RBN Takes A Look At Need For M&A -- May 6, 2024

Locator: 47073B.

WTI: $78.76.

Tuesday, May 7, 2024: 8 for the month; 72 for the quarter, 271 for the year
37106, conf, BR, Carlsbad 3A UTFH,

Monday, May 6, 2024: 7 for the month; 71 for the quarter, 270 for the year
39348, conf, Hess, TI-T Lalim-157-95-0214H-3,

Sunday, May 5, 2024: 6 for the month; 70 for the quarter, 269 for the year
40277, conf, BR, Carlsbad 1B UTFH,

Saturday, May 4, 2024: 5 for the month; 69 for the quarter, 268 for the year
39465, conf, Hess, EN-Bakke-157-93-1522H-6,

RBN Energy:  E&Ps' 2023 organic reserve replacement metrics weaken, spurring M&A consolidation. Archived.

U.S. E&Ps’ dramatic strategic shift from prioritizing growth to focusing on cash flow generation and shareholder returns has resulted in more earnings-call talk about dividends and share buybacks and less discussion about efforts to replenish and build their proven oil and gas reserves — a critically important factor in establishing company value. The emphasis on financial results has largely masked a sizable increase in the costs E&Ps are incurring to organically replace their reserves and a significant decrease in the volumes replaced. In today’s RBN blog, we’ll analyze the weakening in reserve replacement metrics over the last two years, a trend that has led many producers to grow their reserves through M&A. 

First, let’s define oil and gas reserves and review how they are reported by producers. As we explained in an earlier blog on reserve replacement, proved reserves are quantities of crude oil, natural gas and NGLs assumed to have at least a 90% chance of eventual recovery under existing economic and operating conditions. Oil and gas companies are mandated to report their proved reserves annually in their 10-Ks. The changes result from several factors:

• Extensions and discoveries, the most impactful, are reserves unlocked through the development of existing fields and successful exploration of new properties. These additions are funded by the company’s annual organic — or “finding and development” — capital spending. The level and effectiveness of this investment is critical to the long-term sustainability of an E&P.
• Revisions of previous estimates primarily result from changes in commodity prices — lower prices can make certain volumes uneconomic to produce, while higher realizations nudge volumes into the proved category. Poor well performance can also reduce estimates of future recoverable volumes from a field.
• Purchases and divestitures reflect the net result of M&A activity.
• Production volumes are subtracted from beginning-of-year reserves and current-year reserve additions to arrive at current year-end reserves.