Energy Valuation Insights

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

Special Topics

The Importance of a Quality of Earnings Study

Acquirers of companies can learn a valuable lesson from the same approach that pro sports teams take in evaluating players. Prior to draft night, teams have events called combines where they put prospective players through tests to more accurately assess their potential. In this scenario, the team is akin to the acquirer or investor and the player is the seller. While a player may have strong statistics in college, this may not translate to their future performance at the next level. So it’s important for the team to dig deeper and analyze thoroughly to reduce the potential for a draft bust and increase the potential for drafting a future all-star.

A similar process should take place when acquirers examine acquisition targets. Historical financial statements may provide little insight into the future growth and earnings potential for the underlying company. One way that acquirers can better assess potential targets is through a process similar to a sports combine called a Quality of Earnings Study (QoE).

Permian Basin

Permian Production Remains Strong

The economics of Oil & Gas production vary by region. Mercer Capital focuses on trends in the Eagle Ford, Permian, Bakken, and Marcellus and Utica plays. The cost of producing oil and gas is determined by the reserve’s geological makeup, depth, and the cost of transporting raw crude to market. Depending on these factors, we can see different costs in different regions. We take a closer look at the Permian in this post.

Production growth in the Permian continued to exceed growth in the Eagle Ford, Appalachia, and Bakken over the past year as the basin remains one of the most economical regions in U.S. energy production.  With the surge in commodity prices over the past quarter, it might have been expected that producers would start bringing more rigs online, leading to more production growth than what we saw.  However, as upstream companies have signaled, it may not be realistic to expect such increased deployment of capital from public operators in the near future, though private operators may very well move to take advantage of the higher price environment.  With greater emphasis on returning cash to shareholders, continued levels of relatively low investment in growth capital may be expected.  However, its significantly large contribution to total energy production continues to make the Permian a steady source of growth for overall U.S. oil and gas production.

Mergers, Acquisitions, & Divestitures Permian Basin

M&A in the Permian: Acquisitions Slow as Valuations Grow

Transaction activity in the Permian Basin cooled off this past year, with the transaction count decreasing to 21 deals over the past 12 months, a decline of 6 transactions, or 22%, from the 27 deals that occurred over the prior 12-month period.  This level is in line with the 22 transactions that occurred in the 12-month period ended mid June 2020. Read more in this week’s post.

Mineral and Royalty Rights

Mineral Aggregator Valuation Multiples Study Released

With Market Data as of May 12, 2022

Mercer Capital has its finger on the pulse of the minerals market.  An important trend has been the rise of mineral aggregators, which have largely supplanted the trusts as the primary method of publicly traded minerals ownership.

In this updated Study, Mercer Capital has thoughtfully analyzed the corporate and capital structures of the publicly traded mineral aggregators to derive meaningful indications of enterprise value.  We have also calculated valuation multiples based on a variety of metrics, including distributions and reserves, as well as earnings and production on both a historical and forward-looking basis.

Special Topics

Themes from Q1 Earnings Calls

Part 2: Oilfield Service Companies

This week we take a look at the key takeaways from the OFS Q1 2022 earnings calls. Themes from these calls include short-cycle projects to bolster near-term production, margin expansion, and the growing importance of relationships with private operators. Read more in this week’s post.

Valuation Issues

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 Valuation Issues

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 Valuation Issues

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 Valuation Issues

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.

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