Exam 2 Study Questions

Question 1

Operating Cash Flow Formula

Answer 1

Net Operating Income (EBIT)*(1-TaxRate)+Depreciation and Amortization Expense

Question 2

Free Cash Flow

Answer 2

Operating Cash Flow - Investments (Change in fixed assets +change in Net Operating Working Capital (Current Assets - Non interest bearing current liabilities)

Question 3

7 Categories of ratios

Answer 3

Liquidity, asset management, debt management, market values, payout policy, profitability, energy ratios

Question 4

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

Answer 4

Triangular, uniform, and lognormal

Question 5

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

Answer 5

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

Question 6

Which of the following options is a tangible risk?

Answer 6

Financial risk; Insurance risk; Commodity price risk.

Question 7

Other things held constant, anincreasein the cost of capital discount ratewill result in adecreasein a project’s NPV.

Answer 7

TRUE

Question 8

____________ isa 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.

Answer 8

Monte Carlo Simulation

Question 9

The project that Williams undertook that I describe in the “Capital Budgeting and Risk Analysis in the Oil and Gas Industry” lecture is:

Answer 9

Devil’s Tower

Question 10

Which method is the following sentence talking about to estimate the reserves ? The highest reserves figure, the amount that the geologists are 10% sure is there.

Answer 10

Possible

Question 11

What does the picture show us?

Answer 11

Flatter distribution, larger standard deviation, larger stand-alone risk.

Question 12

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

Answer 12

Uniform

Question 13

Proven reserves is the lowest reserves number and is the amount that the geologistshave the highest level of beingsure there is at least this amount of oil in the reserve formation. This is alsoknown as ______________.

Answer 13

P90

Question 14

From the diagram, which of the following we can conclude?

Answer 14

We are about 77% confident that the discounted payback will be less than 2.5 years.

Question 15

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?

Answer 15

Increase NPV

Question 16

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

Answer 16

Increase the required rate of return

Question 17

Risk analysis in capital budgeting is usually based on subjective judgments.

Answer 17

TRUE

Question 18

______________ examines several possible situations, usually worst case, most likely case, and best case andalso provides a range of possible outcomes.

Answer 18

Scenario analysis

Question 19

What are the advantages of simulation analysis?

Answer 19

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.)

Question 20

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”?

Answer 20

Weather

Question 21

What does “risk” mean in capital budgeting?

Answer 21

All of the above (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. )

Question 22

_________________ 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%?”

Answer 22

Sensitivity analysis

Question 23

Which of the following reasonsis not a reason as to why sensitivity analysis is useful?

Answer 23

Gives probabilities of of various possible outcomes

Question 24

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)”

Answer 24

Proved or Proven

Question 25

What are the three valuation approaches that Walt Simkins describes in his lecture over Capital IQ?  Hint: This is the guest speaker video when Walt presents Capital IQ techniques he uses at Deloitte.  List and describe the three approaches.

Answer 25

Yes, I will do this.

Question 26

In the COP natural gas project, what best summarizes the risks?

Answer 26

2 greatest risks are first - price and second - quantity

Question 27

What describes a Monte Carlo

Answer 27

Helpful in a project analysis since the outcomes from large investment projects are often the result of the interaction of a number of interrelated factors

Question 28

What commodity has the highest volatility

Answer 28

Natural Gas

Question 29

_____involves the simultaneous purchase of a crude oil futures contract and the sale of gasoline and/or heating oil futures contracts

Answer 29

Crack spread trade

Question 30

A good valuation provides a precise estimate of value (T/F)

Answer 30

FALSE

Question 31

In relative valuation, the more quantitative a model, the better the valuation (T/F)?

Answer 31

FALSE

Question 32

Mean reversion in energy prices is a way to model in which…

Answer 32

prices are expected to revert to a mean value over time

Question 33

Which contract is the most successful --- natural gas futures or electricity futures?

Answer 33

natural gas futures

Question 34

Which indexes are used by investors for oil hedging

Answer 34

Standard and Poor's Goldman Sachs Index

Question 35

In what year was the NYMEX HH natrual gas futures contract launched?

Answer 35

1990

Question 36

The two major futures exchanges in the world are the Nymex and ICE (T/F)?

Answer 36

TRUE

Question 37

What energy ratio gives an estimate of the cost to replace reserves through the "drill bit?"

Answer 37

F&O reserve replacement ratio

Question 38

MIRR is better than IRR because

Answer 38

1. MIRR correctly assumes reivestment at projects cost of capital 2. MIRR avoids the problem of multiple IRRs

Question 39

Which exchange had the first modern exchange traded energy futures contract and what was the year?

Answer 39

New York Cotton Exchange in 1971

Question 40

Weakeness of payback

Answer 40

Ignores time value of money and ignores cash flows occurring after the payback period

Question 41

What does risk mean in capital budgeting

Answer 41

1. Uncertanity about a projects future profitablility 2. Measured by standared deviation of NPV, IRR and beta 3. Will taking on the project increase the firms and shareholders risk

Question 42

Energy derivatives are traded on a variety of energy producti, the largets silgle category cosists of

Answer 42

petroleum (oil) derivatives

Question 43

First capital budgeting principle

Answer 43

Invest in projects that yeild a return greater than the acceptable hurdle rate

Question 44

F&D reserve replacement ratio

Answer 44

Percentage of reserves consumed by production during the year that were replaced through improved recovery or new discoveries

Question 45

DuPont Analysis

Answer 45

A way to view how a company manages profit margin, total asset turnover, and the equity multiplier to generate ROA and ROE

Question 46

In 2014, which of the following is true regarding ConocoPhillip's EBITDA to Captial Expenditures ratio?

Answer 46

ConocoPhillips did not outspend their earnings as measured by EBITDA to captial expenditures in 1014 because the ratio is 1.08

Question 47

Retrun on Capital Employed (ROCE)

Answer 47

Shows how effective the management team uses firm's assets to generate profit

Question 48

Which ratio tells us the costs of adding reserves in relation tho the value of those reserves added

Answer 48

Value added ratio

Question 49

Times-interest earned ratio

Answer 49

Mesure the availability of safety cushon provided by net operating income

Question 50

What are not directly reflected on an oil and gas company balance sheet?

Answer 50

Reserve values

Question 51

Benchmarkeing is important when

Answer 51

investing, doing and internal company analysis, considering employement

Question 52

______are a share of the cash distribution paid by the MLP partnership , which gradually increases as the partnership increases the cash distribution

Answer 52

Incentive distribution rights

Question 53

Why would a company NOT choose and MLP structure

Answer 53

the company is unable to provide steady cash flows

Question 54

_______shows how changins in only one variables at a times, such as volume or prices, affects the NPV or IRR

Answer 54

Sensitivity analysis

Question 55

The cost of reserves acquisition for the entire period of 2010-2014 was higher than the cost to find and develop reserves (T/F)?

Answer 55

FALSE

Question 56

What parts of the value chain performs best from spin-offs?

Answer 56

Midstream and downstream

Question 57

Two basis laws of thermodynamics?

Answer 57

Energy is neither created or destroyed. In a closed system, heat energy tends towards randomness

Question 58

Which of the following choices best explains any misperceptions the poll paricipants have?

Answer 58

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.

Question 59

Which of the following choices best explains any misperceptions the poll participants had based on whether they were Democrats or Republicans? 

Answer 59

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.

Question 60

Does following statement correctly summarize the author's (Sheridan Titman) conclusion? It’s not surprising that Democrats tend to distrust large corporations and that Republicans tend to think that regulation does more harm than good. However, a casual evaluation of the recent political discourse suggests that politicians, in their pandering to the world view of their base, slant information in ways that reinforce misperceptions. Democracy requires an educated and informed electorate. A political process that encourages misinformation can’t be a good thing.

Answer 60

Yes, this statement summarizes the author's opinion.

Question 61

When valuing a private company acquisition, which of the following is important when conducting step 4 analysis (refining the estimate)?

Answer 61

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

Question 62

In relative valuation, the more quantitative a model, the better the valuation. 

Answer 62

FALSE

Question 63

A good valuation provides a precise estimate of value.

Answer 63

FALSE

Question 64

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?

Answer 64

8.5 x

Question 65

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?

Answer 65

5.7x

Question 66

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?

Answer 66

Fundamental valuation

Question 67

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?

Answer 67

Relative valuation

Question 68

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

Answer 68

Fundamental valuation

Question 69

______________ 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

Answer 69

Relative valuation

Question 70

______________ uses option pricing models to measure the value of assets that share option characteristics.

Answer 70

Option pricing theory

Question 71

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.]

Answer 71

Equity value of $65.2 million for Helix

Question 72

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.

Answer 72

TRUE

Question 73

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

Answer 73

MLPs

Question 74

Which of the following are advantages of MLPs?

Answer 74

All of the answers are correct.

Question 75

Why would a company NOT choose the MLP structure?

Answer 75

The company is unable to provide steady cash flows

Question 76

_________ are a share of the cash distribution paid by the MLP partnership, which gradually increases as the partnership increases the cash distributions.

Answer 76

Incentive distribution rights

Question 77

A valuation is an objective search for "true" value.

Answer 77

FALSE

Question 78

What estimate has convinced ExxonMobil and Chevron to anticipate that the oil demand will continue to rise for the next two decades?

Answer 78

Consumption trends, population growth, and rising living standards in the developing world.

Question 79

Why is Suncor Energy considered to be a "differentiated story"?

Answer 79

“Capital discipline, cash return to shareholders, and the power of integration.”

Question 80

What is the Tesla effect and how is it impacting the energy market?

Answer 80

A concept that the gasoline and diesel vehicles will be replaced by electrical vehicles in the future and weakened the oil demand in energy market.

Question 81

Who is Michael Rothman? What is Rothman's opinion on the global oil market and why?

Answer 81

Michael Rothman, commodities analyst, is optimistic about the oil market future, because he believes that the oil demand will grow and causes Brent crude benchmark to hit higher by year’s end.

Question 82

Why has Wall Street abandoned oil and gas stocks?

Answer 82

The energy stocks has not been performing well and has worsened due to the US-China trade war and other geopolitical disruptions.

Question 83

What path do traps follow

Answer 83

the ones with the least resistance

Question 84

who are the top petroleum producers?

Answer 84

saudi arabia, us, russia

Question 85

______requires a write-down on the book value of oil and gas reserves if the value of reserves falls below the capatilized costs on the balance sheet.

Answer 85

Ceiling test limitation

Question 86

What are 3 global benchmarks for refining margins?

Answer 86

US gulf coast, Northwestern Europe, Singapore

Question 87

5 rules of thumb in choosing probability distributions

Answer 87

1. if you have relevant data us it, 2. Does the variable you are modeling only assume discrete values? If so, use discrete distributions, 3. select distrubitons that fit the wisdom of experts from whom you get parameter estimates, 4. if there is a theoretical reson for selecting a particular distribution then do so, 5. KISS

Question 88

Where is the Williams project located?

Answer 88

5,700 feet deep. Located in the Gulf of Mexico

Question 89

Most valuations on Wall Street are ________valuations

Answer 89

Relative

Question 90

4 steps to using Method of Comparable Valuation

Answer 90

1. identify comparables, 2. calculate valuation ratio fore each (EBITDA), 3. calculate an initial estimate of value, 4. refine the estimate

Question 91

3 Relative Methods of valuation

Answer 91

EBITDA, EBITDAX, P/E multiple

Question 92

EBITDA multiples

Answer 92

used for mature businesses, do not use when there is a lot of future value

Question 93

EBITDA pros

Answer 93

Widely used, easy/data readily available, good for mature businesses

Question 94

EBIDA cons

Answer 94

not exact, cannot use if EBITDA negative, not good for high growth companies

Question 95

Intangible risks

Answer 95

Weather, engineering/project risk, act of god risk, legal, political…

Question 96

Which three concepts of the eleven accounting concepts are of prime importance in understanding financial reporting in the oil & gas industry?

Answer 96

The realization concept, the matching concept, the cost concept

Question 97

The ceiling test limitation is of greater concern for companies using which of the accounting methods?

Answer 97

Full cost

Question 98

WTI futures contract is

Answer 98

1000 bbls

Question 99

If a refinery is trying to hedge using a collar strategy, which of the following strategies should be used?

Answer 99

buy a call and sell a put

Question 100

Standard cost-of-carry models do a good job of characterizing energy forward curves. (T/F)

Answer 100

FALSE

Question 101

An important advantage of relative valuation is its close connection to __________as it values a business "relative" to the values or prices accorded to similar businesses at the time

Answer 101

Observed Market Prices

Question 102

An increase in the basis will ______ a long hedge and _______ a short hedge.

Answer 102

Benefit/Hurt

Question 103

Who made the statement: "Go the extra mile because there's no traffic jam there"

Answer 103

Roger Staubach

Question 104

What was Dana Murphy's undergraduate degree from where?

Answer 104

Geology, OSU

Question 105

Which oil/gas formation produces the most water in OK

Answer 105

Mississippian

Question 106

Which formation is of the most concern for earthquakes

Answer 106

Arbuckle