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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
The burgeoning mineral market is leading the way for an energy sector that has lagged in returns for several years now. For this week’s post, we highlight the ascension of the estimated $400 to $600 billion onshore mineral market in the U.S, a topic discussed last month at the DUG Permian Basin Conference in Fort Worth.
Mineral Aggregators are Leading the Forefront in an Underwhelming Energy Sector
In this post, we will review the continued IPOs and valuation implications for the mineral aggregators market as well as examine Brigham’s operations and placement in this sector.
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.
Over the last 12 years the oilfield waste water disposal industry has grown exponentially, both on an absolute basis, and by rank of its importance/size among the oilfield services. This growth has been largely driven by the increased volumes of waste water generated in the production of oil from shale plays. This post discusses the basics of salt water disposal that has become so important given the rise of hydraulic fracturing.
The purpose of an endowment is to provide a permanent source of funding that maintains the operations of colleges, universities, churches, etc. To best serve its fiduciaries, an endowment should achieve the highest return possible. Congruently, when divesting, the endowment must ensure it achieved a fair price for its investments. This post does not weigh in on the discussion of whether endowments should or should not liquidate fossil fuels. Rather, we hope to educate and advise those who have decided to divest their fossil fuel assets and are unsure of how to proceed.
A Closer Look at Permianville Royalty Trust
In previous posts, we have discussed the relationship between public royalty trusts and their market pricing implications to royalty owners. Many publicly traded trusts are restricted from acquiring other interests, so they have relatively fixed resources, and the value of these trusts comes from generally declining distributions. In many cases, the royalty comes from a related operator, though this is neither required nor characteristic of all trusts. There are also other MLPs such as Kimbell Royalty Partners, Viper Energy Partners, Dorchester Minerals, and Black Stone Minerals that are aggregators consistently gobbling up new acreage. In this post, we explore the subject characteristics of Permianville Royalty Trust, formerly known as Enduro Royalty Trust.
Eagle Ford Region Overview
Nearly a quarter of the way through 2019, prices have rebounded somewhat after a tumultuous end to 2018. First quarter energy prices again moved in opposite directions, with crude prices increasing steadily over the period while natural gas prices decreased from $2.94 to $2.80 per Mcf by mid-March despite peaking at over $3.50 in mid-January.
Over the last twelve months, the Eagle Ford Shale region has experienced steady growth and healthy transaction activity. The region’s strengths, such as its low cycle times, high oil cuts and Louisiana Light Sweet crude and Brent oil pricing, has facilitated free cash flow and made the area attractive to both investors and operators.
Our whitepaper “How to Value Your Exploration and Production Company” provides an informative overview of the valuation of exploration and production companies. Because of the historical popularity of this post, we revisit it this week. This post helps you, the reader, understand how E&P companies are valued which may help you understand how to grow the value of your business and maximize returns when it comes time to sell.
Bryce Erickson recently attended the 2019 NAPE Expo in Houston, Texas. One of the repeated sentiments among several panelists was that valuations are currently attractive despite declining commodity prices and logistics constraints. If capital and resource supply are managed efficiently, it could align the strong upstream and midstream potential with cash flow reality.
We Read the Earnings Calls so You Don’t Have to
Commodity prices exhibited significant volatility to end 2018 with steep declines in crude prices and a spike in natural gas prices that subsequently fell back. The general market also declined over the period, making it difficult to parse reasons for various stock price gyrations. While lower prices aren’t ideal for industry operators, earnings calls remind wary investors that there’s more to price than what trades on the NYMEX. Executives this quarter also note a shift in focus when it comes to capital outlays.
This week, we take a look at some of the earnings commentary of large players in the oil and gas space to gain further insight into the challenges and opportunities developing in the industry.
Mercer Capital is pleased to announce that J. David Smith, ASA, CFA has joined the firm and leads the firm’s Houston office.
Legal Rights and Valuation Considerations For Your Limited Partner Interest
A partnership is a business owned by two or more individuals. In its most basic form, a partnership typically falls into one of three categories: a general partnership, a joint venture, or a limited partnership. While the specifics of these three types can vary depending on the goals of the business, they all share similar features. For the purposes of this post, we will be examining benefits and rights we have come across in performing valuations over various types of partnership structures and their relation to value.