Challenge

Valuation Research Group’s Mexico-based affiliate Grupo NASSA was retained by an energy production company whose subsidiary had acquired certain distressed assets from an energy and production company. The acquired company was in Chapter 11 bankruptcy protection after the precipitous drop in oil prices in 2015. Grupo NASSA and US-based VRG affiliate, Valuation Research Corporation (VRC) partnered on the engagement to determine the fair value of certain tangible and intangible assets of the acquired company. Grupo NASSA valued other ancillary assets such as vehicles. To perform the valuation of the energy reserves VRG coordinated with multiple parties operating in different languages and valuing assets at several locations. This included VRC’s US-based staff, Grupo NASSA’s Mexico-based staff, the acquiring company and its subsidiary, the acquired company and VRC’s expert geologists. The valuation included on-site evaluation of the acquired oil platforms as well as oil reserves and wells – some developed, some undeveloped – off the coast of Peru.
In selecting a valuation methodology, VRG needed to consider the significant divergence in the enterprise value of the business versus the undiscounted value of the assets given the dramatic drop in commodity prices at the time.

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Solution

VRG employed a cost approach to determine the value of the tangible assets. The value of the tangible assets required the calculation of a significant economic obsolescence factor given their low utilization. To determine the value of the oil and gas reserves, VRG employed a Multi-Period Excess Earnings Method (MPEEM). In estimating the fair value of the personal property, the cost approach was used because it provided the most accurate reflection of the asset’s value to the owner-user on an ongoing basis. Determining an economic obsolescence on the tangible assets was challenging given fluctuating energy prices and uncertain production projections. To value the intangible reserve assets, VRG addressed valuation issues relative to the reserve interests.

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