We continue the “what a difference a year makes” theme, but now with a focus on analyst projections, then-and-now (then being as of year-end 2020, and now being as of year-end 2021) and energy stock valuation multiples. For the purpose of our analysis, we identified publicly traded energy companies trading on the NYSE and NASDAQ exchanges and operating in three broad areas – exploration and production (E&P), oilfield services (OFS), and midstream. So, what are the analysts expecting? Find out in this week’s post.
Key Aspects of the Energy Industry in 2021
The close of 2021 marked the end of a long upward march for the energy sector. With oil closing up the year at $75 and gas at nearly $4 per mmbtu, the commodity markets driving the energy sector were much more economically attractive to producers. Stock indices such as the XLE was up over 50% for 2021 and was by far the best performing sector. Rig counts rose along with prices. Crude production also rose to 11.7 million bbls/day with room to grow. In addition, OPEC+ has signaled it will continue its scheduled output growth. All of this growth is coming alongside the ascent of wind and solar. Even though the Omicron variant affected prices in December, most analysts believe that COVID won’t stop the growth. In this post, we review the industry at the end of 2021 and look forward to 2022.
Energy Valuation Insights’ Top Blog Posts
After an extraordinarily challenging 2020, 2021 gave Oil & Gas companies some respite and (perhaps most importantly) some optimism going into 2022. As we enter the new year, we look back at to see what was popular with you – our readers. Here is a list of some of our top posts of 2021.
Did you miss Mercer Capital’s 2021 Energy Purchase Price Allocation Study? If you did, before we move into 2022, take a look at the 2021 Study. This study researches and observes publicly available purchase price allocation data for three sub-sectors of the energy industry: (i) exploration & production; (ii) oilfield services; and (iii) midstream and downstream.
This study is unlike any other in terms of energy industry specificity and depth. The study provides a detailed analysis and overview of valuation and accounting trends in each sub-sector. This study also enables key users and preparers of financial statements to better understand the asset mix, valuation methods, and useful life trends in the energy space as they pertain to business combinations under ASC 805 and GAAP fair value standards under ASC 820. We utilized transactions that closed and reported their purchase allocation data in calendar year 2020.
The economics of Oil & Gas production vary by region. Mercer Capital focuses on trends in the Eagle Ford, Permian, Bakken, and Marcellus and Utica plays. In this post, we take a closer look at the trends in the Marcellus and Utica.
Activity in 2021 Was Muted Relative to 2020
M&A transaction activity in the Marcellus & Utica shrank in number in 2021 relative to 2020. However, the relatively greater magnitude of production density represented by the transactions in 2021 could prove to be a bellwether of more “transformational” transactions to come in 2022 as companies stake their claim in the gas and gas liquids-rich basins of Appalachia. In this week’s post we review M&A activity in 2021 including the EQT/Alta Resources and Northern Oil and Gas/Reliance transactions.
With Market Data as of November 29, 2021
Mercer Capital has its finger on the pulse of the minerals market. An important trend has been the rise of mineral aggregators, which have largely supplanted the trusts as the primary method of publicly traded minerals ownership.
In this updated Study, Mercer Capital has thoughtfully analyzed the corporate and capital structures of the publicly traded mineral aggregators to derive meaningful indications of enterprise value. We have also calculated valuation multiples based on a variety of metrics, including distributions and reserves, as well as earnings and production on both a historical and forward-looking basis.
As commodity prices have risen and Q3 profit reports have rolled in, oil and gas companies have been accused of price gouging. This accusation isn’t true. They are tentative and reticent. Why? The answer is found somewhere among supply and demand dynamics, rising costs, and capital headwinds.
Part 2: Mineral Aggregators
Themes in our Q2 mineral aggregator earnings calls digest included capital discipline by operators, expectations of a very favorable price environment, and increases in distributions to shareholders, resulting in an overall optimistic outlook for the sector. This week we focus on the key takeaways from the mineral aggregator Q3 2021 earnings calls which addressed anticipated acquisition activity, production expectations, and whether or not the sector remains optimistic about the future.
The Q3 earnings calls for E&P operators continued the theme from Q2 – an oil and gas industry reaching a relatively steady operational state, with efficiencies offsetting cost inflation and helping lead to growth in free cash flow despite the tumultuous past 18 to 24 months. In the Q3 earnings calls, maintaining capital discipline with flat or low growth in production volumes was a point of focus as was E&P operators’ possible approaches to fortify their value proposition to shareholders. Check out this week’s post for details.
Natural Gas & Renewables Join the D-CEO Awards Stage in Dallas
Mercer Capital’s energy team sponsored and attended the D-CEO 2021 Energy Awards in Dallas earlier this week. It was a great event and a good opportunity to connect with clients, peers, and industry leaders in the energy space. Awards ranged from honoring top executives, including Scott Sheffield of Pioneer Energy, to private equity firm innovators like Pearl Energy Investments.
Thematically, the focus of this award dinner was the interdisciplinary threads between oil, natural gas, and renewables.
Natural gas prices are rising. So why is production not ramping up to meet heightened demand? Is the demand mostly coming from the U.S.? What are the ripple effects of higher natural gas prices? We tackle all this and more in this week’s post.
In August, Chesapeake Energy Corporation announced that it would acquire Vine Energy Inc. in a stock-and-cash transaction valued at approximately $2.2 billion. We previously discussed Vine’s IPO, which was the first upstream (non-minerals, non-SPAC) initial public offering since Berry Petroleum’s debut in mid-2017.
Vine’s decision to be acquired in a ~0% premium transaction less than five months after its IPO speaks to the difficulty for E&P companies to manage public market dynamics even in a much-improved commodity price environment.
In this post, we dig into the transaction rationale, look at relative value measures, and analyze how this transaction seems to indicate a shift in Chesapeake’s strategy.
In this post we take a brief look at several ESG criteria among E&P operators to see what trends may be present among the operators with the highest and lowest ESG scores, as provided by Global Market Intelligence.
In this post we discuss the most important information contained in a reserve report, the assumptions used to create it, and what factors should be changed to arrive at Fair Value or Fair Market Value.
The economics of Oil & Gas production vary by region. Mercer Capital focuses on trends in the Eagle Ford, Permian, Bakken, and Marcellus and Utica plays. 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.
Transaction Volume and Deal Size Rebound in 2021
Over the last year, deal activity in the Bakken has been steadily increasing after a challenging 2020. Eight of the nine deals, in the last twelve months, occurred in the last eight months as the price environment has turned more favorable. As the industry seems optimistic that the worst of COVID-19 is behind us, deal activity may continue to increase into next year, but there is always hesitation, especially with the Delta variant on the rise.
Clean Future Act Regulatory Concerns
In the midst of the COVID pandemic, the rise of the Delta-variant, and general summer distractions, not a lot of attention has been given to the 117th Congress’ H.R. 1512 – aka the “Climate Leadership and Environmental Action for our Nation’s Future Act” or the “CLEAN Future Act.” The Act was first presented as a draft for discussion purposes in January 2020. After more than a year of hearings and stakeholder input, it was introduced as H.R. 1512 in March 2021. Of particular interest to the Oilfield Water Management sector, is Section 625 of the Act. In that section, the Environmental Protection Agency would be ordered to determine whether certain oil and gas production byproducts, including produced water, meet the criteria to be identified as hazardous waste. The legislation in fact, mandates that the EPA must make its determination within a year after the Act becomes law. Read what Section 625 might mean for Oilfield Water Management industry participants.
With Market Data as of August 24, 2021
Mercer Capital has its finger on the pulse of the minerals market. An important trend has been the rise of mineral aggregators, which have largely supplanted the trusts as the primary method of publicly traded minerals ownership. Due to a variety of corporate structures (including master limited partnerships and Up-Cs) and complex capital structures (including preferred equity and non-traded common units), mineral aggregator enterprise values pulled from databases are often missing meaningful components of value, leading to skewed valuation multiples.
Mercer Capital has thoughtfully analyzed the corporate and capital structures of the publicly traded mineral aggregators to derive meaningful indications of enterprise value. We have also calculated valuation multiples based on a variety of metrics, including distributions and reserves, as well as earnings and production on both a historical and forward-looking basis.
Part 2: Mineral Aggregators
Last week, we reviewed the second quarter earnings calls for a select group of E&P companies and briefly discussed the macroeconomic factors affecting the oil and gas industry. In this post, we focus on the key takeaways from mineral aggregator second quarter 2021 earnings calls.
In Part I of our Themes from Q1 Earnings, there was cautious optimism in the E&P space as most of the operators we tracked reported relatively stable performance. In the Q2 E&P operator earnings calls, there was continued discussion of positive free cash flow, as well as deleveraging and a return of capital to shareholders. Notably, commentary regarding any tax implications arising from Washington was absent this time around, and previously outlined ESG initiatives, perhaps not surprisingly, were also all well on track, if not better, this quarter than in Q1. In this latest round of earnings calls, however, the primary themes were nuanced with indications of tempered growth plans, and continued growth in free cash flow stemming from increased operational efficiency in spite of projected inflation.
As we await second quarter earnings for publicly traded upstream producers, there are several markers and trends that suggest cash flows and profits will swell. Investment austerity and the recently resulting profits will almost certainly be bandied about on management calls. However, what might not be touted as loudly will be how much longer this can last?
As the volatility continues with oil field service companies (the OSX has nearly doubled since November 2020), valuation and techniques associated therewith are important to consider right now. Therefore, this week we are reposting our blog post and whitepaper as it pertains to how to understand and value oil field service companies.
A Tale of Two Transactions
M&A transactions picked up in the 12-months ended mid-June relative to the 12-month period preceding it. Among all the transactions that occurred over this period, one pair jumped out involving a common buyer and for which valuation metrics were available. These related to Pioneer’s acquisition of Parsley Energy in October 2020 and DoublePoint Energy in April 2021. In this post, we take a deeper dive into each transaction.