Major changes in energy sector valuations

BVWireIssue #224-3
May 19, 2021

industry analysis
ASA, conference, industry analysis, COVID-19

In the wake of the pandemic, there is a “paradigm shift” in valuations in the energy sector, according to one speaker at the Energy Valuation Conference, hosted by the Houston Chapter of the American Society of Appraisers on May 12. Well over 200 attendees in 10 different countries listened to a full day of sessions from top experts in this sector. BVR sponsored the live webcast of the event.

The pandemic hit the energy sector particularly hard. Earnings plummeted, and more than 100 North American oil and gas firms filed for bankruptcy in 2020. M&A activity took a hit, and now there appears to be more sellers than buyers. Speakers pointed out that transaction multiples going forward are expected to shift in certain subsectors.

Rebound timing? Several third-party forecasts predict the energy sector won’t get back to prepandemic levels until 2030. Best case is 2024, if there’s a big economic recovery, and worst case is 2050, if the recovery is slow, speakers said. Interestingly, several speakers did not put much weight on the impact of the rise of electric vehicles on the oil and gas business.

Several speakers discussed the regulatory environment, which is abuzz with a number of major proposals that would directly impact this sector. What’s more, there are serious concerns about the Biden administration’s actions so far concerning the oil and gas industry.

For valuation experts not familiar with this industry, speakers gave some good overviews of the different components of the industry, namely, the upstream, midstream, and downstream subsectors. There was also an interesting session on the new proposed tax provisions and the important role valuations play in tax credits. Also interesting was a session on the fast-paced world of used equipment auctions (this sector is fixed asset-heavy). The growing trend in environmental, social, and corporate governance (ESG) was also covered. A recap and key takeaways from the conference will appear in the July issue of Business Valuation Update.

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