2021 Energy Valuation Conference Key Takeaways

article

Date may 25, 2021

Gordon Brothers appraisers specializing in the energy space attended the 2021 Energy Valuation Conference hosted by the Houston Chapter of the American Society of Appraisers on May 12. The conference featured presentations from thought leaders in the valuation, accounting, banking and energy industries, as well as the public sector.

Mark Winger, Senior Manager, Valuations summarizes six key takeaways from the conference including recent trends in mergers and acquisitions and current market factors affecting asset values within the energy industry.

  • Contingent Consideration Provisions: While prevalent in other industries for years, the adoption of contingent consideration provisions has become increasingly common for transactions in the energy space. Contingent consideration represents an amount the buyer of a company pays to its former owners should certain future events occur, including, but not limited to, specific revenue and earnings levels. This consideration lets sellers share in the upside of a business after the sale. Most often, the calculation of contingent consideration for transactions within the energy space depends on changes in commodity prices versus achieving a level of future performance most commonly specified within other industries.

  • Cost Saving Opportunities: Given challenging conditions within the energy industry because of COVID-19 and the corresponding collapse in commodity prices, cost saving opportunities are the primary motivation for companies to pursue mergers and acquisitions, with the focus on accretive transactions. Specifically, transaction multiples involving mergers within the energy space have declined considerably in recent months due in part to pessimistic industry supply and demand forecasts.

  • Free Cash Flow Yield: For valuations of energy companies, investors tend to focus on free cash flow yield to evaluate investment opportunities as many currently view energy as essentially a zero-growth industry. For unlevered investments, investors view those with yields of more than 10% as most appealing, whereas the focus with levered investment opportunities involves an evaluation of the ratio of free cash flow to enterprise value.

  • Global Capacity Additions: Within the refining and marketing space, the bulk of global capacity additions have occurred over the past 20 years in the Asia Pacific region with the remaining regions, most notably North America, Europe and the Middle East, experiencing modest increases or declines. In the North American market, several refiners have idled or closed facilities in 2020 because of profit margin pressures.

  • U.S. Tax Deductions: Key elements of the U.S. tax plan proposed by the Biden administration eliminate certain deductions historically available to exploration and production companies. These include bonus depreciation and the research and development credit, as well as tax preferences including intangible drilling costs deductions and enhanced oil recovery credit.

  • Lender Information: Historically, lenders have expressed reluctance to lend against an upstream company’s probable and possible oil and gas reserves. In the current particularly challenging environment, lenders are unlikely to lend against these categories of reserves versus proved reserves.

Gordon Brothers has extensive experience in valuing energy entities and their underlying assets, including the upstream, midstream and downstream sectors. We specialize in specific areas of expertise including the valuation of oil and gas reserves, processing facilities, pipelines and bulk terminals.