Category

Energy Valuation Insights

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June 5, 2017 Valuation Issues

How to Use an EV/Production Multiple

Oil and gas analysts use many different metrics to explain and compare the value of an oil and gas company, specifically an exploration and production (E&P) company. The most popular metrics (at least according to our eyeballs) include (1) EV/Production; (2) EV/Reserves; (3) EV/Acreage; and (4) EV/EBITDA(X). Enterprise Value (EV) may also be termed Market Value of Invested Capital (MVIC) and is calculated by the market capitalization of a public company plus debt on the balance sheet less cash on the balance sheet. In this post, we will dive into one of these four metrics, the EV/Production metric, and explore the most popular uses of it.

May 22, 2017 Bankruptcy Domestic Production

Are Oil and Gas Bankruptcies a Thing of the Past?

Since the start of the oil downturn, more than 120 upstream and oilfield service companies declared bankruptcy. However, as we described in a previous post, the decision to file for bankruptcy did not always signal the demise of the business. Now more prepared, many E&P companies who reorganized are looking to grow.

May 15, 2017 Special Topics Valuation Issues

E&P: What We Learned from 1st Quarter Earnings

The first quarter of 2017 was productive and active for upstream E&P but the change in market capitalizations of many oil and gas companies does not match the reported increase in earnings and production estimates. Looking at our universe of energy companies in the E&P space, over 70% beat earnings estimates. This statistic held true no matter if the energy company was a global integrated operator or a pure upstream producer. To provide a flavor of the attitude, we selected the two largest publicly traded energy companies involved in E&P (STO and XOM) as well as six companies with primary operations in the Permian Basin (PXD, CXO, NBL, XEC, FANG, and RSPP) and reviewed the highlights of their latest earnings releases. As summarized in this post, each of these companies exceeded analyst expectations.

May 8, 2017 Domestic Production Special Topics

Why Aren’t We Talking About the Gulf of Mexico?

Artem Abramov, of Rystad Energy, recently published an article in the Oil and Gas Financial Journal comparing shale and offshore drilling. He claims, the “Gulf of Mexico [is] as important as [the] Permian Basin for U.S. oil production” but it has been overlooked since the advancement of shale gas. The EIA reports that offshore drilling accounts for 17% of total domestic crude oil production. So, why aren’t we talking more about oil and gas production from the Gulf of Mexico (GoM)?

May 1, 2017 Special Topics

Is Cash Always King?

Travis Harms, CFA, CPA/ ABV, Senior Vice President at Mercer Capital, recently published a blog post on Mercer Capital’s Financial Reporting Blog contemplating the appropriate amount of cash for a company to hold. This topic is especially pertinent to the oil and gas industry, in which 70 companies went bankrupt last year. Now as companies have started to increase capital expenditures again, they must consider how much cash they should keep as a cushion while considering the effect of this low-yielding asset on value.

April 25, 2017 Mineral and Royalty Rights

How to Invest in PUDs in the Permian Basin without Paying for the Well

In previous posts we have discussed the existence of royalty trusts & partnerships and their market pricing implications to royalty owners. Many of those trusts have a set number of wells generating royalty income at declining rates for multiple years to come. Viper Energy Partners LP (VNOM) is not a trust, but a partnership, solely focused on the Permian Basin with royalty interests in producing wells as well as proven undeveloped (PUD), probable and possible wells. In this post, we consider VNOM, the current market, and implications for royalty owners.

April 17, 2017 Special Topics

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).

April 11, 2017 Mergers, Acquisitions, & Divestitures Special Topics

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.

April 4, 2017 Mineral and Royalty Rights

How to Value Overriding Royalty Interests

When comparing a royalty interest to an ORRI, it is critical to understand the subtle nuances of the rights and restrictions between the two. Owners of royalty interests utilizing Permian Basin Royalty Trust as a valuation gauge should adjust for such differences as well as other differences between publicly traded and non-marketable securities.

March 27, 2017 Special Topics

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.

March 20, 2017 Valuation Issues

How to Perform a Purchase Price Allocation for an Exploration and Production 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.

March 13, 2017 Downstream Analysis Special Topics

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.

March 7, 2017 Special Topics

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.

March 1, 2017 Special Topics Valuation Issues

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.

February 14, 2017 Downstream Analysis

Refining Overview

There are four main components to refined product prices: (1) Input Prices (i.e. crude oil), (2) Wholesale Margins, (3) Retail Distribution Costs, and (4) Taxes. Generally, input prices and wholesale margins drive fluctuations in product prices as the last two are relatively stable. Thus, in order to understand refined product prices we consider the macroeconomics trends in the global oil and gas market which drive input prices.

February 6, 2017 Mineral and Royalty Rights

There Was Blood

Many operators and oil and gas service companies didn’t survive the last 20 months, and most of the news headlines focused on their story. For royalty owners, who might depend upon royalty checks for steady income, it was equally scary as their payments shrunk due to low oil prices which were magnified by lower production rates. However, the last 12 months have provided some relief. In post, we reflect on the effects of the market and valuation implications for royalty owners.

January 30, 2017 Special Topics

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.

January 23, 2017 Mergers, Acquisitions, & Divestitures

Noble Energy Buys Clayton Williams: A Closer Look at the Acquisition

On January 16, 2017, Noble Energy, Inc. announced the acquisition of all Clayton Williams Energy equity for approximately $2.7 billion in NBL stock and cash. Noble Energy is a global independent oil and gas exploration and production company. Their acquisition of CWEI demonstrates an effort to accelerate high margin growth by focusing capital in productive regions such as the Permian Basin.

January 16, 2017 Bakken Shale Eagle Ford Shale Mergers, Acquisitions, & Divestitures Permian Basin

2016 M&A Overview

As oil and gas prices remained low, deal volume picked up in the beginning of 2016 as companies were forced to sell assets in order to quickly generate cash to pay off debt and avoid bankruptcy. As the year continued, M&A activity increased and total deal value at the end of 2016 doubled that of 2015.

January 9, 2017 Bankruptcy Domestic Production Mergers, Acquisitions, & Divestitures Permian Basin

2016 Oil and Gas: A Year in Review

2016 was a year to remember and a year to forget for many in the oil and gas industry. On the positive side, energy commodity prices curbed their downward, volatile nature by finishing the year at higher prices than where they started. In this post, we survey how the industry ended the year from production and supply to bankruptcies and transactions as we look to 2017.

January 2, 2017 Bakken Shale

Quick Facts: Bakken

Each quarter, Mercer Capital’s Exploration & Production Industry newsletter provides an overview of the E&P sector, including world demand and supply, public market performance, valuation multiples for public companies, and a region focus. Mercer Capital closely follows oil and gas trends in the Permian Basin, Eagle Ford Shale, Bakken Shale, and Marcellus and Utica Shale. Last quarter our E&P newsletter, focused on the Bakken Shale. Today, we take a step back and review the broad characteristics of the Bakken Shale.

December 27, 2016 Special Topics

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.

December 12, 2016 Bakken Shale Valuation Issues

Exploration & Production 3Q16 Newsletter | Region Focus: Bakken

Each quarter, Mercer Capital’s Exploration & Production Industry newsletter provides an overview of the E&P sector, including world demand and supply, public market performance, valuation multiples for public companies, and a region focus. This quarter we focus on the Bakken Shale.

December 5, 2016 Mineral and Royalty Rights

Royalty Interests Discover the Permian

Royalty trusts, like the rest of the oil and gas industry, have been hit hard. In this post, we examine their performance over the last couple of years and consider the impact of bankruptcy.