Energy Exam 2

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

This is a P/E Valuation Method Question. Marshall Chance Chemicals (MCC) is a large, privately held chemical company that is considering going public. Answer the following questions using the information for the comparables provided in the table. [Hint: If you want assistance, refer to the relative valuation lecture where I show how to value the chemical division of ExxonMobil if they were planning to sell it off. Do not apply the private company discount since the company is planning on going public.] If MCC has earnings of $250 million, what total equity value do you estimate for the MCC, using the average for the comparables?

$3.57 Billion

This is a problem over Relative Valuation. Refer to Problem 8-13 in the lecture on Relative Valuation, which is in the Chapter 8 PDF file posted to Brightspace. Note: This is not Chapter 8 in our class textbook. Value Burlington Resources using Apache as the only comparable firm. There are lectures where I show how to value Burlington Resources using XTO Energy as the only comparable firm. Here, I want you to use a different comparable. Using the EV/EBITDA method, what value per share do you obtain for Burlington Resources?

$40.40 per share

Which of the following are Tesla competitors? Hint: This is a question to test your knowledge of using Capital IQ.

- Apple - Hyundai Motor Company - Auro Robotics

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

Which one of the following does not belong as one of the five Basic Rules of Thumb in choosing probability distributions?

- If there is a theoretical reason for selecting a particular distribution, then certainly do so. - Use the KISS principle! (Keep it Simple, Stupid!) - 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. - Select distributions that fit the wisdom of experts from whom you get parameter estimates. - Does the variable you are modeling only assume discrete values? If so, use discrete distributions. - I have no idea! --> All of the choices listed are one of the basic rules of thumb -- so none of them are incorrect.

Tesla is listed in 5 major industry classifications. These are ________? Hint: This is a question to test your knowledge of using Capital IQ.

- Industrials - Utilities

Which of the following are advantages of MLPs?

- The sponsor often can defer significant amounts of taxation upon formation of the MLP. - Incentive distribution rights entitle sponsor to increasing distributions. - 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. - 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). --> All choices are correct

Typical Assets of an MLP

- Upstream: actual extraction of hydrocarbons - Gathering and processing: transport oil and gas from wellhead to processing facility, refinery or pipeline - Long-haul pipelines: transport oil and gas considerable distances to storage or refining complexes - Storage: Holds oil and gas before being shipped to end users

What does "risk" mean in capital budgeting?

- Will taking on the project increase the firm's and stockholders' risk? - Uncertainty about a project's future profitability - Measured by standard deviation of NPV, standard deviation of IRR, beta. --> All of the Above

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

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

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?

8.5x

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

Covered Call Writing

A covered call strategy is an instance where an investor holds along position in a security and also sells a call option, giving the option‐buyer the right, but not the obligation to purchase the underlying asset at the contractual price within the contractual time period.

What are the advantages of simulation analysis?

A)Gives an intuitive graph of the risk situation. B) Shows range of NPVs, the expected NPV, sNPV, and CVNPV. C) Reflects the probability distributions of each input. --> A, B, C

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.

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.

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

MLP Investment Philosophy (opportunity types)

Core, small cap/dropdown stories, general partners, special situations

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

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.]

Equity value of $65.2 million for Helix

(T/F) A good valuation provides a precise estimate of value. (Note: From the relative valuation lecture.)

False

(T/F) A valuation is an objective search for "true" value. Hint: From the lecture on Relative Valuation.

False

(T/F) Other things held constant, an increase in the cost of capital discount rate will result in a decrease in a project's IRR.

False

(T/F) 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.

Multi-Cap Value Strategy

Focused domestic stock strategy with flexibility to invest in most attractive strategy.

___________ relates the value of an asset to the present value of expected future cashflows on that asset.

Fundamental Valuation

which of the following reasons is not a reason as to why sensitivity analysis is useful?

Gives probabilities of of various possible outcomes

_________ 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

The TEV 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.

Increasing

What is the main source of revenues for the Southwest Airlines Blended Winglet Project? Hint: This question is from Ch. 23 of the textbook on Southwest Airlines.

Jet fuel savings

Diversification Benefits

Low correlation to traditional equities makes MLPs attractive as a diversifier within the risky assets of an overall portfolio

_____ are partnerships that trade on public exchanges or markets and trade in the form of units.

MLPs

Small Cap/Dropdown Stories

MLPs that are small and/or newly public which are expected to grow rapidly in the near‐term through acquisitions and organic growth capital expenditures.

Core

MLPs with dominant asset footprints, high quality management and solid financial strength with visible future growth prospects.

____________ 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 technique is the most widely used in Capital Budgeting, if we had to pick the most popular one?

Net present value

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

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

General Partners

Publicly‐traded General Partners (GPs) that control an MLP and receive an asymmetrically large proportion of its future growth via Incentive Distribution Rights (IDRs).

Textbooks define Return on Assets (ROA) as Net Income (NI) divided by Total Assets (TA) or ROA = NI/TA. 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)

______________ 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

Relative Valuation

______________ 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

Special Situations

Spin‐outs, M&A, Restructuring, and other catalysts for additional value realization.

Why would a company NOT choose the MLP structure?

The company is unable to provide steady cash flows

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.:24.99%

Which of the following statements is correct. The three most common distributions used in Monte Carlo Simulation are:

Triangular, uniform, and lognormal

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

True

(T/F) 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

(T/F) 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

Which population distribution method only needs two parameters-- min and max?

Uniform

Qualifying income

_______ includes income and gains derived from exploration, development, mining or production, processing, refining, transportation or the marketing of any mineral or natural resource.

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.

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