Before the oil and gas industry in North America fully recovered from the 2014-15 crude oil prices crash, the lockdowns and travel restrictions during the COVID-19 Crisis further damaged the industry in 2020. The benchmark prices of US crude oil May contracts turned negative for the first time on April 20, 2020. The turmoil is followed by a new wave of corporate restructuring in the oil and gas industry, and the business enterprise valuation of the debtors becomes more challenging than usual during these unprecedented times.
The coronavirus impacts on E&P, Midstream, Refiners, and Oilfield Servicers in North America are short-term in some respects and long-term in others. Inventory level, storage capacity, the new territory of oil prices, rig counts, and geopolitical tensions are just the first few things to be considered, Appropriate selection of pricing benchmarks is important in the determination of value. The price differentials, the mix of oil and natural gas, the implementation of drilling and recovery technology, and transportation cost per barrel are among many variables and assumptions in DCF models. The industry widely uses PV-10 in reserve reports prepared by engineers to measure the relative size and value of reserves, which often serves as a starting point rather than an estimate of the fair market value.
Valuation plays a key role in the bankruptcy process including the establishment of the debtor’s insolvency, plan confirmation/cramdown, and adequate protection in the claim/collateral value, breach of fiduciary duty by directors or officers, fraudulent transfers etc. The value of the debtor is a critical component in the determination of the plan’s distributions to be received by each class of creditors and stakeholders. Whether or not the value of the debtor exceeds the amount of creditors’ claims is the center of common disputes between the equity committee and creditors in the plan confirmation process.
The differences in valuation between debtors’ and creditors’ experts illustrate the complexity of valuation in the oil and gas industry, especially during these uncertain times. A&C’s qualified and experienced professionals can assist each stakeholder navigate the process. If you have questions regarding this topic, please reach out to us at 469-467-4660 or info@ahujaclark.com.
