Case Studies

Valuation and Deal Structure

Engagement was with a large industrial company whose business requires as large volumes of dry natural gas over many years as part of its processes.   The client was considering purchase of natural gas reserves in the ground as a physical hedge against long term increases in the price of natural gas. Dan was engaged to help company evaluate alternatives ranging from purchasing royalty trust interests to working interests with producers.   The physical location of the client’s facilities and regulatory considerations led to an evaluation of deals in the south central U.S, including the Arkoma Basin, Woodford shale, Barnett shale, Haynesville/Cotton Valley, and Tuscaloosa marine shale.

The engagement included a review of deal structure, reserves and production purchased, and pricing of transactions undertaken by other large natural gas end users; other transactions in the area of interest; examination of prospects on a field by field, producer by producer basis; consideration of new reserve demand arising from Gulf Coast LNG projects; and reserve volume price elasticity.   The engagement resulted in a list of suitable target partners to be approached following management review.

Dan was able to call upon his deep experience and long relationships in the oil and gas industry to visit companies’ management, investment banking contacts, geologists, petroleum engineers, and industry regulators to develop an actionable plan for the client.

Complex Options

As part of a multibillion dollar transaction currently being negotiated, Dan was engaged to examine the optionality of long term contracts existing between the two parties and place a value on the contracts when viewing their terms as those of options.
The complexity of the options arose from the presence of strike price reset based upon an agreed upon formula, a floating strike price, and monthly exercise dates extending decades into the future. In addition the term of the option could vary depending upon the occurrence of certain external regulatory events beyond the control of either party.
Dan used the Cox-Ross-Rubenstein approach to address the problem thereby allowing for the discontinuities discussed above, the floating strike price, and an option term contingent on a regulatory event.

This solution design has allowed the client to perform pricing scenarios very quickly with the flexibility required given the indeterminate time horizon for the options.
Perhaps most importantly, Dan reduced the results of his work to a set of simple graphs which make his work intuitively accessible and understandable to those without a mathematical or finance background.

Capital Structure and Bankruptcy

Accumyn represented one of the parties subject to federal government fines as a result of the Macondo oil spill.     One of the key issues in this proceeding was the probability that the client would either suffer a credit rating decrease or be forced into bankruptcy as a consequence of the proposed fines.   In support of the Accumyn’s testifying expert, Dan examined the client’s capital structure and determined that both downgrade and default were risks owing to the company’s peculiar debt structure.

In comparison to other companies in its industry, the Company’s balance sheet over levered. In addition the debt securities the company had recently issued contained provisions for an upward revision of the coupon rate for each level of debt down grade from the level when the bonds were issued.

As a result, a downgrade would have an immediate effect on cash flow to cover the cost of these bonds already outstanding.   This held the potential for a downward debt spiral into bankruptcy as the cost of capital rose at a time when the company’s business was suffering as a result of the shutdown in drilling in the Gulf of Mexico imposed following the disaster.

The case was subsequently resolved favorably for the client.