New Alberta reserve reporting guidelines could prompt more M&A activity

By OGJ editors

HOUSTON, Oct. 30 -- The Alberta Securities Commission's (ASC) new reserve reporting guidelines could boost mergers and acquisitions because firms might sell assets that will be written down, said Sayer Securities Ltd., Calgary.

These guidelines could lead to reserve write-downs and a reclassification of reserves, affecting small producers the most because their reserves generally consist of a higher percentage of nonproducing properties than do larger companies.

Oil and gas companies also might be forced to sell properties because revised reserve estimates could mean a lower borrowing capacity, said Tom B. Pavic, an accountant with Sayer Securities.

Small producers could alleviate this problem altogether by selling assets with nonproducing reserves before being required to comply with the guidelines, beginning next year, Pavic said.

The Canadian M&A market has been very quiet in 2003, compared with previous years, Sayer statistics indicate.

Independent engineers
Implementation of the NI 51-101 guidelines could lead independent engineers to take a more conservative approach toward reserves.

"The rumblings on the street are that any reserve write-downs at the end of 2004 could lead to a subsequent detailed review of both the reporting issuer and its independent engineer by the ASC. Consequently, the independent engineers may be aggressively cutting reserves this year on properties that have not recently met forecasts, with a view to applying an overly negative revision for the end of 2003 so that future revisions are positive rather than negative," said Pavic.

Most engineering firms indicated that the total volume of reserves probably will not change, but the classification of the reserves will change.

"It is likely that many companies will find that reserves previously classified as proven may now be classified as probable," Pavic said. This reclassification might affect the borrowing capacity of smaller companies.

"The banks generally lend money based on a percentage of total proved producing reserves from an independent reserve report. The rule of thumb in the industry has been that banks will lend up to 50% of the value of the total proved producing reserves at a 15% discount.

"If a company's proved producing reserves decline because of the new standards, this might lead to a declining borrowing base available to these specific firms, depending on the individual bank's reliance on an independent engineer's reserve report. This lower financing capability could put pressure on companies to sell properties that will lose value under NI 51-101," he said.