Energy Valuation Insights

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

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.

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.

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.

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.

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.

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.

Special Topics

Master Limited Partnerships

Master Limited Partnerships (MLPs) are publicly traded partnerships, which reap the tax benefits of a partnership and the liquidity benefits of a public company. In this post, we address both the history of MLPs and considerations when valuing them.

Mergers, Acquisitions, & Divestitures

Noble Energy Buys Clayton Williams: A Closer Look at the Acquisition

On January 16, 2017, Noble Energy, Inc. announced the acquisition of all Clayton Williams Energy equity for approximately $2.7 billion in NBL stock and cash. Noble Energy is a global independent oil and gas exploration and production company. Their acquisition of CWEI demonstrates an effort to accelerate high margin growth by focusing capital in productive regions such as the Permian Basin.

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