Earlier this month, I praised Forest Oil
While some companies, like EOG Resources
As with other natural gas-weighted exploration and production companies, Cabot saw a negative impact from prices, which were lower on a monthly average basis than they were on Dec. 31. This pulled a bit more than 101.6 billion cubic feet equivalent (Bcfe) out of the proved reserve category. That's a very small impact relative to the company's total reserves, which exceed 2 Tcfe. I take this as a sign that, as with Range Resources
Taking a slightly larger chunk out of reserves was the change in how E&Ps can book proved undeveloped (PUD) locations. In response to the SEC's initiative to get companies to be more realistic about locations that they plan to drill, Cabot removed virtually all PUDs booked more than five years ago.
I'm not clear on the quantity of PUDs the company booked under the new, more permissive SEC rule regarding offset locations, but the company noted that its percentage of PUDs rose by 5%, to 36% of total reserves. That's still on the low end. Chesapeake Energy
Cabot made a very important point in its release that all E&P investors should consider when assessing the conservatism of reserve reports this year. The future development cost associated with Cabot's PUD bookings (i.e., the money needed over the next five years to turn these claimed reserves into producing assets) is $1.1 billion. That's less than two years of cash flow at present rates.
Compare this situation to Petrohawk, which generated a level of cash flow comparable to Cabot over each of the past two years, but pegs future development capital at nearly $3.2 billion. That doesn't appear to leave a lot of wiggle room.
As annual reports get filed over the next few weeks, I'd suggest watching companies' anticipated future development costs like a hawk.
Fool contributor Toby Shute doesn't have a position in any company mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter. The Fool owns shares of Chesapeake Energy. The Motley Fool has a disclosure policy.