What Would You Do with $1 Billion?

Less than one month ago investors bet $1 billion on James Hackett, former President and CEO of Anadarko Petroleum Corp. Silver Run Acquisition Corp. II is a blank check company that will leverage James Hackett’s knowledge of the Eagle Ford Shale and Permian Basin to fund an opportunistic acquisition. Silver Run II was created by the Riverstone Holdings LLC, the bank that successfully started the blank check company over a year ago now known as Centennial Resource Production LLC. The original stock sale for Silver Run Acquisition Corp I, which raised $900 million is expected to exceed $1 billion. If the banks managing the deal exercise their options to buy shares, which they generally do, the Company would be tied for the record largest blank-check offering. Before we review the recent uptick in investment in oil and gas blank check companies, we will review the basics of blank check companies and special purpose acquisition companies (SPACs).

Eureka! Observations & Thoughts from the Permian DUG Conference

Last week, Mercer Capital attended the DUG Permian Basin Conference in Fort Worth. It was a solidly attended event hosted by Hart Energy. The session speakers were a mix of mostly company executives and industry analysts. The presentations were tinged with a lot of optimism – centered on the positive and unique economics of the Permian, tempered by (some) cautionary commentary. We will follow on in later posts with some more detail on specifics, but today we want to touch on a few thematic elements: the Permian was the center of the M&A activity in 2016 and will be in 2017, efficiency and productivity gains are helping to fuel activity, and a rise in rig counts will eventually mean rise in costs.

The Wild Goose Chase Is Over

From 2000 to 2005, “concerns that supply could run out and soaring oil prices sent energy companies on a grand, often wildly expensive, chase for new production.” They were investing in multi-billion-dollar projects in the Arctic waters and Kazakhstan’s Captain Sea. A WSJ article titled, “Oil Companies Take Thrifty Bets,” explained that when oil was worth $100 per barrel oil companies had much higher risk tolerance and were able to invest heavily in the exploration of undeveloped land and ocean. But as the price of oil declined and has settled around $50 per barrel, the wild goose chase for oil has come to an end.

A Bright Spot at the Bottom of the Barrel

Asphalt and road oil are used primarily by the construction industry for roofing and waterproofing and for road construction. Asphalt is a byproduct of petroleum refining. During the distillation process of crude oil, asphalt does not boil off and is left as a heavy residue. Generally around 90% of crude is turned into high margin products such as gasoline, diesel, jet fuel, and petrochemicals while the other 10% is converted into asphalt and other low margin products. Petroleum refiners sell asphalt to asphalt product manufacturers who produce retail products such as asphalt paving mixtures and blocks; asphalt emulsions; prepared asphalt and tar roofing and siding products; and roofing asphalts and pitches, coating, and cement.

Thoughts of a Non “Oil Price Guru”

On February 27, 2017 the Wall Street Journal published an article titled “The Rise of a Global Oil-Price Guru”. Simply put, Gary Ross knows anyone and everyone in the energy world. From the west coast of California, east to the Arab Sheiks and beyond, there is no one better connected. While we do not claim to have the same network or prediction abilities as Ross, our predictions for oil prices come with a lower price tag (none at all) than Ross’ more than $50k consulting fee.

Are S&P Energy Stock Valuations Really Crazy Right Now?

A few days ago the Wall Street Journal published an article discussing what the author described as “crazy” stock valuations, and in particular the inflated valuations of oil and gas stocks from the perspective of operating earnings ratios. While we certainly are believers that value is driven by future operating earnings, and that earnings in the energy sector have fallen precipitously since 2014, is this all that determines the market’s pricing of the S&P 500 energy sector? As we reflect on this for a moment, a few additional considerations came to mind that may explain these “crazy” valuations more fully.

Master Limited Partnerships

Master Limited Partnerships (MLPs) are publicly traded partnerships, which reap the tax benefits of a partnership and the liquidity benefits of a public company. In this post, we address both the history of MLPs and considerations when valuing them.

Renewable Fuel Standards and Refiners

Trump’s nominations suggest that the upcoming presidential term will provide a friendly oil and gas environment. While it is unclear what the President-elect’s plan is for the RFS program, it is likely that he will face challenges balancing farm and oil interests.

An Introduction to Dividends and Dividend Policy for Private Companies

As the calendar year draws to a close, many private companies consider the issue of dividends and dividend policy. Originally published in his book, Unlocking Private Company Wealth, Z. Christopher Mercer, FASA, CFA, ABAR provides an introduction to dividends and dividend policy. He begins with the obvious observation that no matter how informal, your company has a dividend policy.

Politics & Energy:  Thoughts and Observations on the Election

Government at all levels (federal, state & local) impacts the energy industry. Whether it be overarching regulation at the Department of Energy, fracking bans in New York state, or local permitting issues – it impacts production, economics, and strategy. This week’s election (like most elections) will have a material impact on the oil and gas industry, and thus producers, associations, and other industry participants will be observing closely as to the outcome. Recently, editors of the Oil & Gas Journal (Nick Snow & Bob Tippee) gave some of their thoughts on the topic.

The Fair Market Value of Oil and Gas Reserves

A couple of weeks ago we looked at Exon Mobil Corp.’s lack of asset write-downs to understand different values placed on oil and gas reserves in a GAAP, Non-GAAP, and IFRS context. This week we explain how to find the fair market value of oil and gas reserves.

Oil and Gas Reserve Values

This is the first of two posts in which we will investigate the different values placed on oil and gas reserves in a GAAP, Non-GAAP, IFRS, and fair market value context. As an example we will consider Exxon Mobil Corp., the nation’s largest energy company, which is under investigation for its lack of asset write-downs amid falling oil and gas prices.

PV-X: WACCs for E&P Companies

In the oil and gas industry, standardized reporting and industry analysts typically use a 10% discount rate on projects’ future cash flows. In this post we explain how such a discount rate is calculated and its effects on valuation; and then discuss a model that provides the discount rates that exploration and production companies face in the current market.

Oil and Gas Market Discussion: Part 1

In May 2016, we attended a panel event discussing investment opportunities in the financially distressed oil and gas sector. The panel included a “who’s who” of oil and gas experts located in Texas. Two industry participants, two consultants, one analyst and one economist discussed the economic outlook for energy prices; and then corporate strategy and investment opportunities given the economic outlook. This post, the first of two summarizing this panel discussion, will report on the economic discussion.