Proved + Probable (2P)

Proved + Probable (2P) is a standard classification used in the oil and gas industry to estimate the volume of recoverable Hydrocarbons (like oil and natural gas) in a reservoir. Think of it as a geologist's best-educated guess, balancing certainty with strong potential. It represents the sum of Proved Reserves (1P)—which are virtually certain to be recovered—and Probable Reserves, which are resources that are likely, but not yet guaranteed, to be commercially extracted. For an investor, the 2P figure provides a more optimistic, yet still reasonable, picture of an energy company’s assets than the ultra-conservative 1P measure alone. It’s a crucial number because these Reserves are the company's core asset and the source of all future revenue. Understanding the quality and likelihood of these underground assets is fundamental to figuring out what an energy company is truly worth.

For a value investor, buying a stock is like buying a piece of a business. In the oil and gas sector, the “business” is essentially a portfolio of underground assets waiting to be drilled, produced, and sold. The 2P classification is your best window into the realistic size of that portfolio. While regulators like the SEC in the United States focus heavily on the most conservative 1P number for official filings, relying solely on it can be like valuing an apple orchard based only on the apples already in the basket, ignoring the healthy, growing fruit still on the trees. The 1P reserves are the “apples in the basket.” The Probable reserves are the “apples on the tree” that have a very good chance of ripening. By using 2P reserves, a value investor can get a more complete picture of a company's potential future Cash Flow and perform a more comprehensive valuation, such as calculating the firm's Net Asset Value (NAV). It allows you to see not just what the company has today, but what it's very likely to have tomorrow, helping you spot undervalued companies that the market might be overlooking.

To truly grasp 2P, it helps to see where it fits within the full range of reserve estimates. Geologists and engineers classify reserves based on their degree of certainty.

This is the gold standard of reserves. To be classified as “Proved,” there must be a high degree of certainty (typically defined as at least a 90% probability) that the hydrocarbons can be recovered commercially under current economic conditions, using existing technology. Think of this as the money that is already in the company's bank account. It's the most reliable and conservative figure.

These are reserves that are not yet “Proved” but have a reasonable level of confidence (typically a greater than 50% probability) of being recovered. They might be located in undrilled areas near a proved field or require more data to confirm their full extent. Adding these to the 1P number gives you the 2P figure. Think of this as a year-end bonus that your boss has promised, but hasn't yet put in writing. It's likely to come through, but you wouldn't spend it just yet.

This is the next layer of potential. “Possible” reserves have a lower chance of being recovered than probable reserves (typically 10% to 50% probability). These are more speculative and might be based on less geological data. When you add Possible reserves to the 2P figure, you get Proved + Probable + Possible (3P), which is the most optimistic (and riskiest) estimate. Think of this as a lottery ticket; it's a nice-to-have, but you can't build your financial plan around it.

Don't just take the 2P number at face value. A savvy investor digs a little deeper.

Every year, oil and gas companies publish a detailed Reserve Report, often audited by an independent third-party engineering firm. Read it! Pay attention to the breakdown. A company whose 2P reserves are 80% Proved and 20% Probable is a much lower-risk investment than one whose 2P reserves are 40% Proved and 60% Probable.

Great companies don't just sit on their reserves; they actively work to upgrade them. A key sign of a competent management team is a strong track record of converting Probable reserves into Proved reserves through successful drilling and appraisal. This process is a key part of Reserve Replacement—proving that the company can replace the oil and gas it produces each year. A high conversion rate means the company is effectively turning potential into reality.

Reserve estimates are not static; they are heavily influenced by the price of oil and gas. A reservoir that is profitable to drill at $90/barrel might be uneconomic at $50/barrel. Always check the commodity price assumptions used in the reserve report. If the company is using an unrealistically high price to calculate its reserves, its 2P number might be inflated. Compare their assumptions to current market prices and long-term forecasts to see if they are being realistic or overly optimistic.