tests. Under the new rules, companies can establish reserves using newer technologies such as seismic data. In addition, companies will be allowed to provide a more detailed look at reserves rather than focusing exclusively on proved reserves. That change is meant to give investors a clearer picture of a company's true reserve base and prospects for future reserve additions.

In addition, reserves are calculated based on what is economically recoverable at a certain price. Under the old rules that reference price was the closing price of oil and gas at the end of the year. The old system clearly distorts results because the price on the last day of the year may or may not reflect conditions over the course of the year. This is particularly true for natural gas prices, which are subject to seasonal factors and are relatively volatile. And volatility has become the norm rather than the exception in recent years. Under the new SEC system, the reference price will be based on the monthly average price over the course of the year.

Finally, the new rules allow companies to report unconventional oil sources such as oil sands as proved reserves rather than just conventional oil."

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