What Is a Reserve Report? (Part II)

This is the second of multiple posts discussing the most important information contained in a reserve report, the assumptions used to create it, and what factors should be changed to arrive at Fair Value^[1] or Fair Market Value^[2].

In our first post, we discussed the purpose of a reserve report, why they are important, how they are prepared and what is contained in the report. In this post, we discuss two of the most important inputs that go into every reserve report: production and pricing and why it may be appropriate to make adjustments to these inputs for purposes of Fair Value or Fair Market Value.

What Is a Reserve Report?

To recap, a reserve report is a reporting of remaining quantities of minerals which can be recoverable over a period of time. The current rules define these remaining quantities of mineral as reserves. The calculation of reserves can be very subjective, therefore the SEC has provided, among these rules, the following definitions, rules and guidance for estimating oil and gas reserves:

Reserves are “the estimated remaining quantities of oil and gas and related substances anticipated to be economically producible.
The estimate is “as of a given date.”
The reserve “is formed by application of development projects to known accumulations.” In other words, production must exist in or around the current project.
“In addition, there must exist, or there must be a reasonable expectation that there will exist, the legal right to produce or a revenue interest in the production of oil and gas.”
There must also be “installed means of delivering oil and gas or related substances to market, and all permits and financing required to implement the project.”
Therefore, a reserve report details the information and assumptions used to calculate a company’s cash flow from specific projects which extract minerals from the ground and deliver to the market in a legal manner.

In short, for an E&P company, a reserve report is a project-specific forecast. If the project is large enough, it can, for all intents and purposes, become a company forecast.

Production

In our first post, we summarized 12 significant assumptions made in a reserve report. Production is an important input that goes into every reserve report. Production revolves around the estimate of current and future oil and gas removed from the resource play. To organize the certainty of future production forecasts, the SEC requires the use of three categories: (1) Proved, (2) Probable, and (3) Possible. These categories have the following definition:

Proved: An estimate that is reasonably certain. There must be at least a 90% probability that the actual quantities recovered will equal or exceed the estimate. Therefore, economic producibility: proved oil and gas reserves are those quantities which can be estimated with reasonable certainty to be economically producible from a given date forward from known reservoirs and under existing economic conditions, operating methods and government regulations. Economic producibility must be based on existing economic conditions.
Probable: An estimate that is as likely as not to be achieved and when using a probabilistic method, there must be at least a 50% probability that the actual quantities recovered will equal or exceed the estimate.
Possible: An estimate that might be achieved, but only under more favorable circumstances than are likely and, when using a probabilistic method, there must be at least a 10% probability that the actual quantities recovered will equal or exceed the estimate.

The production assumptions might be the most important assumption within the reserve calculation. Careful attention should be utilized in the estimation of future production. Use of a certified reserve engineer is highly encouraged for this assumption. If the production and decline curves are prepared in an appropriate manner, no adjustment to this input is needed for Fair Value or Fair Market Value, unless hypothetical conditions are to be applied. In which case, adjustments need to be made for matching the valuation date with the production forecast date.

Pricing

Reserve reports allow for two types of pricing assumptions for the future estimate at which the minerals are assumed to be sold in the market place. The first SEC rule states (1) companies should use the average of the first day of the month price for the previous 12 months; therefore, an average of the previous year (historical pricing); and (2) the SEC also allows for use of contract prices if future production is contractually guaranteed at certain pricing. This type is forward-looking.

For the most part, reserve reports use historical prices in their analysis. This assumption should be challenged for possible replacement in Fair Value or Fair Market Value analysis.

In these types of situations, future expectation is appropriate to utilize in the reserve calculation. Therefore, a forward-looking price assumption, frequently called a “price deck,” should be considered.

Forward-looking price assumptions come in the form of futures contracts which are based on certain amounts of crude oil/natural gas delivered in certain future months. These types of futures contracts are traded daily on various exchanges^[3] and include contracts for delivery as far out as 60 months or longer in some instances.

Therefore, with the available information and forward-looking purpose of Fair Value and Fair Market Value analyses, strong consideration should be made to replace a historical price deck with a forward-contract price deck. Additionally, incorporation of differentials and local pricing should also be considered when using a price deck based on futures contracts.

A Plug for Mercer Capital

Mercer Capital has significant experience valuing assets and companies in the energy industry. Because drilling economics vary by region it is imperative that your valuation specialist understands the local economics faced by your E&P company. Our oil and gas valuations have been reviewed and relied on by buyers and sellers and Big 4 Auditors. These oil and gas related valuations have been utilized to support valuations for IRS Estate and Gift Tax, GAAP accounting, and litigation purposes. We have performed oil and gas valuations and associated oil and gas reserves domestically throughout the United States and in foreign countries. Contact a Mercer Capital professional today to discuss your valuation needs in confidence.

Endnotes

^[1] “The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” – FASB Glossary

^[2] “The price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts” – U.S. Treasury regulations 26 C.F.R. sec. 20.2031-1(b)

^[3] Chicago Mercantile Exchange, New York Mercantile Exchange, Intercontinental Exchange

Haynesville Shale M&A Update: 2025 in Review

Key TakeawaysHaynesville remains a strategic LNG-linked basin. 2025 transactions emphasized long-duration natural gas exposure and proximity to Gulf Coast export infrastructure, reinforcing the basin’s importance in meeting global LNG demand.International utilities drove much of the activity. Japanese power and gas companies pursued direct upstream ownership, signaling a shift from traditional offtake agreements toward greater control over U.S. gas supply.M&A was selective but meaningful in scale and intent. While overall deal volume was limited, announced transactions and reported negotiations reflected deliberate, long-term positioning rather than opportunistic shale consolidation.OverviewM&A activity in the Haynesville Shale during 2025 was marked by strategic, LNG-linked transactions and renewed international investor interest in U.S. natural gas assets. While investors remained selective relative to prior shale upcycles, transactions that did occur reflected a clear pattern: buyers focused on long-duration gas exposure, scale, and proximity to Gulf Coast export markets rather than short-term development upside.Producers and capital providers increasingly refocused efforts on the Haynesville basin during the year, including raising capital to acquire both operating assets and mineral positions. This renewed attention followed a period of subdued transaction activity and underscored the basin’s continued relevance within global natural gas portfolios.Although the Haynesville did not experience the breadth of consolidation seen in some oil-weighted plays, the size, counterparties, and strategic motivations behind 2025 transactions reinforced the basin’s role as a long-term supply source for LNG-linked demand.Announced Upstream TransactionsTokyo Gas (TG Natural Resources) / ChevronIn April 2025, Tokyo Gas Co., through its U.S. joint venture TG Natural Resources, entered into an agreement to acquire a 70% interest in Chevron’s East Texas natural gas assets for $525 million. The assets include significant Haynesville exposure and were acquired through a combination of cash consideration and capital commitments.The transaction was characterized as part of Tokyo Gas’s broader strategy to secure long-term U.S. natural gas supply and expand its upstream footprint. The deal reflects a growing trend among international utilities to obtain direct exposure to U.S. shale gas through ownership interests rather than relying solely on long-term offtake contracts or third-party supply arrangements.From an M&A perspective, the transaction highlights continued willingness among major operators to monetize non-core or minority positions while retaining operational involvement, and it underscores the Haynesville’s attractiveness to buyers with a long-term, strategic view of gas demand.JERA / Williams & GEP Haynesville IIIn October 2025, JERA Co., Japan’s largest power generator, announced an agreement to acquire Haynesville shale gas production assets from Williams Companies and GEP Haynesville II, a joint venture between GeoSouthern Energy and Blackstone. The transaction was valued at approximately $1.5 billion.This acquisition marked JERA’s first direct investment in U.S. shale gas production, representing a notable expansion of the company’s upstream exposure and reinforcing JERA’s interest in securing supply from regions with strong connectivity to U.S. LNG export infrastructure.This transaction further illustrates the appeal of the Haynesville to international buyers seeking stable, scalable gas assets and highlights the role of upstream M&A as a tool for portfolio diversification among global utilities and energy companies.Reported Negotiations (Not Announced)Mitsubishi / Aethon Energy ManagementIn June 2025, Reuters reported that Mitsubishi Corp. was in discussions to acquire Aethon Energy Management, a privately held operator with substantial Haynesville production and midstream assets. The potential transaction was reported to be valued at approximately $8 billion, though Reuters emphasized that talks were ongoing and that no deal had been finalized at the time.While the transaction was not announced during 2025, the reported discussions were notable for both their scale and the identity of the potential buyer. Aethon has long been viewed as one of the largest private platforms in the Haynesville, and any transaction involving the company would represent a significant consolidation event within the basin.The reported talks underscored the depth of international interest in Haynesville-oriented platforms and highlighted the potential for large-scale transactions even in an otherwise measured M&A environment.ConclusionWhile overall deal volume remained selective, the transactions and reported negotiations in 2025 reflected sustained global interest in U.S. natural gas assets with long-term relevance. Collectively, the transactions and negotiations discussed above point to a Haynesville M&A landscape driven less by opportunistic consolidation and more by deliberate, long-term positioning. As global energy portfolios continue to evolve, the Haynesville basin remains a focal point for strategic investment, particularly for buyers seeking exposure tied to U.S. natural gas supply and LNG export linkages.

What Is a Reserve Report? (Part II)