HOUSTON—Burdened by a year filled with low oil and natural gas prices that have made drilling uneconomical in some areas and limited access to capital, the 50 largest U.S. E&P companies were forced to revise down oil and gas reserves in 2015.

Downward reserve revisions totaled 4.1 billion barrels (Bbbl) of oil and 40 trillion cubic feet (Tcf) of gas, according to Ernst & Young’s (EY) U.S. oil and gas reserves study released June 14. Year-end 2015 oil reserves dropped 12% to 24.1 Bbbl, while year-end gas reserves plummeted 21% to 147 Tcf, compared to 2014. The large, mainly oil-focused, independents were impacted the most, with end-of-year reserves falling 16%.

The main reasons: pricing and liquidity.

“Drilling is no longer economical at $55 to $60 a barrel,” said Herb Listen, a U.S. oil and gas assurance leader for EY, compared to $90/bbl in 2014. Plus, some proved undeveloped reserves that were on companies’ books in 2014 had to be removed in 2015, “even though they were economical because oil and gas companies didn’t have liquidity or access to capital to be able to develop them.”

However, as John Russell, oil and gas assurance partner for EY, pointed out: the resources are still present, although they fail to meet what the U.S. Securities and Exchange Commission defines as proved developed reserves.

“They may come out of the proved category when this happens,” but they will be probable and possible, he said, adding the likelihood is high that those volumes will be future proved reserves.

The revisions came as the largest E&Ps in the U.S. saw their revenue fall by 41% to $129.8 billion, while capex fell by the same percentage to $117.5 billion in 2015 compared to the previous year, amid the global hydrocarbon supply-demand imbalance, according to the study. The largest downward revisions were reported by:

  • ConocoPhlilips, 269 million barrels (MMbbl);
  • Occidental Petroleum, 248 MMbbl; and
  • Continental Resources, 246.8 MMbbl.

Part of the challenge for some independents in the study is that funding was obtained through reserve-based lending (RBL)—essentially banks providing companies a line of credit or access to future borrowings based on a percentage of their proved reserves, Listen said.

“As these proved reserves have been coming down the amounts available to companies via RBL agreements have been coming down,” he said. The situation has presented obstacles for some independents’ ability to weather lower oil prices.

Production Up

Despite low commodity prices, the top E&Ps produced more oil and gas in 2015 than in 2014 although they fetched less money for it.

The study showed oil production increased 10% from 2.1 Bbbl in 2014 to 2.4 Bbbl in 2015. BHP Billiton, 22.7 MMbbl; Encana, 20.2 MMbbl; and Chevron, 17.0 MMbbl, posted the largest increases.

Gas production also rose in spite of lower prices. Production by the top E&Ps grew by 2% from 13.4 Tcf in 2014 to 13.6 Tcf in 2015, the study revealed. Combined, Southwestern Energy, Antero Resources and EQT increased production by more than 100 Bcf.

Exploration Down

The story was not the same for exploration and development activity. The number of net exploratory wells drilled by the top 50 U.S. E&Ps dropped by 41% to 957 in 2015, the study showed. The development well count also fell—tumbling 31% to 10,677.

Oil extensions and discoveries dropped to 3.1 Bbbl, but managed to stay above 2011 levels. “Activity still continues albeit at a lesser pace,” Listen said.

In contrast, gas discoveries and extensions fell to 18.7 Tcf in 2015, compared to 29.6 Tcf in 2014 and 26.7 Tcf in 2011.

M&A

There was also less M&A activity than expected in 2015. The major deals were Noble Energy’s $3.9 billion acquisition of Rosetta Resources and WPX Energy’s $2.35 billion acquisition of RKI Exploration & Production.

“While many expect an uptick in asset sales due to oil and gas companies’ need for capital, the most valued E&P assets in this current environment are frequently the lifeblood of their companies’ operations,” Mitch Lane, oil and gas transactions leader for EY’s southwest region, said in a press release. “As a result, the bid-ask spreads for quality, producing properties and declining values of some non-producing properties have hindered transactions and private equity investment thus far.”

EY believes companies with solid balance sheets that are comfortable making deals in today’s environments will acquire properties that are strategic to their portfolios. But don’t expect to see such companies acquiring others loaded with debt.

The study showed that purchases of oil reserves were 517 MMbbl, while sales were 627 MMbbl. On the gas side, purchases were 2 Tcf, while sales were 7.4 Tcf.

“There’s been an explosion in terms of growth due to new technologies, new innovation. Development of new reserves over the past decade has been positive for this industry,” Listen said. “But now we find ourselves in a very challenging environment as a result of low oil prices due to the perceived abundance of oil and the actions that have been taken by OPEC over the last year and a half, and that has created the situation that companies are in today.”

It’ll be interesting to see how 2016 ends, he added, suspecting it will look similar to 2015 unless commodity prices rally—something for which he hopes.

The U.S. Energy Information Administration projects the oil price will average $40 in 2016 and $51 in 2017. The gas price is forecast to average $2.32 this year, improving to an average of $3.11 next year.

For the study, EY independently collected and examined E&P industry trends based on publicly available data—such as financial statements, annual statements and footnote disclosures—for the top 50 U.S. E&P companies. The companies did not review the study’s findings.

Velda Addison can be reached at vaddison@hartenergy.com.