More Questions About Chesapeake’s Reserves

Last week, Chesapeake Energy wiped 4.6 trillion cubic feet of oil and gas reserves off its books.

The Oklahoma City company is focusing on oil and drilling in areas that produce valuable petroleum liquids as well as natural gas. Those write downs represented about 24 percent of the company’s total reserves, Forbes reported in a piece that questioned whether Chesapeake should be buying land that’s uneconomical to drill.

The Wall Street Journal has other questions about Chesapeake’s reserves, namely whether or not they’re overestimated.

Reporter Matt Wirz’s questions center on third-party verification of oil and gas reserves, which is industry standard but not required by the Securities and Exchange Commission.

Independent firms produced 77 percent of Chesapeake’s reserve estimates in 2011; but third-party firms produced 89 percent of the reserve estimates at each of nine Chesapeake competitors, the WSJ reports. “Chesapeake’s crosstown rival,” Devon, targets about 90 percent for independent review. At SandRidge Energy, another crosstown competitor, that number is about 95 percent.

The worry for Chesapeake is that its level of oversight could cause high reserve estimates, leading to excessive write-downs in the future. Historically, Chesapeake’s write-downs have been in line with industry averages, according to a review of estimate revisions from 2006 to 2011.

Most of the revised estimates Chesapeake announced last week “were initially prepared by an independent engineer,” the WSJ reports:

Nevertheless, they reflect Chesapeake’s aggressive booking of undeveloped gas reserves, said Duane Grubert, an analyst at brokerage Susquehanna International Group LLP. The write-down makes Chesapeake “the number one cutter of reserves,” he added.

William Kazmann, president of LaRoche Petroleum Consultants in Dallas tells the WSJ he’d be more comfortable if 85 percent of Chesapeake’s reserves were independently audited.

Chesapeake’s lower figure, he added, “doesn’t make me unduly uncomfortable, but I’d rather see a higher number.”


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