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.
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.
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.
It’s been tough out there for equity capital markets bankers covering the upstream sector. Since 2016, there have only been five U.S. E&P company IPOs. The dearth of activity is driven by a number of factors which we discuss further in this week’s blog post.
The economics of Oil & Gas production vary by region. 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. In this post, we take a closer look at the Permian.
Pocketbooks Open for More Deals and Larger Positions
Transaction activity in the Permian Basin picked up in earnest this past year, indicating greater optimism in extracting value from the West Texas and Southeast New Mexico basin.
Like a small boat navigating a big sea, oil & gas valuations are impacted by a plethora of factors that can change almost instantly. Some factors help in arriving at a shareholder’s destination, others do not. Some factors the crew can control, others not so much (and some factors are more predictable than others). As this vessel heads for the destination shores of high returns, it must navigate through natural economic influencers such as production risk, commodity prices, supply logistics and demand changes. In addition, it also must face regulatory shifts that the Biden Administration is and could generate in the future such as tax changes, policy shifts and more. Most likely, these policies will create some volatility and headlines, but in the aggregate will not change valuations much. In this post we examine a few of these regulatory items and how they might change the course of an oil and gas company’s valuation going forward.
Part 2: Mineral Aggregators
Last week, we reviewed the first 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 first quarter 2021 earnings calls.
Things appear to be on the upswing, albeit with cautious optimism, in the exploration and production space. Most of the eight E&P operators we tracked reported that operations in the first quarter were relatively stable in spite of winter storm Uri. The ultimate trending phrase in E&P operators’ earnings calls was “positive free cash flow.” Deleveraging remains a primary goal for many operators. In addition, few E&P operators seemed overly concerned with the potential tax implications stemming from regulatory changes brought forth by the Biden Administration.
The rise of SPACs, or special purpose acquisition companies, has been the hottest trend in capital markets during the past year.
In this blog, we take a look at a few oil & gas companies that were early adopters of the SPAC structure, review the recent pivot of SPACs towards energy transition companies, and see what the future might hold for the few remaining oil & gas-focused SPACs.
It has been almost a year since crude prices went into the abyss on last April 20th. Markets are fast moving and unforgiving at times, but it appears with $60+ oil prices for 2021, that the upstream business can now start to slow down, look around, and evaluate what direction to go next.
Transaction Activity Slows Amid Challenges of 2020
M&A transaction activity in the Eagle Ford was fairly quiet throughout 2020 before Chevron’s $13 billion deal with Noble Energy. The Chevron-Noble Energy transaction and the Ovintiv-Validus deal could be foreshadowing a busier M&A market in 2021.