Energy Valuation Insights

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

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Energy Valuation Insights


Permian Basin

Captain Obvious: Location is Key in E&P

Deal activity, while quiet in the first quarter of the year, has picked up significantly in the last four months, especially in the Permian Basin. Pioneer has been one of the more active companies making investments in the play, but why would they in such a bleak energy climate?

Special Topics

PV-X: WACCs for E&P Companies

In the oil and gas industry, standardized reporting and industry analysts typically use a 10% discount rate on projects’ future cash flows. In this post we explain how such a discount rate is calculated and its effects on valuation; and then discuss a model that provides the discount rates that exploration and production companies face in the current market.

Bankruptcy Domestic Production Valuation Issues

Oil and Gas Market Discussion: Part 2

In May 2016, we attended a panel event discussing investment opportunities in the financially distressed oil and gas sector. The panel included a “who’s who” of oil and gas experts located in Texas. Two industry participants, two consultants, one analyst and one economist discussed the economic outlook for energy prices and then corporate strategy and investment opportunities given the economic outlook. This post, the second and last summarizing this panel discussion, will report opinions given on corporate strategy and investment opportunities.

Bankruptcy Domestic Production Valuation Issues

Bankruptcy: An Overview Part 3

Upon confirmation by the bankruptcy court, a bankruptcy plan must not be likely to result in liquidation or further reorganization. To satisfy the court, a cash-flow test is used to analyze whether the restructured company would generate enough cash to consistently pay its debts. This post walks through the three steps of a cash-flow test.

Domestic Production Valuation Issues

Oil and Gas Market Discussion: Part 1

In May 2016, we attended a panel event discussing investment opportunities in the financially distressed oil and gas sector. The panel included a “who’s who” of oil and gas experts located in Texas. Two industry participants, two consultants, one analyst and one economist discussed the economic outlook for energy prices; and then corporate strategy and investment opportunities given the economic outlook. This post, the first of two summarizing this panel discussion, will report on the economic discussion.

Bankruptcy Valuation Issues

Bankruptcy: An Overview Part 2

From January through May of this year, 39 E&P companies and 31 oilfield services companies had to file for bankruptcy. This post is the second of three aimed at helping those companies and any others who may face bankruptcy in the future to understand the valuation-related aspects of Chapter 11 restructuring. In the first post, we highlighted two reorganization requirements tied to valuation. Here we will explore the consequences of the first of those requirements: The plan should demonstrate that the economic outcomes for the consenting stakeholders (creditors or equity holders) are superior under the Chapter 11 proceeding compared to a Chapter 7 proceeding, which provides for a liquidation of the business.

Bakken Shale Bankruptcy

M&A Activity in the Bakken

In order to survive, when producing is no longer economically feasible, production companies are selling “non-core” assets to generate the cash. M&A activity of Bakken assets has slowed in 2016, but most Bakken assets are selling for heavy discounts making them attractive to buyers. This posts discusses some of these transactions in light of the current environment.

Bankruptcy

Bankruptcy: An Overview

In the current low pricing environment, many oil and gas companies are declaring bankruptcy. However, the decision to file for bankruptcy does not have to signal the demise of the business. If executed properly Chapter 11 reorganization in fact affords these financially distressed or insolvent companies an opportunity to restructure their liabilities and emerge as sustainable going concerns.

Bankruptcy Valuation Issues

Bridging Valuation Gaps: Part 3

This is the third and final post in a series aimed at helping E&P companies to navigate the sale of non-core assets and bankruptcy by examining how option pricing, a sophisticated valuation technique, can be used to understand the future potential of the assets most affected by low prices, PUDs and unproven reserves. In this post, we delve into the specifics of adapting option pricing from shares of stock to oil and gas, highlighting some of the challenges and key steps of the process.

Bankruptcy Valuation Issues

Bridging Valuation Gaps: Part 2

This is the second in a series of three blog posts aimed at helping E&P companies to navigate the sale of non-core assets and bankruptcy by examining how option pricing, a sophisticated valuation technique, can be used to understand the future potential of assets most affected by low prices, PUDs and unproven reserves. In this second installment we explain the general idea behind option pricing and why it may be more suited to a low price environment than traditional DCF models. Part three will then cover some of the issues that arise when using the option pricing method to value oil and gas companies’ assets.

Bakken Shale Bankruptcy Valuation Issues

Bridging Valuation Gaps: Part 1

Due to a precipitous drop in oil prices since June 2014, oil exploration and production companies in the US have struggled to pay their debts and in many cases have had to file for bankruptcy. This is the first post in a three part series examining how option pricing, a sophisticated valuation technique, can be used to understand the future potential of the assets most affected by low prices, PUDs and unproven reserves.

Downstream Analysis

How Sweet It Was

Refiners anticipated crude oil exports would increase when the export ban was lifted which reduced excess supply in the US and relieved the downward pressure on market prices. Once the price of crude increased in the US, refiners profit margins shrink, and profits shrank as expected. But with falling crude prices worldwide, the compression of downstream margins cannot be explained by the story refiners expected.

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