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Proposed SEC Change To Oil Reserves May Help Smaller Cos

Last update: 6/27/2008 5:14:42 PM

By Isabel Ordonez, Jason Womack and Hyun Young Lee
Of DOW JONES NEWSWIRES

HOUSTON (Dow Jones)--Small oil and gas companies generally off Wall Street's radar could be the biggest winners under the Securities and Exchange Commission's proposal to update the way energy companies report reserves.

The SEC proposed new regulations Thursday to overhaul the system for reporting reserves, a critical valuation benchmark to Wall Street.

One of the proposed changes would allow the industry to report "probable" and "possible" reserves in company financial statements, a shift the industry has argued would provide a more accurate picture of the resources they control.

The change, if codified, is expected to increase the official amount of reserves reported by companies across the entire oil and gas sector.

Unlike Exxon Mobil Corp. (XOM) and other giants, smaller exploration and production companies aren't often given the benefit of the doubt when they tout resources that don't meet the SEC's strict guidelines for "proved reserves."

The changes proposed Thursday are seen likely to legitimize more of the smaller companies' holdings.

"The change would favor small companies because analysts will have more information about them and put more substance to their numbers," said Phil Weiss, energy analyst at Argus Research in New York.

Friday, most energy companies were still studying the proposed changes.

"We support updating the rules but need time to understand the effects of the proposed changes," said a spokesman for Chevron Corp. (CVX). Officials with Devon Energy Corp. (CVN) and ExxonMobil also said they were studying the revisions.

But a senior executive with Continental Resources Inc. (CLR), an Oklahoma-based independent oil and gas producer, said the company's reserves could jump significantly under the proposed changes. The bulk of Continental's reserves, about 83%, are in unconventional plays like the Bakken shale, an oil-rich formation in Montana and North Dakota.

Continental President Mark Monroe said the proposed changes could boost the company's total reserves in the Bakken from 7 million barrels of oil to more than 100 million barrels.

"You are talking about hundreds of thousands of acres of running room," Monroe said. "That's a lot of probable and possible reserves."

The change would also allow producers in Alberta, Canada's massive oil sands to classify the holdings as oil reserves. Currently, the industry can report the oilsands in their SEC filings - but they are usually counted as mining operations, not oil reserves.

But oilsands players, which tend to be oil majors and large independents, may continue to split out oilsands reserves from conventional crude to reassure investors that they're not shielding poor reserve replacement ratios behind massive oil sands figures, said Simon Wardell, a London-based oil analyst at consultancy Global Insight.

Smaller companies that operate in the oilsands tend to list only on the Toronto Stock Exchange, rather than in New York. The bigger benefit to Canadian players may come from the proposal that producers use a 12-month average price to estimate reserves, rather than year-end prices, which is the current rule. Bitumen prices tend to be more volatile than conventional oil and gas.

"Two or three years ago, a number of the major oil companies reported no reserves in their major oilsands projects" because bitumen prices, which trade at a discount to light, sweet crude oil, had slumped dramatically at the end of the year, said Gord Graham, a Calgary-based partner at Ernst & Young. "But three weeks earlier or later, you would have been doing quite nicely."

The proposal is open to public comments for 60 days. After that time the SEC will analyze the public input and vote on a final rule, said SEC spokesman Kevin Callahan. There isn't a specific timeline for either formulating a final rule or deciding on the effective date companies might start reporting under the possible new rule, he added.

Thursday's announcement follows a more preliminary move by the SEC in December 2007 to seek comments on a proposed update of the rules. The oil industry has been pressing for a revision in recent years, arguing that the present system undercounts their holdings.

The reserves issue also soared to the forefront in 2004, when Royal-Dutch Shell PLC (RDSA) announced a major downward revision of its holdings, a move that resulted in major enforcement from U.S. and European regulators and led to a shakeup in Shell's corporate leadership.

-By Isabel Ordonez, Jason Womack and Hyun Young Lee, Dow Jones Newswires; 713-547-9207; [e-mail]. (END) Dow Jones NewswiresJune 27, 2008 17:14 ET (21:14 GMT)