Proved Reserves (P1)

Proved Reserves (P1) are the estimated quantities of oil, natural gas, and other mineral resources that geological data and engineering data demonstrate with reasonable certainty to be recoverable in the future. These reserves must be extractable from known reservoirs under existing economic conditions, using current operating methods and government regulations. Think of P1 reserves as the most reliable and conservative estimate of an energy company’s underground assets—it’s the oil or gas that is not just physically there, but is also commercially viable to extract right now. This is the bedrock of an oil and gas industry company's valuation, as defined by regulatory bodies like the U.S. Securities and Exchange Commission (SEC). P1 reserves are the “sure things” that analysts, banks, and savvy investors focus on, standing in stark contrast to the more speculative Probable Reserves (P2) and Possible Reserves (P3), which carry lower degrees of certainty.

At its core, the concept of Proved Reserves is built on confidence and economic viability. It’s not enough for a geologist to say, “I think there's oil down there.” The company must have concrete data to back it up and a clear path to profitability.

The term “reasonable certainty” isn't just a fuzzy feeling; it's a high technical standard. For the SEC, it implies a high degree of confidence that the quantities will be recovered, which is generally interpreted in the industry as at least a 90% probability. To meet this standard, a company must demonstrate economic producibility, meaning it can make a profit extracting the resource at current commodity prices and with its current technology. If oil prices crash, a field that was once “proved” can lose that status overnight if it becomes too expensive to operate, highlighting how dynamic these figures can be.

Not all Proved Reserves are created equal. They are further broken down based on their development status, which tells an investor how close that resource is to generating cash.

• Proved Developed Producing (PDP): This is the gold standard. These are reserves being recovered right now from existing wells with equipment already in place. The metaphorical tap is on, and the cash is flowing. Companies rich in PDP reserves are typically stable cash generators.
• Proved Developed Non-Producing (PDNP): These reserves are ready to go but aren't currently producing. The well has been drilled and the necessary equipment is in place, but production might be temporarily halted for maintenance or to wait for a pipeline connection. They are just one step away from becoming PDP.
• Proved Undeveloped (PUD): These reserves are confirmed to be in a known reservoir but require significant additional investment to extract. This could mean drilling new wells or installing major new facilities. While still considered “proved,” PUDs carry more risk and require future capital expenditure (CapEx) before they can generate any revenue.

For anyone practicing value investing in the energy sector, P1 reserves are not just a data point; they are the central pillar of the entire investment thesis. They are the company’s primary income-producing asset—its inventory on the shelf, just waiting to be sold.

Understanding P1 reserves allows you to look past the noise of daily oil price fluctuations and assess the tangible value of a company.

1. Core of Valuation: P1 reserves are the main input for valuation models. A common industry metric is the PV-10, which calculates the present value of future net revenue from proved reserves, discounted at 10%. This gives a quick, though simplified, estimate of the company's asset value, allowing you to compare it to its market price.
2. Indicator of Health and Stability: Banks use P1 reserves as collateral for loans. A company with a large and growing base of proved reserves, especially PDP, is seen as financially stable with strong borrowing capacity.
3. Measure of Sustainability: The Reserve Replacement Ratio is a critical performance metric. It compares the amount of new proved reserves added in a year to the amount of oil and gas produced. A ratio consistently over 100% signals that the company is successfully finding or acquiring more reserves than it's selling, ensuring its long-term survival and growth. A ratio below 100% means the company is slowly liquidating itself.

While P1 reserves are the most reliable figures, a smart investor digs deeper to understand the nuances.

• The PUD Trap: Be wary of companies that report massive P1 reserves composed mostly of PUDs. It may look impressive, but it signals that huge amounts of future investment will be needed to turn those reserves into cash flow. A high proportion of PDP reserves is a much stronger sign of immediate financial health.
• Price Assumptions: Always check the commodity price assumptions used in the company’s reserve report. If management used an unusually high price to calculate its reserves, their reported value could be inflated and vulnerable to a price downturn.
• Execution Risk: Management’s track record matters. Do they have a history of converting PUDs to PDPs efficiently and on budget? A great asset in the ground is worthless without a competent team to get it out.