Energy Valuation Insights

July 3, 2018 Permian Basin

Growing Pains Curb Valuation Gains in the Permian

2Q18 Review

The story of the Permian Basin in 2018 so far has been developing as one of the finest proverbial “fishing holes” in the world.  However, as the year has progressed, it appears many industry players have found their reputed “catch” too big to process and are scrambling to deal with it before it begins to stink.

Translation: the year began with a flurry of developmental drilling activity followed by an emerging bottleneck.  The unintended consequence of this has been that some operators have been growing oil production too fast for pipeline and infrastructure to keep up.  A pricing differential has arisen due to the supply glut and there has been concurrent stagnation in valuations.  In this post, we discuss how some of it has transpired through the timeline of the first half of 2018.

June 25, 2018 Permian Basin

Take What You Can and Get Out

When oil prices crashed in mid-2014, companies were forced to become more efficient in order to survive. It became clear that location meant more than ever and companies could no longer justify operating in regions such as the Bakken and the Eagle Ford, where break-even prices were higher than they were in the Permian.  Thus in order to stay in business, companies flocked to the Permian.  This week, we look at how the increased appeal of the Permian Basin has affected M&A activity in the oil and gas sector.

June 18, 2018 Permian Basin

Piping Hot Permian

Production in the Permian is as hot as the summers in West Texas. Despite being discovered in the 1920s, it was not until 2007 that the region’s true potential was realized when hydraulic fracturing techniques were used to access the play’s tight sand layers. Given its low-cost economics and large well potential, in recent years, the Permian has been in the limelight with operators and investors alike prioritizing the region.

In this post, we discuss the increase of rig counts and production in the region, along with valuation implications for companies operating in the Permian.

June 12, 2018 Special Topics

3 Things All Mineral Owners Should Know

Minerals Workshop at the DUG Permian Basin Conference

On May 21, Mercer Capital attended the Minerals Workshop at the DUG Permian Basin Conference in Fort Worth, Texas. The agenda included five presentations and eleven speakers, including royalty brokers, royalty aggregators, and royalty managers. We learned about changes in the royalty market, mineral investor required returns, private equity strategies and due diligence musts for buyers. In light of the information, three themes emerged that mineral owners should know about the royalty market.

June 6, 2018 Special Topics

Tax Reform and Purchase Price Allocations for Oil & Gas Companies

On December 22, 2017, President Trump signed The Tax Cuts and Jobs Act, which resulted in sweeping changes to the U.S. tax code.  The Act decreased the corporate tax rate to 21% from 35%, in addition to modifying specific provisions around interest, depreciation, carrybacks, and repatriation taxes.  The change in tax rate will have the biggest impact on purchase accounting. In the energy industry, this will manifest itself in several different ways.  This blog post explores some of the impacts to valuations performed under fair value accounting in ASC 805 and ASC 820.

May 21, 2018 Marcellus and Utica Shale Permian Basin

The Permian Boom Causing a Natural Gas Bust

The oil industry is cruising. Producers are flocking to many oil rich plays, most notably the Permian Basin, Bakken, and Eagle Ford. Producers in these areas are all looking to exploit multi-zone payouts and gain significant efficiencies with new deep lateral and horizontal wells. While this strategy is working very well for oil producers, often lost in the oil excitement is the byproduct, additional dry and natural gas liquids. For producers targeting natural gas, this is not good news.

May 14, 2018 Mineral and Royalty Rights

Royalty Interests and the Importance of the Operator

In previous posts, we have discussed the market pricing implications of publicly traded royalty trusts to royalty and mineral owners. We have explained the importance of understanding the specifics underlying those trusts before using them as a pricing benchmark. In this post, we will delve further into market prices of royalty and mineral interests and the important role of operators. We will look into the three publicly traded royalty trusts operated by SandRidge Energy: SandRidge Mississippian Trust I, SandRidge Mississippian Trust II, and SandRidge Permian Trust.

May 7, 2018 Mineral and Royalty Rights

Considerations for Endowments Divesting Fossil Fuels

The purpose of an endowment is to provide a permanent source of funding that maintains the operations of colleges, universities, churches, etc.  To best serve its fiduciaries, an endowment should achieve the highest return possible.  Congruently, when divesting, the endowment must ensure it achieved a fair price for its investments. This post does not weigh in on the discussion of whether endowments should or should not liquidate fossil fuels.  Rather, I hope to educate and advise those who have decided to divest their fossil fuel assets and are unsure of how to proceed.

April 30, 2018 Mineral and Royalty Rights

Royalty Trusts: I’m a Revenue Partner… No, Wait… That Looks Like Equity

In previous posts, we have discussed the existence of publicly traded royalty trusts & partnerships and their market pricing implications to royalty owners. Before using publicly traded royalty trusts as a pricing reference for your royalty interest, it is important to understand the economic rights and restrictions within those royalty trusts. In this post, we discuss the current market, the outperformance of the Whiting USA Trust II (WHZT), and importance of understanding the details about your royalty interest.

April 24, 2018 Eagle Ford Shale

Eagle Ford – 2017/2018 Acquisition & Divestiture Commentary

This week’s blog post discusses several observations: There has been steady A&D activity over past 12 months, with typical valuations between $8,000 – $10,000 per acre. The formation of Magnolia Oil & Gas Corporation from the deal between a blank check company & Enervest creates a pure play South Texas producer in the Eagle Ford and Austin Chalk. Lastly, producers are still divesting positions and re-allocating resources to Permian Basin.