“…A Barnett package of assets would probably be a lot easier to value at this point than an Eagle Ford package….”

Discount rates among shale plays continue to be diverse, based on which plays have proven to perform, says Jim Parkman, co-founder and managing director of energy investment-banking firm Parkman Whaling LLC.

“I’m not sure that we totally understand how to value the shale reserves yet because we’re not sure what the ultimate (recoveries) are,” Parkman says in the complimentary webinar “Jim Parkman’s Observations On The Recent Reorg Cycle, And Forward Markets” hosted by OilandGasInvestor.com and now available on demand.

“We don’t have a clear picture of the decline rates and, of course, you don’t know what your total reserves are so, any time you have that level of uncertainty, you tend to see, from the practical point of view, the discount rate moving up. That’s going to vary by company and company.”

An energy investment banker for nearly 30 years, Parkman is a leader in energy-company workouts and capital-structure reorganizations, with recent assignments including the restructuring/reorgs of Energy Partners Ltd., Edge Petroleum Corp., Foothills Resources, Beryl Oil and Gas, Bigler, Storm Cat Energy Corp. and four other energy companies.

“In my practical experience, you can have some wildly different analysis in a competitive situation for shale-type assets and that’s probably a result of one party looking at a 25% pretax discount rate and another party looking at a 15% pretax discount rate. So, for shale-type assets, you would expect a huge variation of valuation and, as time passes, that would tend to narrow as industry develops a consensus on how the various shale-type investments will perform….

“For example, a Barnett package of assets would probably be a lot easier to value at this point than an Eagle Ford package of assets…I’d expect a good deal of variability within and among the different shale plays.”

Parkman describes three stalking-horse transactions in the webinar. Does the stalking-horse process work for small deals, say between $1- and $10 million?

“I don’t think there is any difference with the size,” he says. “I think the stalking-horse transaction can be designed at any size. You probably have more competition with the small transactions, so I would say ‘yes, it probably works,’ except for transaction cost because, of course, there usually is a break-up fee related to a potential purchaser taking a stalking-horse position and, if the break-up fee is not large enough to cover the transaction cost, it may not be too appealing.

“So, in theory, there may be a lower limit on whether or not the stalking horse process is functional.”

Hear these and more of his remarks in the complimentary webinar “Jim Parkman’s Observations On The Recent Reorg Cycle, And Forward Markets,” which includes a PDF of Parkman’s slides.

Does he expect E&P bankruptcies this year? “There is always the risk of bankruptcy or meltdown of E&P companies, especially given the widespread adoption of hedging strategies,” he says, “because, if there is counterparty failure or default…, there can be a liquidity crisis and a consequent meltdown scenario…

“There can always be, in any conditions, potential bankruptcy…There are some companies that have been able to accrete through the downturn without requiring restructuring or bankruptcy…but, compared to this time last year, we’re in a far better position because, this time last year, I would have said there would be at least 10 bankruptcies before the end of the year and I’m certainly more optimistic about that (in 2010).”

–Nissa Darbonne (ndarbonne@hartenergy.com), E-Editor, Hart Energy Publishing; Oil and Gas Investor, A&D Watch, Oil and Gas Investor This Week, OilandGasInvestor.com Today, OilandGasInvestor.com, A-Dcenter.com, UGcenter.com, UGcenter.com Today, EPmag.com, E&P Buzz, PipeLineandGasTechnology.com, PGT News, HartFUEL.com, FUEL.