In the last year, M&A activity in the upstream area of the oil and gas industry has increasingly become top-heavy, characterized by several headline deals. While the broader North American E&P deal count has been shrinking since 2022, a handful of major acquisitions in the last year have led to a spike in upstream M&A spending. With fewer yet higher-dollar deals and producers eyeing to expand their portfolios of core acreage, the energy industry’s M&A market has greatly shifted in 2024.
The oilfield water industry (OFW, or midstream water) continues to grow in importance within the general upstream energy industry. So much so that while historically considered part of the Oilfield Services Industry (OFS), midstream water is now considered its own industry within the upstream space, separate from the more general OFS. In this week’s Energy Valuation Insights blog, we explore the current status, trends, and expectations for the future of midstream water.
The SCOOP/STACK is a significant oil and gas play found in the Anadarko Basin of Oklahoma. Historically, the Anadarko Basin has been a prolific area for oil and gas extraction. It spans approximately 70,000 square miles across Western Oklahoma, the Texas Panhandle, and parts of Southwestern Kansas and Southeastern Colorado. The basin’s geology features some of the thickest and highest-quality shale reservoirs in the United States, making it an attractive site for drilling and production. Given that fact pattern, it might surprise some to learn that activity in the SCOOP/STACK has been sluggish, to say the least, in recent times.
There are always going to be barriers to success in an industry. Barriers to entry, barriers to growth, barriers to profitability, and barriers to progress can lurk to name a few. The upstream industry has its share. For gas, its own oversupply and low prices are an issue. For oil, capital constraints are reining in investment. Both commodities also thirst for quality labor to fuel growth and longer-term underlying optimism, but that workforce does not exist right now and may take a while to develop. What does this mean for the future of the industry?
M&A deal flow was sidelined for much of 2022 and 2023, but pent-up M&A demand is expected to compel buyers and sellers to renew their efforts in 2024 and beyond. As deal activity recovers, sellers need to be prepared to present their value proposition in a compelling manner. This is when having an independent Quality of Earnings Report tailored to the seller’s needs becomes crucial. In this post, we review five reasons sellers benefit from a QofE report when responding to an acquisition offer or preparing to take their business models or assets to market.
As we’ve often highlighted on this blog, transaction activity in the O&G sector has waned in recent years. Rather than utilizing free cash flows to support expansions via acquisitions, companies have emphasized capital discipline, favoring dividend payouts and buybacks. With this thinning of the buyer market, its more important than ever for a potential seller to be able to provide potential buyers with a clear picture of the company’s capacity for generating cash flows.
In that light, we thought our readers would appreciate a recent Mercer Capital slide deck on quality of earnings (QofE) analysis. The purpose of a QofE analysis is to translate historical reported (GAAP) earnings into a relevant picture of earnings and cash flow that is useful in developing credible forward-looking estimates. The stakes are high in the transaction arena. Whether embarking on a sale process or responding to an unsolicited inquiry, sellers have precious few opportunities to set the tone. A QofE process equips sellers with the confidence of understanding their own position while engaging the buy-side with awareness and transparency that promotes a more efficient negotiating process and the best opportunity for a favorable outcome. Read more in this week’s post.
The Railroad Commission of Texas is overhauling its primary rule for water protection, Statewide Rule 8, to address environmental standards and oil and gas industry practices that have evolved significantly since the rule’s last major revision in 1984. The proposed changes aim to streamline regulations, update requirements for waste management, and enhance the Commission’s ability to track and collect data on oilfield waste transport. These modifications are expected to impact the economics of oil and gas drilling projects, particularly for smaller operators, and could lead to increased demand for oilfield waste disposal services. to understand more, read this week’s post.
In the evolving landscape of the oil and gas industry, non-operating working interests are gaining attention for their unique role in upstream capital markets. These interests, characterized by smaller ownership and higher risks, offer a niche opportunity for investors looking for alternative avenues in the energy sector. With a focus on profit margins and cash flow returns, non-op companies like Northern Oil and Gas, Evolution Petroleum Corporation, and others are demonstrating varying degrees of success, presenting both challenges and opportunities for discerning investors.
The 4Q23 issue of Mercer Capital’s Exploration & Production newsletter focuses on the Haynesville Shale. Haynesville production held up reasonably well during the 2023 review period, particularly considering the sharp fall-off in the basin’s rig count. Despite the Henry Hub natural gas front month futures prices ending the year well below their starting point, the outlook for the Haynesville basin is favorable and anticipated to continue growing due to rising demand from LNG facilities and petrochemical plant development along the U.S. Gulf Coast.
In addition to our overview of the Haynesville, this newsletter also contains:
– Oil and Gas Commodity Price Update
– 2024 Outlook for the Industry
– Industry M&A Activity
– Public Company Performance
– Production Update
– Rig Counts
Download the newsletter to stay up to date on the industry.
In the intricate world of oil and gas investments there are many ways that ownership from hydrocarbon production can be divided. One way is through non-operating working interests which is, to many, a less familiar ownership position. This post explores the nuanced distinctions between traditional operating working interests and non-operating (non-op) interests, highlighting how the latter, despite sharing cost burdens, lack decision-making power in operational matters.
With a focus on the economic implications, risks, and benefits for investors, particularly through the lens of companies like Northern Oil and Gas, we discuss the complex dynamics and strategic financial maneuvers within the industry, setting the stage for a deeper exploration of valuation and economics in next week’s post.
U.S. oil seems to be headed toward a period of upward price pressure. U.S. natural gas on the other hand, appears to be back in a somewhat oversupplied position.
Year-end 2023 is quickly approaching so that means it’s time to take a look back at the year. Here are the top ten posts for the year measured by readership. Thank you to our readers for your constant support! It’s our honor to cover the oil & gas industry for you.
In this week’s post, we honor the late Berkshire Hathaway Vice Chairman by delving into his insightful quotes. Our colleague Brooks Hamner discusses Mungerisms like the pitfalls of flashy investment strategies and the skepticism around cryptocurrency, to the critique of over-diversification and reliance on traditional financial metrics like EBITDA. When it comes to investing in any industry or business, no one had more unique ideas than Charlie Munger.
Key themes we saw in Q3 earnings calls for oilfield service (“OFS”) companies were a rebound in activity, increased M&A in the space, and a focus on capital returns. Operators agree on a positive outlook for 2024, driven by factors like healthy commodity prices and global demand. As the industry evolves and OFS operators continue to make strategic shifts, we’ll keep you updated on future changes.
This week, we look at earnings calls in the upstream sector for Q3 2023. The past quarter saw significant M&A activity, like Exxon Mobil’s acquisition of Pioneer Natural Resources, which emphasizes efficiency and inventory expansion. As domestic operators are increasing production to meet demand, the industry expects a favorable environment going into 2024.
Mercer Capital recently attended D CEO’s 2023 Energy Awards, an event that recognizes significant contributions to the energy sector in the Dallas Fort Worth area, including both traditional and renewable energy achievements. The ceremony highlighted the importance of integrating sustainable energy practices, exemplified by Lee Graves’s award for Renewable Energy Executive of the Year, and celebrated major industry milestones like Exxon’s acquisition of Denbury. In a blend of personal and professional narratives, the prestigious Legacy Award was presented to Kelcey Warren of Energy Transfer Partners, featuring discussions of his career and philanthropic impact on the city, notably Klyde Warren Park.
In a time where numerous things could dampen demand, prices, profits, and valuations, the energy industry continues an upward trend.
Mercer Capital is pleased to announce the release of the “2023 Energy Purchase Price Allocation Study.” This study provides a detailed analysis and overview of valuation and accounting trends in different subsectors of the energy space for the 2022 calendar year. This study researches and observes publicly available purchase price allocation data for four sub-sectors of the energy industry: (i) exploration & production; (ii) oilfield services; (iii) midstream; and (iv) refiners and marketers.
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. It 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 2022.
The recent America’s Natural Gas conference shed light on crucial themes in the energy sector, highlighting an increasing demand for liquefied natural gas (LNG) amid challenges like insufficient pipeline and storage infrastructure, which poses a substantial hurdle to meeting the soaring need both domestically and internationally. Noteworthy initiatives, such as Mexico Pacific’s strategic LNG facility, aim to bridge infrastructural gaps by delivering responsibly sourced natural gas from the Permian Basin to Asian markets, while also focusing on a sustainable and strategic location to optimize shipping and pricing. The discourse at the conference also underscored the notable reduction of CO2 emissions with the rising market share of natural gas, as well as the pragmatic and logistical challenges faced by renewable energy endeavors, indicating that a balanced, multi-faceted approach to energy transition is imperative in ensuring reliability, sustainability, and affordability in global energy supply.
Despite initial downward trends in commodity prices in 2023, a sustained period of healthy prices, particularly for crude oil, has instilled an industry-wide sense of optimism about future growth in spending. Key industry leaders emphasize the role of technologies in boosting operational performance, echoing the sentiment that proper tech implementation is directly linked to better financial outcomes. As companies gear up for a prolonged upcycle in activities, technology and commodity prices are helping set the stage for an optimistic outlook through 2024 and beyond.
In the recent Q2 2023 earnings calls, upstream executives noted the shift in their focus from exploration to maintaining production through various strategies, such as acquiring legacy assets and implementing well workovers. Furthermore, leaders predict pressures on the global crude oil supply, with expectations of OPEC+ continuing their production cuts and minimal refinery capacity. Additionally, despite record production levels in the Haynesville Shale, there’s been a noticeable drop in drilling and completion activity, as natural gas prices continue to decline from 2022 highs. Dive deeper in this week’s blog.
Choosing an industry expert to value your oil & gas company has several distinct benefits that stem from a deep understanding of the sector’s unique dynamics, trends, and complexities. Selecting a valuation expert to assess your oil & gas company brings a distinct set of advantages rooted in their specialized training, adherence to recognized standards, and a focused approach to valuation. So, which should you choose? In this article, we make the case for choosing an industry expert and then make the case for choosing a valuation expert. Then we suggest the a solution.
In this week’s post, we feature an entry from our Family Business Director blog that recaps the recent Berkshire Hathaway Shareholder Meeting. While the content is not targeted directly to energy industry participants, it is timeless for all of us. We hope you enjoy!
The Q1 2023 earnings calls from the upstream segment of the oil and gas industry have brought to light various viewpoints on shareholder returns, presenting a dichotomy between stock buybacks and dividends. Although the Eagle Ford region stands out with its high return rate and generous drilling inventory, the spotlight is gradually shifting towards the Permian Basin, where operators aspire to leverage better well economics, project scheduling flexibility, and cost savings for improved free cash flow.
