Step aside, proved developed reserves. You are merely the reassuring base line whose cash flow and value are so assumed that investors, analysts-and certainly asset buyers-have grown complacent about you. Today, proved undeveloped (PUD), probable and even possible reserves have taken greater significance for asset buyers, investors looking for the next hot growth stock, and bankers who loan against reserves. Undeveloped acreage in a marquee play such as tight-gas, shales or coalbed methane is now the hottest asset in the industry. That much was clear in August, when the industry flocked to Denver for two key events, the 17th Rocky Mountain Natural Gas Strategy Conference sponsored by the Colorado Oil & Gas Association, and The 10th Annual Oil & Gas Conference, hosted by EnerCom Inc. Both events saw record attendance. Again and again, executives who spoke emphasized their acreage positions, their drillable locations, well-spacing and down-spacing. State regulatory agencies that approve more wells are the upstream industry's friends. Yet even as companies sought bragging rights on their land positions and growth opportunities, we've seen this year how quickly they are willing to sell those same precious assets into a frothy marketplace for more than $2 per thousand cubic feet equivalent. Operators who used to systematically drill all locations to prove up the size and areal extent of a field and unlock its entire value, now sell it. Today, they drill fewer wells, prove up maybe a third or half of the potential, then entice buyers by putting the rest of the PUDs on the table. It's not uncommon to hear executives of E&P start-ups say they intend to drill just enough locations to prove the point and then attract buyers looking for drilling opportunities. "Cash-rich, opportunity-short" describes some players. Medicine Bow in Denver began two years ago and just sold for $814 million. Celero Energy in Midland began at about the same time and just sold for $802 million. It is not uncommon for press releases to tout how many acres a company has amassed in a play or basin. Bill Barrett Corp. has 970,000 acres of net undeveloped leases in the Rocky Mountain region. Southwestern Energy has 770,000 in one play, the emerging Fayetteville Shale in Arkansas. In June, Simmons & Co. International analyst Mark Meyer initiated coverage of seven E&P companies he calls "story stocks." Normally these relatively small companies would not be a Buy because they command premium valuations based on traditional metrics like cash flow multiples or proved reserves. But Meyer still thinks they are worth a look. Why? What they have in common, and attracts Meyer, is geographic concentration in unconventional natural gas plays, and they hold a disproportionate amount of undeveloped acreage for their size. The seven are Bill Barrett Corp., Delta Petroleum, Goodrich Petroleum, Gasco Energy, Quicksilver Resources, Range Resources and Southwestern Energy. "We believe the key [to these stocks] is a detailed, risk-adjusted quantification of the unproved acreage and its potential impact on net asset value...and to assess a variety of scenarios with respect to the pace of development of their out-sized acreage positions...," Meyer says. We see this when a company picks up acreage in a hot play like the Barnett Shale or the Piceance Basin and its stock goes up on the announcement. When did locations and raw acreage become so cool? Across the industry, companies are restructuring their asset mix to change the PUD outlook. For Forest Oil, after two years of retooling the business model, some 43% of the company's proved reserves are new to the portfolio. When it bought the Buffalo Wallow Field, it paid for 40 locations but identified 370. Every business unit in the company now has at least one growth play in it. Forest Oil has more than 1 million undeveloped acres in Alaska and its Permian Basin holdings have tripled in 18 months. Another company that has radically changed its reserve profile is Noble Energy. Pro forma for its acquisition of Patina Oil & Gas, it has gone from 73% of reserves being abroad and having a company-wide average six-year reserve life, to having 49% of its reserves domestic and onshore. It has identified 200 million barrels of oil equivalent of unproved oil assets and has 750 projects in Colorado's Wattenberg Field alone. Pogo Producing Co. chairman and chief executive Paul G. Van Wagenen says Pogo is turning a new page-selling its Thailand assets and buying Northrock Resources in western Canada. "We see this transition providing the basis for significant and continuing growth in both reserves and production." He has bumped up Pogo's capital budget 52%. A drilling slow-down initially projected to last through 2005 is canceled. Resuming aggressive drilling in the second half of this year will add back 75 of the postponed wells. More than ever before, the prize today is PUDs and possibles. They are as much a commodity as production used to be.

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