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Energy Valuation Services: Tips, Best Practices, and Insights from the Field

Energy Valuation Hero (2)There aren’t too many industries under a more powerful and exacting microscope than energy. Between extreme volatility in commodity prices, rising ESG tides, and a constant barrage of global headlines – mostly from surging gas prices – there isn’t much room for error in the sector. That is, if there’s any at all.

Of course, that notion just underscores the need to get things right the first time, making your choice of valuation practices and partners a critical one. So to keep you on track, we’re lending some key insights we’ve garnered through our decades of collective experience on the energy valuation frontlines. So let’s jump in.

The Oil & Gas Financial Due Diligence Checklist

 

Areas of Need for Valuation Services in Energy

The term energy can mean different things to different people these days. Oil and natural gas, nuclear, coal, a growing list of renewable energy sources in hydro, biomass, solar, geothermal, and wind power – they all fall under the massive energy sector moniker. And as you might guess, oil companies have vastly different valuation issues and needs than power plants and energy storage providers.

However, while particular needs might differ across the industry, there will always be consistent demand for valuation services in energy. It’s just that, as the following list demonstrates, those needs vary according to the countless internal and external forces acting upon them. Put another way, while something like impairment isn’t driving valuation needs at the moment given current prices, it might seem like a completely different world for energy companies two or three years from now.

Speaking of impairment, the flip side of a market knee-deep in impairments is an acquisitive one, just like we’re seeing today. And while the role valuations play in M&A goes far beyond what a single-paragraph summary can cover – not to mention establishing the purchase price, equity consideration, purchase price allocation and accounting requirements, and other complexities – the upside of the cycle entails a different set of valuation needs than the downside.

Impairment Testing

Speaking of the downside of the cycle, under different circumstances than the record-setting prices we’re seeing today, valuations on oil and gas reserves and other assets could absolutely be necessary for annual impairment testing or restructuring needs.

In other words, when the market starts to go sideways for an extended amount of time, the demand for valuations increases in lockstep. Granted, we’re nowhere near that environment right now, but given the cyclical nature of the energy sector, those days will return, probably sooner than anyone would like.

Incentive Units, Stock Compensation and Options

This valuation need is especially important to CFOs and CEOs, not just in energy but virtually all industries. Simply put, companies issue stock, provide it as performance incentives to leadership, and need to value those stock incentives. 

Strategic Valuations

Need to value a company or equipment before M&A or a carve-out? Or maybe as part of a scenario analysis based on different factors and market variables? You’ll need valuations for each of those instances.

Equipment and Real Estate

Things change quickly in energy – just look at the constant state of motion oilfield services are in. Therefore, timely market data and relevant research are crucial for matching equipment and real estate market values to valuation dates, something that’s especially true during times of extreme scarcity or abundance. This is a unique area where an experienced valuation services team can feel like your best friend.

Property, Estate, And Gift Tax

Do you want to know who else demands accurate valuations for companies, equipment, and real estate? The government, that’s who. But you already knew that. Therefore, property, estate, and gift taxes create another need for valuations in the energy industry.

Conversion from Full-Cost Accounting

In case there are any remaining companies still in need in this area, converting from full-cost accounting to successful-efforts accounting creates yet more demand for valuation services in oil and gas.

Asset-Based Lending

Capital makes the world go ‘round. But where will you get the money to invest in new equipment, acquire other companies, and just generally grow? And what are you going to use to secure that capital? Of course, that’s where asset-based lending (ABL) comes into play and, since a lender is going to need something more concrete than your good word, you’ll have to provide a valuation of the assets you’re using to secure the loan.

Fairness Opinions

Transactions are another instance where your good word and a handshake aren’t sound substitutes for an accurate valuation. Fairness opinions provide peace of mind to the parties involved in a transaction, assuring the underlying assets are fairly priced according to current market conditions.

 

Why Valuations Are Important in the Energy Industry

Now that we’ve sprinted through some of the main areas where valuations fit in with energy operations, let’s take a look at some of the reasons why valuations are essential to the sector.

Investor Confidence

As we said up top, energy is always under a powerful, scrutinizing microscope. Thus, it’s vital you get your accounting right the first time. Otherwise, you’re at risk of losing investor confidence, something that doesn’t bode well for your future success and viability.

Put another way, investors don’t have much patience anymore, so even small surprises could be enough to prevent them from diving back into energy positions. In that sense, it’s far more important to get an accurate valuation now rather than creating a future impairment that, like it or not, will only further erode confidence in your organization and the industry itself.

Lack of Inhouse Expertise

Many organizations in energy have cut costs significantly in recent years, limiting in-house accounting expertise that could otherwise handle more complex responsibilities and processes. Obviously, valuations fall squarely within that complex category of accounting and finance tasks.

Mergers and Acquisitions

Successful M&A depends on accurate, timely accounting. Now, in an environment where cost-cutting is still fresh in everyone’s minds, we understand there’s a temptation to save on expenses. However, thinking from a macro perspective, when you’re involved in a multimillion dollar transaction, it just makes sense to spend a fraction – literally – of that market price on valuation specialists that can help ensure the deal goes through successfully.

Engineers Don’t Speak Accounting

Engineers do so much heavy lifting across the energy industry. But as essential as they are to operations, engineers don’t speak accounting-ese, nor do they want to. That said, if you let your technical people be technical, outside specialists like Embark will translate the technical into what you need for accounting.

 

Best Practices on Choosing a Valuation Services Provider

The energy industry is a bird of a different feather. It’s under a brighter, harsher spotlight, deals with forces and variables that would make other industries blush, and is looking at even rockier terrain down the road as global dynamics, climate change and other ESG-related demands, as well as evolving energy resources and needs reshape the entire sector.

The point is, working in energy in many capacities requires specialized skill sets and experience that simply aren’t needed in other industries. Therefore, our first and most obvious best practice is to choose a valuation services provider that understands what you do. That “gets” energy, has worked in the industry, and isn’t trying to pass the right verbiage off as genuine experience in the sector.

Similarly, you want to find a team that’s familiar with systems and processes specific to the energy sector. Otherwise, you’re going to have to educate them on what you do and how you do it, exercises that don't exactly scream efficiency and time savings. Ultimately, the ideal valuation specialist will do their job with minimal disruption to your workflow since you still have operations to run.

But that’s exactly what Embark’s valuation specialists provide – skills and experience rooted in energy. When you work with Embark, you don’t have to obsess over EBITDA multiples, enterprise values, and other relevant metrics because we do that for you. Instead, you can focus on what you do best, knowing your valuation is in the best of hands. It’s what we do, and we can’t wait to tell you more about it.

Free Resource

The Oil & Gas Financial Due Diligence Checklist

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