Energy Valuation Insights

A weekly update on issues important to the oil and gas industry

Category

Energy Valuation Insights


Mergers, Acquisitions, & Divestitures

Parsley’s Acquisition of Jagged Peak Highlights Key Consolidation Trends

On October 14, 2019, Parsley (PE) announced that it was acquiring Jagged Peak (JAG) in an all-stock transaction valued at $2.27 billion.  The market’s reaction to the announcement was generally negative, as Parsley closed down more than 10% on the date of the announcement.  This appears to be driven, at least in part, by investors’ desire for Parsley to be acquired rather than be the acquirer. Despite the negative market reaction, we believe this transaction is emblematic of key trends we expect to see during the next wave of consolidation.

Mineral and Royalty Rights

Public Royalty Trusts: More Than Meets the Eye

Yield Traps, Depressed Commodity Prices, and Stage of Decline May Decrease Utility of Public Yields

In previous posts, we have discussed the relationship between public royalty interests and their market pricing implications to royalty owners.  We have differentiated between mineral aggregators and public royalty trusts and introduced some other considerations for how to pick the appropriate comparable. In this post, we will discuss the prevailing high dividend yields of public royalty trusts. We will also offer some reasons for why these trusts may be declining not just in production but also their comparability, from a valuation perspective, to some privately held mineral interests.

Special Topics Valuation Issues

How to Perform a Purchase Price Allocation for an Oilfield Services Company

When performing a purchase price allocation for an oilfield services company, careful attention must be given to both the relevant accounting rules and the specific nuances of the oil and gas industry. Oilfield services companies can entail many unique characteristics that are not present in non-oilfield related businesses such as manufacturing, wholesale, non-energy related services, or retail. We will explore the unique factors in future entries. In this blog post, we discuss the guidelines for purchase price allocations that all companies must adhere.

Bakken Shale

M&A in the Bakken

Deals May Be Slow, But Production Remains Steady

Acquisition and divestiture activity in the Bakken for last twelve months has been minimal. The lack of deals, however, does not mean that activity or production hasn’t been meaningful. In fact, production has grown approximately 10% year-over-year through September with new well production per rig increasing over 29%. Also, while other major basins have been decreasing rig counts, the Bakken has remained steady year-over-year as of the end of September.

Bakken Shale

Bakken May Lack Flash, But Has Fundamentals

The economics of oil and gas production vary by region. The cost of producing oil and gas depends on the geological makeup of the reserve, depth of reserve, and cost to transport the raw crude to market. We can observe different costs in different regions depending on these factors. In this post, we take a closer look at the Bakken Shale.

Special Topics Valuation Issues

The Fair Market Value of Oil & Gas Reserves

Oil and gas assets represent the majority of value of an E&P company. The Oil and Gas Financial Journal describes reserves as “a measurable value of a company’s worth and a basic measure of its life span.” Thus, understanding the fair market value of a company’s PDP, PDNP, and PUDs is key to understanding the fair market value of the Company.

Valuation Issues

How to Perform a Purchase Price Allocation for an E&P Company

When performing a purchase price allocation for an Exploration and Production (E&P) company, careful attention must be paid to both the accounting rules and the specialty nuances of the oil and gas industry. In this blog post, we discuss the guidelines for purchase price allocations that all companies must adhere.

Special Topics

Themes from Q2 2019 Earnings Calls

Will “Capital Efficiency” Prevent Bankruptcy and Maintain Production as E&P’s Reduce CapEx?

While large, rapid commodity price declines are certainly harmful for near-term profits and long-term planning, persistently low prices may be more ominous for industry operators and investors. Prices rebounded from a low of $45/bbl, but crude has been below $60 for nearly 3 months. Natural gas prices have similarly languished, remaining below $2.50/mmbtu in that time. Two Houston-based E&P companies (Halcon & Sanchez) recently filed for Chapter 11 bankruptcy within days of each other, raising questions about the state of the industry. Size and operational efficiency may enable some players to stave off issues, while others may be forced into difficult decisions between preserving capital and investing over budget to produce enough debt-servicing cash flow.

Domestic Production Special Topics

An Overview of Saltwater Disposal

Part 2 | Economics of the Industry

In a prior blog post, we provided an overview of the saltwater disposal (SWD) industry, detailing the source of demand for SWD services, the impact of the shale boom, geographic distribution, site selection, construction, and regulation.  We now take a look at the economics of the SWD industry and the trends that impact the economics.

Mineral and Royalty Rights

Public Royalty Interests: Picking the Right Comparable

In previous posts, we have discussed the relationship between public royalty interests and their market pricing implications to royalty owners.  Here, we will define our group of royalty interests which can be used to gain valuation insights.  Specifically, we will look at mineral aggregators, natural gas focused trusts, and crude oil focused trusts and the statutory differences between them. We also consider how dividend yields and other public data can be used to imply value for private mineral interests while being judicious in our application of such metrics.

Mergers, Acquisitions, & Divestitures

Comstock’s Acquisition of Covey Park

A Valuation Analysis of the Multibillion-Dollar Haynesville Deal

On July 16, 2019, Comstock Resources, Inc (NYSE: CRK) finalized its acquisition of Haynesville operator Covey Park Energy LLC. Announced on June 10, 2019, the companies entered into an agreement under which Comstock would acquire Covey Park in a cash and stock transaction valued at approximately $2.2 billion, including assumption of Covey Park’s outstanding debt and retirement of Covey Park’s existing preferred units (totaling approximately $1.1 billion).

For the purposes of this post, we will be examining this deal from a few different vantage points and reviewing the fair value of the various components that make up total deal value. We’ll also look at how this transaction compares to industry valuation metrics and what kind of strategic advantages Comstock may have a result of the deal.

Valuation Issues

Challenges in Appraising Refinery Businesses

The appraisal of businesses involved in the refining of crude oil entails a number of challenges.  Some are unique to the industry, and others are more common.  The challenges arise primarily in two areas – assessing the level of uncertainty inherent in the entity’s future cash flows and forecasting the entity’s future operating results.

Special Topics

Natural Gas Takeaway Constraints

A Tale of Two Basins

Appalachia and the Permian are responsible for much of the United States’ surging natural gas production, resulting in relatively low benchmark prices. However, difficulties capturing, storing, and transporting natural gas mean that large regional price differentials can occur.

While Appalachia price differentials have narrowed significantly, Permian pricing differentials have widened, often resulting in $0 or sometimes negative realized prices. Going forward, futures prices imply a modest widening of the Appalachia basis over time, while the Permian basis will not stabilize until 2021.

Permian Basin

Valuations In The Permian

Gearing Up For The Long Haul Or Running In Place?

When it comes to the oil patch, the word “growth” can be a vague term. It’s a word that can be masqueraded around to suit the perspective of whomever utters it. What does it mean in an industry whose principle resources are constantly in a state of decline? When it comes to the Permian Basin these days, growth applies to resources, drilling locations and production. Unfortunately, the same can’t be said for profits, free cash flow or new IPOs. Don’t misunderstand, the Permian is the king of U.S. oil plays and by some measures could be taking the crown as the biggest oil field in the world. However, various economic forces are keeping profits and valuations in check.

Special Topics

Q2 2019 Macro Overview

Uncertainties Engulf Global Oil Amid Political Tensions

Brent crude prices began the quarter around $69 per barrel and peaked at nearly $75 in late-April before declining to just below $60 on June 12th, 2019. Prices have since increased to $65, with WTI continuing to trail by about $8 per barrel. In this post, we will assess global supply and demand factors that have caused these price fluctuations.

Mergers, Acquisitions, & Divestitures Permian Basin

M&A in the Permian

Big Deals and Bigger Opportunities

Operators in the Permian Basin have had to pay a premium to access the black gold mine, and companies are still lining up for a chance to get in on the action. While the industry as a whole has been moving into a period of rapid consolidation, a substantial portion of this acquisitive activity has been in the Permian.

Targets with highly contiguous holdings and acreage have been of particular note to acquirers in the Permian. While acreage continuity has not always been the most important aspect of a potential deal, it has certainly become more of a focal point recently.

Special Topics

Forecasting Future Operating Results for an Oilfield Services Company

In our prior two blog posts, we detailed the specifics of “what is” and “what are the characteristics of” an oilfield equipment/services company (“OFS”), and detailed the typical approaches and methodologies utilized in valuing OFS companies.  This week, we’ll address some of the special considerations that must be given attention in the appraisal of OFS companies.  Specifically, the challenges in forecasting the future operating results for an OFS company.

Special Topics

How to Value an Oilfield Services Company

When valuing a business, it is critical to understand the subject company’s position in the market, its operations, and its financial condition. A thorough understanding of the oil and gas industry and the role of oilfield service (“OFS”) companies is important in establishing a credible value for a business operating in the space. Our blog strives to strike a balance between current happenings in the oil and gas industry and the valuation impacts these events have on companies operating in the industry. After setting the scene for what an OFS company does and their role in the energy sector, this post gives a peek under the hood at considerations used in valuing an OFS company.

Special Topics

What is an Oilfield Service Company?

This week’s post is the first in a series related to oilfield service companies. In this first post, we describe what an oilfield service company is, their place in the broader industry, and their key drivers.

Eagle Ford Shale

2019 Eagle Ford Shale Economics

Challenging For Valuation Title Belt

Will the Eagle Ford win the profitability fight with other basins? It may not have the scale or heft of the Permian, but its profitability punches are as strong as anyone’s.

Oil & Gas

Mercer Capital provides oil and gas companies, oil and gas servicers, and mineral & royalty owners with corporate valuation, asset valuation, litigation support, transaction advisory, and related services