Energy Valuation Insights

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

Mineral and Royalty Rights

Before Selling Your Oil and Gas Royalty Interest, Read This

There are many reasons that you may want to sell your oil and gas royalty interest, but a lack of knowledge regarding the worth of your royalty interest could be very costly. Whether an inflow of cash would help you make ends meet or finance a large purchase; you no longer want to deal with the administrative paperwork or accounting cost of reconciling monthly revenue payments; or you would prefer to diversify your portfolio or move your investments to a less volatile industry, understanding how royalty interests are valued will ensure that you maximize the value.

Valuation Issues

Accounting for Risk in Oil and Gas Reserve Valuations

Reserve Adjustment Factors and Risk-Adjusted Discount Rates

One of the most complex aspects of oil and gas valuation is accounting for the risk associated with PDNP reserves, PUD reserves, and the less certain probables and possibles (P2 and P3 Reserves). Generally, there are three ways to account for this additional risk: (1) Using a risk-adjusted discount rate, (2) applying a reserve adjustment factor (RAF), or (3) utilizing a modified option pricing model.

Valuation Issues

Non-Operated Working Interests: Are You Investing in the Operator, the Oilfield, or Both?

Joint Ventures in Oil and Gas

Executing a successful joint venture requires a number of items working in harmony such as solid due diligence, good location, cooperation between both firms, and a degree of luck on the bet they are making.

It seems a bit contradictory that a large amount of projects are structured as joint ventures if they have such a high failure rate. This begs the question, does the success of the JV hinge on the quality of the oilfield or the technical ability of the operator? The answer, we think, lies somewhere in the middle.

Special Topics

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.

Special Topics

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.

Valuation Issues

How to Interpret Breakeven Prices

Before mid-2014, few investors took notice of efficiency-oriented metrics, instead focusing on stories of new oil discoveries and the development of new wells and new technologies.  Since the crash in oil prices, a new measure of success was brought to the forefront:  breakeven prices.

As more companies present this metric and more investors rely on it as an indication of performance, it becomes increasingly important to understand what it actually measures, and if breakeven prices can be compared consistently from company to company.

Special Topics

U.S. Energy and Private Equity

Show Me the Money

Private equity companies in the energy sector are positioned for an interesting opportunity. These companies have seen a surge of fundraising in recent years, leaving managers with large cash reserves or “dry powder” to be appropriately deployed. Despite the large amount of cash available, these firms are having trouble finding places to invest resulting in a decline in PE activity in 2016-2018 with deal counts dropping for the second year in a row by 8%. However, investments could see a marked increase in energy in the last quarter of 2018 and into 2019 as there is a climate of high demand for return on investment and low supply of cash needed for capital expenditures in upstream oil companies.

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