Oil and Natural Gas Reserves

Thursday, December 21, 2006

Expect More Acquisitions in the Oil and Gas Industry

There will likely be more acquisitions in the oil and gas sector, as it is currently cheaper for larger E&P's to acquire oil and gas properties than develop them. For data on the costs of acquiring verses developing oil and gas reserves, see page 20 of this [presentation http://www.oxfordenergy.org/presentations/exploration_production.pdf].

It is more and more difficult for larger Exploration and Production companies to expand, let alone replace oil and gas production year to year. Oil and natural gas production growth for the oil and gas majors over the last three years has averaged less than 5% (see page 17 of this [presentation http://www.oxfordenergy.org/presentations/OilIndustryTrends.pdf] for the data.

90% of the world's oil reserves are located in OPEC countries and the Former Soviet Union, according to the EIA. These countries in general have very restrictive policies towards reserve development for foreign companies. A small or mid-sized independent E&P company with good reserves in politically favorable countries (US, Canada, Australia, EU, New Zealand for example) is very attractive acquisition candidate to larger oil and gas firms given the current situation.

An excellent start to determine which oil and gas firms are attractive acquisition candidates are the reserve valuations of the oil and gas firms compared to their reserves of oil and gas. This data can be found in the first post to this blog.

The very best analysis would be geological analysis of each producing field of the oil and gas firms. I am not a petroleum geologist but a geologist would have a distinct advantage in analysing an E&P co if he/she looked at the geological data for each producing field. This would give a highly detailed view of the future production of each company. It is almost certain that a larger oil firm looking at another firm to acquire would have its team of geologists review their petroleum data.

Every public firm is required by the SEC to have their oil and gas fields reviewed and audited once a year by a repuable outside firm, such as Miller and Lents. It is better if there are two auditing firms, but this is unusual. SThe auditor gives an investor some measure of certainty that the reserves are not misstated, but a detailed, geological view would be a better piece of data for the diligent investor.


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