By OGJ editors
HOUSTON, Mar. 22 -- As news of further reserves reclassifications surfaces within the oil and natural gas industry, concerned investors will continue selling off shares of companies reporting these negative reserves revisions, according to Houston-based Simmons & Co. International Ltd.
"The residual uncertainty associated with the reclassification of reserves has had a detrimental influence on exploration and production stocks. It remains to be seen whether this angst ultimately prompts the market to assign a higher equity risk premium to E&P shares longer term," analyst W. Mark Meyer said in a Feb. 25 research note.
Meanwhile of those oil and gas companies that reduced their reserves estimates, the shares of most of them remained 10% below pre-announcement trading levels for several days or even weeks following the reserves revisions announcements, he said.
In general, companies are apt to undertake more intensive reserve reassessments throughout the rest of 2004 so some negative revisions might not be revealed until year-end 2004 reports are filed, Meyer said.
Uncertainty regarding reserves could become increasingly important to E&P stock performance, he said, noting that the uncertainty associated with reserves never can be completely eliminated.
"Industry executives, regulators, and investors have all been reminded that, although science and regulations are well established, the error band around a company's proved reserves estimate can grow to be uncomfortably wide," he said.
He predicts that investors can expect a "more conservative posture" by companies in their reserves booking practices.
Writedowns review
Royal Dutch Shell Group announced the first major reserves revision of the year on Jan. 9. Last week, Shell announced the recategorization of another 250 million boe as of Dec. 31, 2002. For 2003, Shell has reduced the volume of proved reserves it planned to book by 220 million boe, representing a 16% reduction in the 2003 reserves replacement ratio (OGJ Online, Mar. 18, 2003).
These revisions are in addition to the earlier downward revision of proved oil and gas reserves by 3.9 billion boe, or 20% (OGJ Online, Jan. 9. 2004). The initial revision involved 2002 figures.
Meanwhile, other reserves revisions have included:
-- Forest Oil Corp., Denver, cut the reserves estimate for Redoubt Shoal field in Alaska's Cook Inlet to 8 million bbl as of Dec. 31, 2003, compared with Dec. 31, 2002, estimates of 49 million bbl, of which 36 million bbl were categorized as proved undeveloped. Forest had additional downward revisions of its estimated proved reserves for other properties in the fourth quarter of 2003 totaling 143 bcfe. This was in addition to 36 bcfe of downward revisions to estimated proved reserves taken previously in 2003. "These downward revisions are due to a variety of factors, including recent production performance and revised field development plans," the company said.
-- Nexen Inc., Calgary, reduced its proved reserves by 67 million boe, or 8%. Most of the revision involved production performance, recovery factors, and field economic life assumptions associated with Western Canada conventional properties.
-- Husky Energy Inc., Calgary, eliminated 275 bcf, or 13%, of its natural gas reserves estimates from assets in Northern Alberta and Indonesia's Madura Straits project.
-- El Paso Corp., Houston, reported a 1.8 tcfe negative revision to its proved reserves of Dec. 31, 2003, a 41% reduction from Dec. 31, 2002, levels. That leaves the company with 2.64 tcfe as of Dec. 31, 2003 (OGJ Online, Feb. 18, 2004).
-- Vintage Petroleum Inc., Tulsa, revised downward its Canadian reserves by 26.3 million boe, or 5% of the company's total proved reserves, saying that its Canadian operations have underperformed expectations since their acquisition in 2001.
-- Western Gas Resources Inc., Denver, cut its proved reserve base by 123 bcf, a 30% reduction of year-end 2002 Powder River coalbed methane reserves. This was primarily related to undrilled locations, the company said. Proved net reserves as of Dec. 31, 2003, in the Powder River CBM play were 326 bcfd.
