Corporate Valuation, Oil & Gas

March 5, 2020

Themes from Q4 Earnings Calls

The energy sector gained slight momentum in the fourth quarter as crude prices steadily increased from $54 per barrel at the beginning of October to $61 at the close of 2019.  The gradual increase in prices was fueled partly by optimistic market expectations in early 2020, and the announcement of the United States and China Phase One trade deal.  In early December, OPEC announced their intent to deepen production cuts through March 2020, applying upward pressure on prices.  However, $60 pricing was short-lived in 2020 as concerns regarding the coronavirus, and its impact on global growth and energy demand, sent WTI prices to the $40s.  In this post, we examine some of the most discussed items and trends from the Q4 earnings calls, specifically E&P companies and those in the mineral aggregator space.

E&P Companies

Operators experienced a positive earnings quarter to close 2019 as many beat expectations on both EPS and revenue.  Cost reductions coupled with an increase in oil production fueled organic growth and allowed E&Ps to produce a level of free cash flow to investors.  Participants on the calls were curious on the outlook for 2020, as topics discussed centered around the coronavirus and ESG (environmental, social, and governance) efforts moving forward.

Global Health Affecting Supply and Demand

Due to the calls occurring in early 2020, participants seemed inclined to question the outlook of the energy sector in light of recent news regarding the coronavirus.  Operators, Pioneer Natural Resources and Continental Resources commented on the subject.

  • “Obviously, more bullish, especially with U.S. shale essentially slowing its growth significantly going in 2020 once we get through the coronavirus demand issues. I'm more optimistic that we're going to see a much higher price deck over the next five years.” – Scott Sheffield, President and CEO, Pioneer Natural Resources
  • “We see the oil and gas market as fundamentally oversupplied, with demand even further impacted by the coronavirus. By preserving our high-quality asset for a more structurally sound market; we are further enhancing future value for shareholders.” – Harold Hamm, Chairman, Continental Resources
The Wall Street Journal recently reported that that the coronavirus has sent natural gas prices to their lowest level in years, as natural gas futures for April delivery closed at $1.756/MMbtu.  Operators remain optimistic, however, that the outlook of the industry remains positive, assuming the virus is contained.

ESG Efforts Intensifying

  • “I want to highlight Continental's continued commitment to ESG. As one of the leaders of the horizontal American energy renaissance and a major contributor to U.S. energy independence we are proud to be a part of the approximately 15% rollback in CO2 emissions that has occurred since 2006, thanks to the affordability and availability of clean-burning natural gas and light sweet crude oil produced as a result of horizontal drilling.” – Harold Hamm, Chairman, Continental Resources
  • “Every individual’s compensation is going to be tied to ES&G metrics. Things like water recycle, spill control, total recordable incidence rate, flaring, those are not subject to discretion. Those are quantitative measures that we will incentivize you know a better performance on. That's one thing that we've proven at Diamondback is, what gets rewarded gets done and we intend to do that in our scorecard.” – Travis Stice, CEO, Diamondback Energy
  • “When you look at Slide #23, where the lowest of our peers in emissions intensity where Pioneer on both greenhouse gas intensity and also methane intensity. And what are the major changes we're making in our ESG in regard to compensation, we're increasing that these from 10% to 15% going forward in 2020.” – Scott Sheffield, President and CEO, Pioneer Natural Resources

Mineral Aggregators

As we discussed in a previous post, mineral aggregators have continued to attract equity capital in the energy space amid depressed investor sentiment regarding the industry as a whole.  While some mineral aggregators centered their attention on acquisitions heading into 2020, others were quiet and reiterated their patience that we covered in our third quarter earnings call post.  In the fourth quarter, Kimbell Royalty Partners declared a record financial performance along with their acquisition of the Springbok assets in the Delaware Basin.  On the other hand, Brigham Minerals emphasized their patient strategy, in search for larger mineral packages to meet their strict investment guidelines.  As the price environment remains uncertain, aggregators are being questioned with their strategy moving forward.

Uncertain Price Outlook Leading to Alternative Strategies

  • “That is primarily to give us more exposure to the upside when the gas markets do come back when – if they do, we’re – and also on the downside, adding cash flow to the system in 2021 and 2022 to hedge distributions. So we’re really – we’re playing it in a hedged manner. We’re going to keep a fair amount of exposure to the upside, but we’re also going to put some acreage into play now." – Tom Carter, Chief Executive Officer, Black Stone Minerals
  • “We have received approval to add hedging to our program. We certainly if these prices aren’t going to be hedging oil but some sort of protection on both the spread side or even the gas Waha spread side given the outlook for permitting gases is pretty dire here in 2020. I think we're looking to take that risk out of the Viper story. So we'll be looking at the market and now have approval to hedge from a downside and spread protection perspective.”       –Kaes Van’t Hof, President, Viper Energy Partners
  • “It's opportunities like this that only present themselves every three years to four years in terms of being a little consolidate and take advantage of this type of situation where people are concerned about crude oil prices. So, there is some time that has to go by. But I think our message is, if people are panicky, we can be patient and picky in terms of what we buy.”  – Robert Roosa, Chief Executive Officer, Brigham Minerals
  • “Oil, natural gas, and natural gas liquids revenues in the fourth quarter increased 18% compared to the fourth quarter of last year to $27.2 million. This increase reflects strong performance from acquisitions made in the past 12 months despite the decrease in realized commodity prices. While current pressures persist for many exploration and production companies operating in the U.S., our broad-based, high-quality asset portfolio continues to outperform expectations.” – David Ravnaas, President and Chief Financial Officer, Kimbell Royalty Partners
The difficult price environment in the energy industry is leading mineral aggregators to plan for the future.  The topics discussed revolved around strategies, particularly hedging and reinvestment, to capitalize on the unpredictable nature of the industry over the next few years.  

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

Region Focus: Permian Basin

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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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