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U.S. Reserves Climb 11% in 2014, but Price-Induced Pain Ahead, Says Fitch

U.S. oil and natural gas reserves grew in 2014 by an average of 11% year/year, but that was before commodity prices took a big tumble, according to Fitch Ratings.

Reserves grew on average from 2013 based on a sample of 28 of the most active independents in the United States. However, sharply lower commodity prices seen year-to-date should result in "substantial" negative revisions in 2015. The price drag also is expected to pressure operational metrics, according to the report, "Statistical Review of U.S. Independents" that was published on Monday.

"The impact of low oil prices hasn't fully shown up in the numbers yet," said Senior Director Mark Sadeghian. "Even if oil prices rebound in the near term, many upstream companies will see their 2015 metrics erode as their proven reserve base and organic reserve replacement metrics take a hit next year."

The median increase in reserves in 2014 was 11%, compared with about 6% a year since 2011. The sample showed strong bifurcation, as the most dramatic gains in reserves were seen among the pure-play exploration and production (E&P) names, with 20-30% growth rates.

Meanwhile, several of the big independents reported year/year reserve declines, mostly linked to asset sales and restructurings. Production growth tended to mirror reserve growth across the sample.

E&Ps with big reserve gains last year included EQT Corp., 29%; Concho Resources Inc., 27%; and Continental Resources Inc., 25%. A combination of high organic reserve replacements and the impact of acquisitions also led to big reserve additions by companies that included Southwestern Energy Co., 54%; and Whiting Petroleum Corp., 78%.

Dry gas asset sales, combined with a shift in capital spending to liquids, led to an increase in liquids reserves for several E&Ps. Several operators continued to transition from dry gas mostly because they were redirecting capex. Companies with the biggest year-over-year changes in liquids production included Devon Energy Corp., 10.1%; Range Resources Corp., 9.5%; Linn Energy, 6.6%; EOG Resources Inc., 6.1%; and Apache Corp., 5.5%.

"While Fitch doesn't expect the recent drop in oil prices to shift the industry's bias toward liquids and away from dry gas, the lower cash flows stemming from depressed oil prices are likely to slow this transition."

Across the sample, more than one-third (36%) of the E&Ps reported lower year/year reserves because of asset sales and restructuring programs.

Notable declines were reported by Occidental Petroleum Corp., 19%; Talisman Energy Inc., 19%, Apache, 10%; Chesapeake Energy Corp., 8%; Devon, 7%: Denbury Resources Inc., 6.5%; and Pioneer Natural Resources Co., 5.4%.

"Declines for nearly all of these names were associated with noncore asset sales linked to restructurings, although reallocation of capital to horizontal drilling programs at the expense of vertical programs also was a factor for Pioneer."

Substantial price-based negative reserve revisions are anticipated this year, as the full impact of lower oil and gas prices flows into the U.S. Securities and Exchange Commission (SEC) test prices. Using the SEC first-of-month convention for calculating average prices, West Texas Intermediate (WTI) oil in early May averaged $52.00/bbl, versus 94% a year ago. Natural gas averaged $2.75/Mcf in early May, compared with $4.48 in early May 2014.

"Absent a dramatic recovery in prices, this should result in substantial negative reserve revisions in 2015, particularly to proven undeveloped (PUD) reserves," Fitch stated.

Last year pure unconventional play E&Ps reported the most reserve gains by capitalizing on efficiencies. The efficiency gains also resulted in a decline in median three-year finding, development and acquisition (FD&A) costs, according to Fitch.

Median three-year FD&A costs dropped moderately by 73 cents/boe year/year and generally was affected positively by efficiency gains associated with shale production. However, several other factors influenced the calculations, making the ability to pull a representative trend more difficult, analysts said. These factors included the impact of negative price-based reserve revisions, changes in drilling plans that resulted in debooking of vertical wells, and the impact of infrastructure costs on FD&A calculations.

"Many of the upstream metrics tracked in the study are linked either implicitly or explicitly," Fitch noted. "Results consequently tend to be correlated. For example, a very strong organic RR year implies strong reserve adds and can support lower finding, development and acquisition costs, enhance unit economics and improve debt/barrels of oil equivalent metrics, all else equal.

"A weak RR year tends to reverse this trend. Pure play shale producers generally benefited from this linkage in 2014 given their strong RR, while at least some companies involved in restructuring or asset sales had metrics that were weighed down by such activities."

ISSN © 2577-9877 | ISSN © 2158-8023

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