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SEC's New Plan Could Revamp Oil and Gas Reporting Rules

by: David Enke September 05, 2008 | about stocks: BP / CHK / COP / MRO / RDS.A / XOM    

David Enke

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A new proposed SEC plan will overhaul oil and gas reporting rules that have existed since the 1970s. The new rules will boost the proven reserves reported by oil companies, and in the process boost their shares and potentially increase interest in takeovers (see Financial Week article).

The plan will essentially allow companies to book reserves from “unconventional” oil and gas sources, including oil sands and coal-bed methane. Some deep-water projects that to date have not been allowed to be described as “proven” will also now be included. Furthermore, firms will be able to publish data on what are called “probable” and “possible” reserves, where recovery is not as certain.

The new rules obviously don't change the amount of oil and gas that is available worldwide, but they will help investors better calculate future cash flows and thereby place a proper valuation on a company. Needless to say, the oil companies are in favor of the new rules. The plan will affect both U.S. and international companies that report under SEC rules, which often includes most of the larger international firms. Those with the largest non-traditional sources of future production are most likely to benefit.

Analysts expect that Royal Dutch Shell (RDS.A) is likely to benefit the most among the oil majors, given that they are investing capital to retrieve crude from bitumen-soaked soil in Canada, as well as extract natural gas in coal beds in Australia and China, both of which can now be included as reported proven reserves. ConocoPhillips (COP), Exxon (XOM), and BP (BP) have also invested in non-conventional sources of oil. The reporting of non-traditional proven reserves could also have an impact on acquisitions and takeovers. As mentioned by Neil McMahon, analyst from Bernstein, "We believe that these rule changes could be the catalyst for a wave of acquisitions, with those companies with the largest unproved resource bases making juicy takeover targets for some of the larger cash-rich majors."

McMahon feels that Marathon Oil (MRO), with investments in oil sands and shale, and British gas producer BG, with its stakes in the deep-water Brazilian fields and a new 25% stake in Chesapeake Energy (CHK) and the Fayetteville shale, are potential targets. In fact, given that the changes will bring the SEC rules more in line with European rules, the impact on UK-listed firms, among others, is expected to be positive.

The rule changes are likely to apply to 2009, and not 2008 year-end reporting since the SEC is still in a consultation period and has not committed to a time line for implementation. Given that the market is forward looking, share prices may nonetheless begin to see the impact of the proposed changes which are expected to be approved and put into place quickly.

Disclosures: None

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This article has 5 comments:

  •  
    Sep 05 07:40 AM
    Sounds like a way to inflate reserves.
    Reply
  •  
    Sep 05 09:15 AM
    I THOUGHT THAT THEY WERE INVESTING MANIPULATION. Does this not open up more opportunities?
    Reply
  •  
    Sep 05 09:17 AM
    Gorilla: actually its a way to drag the SEC into the current century. The article did a horrendous job of explaining the "booking" of unconventional resources in that it makes it sound like unconventional resources aren't booked today. Some of them are, there is just a very tight restriction of what can and can't be included. For instance, in the Barnett Shale, it is geologically proven that the shale stretches out across a very large area. But, companies can only book reserves for wells drilled and then one spacing unit around that well. But the resource is located all around it. The new rules will allow the recognition of the additional resource, but place it in a category that denotes that it must be drilled/developed before it makes it to the "Proved Developed" category.

    Also, the author (and or Mr. McMahon who he quotes) made a catastrophic mistake toward the end. BG did not buy "a 25% stake in CHK" and "in the Fayetteville". BP, not BG, bought a 25% stake in the Fayetteville Shale holdings of CHK. That's a far cry from buying a 25% stake in the entire company and he got the companies wrong. Kind of makes you wonder if you really should take stock advice from someone who can make this sort of mistake!
    Reply
  •  
    Sep 05 10:27 AM
    From my understanding there is another issue surrounding the accuracy of proven reserves. Apparently there are two different numbers reported to the agencies...reserves and resources. As it turns out proven reserves reflect the economically feasible reserves. This is a huge kink in the peak oil theory as well as any other medium term shortage argument.

    As the price of oil/nat gas rises suddenly reserve numbers grow simply because projects that were not feasible a year or two before become feasible. That is a wretched way to measure the quantity of oil and natural gas on the Earth.

    It seems to me Wall Street, the media, and policy makers should be more concerned with resources than reserves in the first place. I can understand from a raw cash flow valuation perspective why proven reserves may be important for short term valuations of securities (i.e. less than 5 years). However from a long term perspective natural resource companies are much more of a call option (real or financial) and proven reserves just wouldn't allow the correct valuation in my opinion.

    Case in point, Canadian tar sand energy companies are quite literally a call option on future oil shortages. Yet because of limited technology currently, the amount of reserves available for them to harvest is grossly underestimated because it assumes no improvement in technology, which in itself is a very poor assumption.

    P.S. On a website in which knowledge can be gained, nothing productive comes from being rude.
    Reply
  •  
    Sep 05 02:40 PM
    As a beginner in investing, I read as many blogs and articles as I can, looking for as many opinions as I can find, searching out the little bits of true education amongst the glut of words. The best education I found for today was in that P.S. Thank you.
    Reply
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