As Foolish investors we want to buy companies with growing earnings which will be around for decades to come. Twelve months ago this may have included energy producers Santos Ltd (ASX: STO) and Woodside Petroleum Limited (ASX: WPL).
But as low oil prices drag on there is a growing risk that, without the ample revenues to fund new capital intensive exploration projects, growing production will mean pools of energy reserves start to be depleted.
Santos announced in December that it will shed 26% ($500 million) from its 2015 expenditure budget targeting growth, while Woodside is planning on trimming back around 20% from its total 2015 capital expenditure plan.
At current rates of production, Woodside has approximately 14 years of reserves, while Santos has a longer reserve life of around 23 years. By comparison mid-tier producer Senex Energy Ltd (ASX: SXY) has around 27 years.
| Company | 2P Reserves(in mmboe¹) | Annual production² (in mmboe) | Approximate reserve life |
| Woodside Petroleum Limited (ASX: WPL) | 1,339 | 95.1 | 14 years |
| Santos Ltd (ASX: STO) | 1,245 | 54 | 23 years |
| Drillsearch Energy Limited (ASX: DLS) | 28.3 | 3.1 | 9 years |
| Senex Energy Ltd (ASX: SXY) | 39.9 | 1.47 | 27 years |
Source: company reports. Notes: ¹mmobe = million barrels of oil equivalent. ²Most recent 12 month period.
Total 2P (proved plus probable) reserves for both Woodside and Santos have been declining over the last three years, while Woodside is hitting record production and Santos expects to start increasing its rate of production helped by the start-up of the Queensland-based GLNG joint venture.
Without continued investment in exploration, reserve lives will continue to stall. The alternative is to funnel an increasing percentage of free-cash into trying to replace reserves in the short term which could mean lower distributions to shareholders.
One temporary solution is for producers with shorter reserve lives to buy production from other companies to meet long-term supply contracts, or acquire smaller producers to grow reserves. This is an approach Woodside has taken with the purchase of additional oil and LNG assets from Apache Corporation which could add between 3 to 4 mmboe of production in 2015.
Although long term the LNG industry faces the prospect of supply short-falls and increasing prices, the requirement to continually replace reserves under the current low oil prices could strangle returns for investors over the next five years.
