Energy Valuation Insights

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


Special Topics

Coming Soon: Mercer Capital’s 2019 Energy Purchase Price Allocation Study

We at Mercer Capital love movies.  One fun aspect of a movie is the anticipation for new releases that comes from watching movie trailers, which inform and tease simultaneously.  If done well, they can build anticipation for the show to come.  While not quite a movie trailer, we wanted to introduce you to a new study from our energy team that we are excited about: Mercer Capital’s Energy Purchase Price Allocation Study. 

Q4 2019 Global Macro Review

U.S. Production Hits Milestones Amid Continued Global Political Tensions

Brent crude prices began the quarter around $59 per barrel and have steadily risen to around $68 to close out 2019. WTI pricing has risen at a similar pace although it continues to trail Brent pricing by about $7 per barrel. Natural gas, however, has been trending in the opposite direction as prices have steadily declined since the end of October. In this post, we will examine the macroeconomic factors that have affected prices in the fourth quarter.

The Best of 2019

Energy Valuation Insights' Top Blog Posts

As we plan for a new year and a new decade, we look back at 2019 to see what was popular with you ­– our readers. This week’s post includes a list of the top posts of 2019 grouped by topic (Transactions, Saltwater Disposal, Oilfield Services Companies, Royalty and Mineral Markets, and Basin-Specific posts). If you missed one or two posts during the year, now is the time to catch up on your reading.

Themes from Q3 2019 Earnings Calls

The energy sector in the third quarter has experienced a general decline as crude prices have exhibited volatility and have remained depressed relative to last year. U.S. producers continue to cut rigs and capital expenditures due to continued excess supply and concerns of declining demand. In this post, we examine some of the most discussed items and trends from the Q3 earnings calls, specifically E&P companies and those in the mineral aggregator space.

Valuation Issues

How to Perform a Purchase Price Allocation for an Oilfield Services Company

When performing a purchase price allocation for an oilfield services company, careful attention must be given to both the relevant accounting rules and the specific nuances of the oil and gas industry. Oilfield services companies can entail many unique characteristics that are not present in non-oilfield related businesses such as manufacturing, wholesale, non-energy related services, or retail. We will explore the unique factors in future entries. In this blog post, we discuss the guidelines for purchase price allocations that all companies must adhere.

Valuation Issues

The Fair Market Value of Oil & Gas Reserves

Oil and gas assets represent the majority of value of an E&P company. The Oil and Gas Financial Journal describes reserves as “a measurable value of a company’s worth and a basic measure of its life span.” Thus, understanding the fair market value of a company’s PDP, PDNP, and PUDs is key to understanding the fair market value of the Company.

Themes from Q2 2019 Earnings Calls

Will “Capital Efficiency” Prevent Bankruptcy and Maintain Production as E&P’s Reduce CapEx?

While large, rapid commodity price declines are certainly harmful for near-term profits and long-term planning, persistently low prices may be more ominous for industry operators and investors. Prices rebounded from a low of $45/bbl, but crude has been below $60 for nearly 3 months. Natural gas prices have similarly languished, remaining below $2.50/mmbtu in that time. Two Houston-based E&P companies (Halcon & Sanchez) recently filed for Chapter 11 bankruptcy within days of each other, raising questions about the state of the industry. Size and operational efficiency may enable some players to stave off issues, while others may be forced into difficult decisions between preserving capital and investing over budget to produce enough debt-servicing cash flow.

Domestic Production

An Overview of Saltwater Disposal

Part 2 | Economics of the Industry

In a prior blog post, we provided an overview of the saltwater disposal (SWD) industry, detailing the source of demand for SWD services, the impact of the shale boom, geographic distribution, site selection, construction, and regulation.  We now take a look at the economics of the SWD industry and the trends that impact the economics.

Natural Gas Takeaway Constraints

A Tale of Two Basins

Appalachia and the Permian are responsible for much of the United States’ surging natural gas production, resulting in relatively low benchmark prices. However, difficulties capturing, storing, and transporting natural gas mean that large regional price differentials can occur.

While Appalachia price differentials have narrowed significantly, Permian pricing differentials have widened, often resulting in $0 or sometimes negative realized prices. Going forward, futures prices imply a modest widening of the Appalachia basis over time, while the Permian basis will not stabilize until 2021.

Q2 2019 Macro Overview

Uncertainties Engulf Global Oil Amid Political Tensions

Brent crude prices began the quarter around $69 per barrel and peaked at nearly $75 in late-April before declining to just below $60 on June 12th, 2019. Prices have since increased to $65, with WTI continuing to trail by about $8 per barrel. In this post, we will assess global supply and demand factors that have caused these price fluctuations.

Forecasting Future Operating Results for an Oilfield Services Company

In our prior two blog posts, we detailed the specifics of “what is” and “what are the characteristics of” an oilfield equipment/services company (“OFS”), and detailed the typical approaches and methodologies utilized in valuing OFS companies.  This week, we’ll address some of the special considerations that must be given attention in the appraisal of OFS companies.  Specifically, the challenges in forecasting the future operating results for an OFS company.

How to Value an Oilfield Services Company

When valuing a business, it is critical to understand the subject company’s position in the market, its operations, and its financial condition. A thorough understanding of the oil and gas industry and the role of oilfield service (“OFS”) companies is important in establishing a credible value for a business operating in the space. Our blog strives to strike a balance between current happenings in the oil and gas industry and the valuation impacts these events have on companies operating in the industry. After setting the scene for what an OFS company does and their role in the energy sector, this post gives a peek under the hood at considerations used in valuing an OFS company.

What is an Oilfield Service Company?

This week’s post is the first in a series related to oilfield service companies. In this first post, we describe what an oilfield service company is, their place in the broader industry, and their key drivers.

Domestic Production

An Overview of Salt Water Disposal

Over the last 12 years the oilfield waste water disposal industry has grown exponentially, both on an absolute basis, and by rank of its importance/size among the oilfield services. This growth has been largely driven by the increased volumes of waste water generated in the production of oil from shale plays. This post discusses the basics of salt water disposal that has become so important given the rise of hydraulic fracturing.

Supply Management: How The Market Is Handling Capital And Crude In 2019

Bryce Erickson recently attended the 2019 NAPE Expo in Houston, Texas. One of the repeated sentiments among several panelists was that valuations are currently attractive despite declining commodity prices and logistics constraints. If capital and resource supply are managed efficiently, it could align the strong upstream and midstream potential with cash flow reality.

Four Themes from Q4 2018 Earnings Calls

We Read the Earnings Calls so You Don’t Have to

Commodity prices exhibited significant volatility to end 2018 with steep declines in crude prices and a spike in natural gas prices that subsequently fell back.  The general market also declined over the period, making it difficult to parse reasons for various stock price gyrations.  While lower prices aren’t ideal for industry operators, earnings calls remind wary investors that there’s more to price than what trades on the NYMEX. Executives this quarter also note a shift in focus when it comes to capital outlays.

This week, we take a look at some of the earnings commentary of large players in the oil and gas space to gain further insight into the challenges and opportunities developing in the industry.

Limited Partners, What Are Your Rights?

Legal Rights and Valuation Considerations For Your Limited Partner Interest

A partnership is a business owned by two or more individuals. In its most basic form, a partnership typically falls into one of three categories: a general partnership, a joint venture, or a limited partnership. While the specifics of these three types can vary depending on the goals of the business, they all share similar features. For the purposes of this post, we will be examining benefits and rights we have come across in performing valuations over various types of partnership structures and their relation to value.

Mineral and Royalty Rights

Risk and Return

Working Interests and Royalty Interests

When valuing mineral interests, it is important to consider the nuances of the each type of mineral interest. Given that risk and asset values are indirectly related, it is important to keep in mind the various risk factors which pertain to the mineral interest. We’ll begin by examining the various risks surrounding both types of interests.

Q4 2018 Review and Outlook for 2019

Q4 2018 was truly a dramatic quarter for the industry. It marked the end of the two and a half-year oil price recovery that began in 2016, while natural gas prices reached their highest point since 2014. With ongoing oversupply concerns, stabilizing geopolitical tensions, and lower forecasts for global oil demand, it appears in 2019 oil prices have a long way to recover to its previous high in 2018.

Four Themes from Q3 Earnings Calls

We Read the Q3 Earnings Calls so You Don’t Have to

Improvements in technology have driven the shale revolution. Among these improvements are both cost cutting by oilfield service providers and longer laterals from E&P companies. While capacity constraints from a lack of infrastructure has led to pricing differentials (particularly in the Permian Basin), a lack of inventory in the global oil market is expected to support higher prices, while also increasing price volatility.

As we plan to do every quarter, we take a look at some of the earnings commentary of large players in the oil and gas space to gain further insight into the challenges and opportunities developing in the industry.

Four Key Takeaways from NARO 2018

David Harkins recently attended the 38th Annual National Association of Royalty Owners (NARO) National Convention in Denver, Colorado. Many topics were discussed, some of which could have their own blog posts devoted to them; however, this post includes four key takeaways from the conference.

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