Proven reserves are one of the first things investors look at when valuing oil and gas companies. 

#-ad_banner-#Proven reserves are defined as the quantity of energy sources estimated with reasonable certainty to be recoverable from established or known reservoirs under existing operating conditions. In other words, it’s the amount of oil and gas that a company has the means to extract. 

As long as the company has the capital, the expertise and the resources to get that oil and gas out of the ground, it’s a gold mine for investors. Even better, when a company increases its proven reserves, it becomes a lot more valuable.

One oil and gas company that recently doubled the proven reserves of its key project is Pengrowth Energy (NYSE: PGH), which explores for oil and gas in the Canadian provinces of Alberta, British Columbia, Saskatchewan and Nova Scotia.

StreetAuthority first brought PGH to investors’ attention in May 2011. Over the past few years, Pengrowth has been selling off non-core assets to raise money to fund its crown jewel: its Lindbergh thermal oil project. Last year, Pengrowth sold more than $1 billion in assets to fund the first phase of the Lindbergh project, which is expected to produce 12,500 barrels of oil equivalent (BOE) per day.

The Lindbergh project continues to be a key driver for the company and it is performing beyond expectations. Pengrowth just announced that the proved and probable reserves at its Lindbergh project have more than doubled, which more than doubles the value of those holdings, from $1 billion to $2.2 billion. This is quite a boost for a company with a market cap of only $3.7 billion.

In the update, Pengrowth reported 19.6 million barrel of probable reserves were reclassified as proved reserves. The company also reported an increase of 87.4 million barrels of proved and probable reserves. The new estimate is based on the company’s existing regulatory approvals and new 3-D seismic data. The ongoing development work has lead Pengrowth to seek regulatory approvals to expand daily production to 30,000 barrels.

As a result of the increase in proved reserves, Pengrowth has increased the pre-tax net present value of its proved and probable reserves at the Lindbergh project. Using a 10% discount rate, the value has gone from $1.95 per share at the end of last year to $4.20 per share.

With Pengrowth trading near $7 a share, this provides a lot of downside protection. Furthermore, this makes Pengrowth Energy that much more valuable in the event of a takeover. The Lindbergh project would be an attractive asset to own for any of the major oil sands producers. Given its $3.6 billion market cap, Pengrowth would be an easy acquisition for the likes of Suncor Energy (NYSE: SU), for example, which has a market cap of over $62 billion.

Even without a takeover, things are moving right along for Pengrowth Energy. Because of the progress at Lindbergh, CEO Derek Evans expects significant per-share cash flow growth in 2015.

Pengrowth continues to invest in heavily developing its assets. Last year, Pengrowth spent $700 million developing its oil and gas properties, and the company plans to spend another $715 million this year. Of this, $365 million will be spent on the Lindbergh project, with the rest likely going toward developing its Cardium light oil properties in Alberta and British Columbia.
    
Risks to Consider: Pengrowth has been investing heavily developing its projects and continuing to pay a 6.3% dividend yield. As a result, the company has $1.6 billion in debt. Any delay in its projects, could affect its ability to continue funding the development of its projects, paying the dividend, and servicing its debt load.

Action to Take –> Buy shares of Pengrowth Energy with a price target of $10 for upside of 40%. This would put shares trading at 1.6 times book value, which is still below the industry average of 2.2.

My colleague Dave Forest is an expert on Canadian resource companies — and he just returned from a fact-finding trip to what could be the world’s first $1 trillion boomtown situated in the center of massive new oil and gas deposits. Several oil and resource mining companies (including one that’s up 1,500% in the past year) are poised to make billions from this under-the-radar hotspot. To get access to some of the stock names and ticker symbols Dave’s recommending, follow this link.