Energy Valuation Insights

April 17, 2017 Special Topics

What Would You Do with $1 Billion?

Less than one month ago investors bet $1 billion on James Hackett, former President and CEO of Anadarko Petroleum Corp. Silver Run Acquisition Corp. II is a blank check company that will leverage James Hackett’s knowledge of the Eagle Ford Shale and Permian Basin to fund an opportunistic acquisition. Silver Run II was created by the Riverstone Holdings LLC, the bank that successfully started the blank check company over a year ago now known as Centennial Resource Production LLC. The original stock sale for Silver Run Acquisition Corp I, which raised $900 million is expected to exceed $1 billion. If the banks managing the deal exercise their options to buy shares, which they generally do, the Company would be tied for the record largest blank-check offering. Before we review the recent uptick in investment in oil and gas blank check companies, we will review the basics of blank check companies and special purpose acquisition companies (SPACs).

April 11, 2017 Mergers, Acquisitions, & Divestitures Special Topics

Eureka! Observations & Thoughts from the Permian DUG Conference

Last week, Mercer Capital attended the DUG Permian Basin Conference in Fort Worth. It was a solidly attended event hosted by Hart Energy. The session speakers were a mix of mostly company executives and industry analysts. The presentations were tinged with a lot of optimism – centered on the positive and unique economics of the Permian, tempered by (some) cautionary commentary. We will follow on in later posts with some more detail on specifics, but today we want to touch on a few thematic elements: the Permian was the center of the M&A activity in 2016 and will be in 2017, efficiency and productivity gains are helping to fuel activity, and a rise in rig counts will eventually mean rise in costs.

April 4, 2017 Mineral and Royalty Rights

How to Value Overriding Royalty Interests

When comparing a royalty interest to an ORRI, it is critical to understand the subtle nuances of the rights and restrictions between the two. Owners of royalty interests utilizing Permian Basin Royalty Trust as a valuation gauge should adjust for such differences as well as other differences between publicly traded and non-marketable securities.

March 27, 2017 Special Topics

The Wild Goose Chase Is Over

From 2000 to 2005, “concerns that supply could run out and soaring oil prices sent energy companies on a grand, often wildly expensive, chase for new production.” They were investing in multi-billion-dollar projects in the Arctic waters and Kazakhstan’s Captain Sea. A WSJ article titled, “Oil Companies Take Thrifty Bets,” explained that when oil was worth $100 per barrel oil companies had much higher risk tolerance and were able to invest heavily in the exploration of undeveloped land and ocean. But as the price of oil declined and has settled around $50 per barrel, the wild goose chase for oil has come to an end.

March 20, 2017 Valuation Issues

How to Perform a Purchase Price Allocation for an Exploration and Production 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.

March 13, 2017 Downstream Analysis Special Topics

A Bright Spot at the Bottom of the Barrel

Asphalt and road oil are used primarily by the construction industry for roofing and waterproofing and for road construction. Asphalt is a byproduct of petroleum refining. During the distillation process of crude oil, asphalt does not boil off and is left as a heavy residue. Generally around 90% of crude is turned into high margin products such as gasoline, diesel, jet fuel, and petrochemicals while the other 10% is converted into asphalt and other low margin products. Petroleum refiners sell asphalt to asphalt product manufacturers who produce retail products such as asphalt paving mixtures and blocks; asphalt emulsions; prepared asphalt and tar roofing and siding products; and roofing asphalts and pitches, coating, and cement.

March 7, 2017 Special Topics

Thoughts of a Non “Oil Price Guru”

On February 27, 2017 the Wall Street Journal published an article titled “The Rise of a Global Oil-Price Guru”. Simply put, Gary Ross knows anyone and everyone in the energy world. From the west coast of California, east to the Arab Sheiks and beyond, there is no one better connected. While we do not claim to have the same network or prediction abilities as Ross, our predictions for oil prices come with a lower price tag (none at all) than Ross’ more than $50k consulting fee.

March 1, 2017 Special Topics Valuation Issues

Are S&P Energy Stock Valuations Really Crazy Right Now?

A few days ago the Wall Street Journal published an article discussing what the author described as “crazy” stock valuations, and in particular the inflated valuations of oil and gas stocks from the perspective of operating earnings ratios. While we certainly are believers that value is driven by future operating earnings, and that earnings in the energy sector have fallen precipitously since 2014, is this all that determines the market’s pricing of the S&P 500 energy sector? As we reflect on this for a moment, a few additional considerations came to mind that may explain these “crazy” valuations more fully.

February 14, 2017 Downstream Analysis

Refining Overview

There are four main components to refined product prices: (1) Input Prices (i.e. crude oil), (2) Wholesale Margins, (3) Retail Distribution Costs, and (4) Taxes. Generally, input prices and wholesale margins drive fluctuations in product prices as the last two are relatively stable. Thus, in order to understand refined product prices we consider the macroeconomics trends in the global oil and gas market which drive input prices.

February 6, 2017 Mineral and Royalty Rights

There Was Blood

Many operators and oil and gas service companies didn’t survive the last 20 months, and most of the news headlines focused on their story. For royalty owners, who might depend upon royalty checks for steady income, it was equally scary as their payments shrunk due to low oil prices which were magnified by lower production rates. However, the last 12 months have provided some relief. In post, we reflect on the effects of the market and valuation implications for royalty owners.