Low U.S. natural gas price seen sapping reserves, valuations

Fri Jan 18, 2013 1:14am EST
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By Braden Reddall and Anna Driver

SAN FRANCISCO/HOUSTON (Reuters) - When U.S. natural gas producers release their 2012 annual reports in the next several weeks, many companies may have to drastically reduce a key indicator of their financial health: reserves.

Even though U.S. natural gas prices have bounced away from the decade lows of last April, the country's Securities and Exchange Commission requires companies to calculate and report year-end oil and gas reserves using 12-month average prices.

Last year, the average price for natural gas at delivery point Henry Hub was $2.77 per million British thermal units, 30 percent below a year before, as big supplies from shale gas fields continued to weigh, according to Reuters data.

There is some dark irony here, since it was the industry itself that lobbied to change the SEC rule so that, from 2009, they could use a 12-month average instead of the year-end price.

This sharp price markdown will translate into big cuts to estimates of proved reserves. Reserves are important because they are used in determining the value of a company and are used in pricing loans.

"This is going to be a real issue for the companies with a lot of exposure to natural gas," said Neal Dingmann, oil and gas analyst with Suntrust Robinson Humphrey.

U.S. exploration and production companies likely to see large revisions include Ultra Petroleum Corp UPL.N, Cabot Oil and Gas Corp (COG.N: Quote), Southwestern Energy Co (SWN.N: Quote) and Chesapeake Energy Corp (CHK.N: Quote), analysts said.

Chesapeake and its Oklahoma City rival, Devon Energy Corp (DVN.N: Quote), have already taken gas reserves off the books, in a preview of what to expect when companies in the sector issue annual reports over the next six weeks.   Continued...