Key Metric Likely Won't Reflect Oil Rally
December 26 2016 - 5:01PM
Dow Jones News
By Tatyana Shumsky and Erin Ailworth
The recent run-up in crude oil prices may offer a brighter
outlook for energy companies, but a key accounting metric is likely
to show the sector isn't out of the woods just yet.
As energy companies prepare their annual reports, they will be
calculating a so-called standardized measure of reserve value. This
dollar figure acts as a basis for direct comparison among
companies.
Oil prices have rallied 43% this year, but oil-and-gas producers
including Apache Corp., Chesapeake Energy Corp. and Pioneer Natural
Resources Co. are expected to report a lower standardized measure
in 2016 than 2015. That is because the Securities and Exchange
Commission requires companies to use historic prices in the
calculation.
The SEC price is the average of physical oil prices on the first
day of the month of the past 12 months. That average for 2016 is
down 15% from the 2015 figure. "There's going to be a mismatch
there between accounting and reality," said Robert Thummel,
managing director and portfolio manager at Tortoise Capital
Advisors.
The disconnect comes at a vulnerable time for the sector. Oil
prices plunged to a low of $26.21 in February after exceeding more
than $100 a barrel in 2014. Depressed prices triggered asset
impairments, losses and bankruptcies across the energy
industry.
Standardized-measure figures slumped in step with oil prices.
Apache's standardized measure, for example, was $10.6 billion in
2015, compared with $31.7 billion in 2014, according to company
filings.
Pioneer's standardized measure was $3.2 billion in 2015,
compared with $7.8 billion in 2014, according to annual company
filings. Chesapeake's standardized measure was $4.7 billion in
2015, compared with $17.4 billion in 2014, company filings
show.
While prospects for the industry have recovered as prices
climbed back above $50 a barrel in recent months, investors remain
cautious. The profitability of reserves is a primary concern. "This
disclosure is going to be lower than what they would like to
portray if they were using more recent prices," said Alan Stevens,
assurance partner at BDO's energy practice.
Finance executives in the energy sector can choose between
different accounting methods to value their proved developed
reserves, as well as different variables when estimating confirmed,
yet undeveloped reserves, which can result in vast differences.
By contrast, the SEC's standardized measure provides an annual
snapshot that is consistent across the industry. The metric
requires companies to estimate expected oil and gas sales from
their properties using historic prices, subtract expected operating
and development costs and taxes, and discount those figures by
10%.
"It's gospel because it's the SEC-required reporting number, but
it's not a complete surprise when it comes out," said Gary Clark,
vice president of investor relations at Apache. Institutional
investors and analysts often seek guidance on the direction of the
standardized measure throughout the year, he said.
After the numbers are out, investors sift for any outliers, such
as higher future development costs at a time when the company had
said those costs were falling, he said. "They will look at what you
produced and what you sold, and if at the end of the year you're
left with not as much as was there, they will start to ask
questions."
Cost is the one input that varies from company to company when
calculating the standardized measure. Development costs and the
success of exploration efforts differ substantially by region and
type of operation.
Chesapeake has seen its completion cost for wells in South Texas
cut nearly in half during the past year or so. In the third
quarter, it cost the company $246 per lateral foot to complete a
well, compared with $478 in the second quarter of 2015.
The company is also doing more work with fewer drilling rigs.
"Today 10 rigs at Chesapeake drill as much lateral footage as 35
rigs did in 2013," Jason Pigott, Chesapeake's executive vice
president of operations and technical services, said at the
company's analyst day in October.
Drilling and completion costs for wells fell by 35% since the
end of 2014 for Pioneer in some areas of the Permian Shale in West
Texas.
Such improvements have helped break-even costs decrease in shale
basins across the U.S. by as much as $22 a barrel, according to
research from energy-consulting firm Wood Mackenzie.
Companies that have been able to bring down their costs
substantially also could surprise investors with a less pronounced
drop in their standardized-measure figures, said Mr. Thummel. "That
is the offset that could be interesting."
Write to Tatyana Shumsky at tatyana.shumsky@wsj.com and Erin
Ailworth at Erin.Ailworth@wsj.com
(END) Dow Jones Newswires
December 26, 2016 17:46 ET (22:46 GMT)
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