Corporate Valuation, Oil & Gas

January 8, 2018

What a Steady Oil and Gas Industry in 2017 Points to in 2018

“Steady as she goes.” At least that is what I think captains of most vessels say…except maybe a car. For captains navigating the 2018 oil and gas industry, a repeat of 2017’s relatively calm waters is vocal wish.

2017 in Review

Oil prices closed the year reaching $60 per barrel, WTI futures prices returned to backwardation, and oil price volatility was relatively calm as the price moved within an $18 band all year ($42 - $60). Natural gas, on the other hand, continued its woes of declining prices, transportation constraints, and oversupply. Hope remains that increased natural gas exports will change the narrative, but that is still undetermined. For the oil industry, a repeat of 2017 would be a welcomed event, making the theme for the year ahead – “Steady as she goes.” Before projecting trends of 2018, let’s review 2017, starting with oil and gas commodity prices.

Oil and Gas Commodity Prices

If bottom needs to be found before rebound can happen, 2015 and 2016 provided a solid foundation for the oil and gas price gains in 2017. This past year brought about the feeling of stability for oil prices and continued woes for natural gas. For the year, WTI increased 11% and Henry Hub natural gas decreased 20%. This is the second consecutive year-over-year increase for WTI.

Additional Perspective

In a commodity-focused industry, commodity prices set the overall framework. With last year’s oil and gas prices as the framework, here are a few posts that provide additional color to the 2017 oil and gas industry.

  • Are S&P Energy Stock Valuations Really Crazy Right Now? 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.
  • Are Oil and Gas Bankruptcies a Thing of the Past? The worst of bankruptcies are over. Since the start of the oil downturn, more than 120 upstream and oilfield service companies declared bankruptcy. However, the decision to file for bankruptcy did not always signal the demise of the business. Now more prepared, many E&P companies who reorganized are looking to grow.
  • Oil and Gas Investors Note Move Away From Contango The movement in the future spread away from a contango environment and toward backwardation is positive from a supply and demand perspective. Expectations are a backwardation environment will move crude oil prices higher. However, the exact cause of this change is unknown. While this shift is good news for the industry, company specific risk and investor's fickle attitudes create volatile equity markets.
  • Current Regulatory Environment Affecting the Oil and Gas Industry As business valuation experts, we have to consider the outlook for the economy, industry, and business in every valuation; therefore, we pay attention to the oil and gas regulatory environment to assess what it means for our clients.  Given the new administration, there is much to consider.
  • WTI Futures and Inventories U.S. oil inventories decline as oil exports surge. In this post we address why the shift in oil futures from contango pricing to backwardation is a bearish sign for those in crude oil storage.

Outlook for 2018

The positive momentum for the oil industry should continue as long as prices hold steady or increase. With the futures curve currently in backwardation and the backwardation spread getting stronger, the upward trend in price should continue. Other resource plays, like the Bakken, Eagle Ford, and Canadian Oil Sands will become more attractive and active as the price of oil inches higher. Natural gas, on the other hand, continues to sort out its oversupply and distribution constraints which have continued to push prices down. Reorganization, consolidation, and operational efficiency in the Marcellus and Utica players are anticipated going forward. This focus will continue until gas price relief is a reality, at which point the companies still operating will be well positioned to thrive.

Mercer Capital has significant experience valuing assets and companies in the energy industry, primarily oil and gas, bio fuels and other minerals.  Our oil and gas valuations have been reviewed and relied on by buyers and sellers and Big 4 Auditors. These oil and gas related valuations have been utilized to support valuations for IRS Estate and Gift Tax, GAAP accounting, and litigation purposes. We have performed oil and gas valuations and associated oil and gas reserves domestically throughout the United States and in foreign countries. Contact a Mercer Capital professional today to discuss your valuation needs in confidence.

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EP Second Quarter 2026 Permian Basin
E&P Second Quarter 2026

Region Focus: Permian Basin

The Permian Basin continued to demonstrate its resilience in the twelve-month period through June 30, 2026 (the review period). Despite a modest decline in rig counts, production reached new highs as operators continued to emphasize capital discipline, drilling efficiencies, and productivity improvements. Heightened geopolitical tensions introduced considerably greater volatility into commodity markets during the latter portion of the review period, yet oil prices ended above year-earlier levels and Permian public companies posted strong stock price appreciation. While basin operators continue to balance disciplined capital allocation with long-term production growth, the Permian remains the nation’s premier oil-producing basin and continues to demonstrate its ability to adapt to changing market conditions.
Just Released: Q2 2026 Oil & Gas Industry Newsletter
Just Released: Q2 2026 Oil & Gas Industry Newsletter
Regional Focus: The Permian BasinThe Permian continued to demonstrate its resilience in the twelve-month period through June 30, 2026 (the review period). Despite a modest decline in rig counts, production reached new highs as operators continued to emphasize capital discipline, drilling efficiencies, and productivity improvements. Heightened geopolitical tensions introduced considerably greater volatility into commodity markets during the latter portion of the review period, yet oil prices ended above year-earlier levels and Permian public companies posted strong stock price appreciation. While basin operators continue to balance disciplined capital allocation with long-term production growth, the Permian remains the nation’s premier oil-producing basin and continues to demonstrate its ability to adapt to changing market conditions.
Bryce Erickson Discusses the Changing Economics of Upstream Asset Valuations with Hart Energy
Bryce Erickson Discusses the Changing Economics of Upstream Asset Valuations with Hart Energy
Mercer Capital’s Energy Industry Team Leader, Bryce Erickson, ASA, MRICS, recently shared his perspective on upstream asset valuations in two features published by Hart Energy.Bryce joined other industry professionals at Hart Energy’s 2026 Energy Capital Conference, where he participated in the panel, “Asset Valuations in a High-Price World: Separating Signal from Noise.” The discussion examined how investors, lenders, and operators are assessing energy assets amid elevated commodity prices, increasingly scarce drilling inventory, and continued consolidation across the upstream sector.Markets Turn Their Attention to Tier 2 and Tier 3 AcreageIn a video interview with Hart Energy’s Chris Mathews, Bryce discusses how the scarcity of available Tier 1 acreage is directing greater attention toward Tier 2 and Tier 3 opportunities.As the inventory of premium drilling locations becomes increasingly concentrated, buyers are looking more closely at assets that may previously have received less attention. Higher commodity prices and continued improvements in drilling and completion techniques can make some of these locations more economically attractive. However, broad acreage classifications tell only part of the story. Investors must still examine the specific geology, operating costs, development plans, decline expectations, and risks associated with each asset. Bryce’s comments underscore the importance of disciplined, asset-specific underwriting as competition expands beyond traditionally defined core acreage.How the “Last Cheap Barrels” May Influence BidsHart Energy’s Lisa El-Amin further explores the relationship between inventory scarcity and upstream deal values in “How the Last Cheap Barrels May Be Shaping Today’s Bids” (subscription required).The article considers how competition is shifting toward a diminishing pool of drilling locations capable of generating attractive returns at approximately $50 oil, with much of that inventory concentrated in the Permian Basin. As low-breakeven locations become harder to acquire or replace, buyers may be willing to place greater value on assets offering durable inventory, favorable cost structures, and a long development runway. The result is an M&A market in which bids are increasingly influenced by the quality and scarcity of future drilling opportunities—not simply current production or near-term commodity prices.Valuation ImplicationsTogether, the two Hart Energy features highlight that asset quality and inventory durability are becoming more visible, and potentially more valuable, as the shale sector matures.Determining how these factors affect a particular company or asset requires careful analysis of its reserves, development inventory, cost structure, operating assumptions, and expected cash flows. Mercer Capital has assisted clients with a wide range of valuation needs in the upstream oil and gas industry across both conventional and unconventional plays in North America and around the world. Contact a Mercer Capital professional to discuss your valuation needs in confidence.

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