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New reporting rules will boost oilpatch’s reserves: may lead to takeovers

The Edmonton Journal

New reporting rules will boost oilpatch’s reserves


6 September 2008

LONDON – A U.S. Securities and Exchange Commission plan to overhaul oil and gas reporting rules will boost oil companies’ proven reserves, lift their shares and may even lead to takeovers.

The SEC said in June it wanted to revise the rules, devised in the 1970s, saying they were based on “outdated” thinking.

The stockmarket regulator plans to allow companies to book reserves from “unconventional” oil and gas sources such as oilsands and coal-bed methane — currently two of the hottest areas of investment. Companies would also be able to book reserves at some deep-water projects that cannot currently be described as “proven,” and firms could also publish data on “probable” and “possible” reserves, recovery of which is much less certain.

“The companies will actually be able to book more reserves,” said Frederic van Parijs, Senior investment manager with ING Investment Management in the Hague.

The planned reporting changes will not only apply to U.S. oil companies like Exxon Mobil but other majors, as most report under SEC rules.

“For some companies, it would have a significant impact, particularly if they have a heavy exposure to non-traditional sources of future production,” said Peter Newman, who heads the oil and gas practice at Deloitte & Touche in London.

Individual companies declined to comment on the impact of the changes but support the SEC’s move strongly through industry bodies.

The world’s second-largest non-government-controlled oil company by market value, Royal Dutch Shell, is likely to benefit most among the oil majors, analysts said. The company invested heavily in squeezing crude from bitumen-soaked soil in Alberta, and in extracting gas locked in coal beds in Australia and China, as it sought to rebuild its asset base after a reserves overbooking scandal in 2004.

But rivals including ConocoPhillips, Exxon and more recently BP Plc have also bet big on non-conventionals as oil-producing countries, flush with cash from crude prices above $100/barrel, increasingly keep their richest fields for their state oil companies to develop.

Reserves bookings are an estimate of how much oil and gas a company will extract from its fields, which allows investors to calculate future cash flows and so is probably the key industry measurement investors use for evaluation purposes.

The industry’s failure to grow its proven reserves in recent years has prompted investor fears for its long-term future, despite the industry’s claim that the current, restrictive classification for reserves painted too bleak a picture.

Even though a reclassification of fields doesn’t increase the amount of oil that will be recovered, it is likely to boost sentiment toward companies’ shares, van Parijs said, as it supports the companies’ argument that their performance has not been as bad as the headline numbers suggest.

The overhaul could also lead to more mergers.

“We believe that these rule changes could be the catalyst for a wave of acquisitions, with those companies with the largest unproved resource bases making juicy takeover targets for some of the larger cash-rich majors,” Neil McMahon, oil analyst at Bernstein said in a research note.

McMahon cited British gas producer BG Group Plc and Marathon Oil as potential targets. BG has stakes in deep-water Brazilian fields that are estimated to contain billions of barrels of recoverable oil, but which may not be booked for many years under existing SEC rules.

Marathon has investments in oilsands and shale, another hot unconventional source where companies crack open the shale rock with water jets to release natural gas locked inside.

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