What it is:
A reserve report is filed by companies in the oil and gas industry. It estimates remaining quantities of oil and gas (reserves) expected to be recovered from existing properties.
How it works (Example):
The Securities Exchange Commission (SEC) mandates reserve reporting requirements for the industry.
Oil and gas companies report reserves in categories based on a minimum estimated percentage probability of eventual recovery and production, as follows: proved (90% probable), probable (50% probable), and possible (10% probable).
Proved reserves are required to be reported and reflect "reasonable certainty" of recovery. Proven reserves must be further categorized as developed (from existing wells) or undeveloped.
Why it Matters:
Since oil and gas are depleting assets (meaning they get used up), it's important for a company to accurately report the longevity and earnings sustainability of existing assets. A company with strong reserves relative to the industry bodes well for future earnings and vice versa.
Reserves are particularly important with royalty trusts because they cannot acquire additional properties and earnings will diminish as the oil and gas depletes.