The Dallas Fed Q2 Energy survey highlighted the growing uncertainty and continued pessimism in management sentiments across the sector. Given the concerns shared about the future of the oil and gas markets, it is 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 this week’s post, we highlight the value of a Quality of Earnings (QofE) analysis in the transaction process.
Oil and gas analysts use many different metrics to explain and compare the value of an oil and gas company, specifically an exploration and production (E&P) company. The most popular metrics (at least according to our eyeballs) include EV/Production, EV/Reserves, EV/Acreage, and EV/EBITDA(X). In this post, we will dive into the EV/Production metric, and explore its most popular uses.
Amid the uncertainty in oil markets, for the past year or so, optimism and valuation metrics for natural gas producers have steadily been rising. According to data from Mercer Capital’s quarterly Value Focus: Exploration and Production, reports whereas a year ago show cash flow multiples (or sometimes referred to as EBITDAX in the oil and gas industry) for both oil and gas producers tended to centralize around four (4) to five (5) times, lately, publicly traded gas producers have EBITDAX multiples in the low- to mid-teens, while predominately oil producing companies’ multiples have dropped.
This has been a dramatic change in the past year compared to the industry’s history. While onshore producers of oil and gas have many similar operational and economic traits, such as the shrinking inventory of top tier wells, this decoupling is representative of a fundamentally different outlook for the future of each commodity.
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 post, we make the case for both and provide a solution to this question.
Following our post last week in which we covered the latest changes and trends facing oilfield services (OFS) companies, this week we focus on how to value these companies. Understanding the value of an oilfield services (OFS) company is by its very nature a complex matter. Having a firm grasp on the many similarities and distinctions between these businesses is crucial for performing valuations. In our whitepaper, Understanding Oilfield Services Companies & How to Value Them, we provide invaluable guidance in regard to these aspects of the OFS industry.
Properly accounting for AROs as part of due diligence in an oil and gas transaction is essential for ensuring a fair and accurate valuation of the assets being bought or sold. These obligations represent significant future liabilities, and failing to account for them properly can lead to financial misstatements, regulatory issues, and unexpected costs for the acquiring party. In this week’s post, we discuss AROs in the oil and gas industry and why they matter in transactions.
Natural gas markets continue an optimistic trend towards greater demand to meet a U.S. supply glut. The incoming Trump Administration has promised to pull back regulatory restraints and unleash the industry to “drill baby drill.” However, when it comes to natural gas, there is already plenty of supply; the question is, can that supply become more portable to meet global (instead of regional) demands? We explore this question and a potential answer in this week’s post.
Buy-sell agreements don’t matter until they do. When written well and understood by all the parties, buy-sell agreements can minimize headaches when a company hits one of life’s inevitable potholes. But far too many are written poorly and/or misunderstood. Directors are always eager to discuss best practices for buy-sell agreements. In this week’s post, we talk to Chris Mercer, Mercer Capital’s founder and author of four books on buy-sell agreements, and ask, “Is there a ticking time bomb lurking in your business?”
In a year where natural gas prices have spent most of the year under $3.00, the stock prices of publicly traded Appalachian gas producers have remained remarkably stable. This could come across as surprising. Appalachia has some disadvantages to other US gas producing basins, such as takeaway capacity, logistics, and longer distances to major LNG production facilities. However, since 2022 the stock market has held steady for these companies; of which this confidence has outlasted commodity price and earnings declines over the past two years.
We are excited to share the release of Z. Christopher Mercer’s latest book, “Buy-Sell Agreements: Valuation Handbook for Attorneys” published by the American Bar Association. This week, we share an excerpt from the book and what you can expect to find in the full copy.
The oil and gas industry is constantly changing, with a lot of moving parts and financial complexities. Accurate valuation of assets within this sector is critical for making informed strategic decisions. At Mercer Capital, we have cultivated a deep understanding of the oil and gas industry through decades of experience. To share our knowledge and insights, we have produced three complimentary whitepapers for our blog readers.
A lack of knowledge regarding the worth of a royalty interest could be very costly. This can manifest itself in a number of ways. A shrewd buyer may offer a bid far below the interest’s fair market value; opportunities for successful liquidity may be missed; or estate planning could be incorrectly implemented based on misunderstandings about value. Understanding how royalty interests are properly appraised will ensure that you maximize the value of your royalty, whenever and however you decide to transfer it.
A lack of knowledge regarding the value of your business could be very costly. Opportunities for successful liquidity may be missed or estate planning could be incorrectly implemented based on misunderstandings about value. In addition, understanding how exploration and production companies are valued may help you understand how to grow the value of your business and maximize your return when it comes time to sell.
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.
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.
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.
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 a time where numerous things could dampen demand, prices, profits, and valuations, the energy industry continues an upward trend.
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.
Exxon made waves in the energy M&A markets by announcing its acquisition of Denbury, Inc. In total, the headline value was around $4.9 billion. However, while Denbury is an energy company on the whole, it is made up of two main segments that have very different economics, and neither of their business segments appears to be worth the $4.9 billion price tag. So what did Exxon buy exactly, and how might one value it?
Understanding the behind-the-scenes of mineral property valuation doesn’t need to be difficult. In this blog post, we explain the framework behind mineral property valuation, discussing key concepts and guidance from the Internal Revenue Service. Learn about the cost approach, market approach, and discounted cash flow analysis, as well as the essential factors in determining fair market value. Whether you’re a buyer, seller, or involved in litigation, ensure you’re up-to-date on the intricacies of mineral property valuation.
Corporate finance does not need to be a mystery. In this updated whitepaper, we distill the fundamental principles of corporate finance into an accessible and non-technical primer.
Understanding the value of an oilfield services (OFS) company is by its very nature, a complex matter. The unpredictable cyclicality of the oilfield services industry requires careful consideration of many industry-wide and company-specific factors in developing a reasonable forecast of future operating results. In our blog this week we feature a whitepaper that provides invaluable guidance in regard to these aspects of the OFS industry.
As we have now put a bow on 2022 and have turned our attention to 2023, we suspect that the dreaded “R word” is on the mind of many of our readers as they contemplate the myriad challenges and obstacles their businesses will face in 2023. Now is the time to think critically about how your business is positioned for a potential economic slowdown. This post offers a few practical steps business owners, directors, and their advisors can take to ensure their business continues to thrive.
