EF Assignments 4 - 6
Williams Companies Inc is considering a natural gas project which has the following cash flows. The cost of capital is 10%. What is the NPV of the project? Year Project Cash Flows 0 -$1,000 1 400 2 300 3 500 4 400
$260
This question requires you to use Capital IQ. Select the company, ConocoPhillips (COP), after you log-in. On the left-hand tool bar, under "Financials/Valuation", select "Industry Specific". Wow -- How cool is this! They have the energy specific data that we had to go dig through the 10-K report in our work in class before this. Capital IQ has this information too! Not just financial ratios. This is just one of many reasons why CIQ (short name for Capital IQ) is a great resource! Let's just do an easy question this time. What were COP's Total Oil Revenues and Total Gas Revenues in 2013, respectively? This information is at the at the top part of the information provided. The answers are in millions of $.
$29,763 and $22,539
Bewcastle Oil Service Technologies is evaluating a new project that requires $1,200,000 in new equipment. Bewcastle estimates that the new project will generate $1,400,000 in annual sales at the end of each of the next four years and that total operating costs (variable and fixed costs excluding depreciation) will equal $600,000. Suppose that the firm depreciates the equipment using the straight-line method over four years and the firm's tax rate is 40%. If the projects required return is 11%, what is the total present value of the annual operating cash flows received over the project's four-year life? REMEMBER THAT THIS IS ASKING FOR THE ANNUAL OPERATING CASH FLOWS, NOT NPV.
1,861,467
Bewcastle Oil Service Technologies is evaluating a new project that requires $1,200,000 in new equipment. Bewcastle estimates that the new project will generate $1,400,000 in annual sales at the end of each of the next four years and that total operating costs (variable and fixed costs excluding depreciation) will equal $600,000. Suppose that Bewcastle uses Modified Accelerated Cost Recovery System (MACRS) depreciation rates. The applicable rates are 33%, 45%, 15%, and 7%, respectively. The tax rate is 40%. If the projects required return is 11%, what is the total present value of the annual operating cash flows received over the project's four-year life? REMEMBER THAT THIS IS ASKING FOR THE ANNUAL OPERATING CASH FLOWS, NOT NPV.
1,881,966
The NYMEX natural gas futures contract is settled by delivery of ________ million British Thermal Units of natural gas.
10,000
Aaron McIntire Inc., a large alternative energy firm operating out of Valdez, Alaska, has a new energy project it is considering. The project has a cost of $275,000 and is expected to provide after-tax annual cash flows of $73,306 for eight years. The firm's management is uncomfortable with the IRR reinvestment assumption and prefers the modified IRR approach. You have calculated a cost of capital for the firm of 12 percent. What is the project's MIRR?
16.0%
In what year was the NYMEX Henry Hub natural gas futures contract launched?
1990
Cowboy Oil Company (COC): The company has purchased $4,500,000 worth of equipment that required $500,000 in shipping and installation costs. In addition, the firm's accounts receivable and inventories increased by $1,000,000 and its spontaneous liabilities increased by $600,000. COC's net annual sales revenue is expected to be $8,500,000 at the end of each of the next four years, and total operating costs (fixed and variable costs excluding depreciation) will be $5,300,000. Assume that the firm uses the straight-line depreciation method to depreciate the equipment and the firm's tax rate is 40%. The equipment is expected to have a salvage value of $800,000 at the end of the project's life in four years, and the firm expects all of its investment in net working capital (NWC) to be returned. If its required rate of return is 12%, what is the project's net present value (NPV)?
2,509,641
Jeff Patterson has a solar panel energy savings project which has the following cash flows: Year Cash Flow 0 -$245,454 1 100,000 2 100,000 3 150,000 4 40,000 5 25,000 The cost of capital is 10 percent. What is the project's discounted payback period?
2.64 years
Williams is considering the following project and is computing the IRR. The firm has a cost of capital of 10%. What is the IRR for this project? Year Project Cash Flows 0 -$1,000 1 400 2 300 3 500 4 400
21.22%
Cowboy Oil Company (COC): The company has purchased $4,500,000 worth of equipment that required $500,000 in shipping and installation costs. In addition, the firm's accounts receivable and inventories increased by $1,000,000 and its spontaneous liabilities increased by $600,000. COC's net annual sales revenue is expected to be $8,500,000 at the end of each of the next four years, and total operating costs (fixed and variable costs excluding depreciation) will be $5,300,000. Assume that the firm uses the straight-line depreciation method to depreciate the equipment and the firm's tax rate is 40%. The equipment is expected to have a salvage value of $800,000 at the end of the project's life in four years, and the firm expects all of its investment in net working capital (NWC) to be returned. If its required rate of return is 12%, what is the project's IRR?
31.6
What date in 2016 did EQT acquire Statoil assets in the Marcellus Shale for $410MM? Hint: This is a Capital IQ question. Perform a filter on key developments to help answer this question.
7/8/2016
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
Which of the following are advantages of MLPs?
All of the answers are correct. Advantages: 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). 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. The sponsor often can defer significant amounts of taxation upon formation of the MLP. Incentive distribution rights entitle sponsor to increasing distributions.
What hedge fund lost $6 billion on speculative natural gas trades, in particular the March-April spread trade known as the "widow maker" and then went out of business? (Hint: This is from the reading "10 biggest energy risk management disasters of the past 20 years".)
Amaranth Advisors
EQT has a TEV of 7436MM as of 10/1/2019. There is one other company in EQT's Comps with similar TEV. 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.
Antero Resources
Which of the following are Tesla competitors? Hint: This is a question to test your knowledge of using Capital IQ.
Auro Robotics Apple Hyundai Motor Company
_____________ is a market situation where prices are progressively lower in distance delivery months.
Backwardation
An E&P company wishes to hedge using a collar strategy. Which of the following strategies should be used?
Buy a put and sell a call
What company's energy risk management disaster stunned Asian markets by disclosing it had lost $550 million on oil derivatives trades, when the company was suppose to be hedging? (Hint: from the reading "The 10 biggest energy risk management disasters of the past 20 years".)
China Aviation Oil
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.
Columbia Gas Transmission, LLC. Texas Eastern Transmission, LP.
What does "risk" mean in capital budgeting?
Correct! All of the above Uncertainty about a project's future profitability Measured by standard deviation of NPV, standard deviation of IRR, beta. Will taking on the project increase the firm's and stockholders' risk?
Which one of the following does not belong as one of the five Basic Rules of Thumb in choosing probability distributions?
Correct! All of the choices listed are one of the basic rules of thumb -- so none of them are incorrect. Rules: 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. Does the variable you are modeling only assume discrete values? If so, use discrete distributions. Select distributions that fit the wisdom of experts from whom you get parameter estimates. If there is a theoretical reason for selecting a particular distribution, then certainly do so. Use the KISS principle! (Keep it Simple, Stupid!)
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.
Decreased $495MM.
The project that Williams undertook that I describe in the "Capital Budgeting and Risk Analysis in the Oil and Gas Industry" lecture is:
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
Electric Semitractor
Other things held constant, an increase in the cost of capital discount rate will result in a decrease in a project's IRR.
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.
False
Which of the following options is a tangible risk?
Financial risk; Insurance risk; Commodity price risk.
What does the picture show us?
Flatter distribution, larger standard deviation, larger stand-alone risk.
Which of the following reasons is not a reason as to why sensitivity analysis is useful?
Gives probabilities of of various possible outcomes Useful because: Gives some idea of stand-alone risk. Helps identify dangerous variables. Gives some breakeven information
_________ are a share of the cash distribution paid by the MLP partnership, which gradually increases as the partnership increases the cash distributions.
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?
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
Increase the required rate of return
Tesla is listed in 5 major industry classifications. These are ________? Hint: This is a question to test your knowledge of using Capital IQ.
Industrials Consumer Discretionary Utilities
_____ are partnerships that trade on public exchanges or markets and trade in the form of units.
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.
Monte Carlo Simulation
Which commodity has the highest volatility that is described in Chapter 15 (and I also mentioned in class)?
Natural gas
Which technique is the most widely used in Capital Budgeting, if we had to pick the most popular one?
Net present value
Which exchange had the first modern exchange traded energy futures contract and what was the year?
New York Cotton Exchange in 1971
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.]
P90
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.
President of Bond Division
The capital budgeting technique that is useful for ranking projects is _________? Hint: It provides a "bang for your buck" measure.
Profitability Index
Which method is the following sentence talking about to estimate the reserves ? " The lowest figure, the amount that the geologists are 90% sure is there(sometimes 95% is used which would be P95)"
Proved or Proven
Textbooks define Return on Assets (ROA) as Net Income (NI) divided by Total Assets (TA) or R O A = N I T A. How does Capital IQ define using their acronyms? Hint: This is a question to test your knowledge of using Capital IQ.
ROA = EBIT / ((TAt-TAt-1)/2)
What are the advantages of simulation analysis?
Reflects the probability distributions of each input. Shows range of NPVs, the expected NPV, sNPV, and CVNPV. Gives an intuitive graph of the risk situation.
______________ examines several possible situations, usually worst case, most likely case, and best case and also provides a range of possible outcomes.
Scenario analysis
_________________ is described as follows: •Shows how changes in a variable such as unit sales affect NPV or IRR. •Each variable is fixed except one. Change this one variable to see the effect on NPV or IRR. •Answers "what if" questions, e.g. "What if sales decline by 30%?"
Sensitivity analysis
This diagram illustrates a very useful tool for risk analysis in capital budgeting. It is known as a: [Hint: I discuss this in the video lecture on Capital Budgeting and Risk Analysis in Capital Budgeting.]
Spider diagram
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".
TOTAL S. A.: 24.+%
Why would a company NOT choose the MLP structure?
The company is unable to provide steady cash flows
Which of the following statements is correct. The three most common distributions used in Monte Carlo Simulation are:
Triangular, uniform, and lognormal
In competitive energy markets, mean reversion is a usefule model in which prices are expected to revert towards the long term mean (also used in interest rate modeling).
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
The two major futures exchanges in the world are the NYMEX and ICE Futures (formerly, IPE).
True
In evaluating project risks in the energy industry, which of the risks listed below is considered an "intangible risk", and is not a "tangible risk"? [Hint: This question is from the presentation on Capital Budgeting and Risk Analysis in the Oil and Gas Industry.]
Weather -Tangible risks •Commodity price risk (oil and gas) •Reservoir risk (oil and gas) •Credit risk •Inflation •Financing and insurance risks •Construction risk •Etc... -Intangible risk •Weather •Engineering/Project risk •Acts of God risk •Legal •Political •Etc....
There are two dominant crude oil futures contract: _________________ and _______________.
West Texas Intermediate traded on the NYMEX and Brent traded on ICE Futures
The TEV/LTM Total Revenue is a Market Multiple ratio that has been ________ over the past year? TEV=Total Enterprise Value (Market) = Market Cap less Net Debt. Hint: This is a question to test your knowledge of using Capital IQ of the multiples section and charting with Capital IQ.
decreasing
__________ are financial instruments (contracts) that do not represent ownership rights in any asset. Rather, they derive their value from the value of some other underlying commodity or other asset. Choose the best answer!
derivatives
What is the name of the pattern we observe in the natural gas forward curve? (Hint: I describe this in my Powerpoint lecture on Introduction to Risk Management.)
head and shoulders pattern
A trader who has a ____ position in crude oil futures believes the price of crude oil will ___ in the future.
long/increase
Technical interview question: Corbin Couch was interviewing ExxonMobil in Houston. As part of the interview process, they asked him in the technical interview, the following question: How do you calculate the market capitalization of a company? Hint: This is also covered in Unit 6 but all students should know this! I want to make sure that you know this by asking in on this assignment :-)
market capitalization is the # of shares of stock outstanding multiplied by the current market price.
Energy derivatives are traded on a variety of energy products. The largest single category consists of ______________.
petroleum (oil) derivatives
Technical interview question: Austin Roberts was interviewing a company and to test her knowledge, they asked her the following question: If you are an upstream company and need to hedge the crude oil price risk using a futures contract, would you take a long position or short position in the futures contract?
short position
