Energy Finance Exam 2 (Conceptual)

What are the 5 basic rules of thumb in choosing probability distributions when conducting Monte Carlo Simulation? A) 1.If you have relevant data, then use it! Then utilize distribution fitting capability of @Risk. Excellent way to take advantage of historical data - if appropriate. 2.Does the variable you are modeling only assume discrete values? If so, use discrete distributions (see custom category in CB). 3.Select distributions that you think are best and avoid experts that know more than you do on the subject. 4.If there is a theoretical reason for selecting a particular distribution, then certainly do so. (Energy prices are mean reverting within given time periods.) 5.Use the KISS principle! (Keep it Simple, Stupid!) ***************************************** B) *********************************************** 1.If you have relevant data, then use it! Then utilize distribution fitting capability of @Risk. Excellent way to take advantage of historical data - if appropriate. 2.Does the variable you are modeling only assume discrete values? If so, use discrete distributions (see custom category in CB). 3.Select distributions that fit the wisdom of experts from whom you get parameter estimates. 4.If there is a theoretical reason for selecting a particular distribution, then certainly do so. (Energy prices are mean reverting within given time periods.) 5.Use the KISS principle! (Keep it Simple, Stupid!) ***************************************** C) 1.Avoid using data from the past. Guessing is usually better. 2.Does the variable you are modeling only assume discrete values? If so, use discrete distributions (see custom category in CB). 3.Select distributions that fit the wisdom of experts from whom you get parameter estimates. 4.If there is a theoretical reason for selecting a particular distribution, then certainly do so. (Energy prices are mean reverting within given time periods.) 5.Use the KISS principle! (Keep it Simple, Stupid!) ********************************************** D) ***************************************** 1.If you have relevant data, then use it! Then utilize distribution fitting capability of @Risk. Excellent way to take advantage of historical data - if appropriate. 2.Does the variable you are modeling only assume discrete values? If so, use discrete distributions (see custom category in CB). 3.Select distributions that fit the wisdom of experts from whom you get parameter estimates. 4.If there is a theoretical reason for selecting a particular distribution, then certainly do so. (Energy prices are mean reverting within given time periods.) 5.Use the most complex method available if there is a choice.

1.If you have relevant data, then use it! Then utilize distribution fitting capability of @Risk. Excellent way to take advantage of historical data - if appropriate. 2.Does the variable you are modeling only assume discrete values? If so, use discrete distributions (see custom category in CB). 3.Select distributions that fit the wisdom of experts from whom you get parameter estimates. 4.If there is a theoretical reason for selecting a particular distribution, then certainly do so. (Energy prices are mean reverting within given time periods.) 5.Use the KISS principle! (Keep it Simple, Stupid!)

Use the ConocoPhillips mini-case (Unit 5 material). Do Breakeven Sensitivity Analysis using Goal Seek in Excel. What natural gas decline rate gives an NPV=$50,000? A) 14.4% B) 15.0% C) 10.% D) 14.2% E) 14.8%

14.4%

An energy firm has a $600 million market value of equity, $300 million interest bearing debt, $50 million in cash and equivalents and an EBITDA of $100 million. Exploration expenses paid that year were $50 million. What is the enterprise to EBITDAX multiple? A) 7.5 x B) 5.3 x C) 9.5 x D) 5.7 x

5.7 x

Since 1983, the oil sector has had ___ shocks in which oil prices have dropped by 40% or more. [Hint: This is from my lecture in Unit 6 lecture about financial strategies in challenging times.] A) 9 B) 7 C) 3 D) More than 9 E) 5

7

An energy firm has a $600 million market value of equity, $300 million interest bearing debt, $50 million in cash and equivalents and an EBITDA of $100 million. What is the enterprise to EBITDA multiple? A) 7.5 x B) 8.5 x C) 9.5 x D) 0.12 x E) none of the above

8.5 x

Go to Capital IQ and look up the credit rating for ConocoPhillips (COP). What is the S&P issuer credit rating for the long-term in the local currency (not foreign) as of November 19, 2018 for COP? Hint: Go to the "Tearsheet" in the "Company Summary" on the left-hand toolbar when you log into Capital IQ and have ConocoPhillips pulled up. Then scroll down in the tear sheet and look for information on the S&P Global Credit Ratings. A) A B) AA C) BBB D) A-1 E) BB

A

What are the advantages of simulation analysis? A) Reflects the probability distributions of each input. B) Shows range of NPVs, the expected NPV, sNPV, and CVNPV. C) Gives an intuitive graph of the risk situation. D) A&B E) A&C F) A, B, and C.

A, B, and C.

Benchmarking is important when: A) Investing B) Doing an internal company analysis C) Considering employment D) All of the above

All of the above

What does "risk" mean in capital budgeting? A) Uncertainty about a project's future profitability B) Measured by standard deviation of NPV, standard deviation of IRR, beta. C) Will taking on the project increase the firm's and stockholders' risk? D) All of the above

All of the above

Which of the following are advantages of MLPs? A) An MLP is a way for the sponsoring entity to "monetize" its investment in a group of assets while retaining control over those assets (by owning the general partner). B) Due to lack of corporate level income tax, MLPs generally have a lower cost of capital than corporations, which makes MLPs more competitive in the acquisition marketplace. C) The sponsor often can defer significant amounts of taxation upon formation of the MLP. D) Incentive distribution rights entitle sponsor to increasing distributions. E) All of the choices are correct

All of the choices are correct

Which one of the following does not belong as one of the five Basic Rules of Thumb in choosing probability distributions? A) If you have relevant data, then use it! Then utilize distribution fitting capability of @Risk. Excellent way to take advantage of historical data - if appropriate. B) Does the variable you are modeling only assume discrete values? If so, use discrete distributions. C) Select distributions that fit the wisdom of experts from whom you get parameter estimates. D) If there is a theoretical reason for selecting a particular distribution, then certainly do so. E) Use the KISS principle! (Keep it Simple, Stupid!) F) All of the choices listed are one of the basic rules of thumb -- so none of them are incorrect. G) I have no idea!

All of the choices listed are one of the basic rules of thumb -- so none of them are incorrect.

EQT has a (TEV / Total Revenues LTM - Latest) equal to 2.1x. There is one other company in EQT's Comps with the same trading multiple. What is the name of that company? TEV=Total Enterprise Value (Market) = Market Cap less Net Debt. (Hint: This is a question to test your knowledge of using Capital IQ.) A) Noble Resources. B) Antero Resources C) Concho Resources D) Apache

Antero Resources

When valuing a private company acquisition, which of the following is important when conducting step 4 analysis (refining the estimate)? Pick the best answer. A) Select the best comparables B) Compute the multiple for each of the comparables C) Calculate an initial estimate using an average based on all of the comps D) Apply a discount to the Step 3 estimate because the calculation is for acquiring a private company

Apply a discount to the Step 3 estimate because the calculation is for acquiring a private company

Which of the following are Tesla competitors? (Hint: This is a question to test your knowledge of using Capital IQ.) A) Auro Robotics B) IBM C) Apple D) Hyundai Motor Company

Auro Robotics, Apple, Hyundai Motor Company

What technique did Southwest Airlines' Finance Department use to estimate the cost of equity? Hint: This question is from Ch. 23 of the textbook on the Southwest Airlines Blended Winglets Project. A) Capital Asset Pricing Model (CAPM) B) Bond Yield plus Risk Premium Method C) Return on Equity (ROE) D) Weighted Average Cost of Capital (WACC)

Capital Asset Pricing Model (CAPM)

EQT has a capital structure that has a revolving credit facility that the principle due ____________ from 2017 to 2018. Hint: This is a question to test your knowledge of using Capital IQ. A) Decreased $495MM. B) Increased $495MM. C) Did not changed. D) None of the above

Decreased $495MM.

In Chapter 7 of the text book (How Our Political Views Affect Our View of Energy Prices), survey participants were asked to identify the factors influencing energy pricing. Which of the following choices best explains any misperceptions the poll participants had based on whether they were Democrats or Republicans? A) There were no misperception differences that could be found based on whether the respondents were Democrat or Republican. B) Democrats and Republicans are equally misinformed, but misinformed in very different ways. Democrats tend to believe that the pricing power of energy firms has the most important impact on energy prices while Republicans tend to believe that regulation has the most impact. C) Republicans were misinformed but not Democrats. Republicans tend to believe that regulation has the most impact. D) Democrats and Republicans are equally misinformed, but misinformed in very different ways. Republicans tend to believe that the pricing power of energy firms has the most important impact on energy prices while Democrats tend to believe that regulation has the most impact. E) Democrats were misinformed but not Republicans. Democrats tend to believe that the pricing power of energy firms has the most important impact on energy prices.

Democrats and Republicans are equally misinformed, but misinformed in very different ways. Democrats tend to believe that the pricing power of energy firms has the most important impact on energy prices while Republicans tend to believe that regulation has the most impact.

The project that Williams undertook that I describe in the "Capital Budgeting and Risk Analysis in the Oil and Gas Industry" lecture is: A) Dominion B) Pioneer C) Mount Rushmore Tower D) Devil's Tower E) None of the above

Devil's Tower

Hint: This is a question to test your knowledge of using Capital IQ. Tesla has a product description for a future product of "capable of traveling 804 kilometers on an electric charge - even with a full 36,287-kilogram load - and will cost less than a diesel semi considering fuel savings, lower maintenance and other factors. The truck will have Tesla's Autopilot system, which can maintain a set speed and slow down automatically in traffic. It also has a system that automatically keeps the vehicle in its lane. The company plans a worldwide network of solar-powered 'megachargers' that could get the trucks back up to 400 miles of range after charging for only 30 minutes. The move fits with Musk's stated goal for the company of accelerating the shift to sustainable transportation. Trucks account for nearly a quarter of transportation-related greenhouse gas emissions in the US, according to government statistics. But the semi also piles on more chaos at the Palo Alto." This is a description of... A) Tesla X Class B) Electric Semitractor C) 8V Module D) All weather front trunk mat

Electric Semitractor

What project assessment phase is best described as having the attitude, like taking the Hippocratic Oath, as: "First, do no harm." Hint: This question is from Ch. 23 of the textbook on the Southwest Airlines Blended Winglets Project. A) Engineering Assessment B) Flight Operations Assessment C) Facilities Assessment D) Finance Department Assessment E) No department voiced this attitude

Engineering Assessment

Relative valuation lecture: What happens if we apply a 20% discount for a private company when valuing Helix instead of the other discount used in the slides? Recall that the average EBITDA multiple for comparable firms is 10.48. If Helix anticipates earning $10 million in EBITDA this year (same as in the lecture), then we estimate the equity value of Helix to be what, using a private company discount of 20%? [Reminder: Helix has $2.4 million in cash and $21 million in interest bearing debt.] A) Equity value of $54.8 million for Helix B) Equity value of $60.2 million for Helix C) Equity value of $65.2 million for Helix D) Equity value of $68.2 million for Helix E) Equity value of $54.8 million for Helix

Equity value of $65.2 million for Helix

What energy ratio gives an estimate of the ability to replace reserves through the "drill bit"? A) Production ratio B) Reserve life index C) Reserve replacement ratio D) F&D reserve replacement ratio E) Value added ratio

F&D reserve replacement ratio

In Chapter 7 of the text book (How Our Political Views Affect Our View of Energy Prices), survey participants were asked to identify the factors influencing energy pricing. Regardless of political party, most respondents believe that government regulation had the most impact on energy prices. A) THE ARTICLE DID NOT ADDRESS THIS ISSUE. B) FALSE C) TRUE

FALSE

A good valuation provides a precise estimate of value. (Note: From the relative valuation lecture.) A) True B) False

False

A valuation is an objective search for "true" value. Hint: From the lecture on Relative Valuation. A) True B) False

False

In Chapter 7 of the text book (How Our Political Views Affect Our View of Energy Prices), survey participants were asked to identify the factors influencing energy pricing. Regardless of political party, most respondents believe that government regulation had the most impact on energy prices. A) False B) True C) This chapter did not discuss political views on energy prices. D) I did not read this very short chapter. (Note: Don't choose this answer!)

False

In relative valuation, the more quantitative a model, the better the valuation. (Note: From the relative valuation lecture.) A) True B) False

False

Other things held constant, an increase in the cost of capital discount rate will result in a decrease in a project's IRR. True or False?

False

You should take CapitalIQs list of comparable transaction as gospel, because a the gospel you do not need to review them to see if all are fully comparable. Hint: This is a question to test your knowledge of using Capital IQ. A) True B) False

False

Which of the following options is a tangible risk? A) Commodity price risk; Credit Risk; Weather Risk. B) Reservoir risk; Engineering risk; Inflation. C) Financial risk; Insurance risk; Commodity price risk. D) Weather risk; Legal risk; Political risk.

Financial risk; Insurance risk; Commodity price risk.

You are investing for your retirement. You are planning to take a buy and hold strategy which involves picking some fairly priced stocks and holding them for several years. Which valuation approach should you use? A) Relative valuation B) Fundamental valuation C) Payback period D) Option pricing theory E) Call a friend

Fundamental valuation

___________ relates the value of an asset to the present value of expected future cashflows on that asset. A) Relative valuation B) Fundamental valuation C) Payback period D) Option pricing theory E) Call a friend

Fundamental valuation

Which of the following reasons is not a reason as to why sensitivity analysis is useful? A) Gives some idea of stand-alone risk. B) Helps identify dangerous variables. C) Gives some breakeven information D) Gives probabilities of of various possible outcomes E) All of the above are advantages of sensitivity analysis.

Gives probabilities of of various possible outcomes

The current oil price collapse is comparable to the collapses in 2008-09 and in 1997-98 financial crises. What are the two reasons that make the current collapse worse than the previous two? (Hint: This question is from the Unit 6 lecture about Strategies in Good and Bad Times.) A) Weaker demand and lower than expected supply growth B) No help from OPEC as a defender of oil price and stronger demand C) Higher than expected supply growth and no help from OPEC as a defender of oil price D) Higher than expected supply growth and help from OPEC to defend oil price strength E) None of them are correct

Higher than expected supply growth and no help from OPEC as a defender of oil price

_________ are a share of the cash distribution paid by the MLP partnership, which gradually increases as the partnership increases the cash distributions. A) Keep-whole contracts B) Units C) Incentive distribution rights D) Frac spread rights

Incentive distribution rights

Chesapeake Energy company uses a required return of 12.5% to evaluate most projects of average risk. Suppose the company is looking at a new energy project that is of lower-than-average-risk, and the CEO thinks the discount rate should be risk adjusted. What effect will this have on the project's NPV? A) Decrease NPV B) No effect on NPV C) Increase NPV D) NPV will double.

Increase NPV

Assume that upon receiving your recommendation to accept a new energy project, the CEO says the project is riskier than you've assumed in your analysis and directs you to make adjustments to take into account the perceived increased riskiness. The most logical and likely reaction will be to A) decrease all your forecasted sales amounts B) Increase all your forecasted depreciation C) Decrease the required rate of return D) Increase the required rate of return E) Go to your office, close the door, and have a good cry

Increase the required rate of return

Which of the following statements is CORRECT? The 3 most common distributions used in Monte Carlo simulation are: A) Triangular, rectangular, and lognormal. B) Triangular, uniform, and normal. C) Lognormal, uniform, and normal. D) Lognormal, triangular, and uniform. E) Lognormal, Equilateral, and uniform

Lognormal, triangular, and uniform.

_____ are partnerships that trade on public exchanges or markets and trade in the form of units. A) Spin-offs B) LLCs C) C-Corp D) MLPs E) None of the answers are correct.

MLPs

____________ is a computerized version of scenario analysis which uses continuous probability distributions and hundreds of "scenarios" -- that is, simulations. Using this technique, the computer selects values for each variable based on given probability distributions. A) Sensitivity Analysis B) Scenario Analysis C) Monte Carlo Simulation D) Spider Diagrams E) None of the answers are correct F) Tornado diagram

Monte Carlo Simulation

Which technique is the most widely used in Capital Budgeting, if we had to pick the most popular one? A) Net present value B) Internal rate of return C) Modified internal rate of return D) Payback period E) Use a crystal ball F) Use a Ouija Board

Net present value

______________ uses option pricing models to measure the value of assets that share option characteristics. A) Relative valuation B) Fundamental valuation C) Payback period D) Option pricing theory E) Call a friend

Option pricing theory

In the ConocoPhillips Natural Gas Project, which of the following best summarizes the risks of the project? A) Overall, the two greatest risks in this business area are first - quantity, and second - risk. B) Overall, the two greatest risks in this business area are first - price, and second - quantity. C) Overall, the two greatest risks in this business area are first - price, and second - reputation. D) "In this business, we live and die on investment!"

Overall, the two greatest risks in this business area are first - price, and second - quantity.

In the ConocoPhillips Natural Gas Project, which of the following best summarizes the risks of the project? This question is about the mini-case from Unit 5 work. A) Overall, the two greatest risks in this business area are first - price, and second - quantity. B) Overall, the two greatest risks in this business area are first - price, and second - reputation. C) Overall, the two greatest risks in this business area are first - quantity, and second - risk. D) In this business, we live and die on investment!"

Overall, the two greatest risks in this business area are first - price, and second - quantity.

Proven reserves is the lowest reserves number and is the amount that the geologists have the highest level of being sure there is at least this amount of oil in the reserve formation. This is also known as ______________. [Hint: This question is from my lecture on "Capital Budgeting and Risk Analysis in the Oil and Gas Industry" lecture.] A) P10 B) P50 C) P90 D) Possible reserves

P90

Which of the following is talking about Monte Carlo Simulation Analysis? A) Particularly helpful in project analysis since the outcomes from large investment projects are often the result of the interaction of a number of interrelated factors (or value drivers). B) Examines several possible situations, usually worst case, most likely case, and best case. C) Shows how changes in a variable such as unit sales affect NPV or IRR. D) All of the above. E) None of the above

Particularly helpful in project analysis since the outcomes from large investment projects are often the result of the interaction of a number of interrelated factors (or value drivers).

What was Robert P. Brown's position at Fidelity Management and Research as of January 2019? Hint: This question tests your knowledge of Capital IQ. A) President of Bond Division B) President of Equity Division C) President of Fixed Income Division D) President of Asset Management E) VP Internal Audit

President of Bond Division

Which method in estimating the oil and gas reserves does the following statement describe? "The lowest figure, the amount that the geologists are 90% sure is there." (From the Unit 5 lecture on Risk Analysis in Capital Budgeting.) A) Probable (or Proved + Probable) B) Possible (or Proved + Probable + Possible) C) Proved (also referred to as Proven) D) None of the above

Proved (also referred to as Proven)

You are a short term investor. You trade several times a week on your Ameritrade account, and rarely hold a stock more than 1 month. Which valuation approach should you use? A) Relative valuation B) Fundamental valuation C) Payback period D) Option pricing theory E) Call a friend

Relative valuation

______________ estimates the value of an asset by looking at the pricing of "comparable" assets relative to a common variable like earnings, cashflows, book value, or assets A) Relative valuation B) Fundamental valuation C) Payback period D) Option pricing theory E) Call a friend

Relative valuation

What are not directly reflected on an oil and gas company balance sheet? A) Assets B) Reserve Values C) Liabilities D) Stockholder's equity E) Net property, plant, and equipment.

Reserve Values

EQT is produces natural gas from the Marcellus Shale area. It requires pipeline capacity to carry gas to market. Select all below that are strategic partners of EQT that are pipeline companies. (Hint: This is a question to test your knowledge of using Capital IQ.) MULTIPLE CHOICES ARE CORRECT A) Rice Energy, Inc. B) Columbia Gas Transmission, LLC. C) Texas Eastern Transmission, LP. D) Oklahoma State University, LLC.

Rice Energy, Inc., Columbia Gas Transmission, LLC., Texas Eastern Transmission, LP.

______________ examines several possible situations, usually worst case, most likely case, and best case and also provides a range of possible outcomes. A) Sensitivity analysis B) Scenario analysis C) Monte Carlo Simulation D)Tornado diagrams E) None of the above

Scenario analysis

_____________ shows how changes in only one variable at a time, such as volume or price, affects the NPV or IRR. A) Sensitivity analysis B) Scenario analysis C) Monte Carlo simulation D) Mean reversion E) None of the above

Sensitivity analysis

Who is the Top Holder of shares in Clean Energy Fuels Corp. (NasdaqGS: CLNE) and what percent of Total Shares Outstanding do they own? Hint: This question tests your knowledge of Capital IQ. Search for the company on Capital IQ. Then, on the left-hand tool bar, go to the category "Investors", and then use the sub-category "Public Ownership". A) TOTAL S. A.: 24.99% B) Pickens, Jr., Thomas Boone: 6.42% C) BlackRock, Inc.: 4.7% D) The Vanguard Group, Inc.: 11.5% E) Bezos, Jeffrey P.: 16.2%

TOTAL S. A.: 24.99%

Why would a company NOT choose the MLP structure? A) The company is unable to provide steady cash flows B) Higher taxes for MLPs C) Too much commodity risk for MLPs D) All answers are correct

The company is unable to provide steady cash flows

In Chapter 7 of the text book (How Our Political Views Affect Our View of Energy Prices), survey participants were asked to identify the factors influencing energy pricing. Which of the following choices best explains any misperceptions the poll participants have? A) The poll participants did not have any misperceptions. Overall, they thought demand and supply determined energy prices. B) The poll participants did not have any misperceptions. They correctly knew that global politics and the pricing power of energy companies were the most important factors. C) The poll participants had misperceptions and thought that basic economics were driving energy pricing, not companies' pricing power. D)These poll participants had it exactly backwards. Supply and demand are the most important determinants of energy prices but the poll participants thought the most important factors were first, the pricing power of energy companies and/or electric utilities and second, global politics. E) These poll participants had it exactly backwards. Supply and demand are the most important determinants of energy prices but the poll participants thought the most important factors were first, government regulation and second, global terrorism.

These poll participants had it exactly backwards. Supply and demand are the most important determinants of energy prices but the poll participants thought the most important factors were first, the pricing power of energy companies and/or electric utilities and second, global politics.

Net wells to gross wells is another type of energy ratio discussed in Chapter 9. A high net wells to gross wells ratio indicates which of the following? A) This indicates that a company owns relatively large working interests in the overall wells and this is a good positive indicator of future profitability. B) This indicates that a company owns relatively large working interests in the overall wells and this is a negative indicator of future profitability. C) This indicates that a company owns relatively small working interests in the overall wells and this is a good positive indicator of future profitability. D) This indicates that a company owns relatively small working interests in the overall wells and this is a negative indicator of future profitability.

This indicates that a company owns relatively large working interests in the overall wells and this is a good positive indicator of future profitability.

A valuation in Relative Valuation, we realize that all valuations will have a bias. So relative valution is not an objective search for the "true" value. (Note: From the relative valuation lecture.) A) True B) False

True

Bloomberg has energy data on the following items: refinery outages, futures prices for crude oil, refined product prices, crack spreads, and natural gas prices. This question is: A) True B) False

True

In competitive energy markets, mean reversion is a useful model in which prices are expected to revert towards the long term mean (also used in interest rate modeling). True or False?

True

Risk analysis in capital budgeting is usually based on subjective judgments. (Hint: This question is from the Capital Budgeting and Risk Analysis in the Oil and Gas Industry lecture.) True or false

True

Which population distribution method only needs two parameters-- min and max? A) Lognormal B) Normal C) Triangular D) Uniform E) None of the above

Uniform

What part of the value chain performed worst from the spin-offs by ConocoPhillips, Williams, and Marathon? (Hint: This question of from the Unit 6 lecture about Financial Strategies in Good and Bad Times.) A) Midstream and Downstream B) All parts performed about the same C) Upstream and Downstream D) Upstream E) Upstream and Midstream

Upstream

Which ratio tells us the costs of adding reserves in relation to the value of those reserves added? A) Reserve life index B) Finding and development reserve replacement ratio C) Reserve replacement cost D) Value added ratio E) Value of proved reserve additions

Value added ratio

In evaluating project risks, which of the risks listed below is considered an "intangible risk", and is not a "tangible risk"? A) Commodity price risk B) Reservoir risk C) Credit risk D) Inflation E) Weather

Weather

Which of the following options are intangible risk? A) All of the choices are intangible risks. B) Financial risk; Insurance risk; Commodity price risk. C) Reservoir risk; Engineering risk; Inflation. D) Production; Credit Risk; Weather Risk. E) Weather risk; Legal risk; Political risk.

Weather risk; Legal risk; Political risk.

What is the main source of revenues for the Southwest Airlines Blended Winglet Project? A) jet fuel savings B) jet fuel sales C) labor savings D) increased range of jets E) increased revenues from carrying cargo

jet fuel savings