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Oil and Gas Equipment & Services. Module 7: Valuation Using Residual Enterprise Income. Jeff Ritter. Agenda. Brief Review Modules 4 & 6 Module 7: Residual Enterprise Income DCF Model Residual Enterprise Income Model Issues. World’s Largest Oil F ield C ompany. Module 11. Module 4.
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Oil and Gas Equipment & Services Module 7: Valuation Using Residual Enterprise Income Jeff Ritter
Agenda • Brief Review Modules 4 & 6 • Module 7: Residual Enterprise Income • DCF Model • Residual Enterprise Income Model • Issues
Module 11 Module 4 Parsimonious forecasting Full informational forecasting Difference Level of detail used to form assumptions
Factors considered in Sales Growth Estimate • Historical sales growth • Halliburton • Comparables • Analyst Expectations • High, Low, and consensus estimates: 2013, 2014, 2015 • Oil Rig Counts • Oil Prices and Demand • Earnings Call • “Mid to high single digit sales growth”
Sales Growth Assumption Historical growth for Halliburton and the Industry Rig and Well Count Ex: New construction Oil and Natural Gas Price & Supply/Demand Factors Historical growth has been inconsistent, but growth seems to relate closely to rig and well count. Oil prices and demand are expected to increase, but energy efficiency has slowed the consumption growth in countries such as China. Total rig count is on the decline dropping 10% in the US. 7.2% • Earnings call: “Mid to high single digit sales growth”
Assumptions Sales Growth 7.2% EPM 9.4% EATO 1.56 *Calculating to the nth decimal place looks more professional but does not make the results more accurate.
Issues with Forecast • We are external users: We only have access to general purpose financial statements that are given. • None of the companies are a “pure play” • May need to add additional comparables. • Technip metrics are not consistent with the other firms (Eliminate)
Cost of Debt 3.41% 5.02% X (1-.37) Cost of Equity 10.34% 03685 + 1.48 X .045 My calculate WACC Bloomberg WACC WACC 9.55% WACC 11.50% Confidence Low
Does DCF equal REI? EV DCF EV REI $45,617,000,000
Current Enterprise Value DCF and REI Calculation $45,617,000 $48,795,790 Slightly overvalued
Issues • Needed to take the sales forecast forward an extra two years. • Use correct discount rate for terminal value based on 2019 not 2020. • Don’t forget to add in NEA for REI model. • Make sure the formulas are referencing the correct cells Other outstanding issues: • 2013 data just came out and Halliburton participated in a share buy back program. Halliburton purchased approximately 80 million shares. 930 M to 850 M. • Does this have an affect on my prior analysis?