Energy Valuation Insights

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

Category

Valuation Issues


Domestic Production

Should Appalachian Natural Gas Producers’ Stock Price Resiliency Be Surprising?

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.

Unlocking Value in the Oil & Gas Industry

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.

Mineral and Royalty Rights

What Does the Valuation Process Entail for an Oil and Gas Royalty Interest?

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.

What Does the Valuation Process Entail for an E&P Company?

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.

Special Topics

The Benefits of a Quality of Earnings Analysis for E&P Companies

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.

Special Topics

Non-Operating Working Interests in Oil & Gas

Part 2: Markets and Valuation Characteristics of Non-Op Working Interests

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.

Special Topics

Non-Operating Working Interests in Oil & Gas

Part 1: Characteristics of Non-Op Working Interests, the Risks, and the Benefits

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.

Special Topics

Industry Expert vs. Valuation Expert: Which Should You Choose?

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.

Mergers, Acquisitions, & Divestitures

Exxon’s Acquisition of Denbury

A Tale of Two Businesses, and Neither One Is Worth $4.9 Billion

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?

Special Topics

IRS Valuation Guidance

Mines, Oil and Gas Wells, & Other Natural Deposits

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. 

Special Topics

Corporate Finance in 30 Minutes

Updated Whitepaper

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.

Special Topics

Understanding Oilfield Services Companies & How to Value Them

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.

Special Topics

Are You Ready for the Next Recession?

What 2023 Might Have in Store

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.

Special Topics

U.S. LNG Exports

Part 2: A Closer Look at Projected U.S. LNG Export Terminal Capacity

In Part 1 of our analysis on U.S. LNG Export Terminal Facilities, we examined trends in the number of LNG export facility applications and approval rates from 2010 through 2021, and examined the projected export capacity relative to the projected export volumes of U.S. LNG from 2022 through 2031.  In Part 2 of our analysis, we take a closer look at the anticipated export capacity proposed to come online over the near and mid-term horizons to better understand the underlying factors that have spurred so many projects, seemingly far in excess of projected level of LNG exports from the U.S.

Have Reserve Reports Been Relegated To Investor Footnotes?

For decades, an oil and gas company (all else being equal) often expected to have an enterprise value somewhat close to their PV-10 calculations in their annual reserve report. That’s not the case these days. Consigned to back pages, footnotes, and appendices, the reserve report’s relevance has waned. It is not that reserve reports are obsolete, but investors are focused on other things – namely returns to shareholders, free cash flow and deleveraging

Special Topics

U.S. LNG Exports

Part I: The Current State of U.S. LNG Export Terminal Facilities and Projected Export Capacity

Based on the eye-ball test, it’s pretty clear that projected export capacity could far outstrip demand for U.S. LNG, based on the EIA’s export projections (as of early 2021), only if all that capacity were to come online.  Free Market Economics 101 theory would indicate, rather decisively, that such excessive capacity would clearly not be worth building out given the export volumes projected as of early 2021.  Then, on February 24, 2022, Russia – the largest supplier of LNG to Europe – invaded Ukraine. For an in-depth discussion, read this week’s post.

Bakken Shale Eagle Ford Shale Marcellus and Utica Shale Permian Basin Special Topics

E&P Capital Expenditures Set to Rise, but Remain Below Pre-Pandemic Levels

The upstream oil and gas sector is highly capital intensive; production requires expensive equipment and constant maintenance. Despite higher oil and gas prices, E&P operators have refrained from increasing capital investment, and instead, are delivering cash to shareholders. In this post, we explore recent capex trends in the oil & gas industry and the outlook for 2022 through 28 selected public companies.

Permian Basin Special Topics

Oilfield Water Markets

Update, Trends, and the Future

The Oilfield Services industry has long been known for its cyclicality, sharp changes in “direction,” and demand-driven technological innovation. One segment of the OFS industry that is among those most subject to recent, rapid change is the Oilfield Water segment – including water supply, use, production, infrastructure, recycling, and disposal. In this week’s post, we look to key areas of the Oilfield Water segment – oilfield water disposal and oilfield water recycling – and address both recent trends and where the segment is going in the near-future.

Mineral and Royalty Rights Special Topics

Themes from Q4 Earnings Calls

Part 3: Oilfield Service Companies

After summarizing the key topics from Q4 earnings calls from public E&P operators and Mineral Aggregators, this week, we turn our attention to the Q4 earnings calls from Oil Field Service companies. Key themes include 1) macroeconomic headwinds, such as labor shortages and supply chain constraints; 2) the anticipation of greater M&A activity and industry consolidation in 2022; and 3) ESG, including recognition of OFS operator initiatives from outside the industry, the mitigation of environmental impacts on local communities at present, and projections of continued demand for ESG-focused services.

Mineral and Royalty Rights Special Topics

Themes from Q4 Earnings Calls

Part 2: Mineral Aggregators

In Part 1: Themes from Q4 E&P Operator Earnings Calls last week, we noted themes of cost inflation, a shift in production focus from natural gas to liquids, and macro policy headwinds.  This week, we focus on the key takeaways from the mineral aggregator Q4 2021 earnings calls – specifically discipline in an elevated pricing environment, stagnant production, and strength in position amid inflationary environment.

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