Energy Valuation Insights

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

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Energy Valuation Insights


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.

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.

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.

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.

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.

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.

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.

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.

Special Topics

An Introduction to Dividends and Dividend Policy for Private Companies

As the calendar year draws to a close, many private companies consider the issue of dividends and dividend policy. Originally published in his book, Unlocking Private Company Wealth, Z. Christopher Mercer, FASA, CFA, ABAR provides an introduction to dividends and dividend policy. He begins with the obvious observation that no matter how informal, your company has a dividend policy.

Permian Basin

The Permian Basin: Loaves and Fishes

One of the most commonly taught Bible stories is the miracle of Jesus feeding five thousand people with only five loaves of bread and two fish. Last week we learned of a new miracle story of never ending sustenance. The Permian Basin, which has been drilled since the 1920s and produced billions of barrels of oil, was discovered to hold the largest unconventional crude accumulation in the US.

Permian Basin

Quick Facts: Permian Basin

Over the past few weeks, we have discussed the increase in M&A activity in the Permian and looked at specific characteristics that make the Permian attractive in a low price environment. Today, we take a step back and review the broad characteristics of the Permian Basin.

Special Topics

Politics & Energy:  Thoughts and Observations on the Election

Government at all levels (federal, state & local) impacts the energy industry. Whether it be overarching regulation at the Department of Energy, fracking bans in New York state, or local permitting issues – it impacts production, economics, and strategy. This week’s election (like most elections) will have a material impact on the oil and gas industry, and thus producers, associations, and other industry participants will be observing closely as to the outcome. Recently, editors of the Oil & Gas Journal (Nick Snow & Bob Tippee) gave some of their thoughts on the topic.

Special Topics Valuation Issues

Oil and Gas Reserve Values

This is the first of two posts in which we will investigate the different values placed on oil and gas reserves in a GAAP, Non-GAAP, IFRS, and fair market value context. As an example we will consider Exxon Mobil Corp., the nation’s largest energy company, which is under investigation for its lack of asset write-downs amid falling oil and gas prices.

Mergers, Acquisitions, & Divestitures Permian Basin

M&A Overview: Race to the Permian

M&A activity in the exploration and production industry has recovered from the standstill experienced one year ago as oil and gas companies waited to see what the market would throw at them next. Companies, who cut drilling activity when prices collapsed, are now looking to replace their reserves through acquisitions, the majority of which are occurring in the Permian.

Eagle Ford Shale

Quick Facts: Eagle Ford

Over the previous weeks, we have discussed specific factors in the Eagle Ford like DUCs (Drilled but Uncompleted Wells) and how certain operators behave in this resource play. Today, we take a step back and review the broad characteristics of the Eagle Ford Shale resource.

Eagle Ford Shale

Long Term Value Drivers in the Eagle Ford

Get Your DUCs in a Row

The Eagle Ford Shale is one of the largest economic developments in the state of Texas. Almost $30 billion was spent developing the play in 2013. However, that figure dropped off dramatically in 2015 and 2016. In the wake of that drop-off some of the key residuals of that investment remain and are still on the precipice of becoming more active. These residual investments exist in the form of drilled, but uncompleted horizontal wells – sometimes known as “DUCs” or “Fracklog”. Many of the big shale producers are jumping on board the fracklog bandwagon.

Downstream Analysis

What Would Warren Buffet Do?

It caught investors’ attention when Warren Buffet further increased his stake in Phillips 66 from 78.782 million shares as of June 30, 2016 to 79.6 million as of August 30, 2016. He now has invested over $6 billion in Phillips 66 and owns almost 15% of Phillips’ available shares. His recent move has sparked a lot of questions regarding what Warren Buffet was thinking.

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