Given the numerous bankruptcy announcements in the energy industry, this article “Bridging Valuation Gaps for Undeveloped & Unproven Reserves” should be of interest.
Proved undeveloped reserve (“PUD”) values are (or appear to be) particularly low in the market today. With oil and gas prices significantly depressed due to the current oversupply of these hydrocarbons, many market participants are offering little to zero value for PUDs in transactions. For companies in bankruptcy, this presents valuation issues if attempting to reorganize under Chapter 11. Traditional DCF valuation methodologies will miss the potential up-side value which PUD reserves merit. In light of this extraordinary market environment, option pricing can be utilized to capture the perceived gap between market transactions and intrinsic value of PUDs. This may aid some E&P companies to successfully reorganize under Chapter 11 and avoid Chapter 7 liquidation. This article discusses the option pricing methodology and how it can be applied to PUD reserves.
Mercer Capital has significant experience valuing assets and companies in the energy industry, primarily oil and gas, biofuels and other minerals. These companies include large and small oil & gas exploration and production firms (E&P) with assets less than $100 million dollars to multi-billion dollar transactions.
We have valued companies and minority interests in companies servicing the E&P industry. These include seismic, pipeline, storage, tool manufacturers, companies, etc.
An important part of many of these company valuations are the underlying assets: primarily the oil and gas reserves, i.e. proven producing, proven undeveloped, probables, possibles and raw acreage – both working interests and royalty rights.
Our professionals have valued billions of dollars worth of reserves and have one of the most active valuation practices in America in this arena.