2010 SEC Reserve-Reporting Rules May Affect M&A Deal-Making As Soon As Now

More timely portfolio management, resulting from following new SEC reserves-reporting guidelines at year-end 2009, may improve transaction values for E&P companies when putting assets on the market.

This is among observations by reserves-evaluation and asset-marketing experts in a webinar today, “More, Better: E&P Enterprise Valuation Under New Reserve-Reporting Rules,” hosted by OilandGasInvestor.com. (The 60-minute webinar is archived at the following for post-event sign-up and review: https://www.oilandgasinvestor.com/webinar/200901_epenterprise. The webinar will be archived for 12 months.)

“Petroleum engineers will typically use the time that is available to them,” says Mark Roach, senior vice president, technical resources, with The Oil & Gas Asset Clearinghouse of the SEC’s new 12-month/year reserves-analysis rule. It allows monthly evaluation of reserves, compared with the old practice of year-end-only analysis. E&P companies’ reservoir-evaluation engineers may now be more familiar with the companies’ reserves—and their worth—on a monthly basis.

“You’ll see some transactions and portfolio management occur earlier than in the past,” Roach says.

Scott Rees, chairman and chief executive officer of reservoir-evaluation firm Netherland, Sewell & Associates Inc., describes the SEC’s new view of a five-year rule on booking proved reserves. The point isn’t to say that only reserves that can reasonably be produced in only the next five years is bookable as proved.

“The SEC says five years is a reasonable plan of development. Anything past five years, there should be some circumstance that makes sense for (booking) that.”

For example, an operator may have a several-year history of drilling 20 wells per year in a play with predictable results, and all indications are that this program will continue beyond five years. The operator may have a good claim to book more of the reserves as proved than only what may be drilled in the next five years.

Geoff Roberts, senior vice president, negotiated transactions, for The Oil & Gas Asset Clearinghouse, says the regime opens the company-reporting process to serious potential for misuse or abuse by aggressive public companies.

The definition of proved, undeveloped, producing (PUD) reserves is now less strict, he says. “Purchasers are going to have their hands full in sorting through these PUDs.” They will have to be clear as to the nature of the PUDs that are being reported. “What kind of PUDs are these?”

As for probable and possible reserves, these will gain credibility and value, he adds.

Ron Gajdica, managing director of M&A advisor Scotia Waterous, says the past definitions “really made no sense” in terms of the nature of each oil and gas company’s unique assets and development programs. Under new practices, U.S. companies’ value on the market will improve, and Canadian companies—that report reserves under U.S. rules—will benefit even more. The new rules give greater regard to oil-sands assets than in the past.

Rees notes that more reserves may be booked based on proprietary technology. The SEC isn’t asking companies to disclose their proprietary technologies but companies will certainly need to give the investor some reasonable idea of how and why it works, he says.

The rules are not in effect for another year, yet E&P companies are already affected by them, he notes.

Roach says that deal-making in 2010 will certainly be under a new reserve-evaluation regime. However, “in 2009, there will be some tangible effects of this rule change…on evaluation and transactions.”

While M&A activity is at a virtual standstill in the current commodity-price down-cycle—sellers are reluctant to divest—the new practices’ affect on transaction values may be overshadowed, Roach adds, but this will change.

Roberts expects some of the new definitions will be pushed to the edge—maybe beyond. “PUDs from new technology…I think you’re going to see companies now trying to book entire trends.”

He concludes, “A year from now, it will be interesting to see how the subjective process works.”