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Exam 2 Study Questions Flashcards

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1
Q

Operating Cash Flow Formula

A

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

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2
Q

Free Cash Flow

A

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

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3
Q

7 Categories of ratios

A

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

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4
Q

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

A

Triangular, uniform, and lognormal

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5
Q

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

A

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

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6
Q

Which of the following options is a tangible risk?

A

Financial risk; Insurance risk; Commodity price risk.

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7
Q

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

A

TRUE

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8
Q

____________ 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.

A

Monte Carlo Simulation

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9
Q

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

A

Devil’s Tower

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10
Q

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.

A

Possible

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11
Q

What does the picture show us?

A

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

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12
Q

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

A

Uniform

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13
Q

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 ______________.

A

P90

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14
Q

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

A

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

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15
Q

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

Increase NPV

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16
Q

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

Increase the required rate of return

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17
Q

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

A

TRUE

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18
Q

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

A

Scenario analysis

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19
Q

What are the advantages of simulation analysis?

A

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.)

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20
Q

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”?

A

Weather

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21
Q

What does “risk” mean in capital budgeting?

A

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. )

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22
Q

_________________ 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%?”

A

Sensitivity analysis

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23
Q

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

A

Gives probabilities of of various possible outcomes

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24
Q

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)”

A

Proved or Proven

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25
Q

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.

A

Yes, I will do this.

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26
Q

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

A

2 greatest risks are first - price and second - quantity

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27
Q

What describes a Monte Carlo

A

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

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28
Q

What commodity has the highest volatility

A

Natural Gas

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29
Q

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

A

Crack spread trade

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30
Q

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

A

FALSE

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31
Q

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

A

FALSE

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32
Q

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

A

prices are expected to revert to a mean value over time

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33
Q

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

A

natural gas futures

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34
Q

Which indexes are used by investors for oil hedging

A

Standard and Poor’s Goldman Sachs Index

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35
Q

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

A

1990

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36
Q

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

A

TRUE

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37
Q

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

A

F&O reserve replacement ratio

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38
Q

MIRR is better than IRR because

A
  1. MIRR correctly assumes reivestment at projects cost of capital 2. MIRR avoids the problem of multiple IRRs
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39
Q

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

A

New York Cotton Exchange in 1971

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40
Q

Weakeness of payback

A

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

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41
Q

What does risk mean in capital budgeting

A
  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
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42
Q

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

A

petroleum (oil) derivatives

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43
Q

First capital budgeting principle

A

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

44
Q

F&D reserve replacement ratio

A

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

45
Q

DuPont Analysis

A

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

46
Q

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

A

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

47
Q

Retrun on Capital Employed (ROCE)

A

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

48
Q

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

A

Value added ratio

49
Q

Times-interest earned ratio

A

Mesure the availability of safety cushon provided by net operating income

50
Q

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

A

Reserve values

51
Q

Benchmarkeing is important when

A

investing, doing and internal company analysis, considering employement

52
Q

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

A

Incentive distribution rights

53
Q

Why would a company NOT choose and MLP structure

A

the company is unable to provide steady cash flows

54
Q

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

A

Sensitivity analysis

55
Q

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

A

FALSE

56
Q

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

A

Midstream and downstream

57
Q

Two basis laws of thermodynamics?

A

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

58
Q

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

A

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.

59
Q

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

A

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.

60
Q

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.

A

Yes, this statement summarizes the author’s opinion.

61
Q

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

A

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

62
Q

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

A

FALSE

63
Q

A good valuation provides a precise estimate of value.

A

FALSE

64
Q

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

8.5 x

65
Q

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

5.7x

66
Q

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

Fundamental valuation

67
Q

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

68
Q

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

A

Fundamental valuation

69
Q

______________ 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

70
Q

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

A

Option pricing theory

71
Q

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 $65.2 million for Helix

72
Q

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.

A

TRUE

73
Q

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

A

MLPs

74
Q

Which of the following are advantages of MLPs?

A

All of the answers are correct.

75
Q

Why would a company NOT choose the MLP structure?

A

The company is unable to provide steady cash flows

76
Q

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

A

Incentive distribution rights

77
Q

A valuation is an objective search for “true” value.

A

FALSE

78
Q

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

A

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

79
Q

Why is Suncor Energy considered to be a “differentiated story”?

A

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

80
Q

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

A

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.

81
Q

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

A

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.

82
Q

Why has Wall Street abandoned oil and gas stocks?

A

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

83
Q

What path do traps follow

A

the ones with the least resistance

84
Q

who are the top petroleum producers?

A

saudi arabia, us, russia

85
Q

______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.

A

Ceiling test limitation

86
Q

What are 3 global benchmarks for refining margins?

A

US gulf coast, Northwestern Europe, Singapore

87
Q

5 rules of thumb in choosing probability distributions

A
  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
88
Q

Where is the Williams project located?

A

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

89
Q

Most valuations on Wall Street are ________valuations

A

Relative

90
Q

4 steps to using Method of Comparable Valuation

A
  1. identify comparables, 2. calculate valuation ratio fore each (EBITDA), 3. calculate an initial estimate of value, 4. refine the estimate
91
Q

3 Relative Methods of valuation

A

EBITDA, EBITDAX, P/E multiple

92
Q

EBITDA multiples

A

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

93
Q

EBITDA pros

A

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

94
Q

EBIDA cons

A

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

95
Q

Intangible risks

A

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

96
Q

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

A

The realization concept, the matching concept, the cost concept

97
Q

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

A

Full cost

98
Q

WTI futures contract is

A

1000 bbls

99
Q

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

A

buy a call and sell a put

100
Q

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

A

FALSE

101
Q

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

A

Observed Market Prices

102
Q

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

A

Benefit/Hurt

103
Q

Who made the statement: “Go the extra mile because there’s no traffic jam there”

A

Roger Staubach

104
Q

What was Dana Murphy’s undergraduate degree from where?

A

Geology, OSU

105
Q

Which oil/gas formation produces the most water in OK

A

Mississippian

106
Q

Which formation is of the most concern for earthquakes

A

Arbuckle

Energy Finance (4 decks)

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