Energy Valuation Insights

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

Category

Valuation Issues


Special Topics

Themes From Q4 Earnings Calls

Part 1: E&P Operators

In the last round of earnings calls for 2021, cost inflation was discussed with a bit more granularity than in recent quarterly calls, strengthening oil prices sparked a shift in focus towards the liquid hydrocarbon streams, and commentary regarding macro policies targeting hydrocarbons were prevalent in E&P management discussions.

Special Topics

Oilfield Services 2022

The Rise of the OFS Bulls

In our Energy Valuation Insights from last week, Bryce Erickson focused on Oilfield Services (OFS) company valuations. This week we follow the same OFS theme, but with a focus on OFS “expectations” and the question: “Has the OFS industry turned the corner to a more prosperous outlook?” 

Special Topics

Oilfield Service Valuations: Dawn Is Coming

“The dawn is coming!” This phrase comes to mind as we observe valuations and prospects for oilfield service companies. It has been tough sledding for OFS companies during COVID. At the end of 2020, rig counts were around 350 and DUC counts were high.

However, as we’ve been talking about for the past several weeks, things have changed for the positive as far as the industry is concerned, and it’s going to get better according to presenters at the recent NAPE Global Business Conference in Houston.  The current U.S. rig count is now at 613 and may be heading to 800 this year if OFS companies can fill a real labor shortage gap.

However, when it comes to valuations, assuming oilfield service companies will join the recovery has not always been true in the shale era.  That said – this time may be different.

In this week’s post, we note the past and current performance of oilfield service companies and discuss the valuation trends for the industry.

Special Topics

What a Difference a Year Makes: Part II

Analyst Projections

We continue the “what a difference a year makes” theme, but now with a focus on analyst projections, then-and-now (then being as of year-end 2020, and now being as of year-end 2021) and energy stock valuation multiples. For the purpose of our analysis, we identified publicly traded energy companies trading on the NYSE and NASDAQ exchanges and operating in three broad areas – exploration and production (E&P), oilfield services (OFS), and midstream. So, what are the analysts expecting? Find out in this week’s post.

Marcellus and Utica Shale Special Topics

What a Difference a Year Makes: Part I

Key Aspects of the Energy Industry in 2021

The close of 2021 marked the end of a long upward march for the energy sector.  With oil closing up the year at $75 and gas at nearly $4 per mmbtu, the commodity markets driving the energy sector were much more economically attractive to producers. Stock indices such as the XLE was up over 50% for 2021 and was by far the best performing sector. Rig counts rose along with prices. Crude production also rose to 11.7 million bbls/day with room to grow. In addition, OPEC+ has signaled it will continue its scheduled output growth. All of this growth is coming alongside the ascent of wind and solar. Even though the Omicron variant affected prices in December, most analysts believe that COVID won’t stop the growth. In this post, we review the industry at the end of 2021 and look forward to 2022.

Special Topics

What Is a Reserve Report?

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.

Downstream Analysis Special Topics

How to Value an Oilfield Services Company

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.

Special Topics

What Is a Reserve Report?

A reserve report is a fascinating disclosure of information. This is, in part, because the disclosures reveal the strategies and financial confidence an E&P company believes about itself in the near future. Strategies include capital budgeting decisions, future investment decisions, and cash flow expectations. In this post, we provide a general overview of a reserve report, detailing why they’re important, what they contain, and how they’re prepared.

How to Use an EV/Production Multiple

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 (1) EV/Production; (2) EV/Reserves; (3) EV/Acreage; and (4) EV/EBITDA(X). Enterprise Value (EV) may also be termed Market Value of Invested Capital (MVIC) and is calculated by the market capitalization of a public company plus debt on the balance sheet less cash on the balance sheet. In this post, we will dive into one of these four metrics, the EV/Production metric, and explore the most popular uses of it.

Special Topics

Impairment Testing of Oil & Gas Reserves

2020 Global Events Causing Significant Reserve Write-Downs

The oil & gas market and the energy sector as a whole have taken a beating and experienced unprecedented events due to the global impacts from the pandemic and international price wars. While the scale of the full economic effects from these events has yet to be seen, companies are having to question and consider the need for interim impairment testing on reserves. The purpose of this post is to help oil & gas companies discern whether they may need to make interim impairment assessments and to discuss the impairment testing process.

Hedging And Bank Retreats Complicate Royalty Aggregators’ Valuation

As the clouds begin to clear from the oil patch storm that began three months ago, management, analysts and investors are wondering what is going to happen next. Has the proverbial storm system passed? Is it time to venture out and rebuild, or are we still in the eye of the hurricane, with the back wall on its way? Both are possibilities.

Current Events

Uncharted Valuation Territory: What Is A Barrel Or An Acre Worth Today?

Times are tumultuous for the oil and gas industry. News earlier this month was met with no rise in West Texas Intermediate pricing at the time. It hovered around $20.00 per barrel. Last week it fell to the seemingly unconscionable negative territory. It was worse in other places. In Western Canada heavy select oil was around $4.50 per barrel and dropped to $0 last week. It went negative as well. World demand for oil has dropped somewhere between 20% and 35% by some estimations, and excess supply has been building for weeks.

Something must give, and something will. While global supply and demand imbalance has the industry scrambling in unseen territory, how does this convert to what upstream companies and reserves are worth amid the situation? Is it a 1:1 price to value change ratio? Depending on perspective, the answer is both simple and complicated.

Special Topics

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.

Special Topics

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.

How to Perform a Purchase Price Allocation for an E&P Company

When performing a purchase price allocation for an Exploration and Production (E&P) company, careful attention must be paid to both the accounting rules and the specialty nuances of the oil and gas industry. In this blog post, we discuss the guidelines for purchase price allocations that all companies must adhere.

Challenges in Appraising Refinery Businesses

The appraisal of businesses involved in the refining of crude oil entails a number of challenges.  Some are unique to the industry, and others are more common.  The challenges arise primarily in two areas – assessing the level of uncertainty inherent in the entity’s future cash flows and forecasting the entity’s future operating results.

How to Value Your E&P Company

Our whitepaper “How to Value Your Exploration and Production Company” provides an informative overview of the valuation of exploration and production companies. Because of the historical popularity of this post, we revisit it this week. This post helps you, the reader, understand how E&P companies are valued which may help you understand how to grow the value of your business and maximize returns when it comes time to sell.

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