Energy Valuation Insights

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

Valuation Issues

How to Value an Oil and Gas Refinery

A thorough understanding of the role of refineries in the oil and gas industry is important in establishing a credible value for a business operating in the refining space. In addition, it is critical to understand the subject company’s position in the market, its operations, and its financial condition. In this post, we walk through industry factors, three valuation approaches, and the importance of synthesizing these factors in order glean a holistic understanding of a company’s value.

Mergers, Acquisitions, & Divestitures

EQT’s Acquisition of RICE Energy

Our Valuation Analysis of This Marcellus and Utica Mega Deal

On June 19, 2017, EQT announced the acquisition of Rice Energy (RICE) for approximately $6.7 billion. The result of this transaction is the potential creation of a Marcellus and Utica mega-producer. We take a closer look at the deal in this post and present our analysis.

Mineral and Royalty Rights

3 Types of Mineral Interests

Overriding royalty interests are often used as an incentive for those who are affiliated with the drilling process but do not own the minerals or E&P company (a broker or geologist for, example). Owners of ORRI, like royalty interest owners, bear no cost of production but own a portion of the revenues generated by the drilling process.

Valuation Issues

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 Valuation Issues

E&P: What We Learned from 1st Quarter Earnings

The first quarter of 2017 was productive and active for upstream E&P but the change in market capitalizations of many oil and gas companies does not match the reported increase in earnings and production estimates. Looking at our universe of energy companies in the E&P space, over 70% beat earnings estimates. This statistic held true no matter if the energy company was a global integrated operator or a pure upstream producer. To provide a flavor of the attitude, we selected the two largest publicly traded energy companies involved in E&P (STO and XOM) as well as six companies with primary operations in the Permian Basin (PXD, CXO, NBL, XEC, FANG, and RSPP) and reviewed the highlights of their latest earnings releases. As summarized in this post, each of these companies exceeded analyst expectations.

Domestic Production Special Topics

Why Aren’t We Talking About the Gulf of Mexico?

Artem Abramov, of Rystad Energy, recently published an article in the Oil and Gas Financial Journal comparing shale and offshore drilling. He claims, the “Gulf of Mexico [is] as important as [the] Permian Basin for U.S. oil production” but it has been overlooked since the advancement of shale gas. The EIA reports that offshore drilling accounts for 17% of total domestic crude oil production. So, why aren’t we talking more about oil and gas production from the Gulf of Mexico (GoM)?

Special Topics

Is Cash Always King?

Travis Harms, CFA, CPA/ ABV, Senior Vice President at Mercer Capital, recently published a blog post on Mercer Capital’s Financial Reporting Blog contemplating the appropriate amount of cash for a company to hold. This topic is especially pertinent to the oil and gas industry, in which 70 companies went bankrupt last year. Now as companies have started to increase capital expenditures again, they must consider how much cash they should keep as a cushion while considering the effect of this low-yielding asset on value.

Mineral and Royalty Rights

How to Invest in PUDs in the Permian Basin without Paying for the Well

In previous posts we have discussed the existence of royalty trusts & partnerships and their market pricing implications to royalty owners. Many of those trusts have a set number of wells generating royalty income at declining rates for multiple years to come. Viper Energy Partners LP (VNOM) is not a trust, but a partnership, solely focused on the Permian Basin with royalty interests in producing wells as well as proven undeveloped (PUD), probable and possible wells. In this post, we consider VNOM, the current market, and implications for royalty owners.

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