By Tatyana Shumsky and Erin Ailworth 

The recent run-up in crude oil prices may offer a brighter outlook for energy companies, but a key accounting metric is likely to show the sector isn't out of the woods just yet.

As energy companies prepare their annual reports, they will be calculating a so-called standardized measure of reserve value. This dollar figure acts as a basis for direct comparison among companies.

Oil prices have rallied 43% this year, but oil-and-gas producers including Apache Corp., Chesapeake Energy Corp. and Pioneer Natural Resources Co. are expected to report a lower standardized measure in 2016 than 2015. That is because the Securities and Exchange Commission requires companies to use historic prices in the calculation.

The SEC price is the average of physical oil prices on the first day of the month of the past 12 months. That average for 2016 is down 15% from the 2015 figure. "There's going to be a mismatch there between accounting and reality," said Robert Thummel, managing director and portfolio manager at Tortoise Capital Advisors.

The disconnect comes at a vulnerable time for the sector. Oil prices plunged to a low of $26.21 in February after exceeding more than $100 a barrel in 2014. Depressed prices triggered asset impairments, losses and bankruptcies across the energy industry.

Standardized-measure figures slumped in step with oil prices. Apache's standardized measure, for example, was $10.6 billion in 2015, compared with $31.7 billion in 2014, according to company filings.

Pioneer's standardized measure was $3.2 billion in 2015, compared with $7.8 billion in 2014, according to annual company filings. Chesapeake's standardized measure was $4.7 billion in 2015, compared with $17.4 billion in 2014, company filings show.

While prospects for the industry have recovered as prices climbed back above $50 a barrel in recent months, investors remain cautious. The profitability of reserves is a primary concern. "This disclosure is going to be lower than what they would like to portray if they were using more recent prices," said Alan Stevens, assurance partner at BDO's energy practice.

Finance executives in the energy sector can choose between different accounting methods to value their proved developed reserves, as well as different variables when estimating confirmed, yet undeveloped reserves, which can result in vast differences.

By contrast, the SEC's standardized measure provides an annual snapshot that is consistent across the industry. The metric requires companies to estimate expected oil and gas sales from their properties using historic prices, subtract expected operating and development costs and taxes, and discount those figures by 10%.

"It's gospel because it's the SEC-required reporting number, but it's not a complete surprise when it comes out," said Gary Clark, vice president of investor relations at Apache. Institutional investors and analysts often seek guidance on the direction of the standardized measure throughout the year, he said.

After the numbers are out, investors sift for any outliers, such as higher future development costs at a time when the company had said those costs were falling, he said. "They will look at what you produced and what you sold, and if at the end of the year you're left with not as much as was there, they will start to ask questions."

Cost is the one input that varies from company to company when calculating the standardized measure. Development costs and the success of exploration efforts differ substantially by region and type of operation.

Chesapeake has seen its completion cost for wells in South Texas cut nearly in half during the past year or so. In the third quarter, it cost the company $246 per lateral foot to complete a well, compared with $478 in the second quarter of 2015.

The company is also doing more work with fewer drilling rigs. "Today 10 rigs at Chesapeake drill as much lateral footage as 35 rigs did in 2013," Jason Pigott, Chesapeake's executive vice president of operations and technical services, said at the company's analyst day in October.

Drilling and completion costs for wells fell by 35% since the end of 2014 for Pioneer in some areas of the Permian Shale in West Texas.

Such improvements have helped break-even costs decrease in shale basins across the U.S. by as much as $22 a barrel, according to research from energy-consulting firm Wood Mackenzie.

Companies that have been able to bring down their costs substantially also could surprise investors with a less pronounced drop in their standardized-measure figures, said Mr. Thummel. "That is the offset that could be interesting."

Write to Tatyana Shumsky at tatyana.shumsky@wsj.com and Erin Ailworth at Erin.Ailworth@wsj.com

 

(END) Dow Jones Newswires

December 26, 2016 17:46 ET (22:46 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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