Fitch: Oil and Gas Reserves Strong for Now; Pain Deferred Until Next Year

Oil and gas reserve growth was strong in 2014 with a median increase of 11% from the year prior, according to a Fitch Ratings study of 28 independent exploration and production (E&P) companies. However, Fitch expects sharply lower oil and gas prices seen year-to-date to result in substantial negative reserve revisions in 2015, and drag other operational metrics lower as well.

'The impact of low oil prices hasn't fully shown up in the numbers yet,' says Mark Sadeghian, Senior Director. Even if oil prices rebound in the near term, many upstream companies will see their 2015 metrics erode as their proven reserve base and organic reserve replacement metrics take a hit next year."

Using the SEC's first of the month convention for calculating average hydrocarbon prices, in early May 2015, the price of WTI oil averaged approximately $52, and gas $2.75/mcf, down from 2014 test prices of $94 and $4.48/mcf, respectively.

The impact of asset sales and restructurings continues to reverberate through the industry, with several larger E&Ps reporting year-over-year reserve declines in 2014 as a result. In addition, dry gas asset sales combined with capex shifts to liquids have increased liquids production at a number of companies. While Fitch doesn't expect the recent drop in oil prices to shift the industry's bias toward liquids and away from dry gas, the lower cash flows stemming from depressed oil prices are likely to slow this transition.

In 2014, pure shale play E&Ps saw the most dramatic reserve gains as they capitalized on the ongoing trend of efficiency gains. Companies that benefitted from this most include EQT Corp, Concho Resources, and Continental Resources, with 29%, 27% and 25% increases in proven reserves, respectively. These efficiency gains also resulted in a drop in median three-year finding, development and acquisition (FD&A) costs.

Other large gainers resulted from a combination of high organic reserve replacement and acquisitions, including Whiting Petroleum and Southwestern Energy with 78% and 54% increases in proven resources.