1 / 34

Oil and Gas Equipment & Services

Oil and Gas Equipment & Services. Module 4: Simple Analysis and Parsimonious Forecasting. Jeff Ritter. Agenda. Forecasting Overview RNEA Forecast. World’s Largest Oil F ield C ompany. Forecasting Performance. (Valuable opportunities may be lost). Multiple Method.

elgin
Download Presentation

Oil and Gas Equipment & Services

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript


  1. Oil and Gas Equipment & Services Module 4: Simple Analysis and Parsimonious Forecasting Jeff Ritter

  2. Agenda Forecasting Overview RNEA Forecast

  3. World’s Largest Oil Field Company

  4. Forecasting Performance (Valuable opportunities may be lost) Multiple Method Theoretically based models for valuation • Integral to business decisions • Investing • Value a firm’s common stock before purchasing shares • Managing a firm effectively • Value different strategic investment decisions • Creditworthiness • Forecast the same information but choose to focus on the borrower’s cash flows. • Make best possible forecast NOT just conservatism

  5. Goal Right Answer Enter into debate about assumptions Demonstrate the process by which forecasting toward valuation can be done and the decisions involved Assumptions are relied on

  6. Overview of the Forecast Process Trade off: Dependent on the firms business model. Forecasting relies on enterprise items that we expect to persist. Sales Growth Enterprise profit margin (EPM) Enterprise asset turnover (EATO) RNEA

  7. RNEA Used for analysis of historical data because we assume the amount of resources employed varies throughout the year. Forecast setting allows the use of ending NEA due to the assumed timing of investments by the debt and equity holders.

  8. Enterprise Profit Margin EPAT Sales Preferable Measures how much operating profit the firm earns from each sales dollar.

  9. Level of gross profit the firm earns of products (sales revenue-COGS) What impacts EPM? • Level of competition • Product pricing • Level of enterprise expenses the firm requires to support services • Overhead costs: wages, marketing, R&D Firm’s willingness and ability to control costs

  10. Halliburton’s EPM For each dollar of Halliburton’s sales during 2012, the firm earned roughly 9.82 cents profits after all enterprise enterprise expenses and taxes EPM Pattern 2009-2012?

  11. Potential Issue* Observation • Consider looking at “EPM from Sales” excludes the following: • Impairment charge • Discontinued operations • F/S translation • Gains/losses on cash flow hedges Growth, then decline in most recent year *We don’t want to focus on events with zero expected value

  12. The stability of the enterprise operations’ profitability related to sales of Halliburton does not experience much change when considering EPAT from sales. • The EPM is still relatively stable

  13. Enterprise Asset Turnover Preferable How to increase? Sales Avg(NEA) Increase sales for a given level of Investment in EA and/or reduce the amount of EA necessary to generate sales We want The amount of sales the firm realizes from each dollar invested in enterprise assets. Measures the productivity of the firm’s enterprise assets.

  14. How to increase EATO? Operating WC • Easier than reducing long term net enterprise assets. • How? • Firms can collect their A/R faster, reduce inventories, delay payments to suppliers. Long term EA Difficult to reduce. The level of property plant and equipment required by the the firm is determined by the nature of the firm’s products or services than by management action. Reduce operating working capital (Current enterprise assets-current enterprise liabilities)

  15. Halliburton’s EATO For each dollar of Halliburton’s enterprise assets employed, they generated $1.67 in sales during 2012. EATO Pattern 2009-2012?

  16. Observation Same trend as EPM Growth then decline

  17. EPM and EATO Do not blindly compare the performance of firms across different industries Higher EPM in one industry vs. another does not indicate superior management. Utilizing pure play comparables is ideal EPM and EATO are the weighted average in the various industries the company operates Typical ratios may depend on capital intensity of the industry

  18. Forecasting Process DO NOT forecast the firm’s non-operating, financing, activities Because we are valuing the enterprise and then adjusting for the current value of NFL to determine the value of equity Forecast revenue via forecasts of sales growth rates. Forecast EPAT via forecasts of EPM and components of EPM Forecast NEA via forecasts of EATO and components of EATO

  19. Module 11 Module 4 Parsimonious forecasting Full informational forecasting Difference Level of detail used to form assumptions

  20. Ideal Factors to Consider in the Forecast • Business analysis • Assessment of general economic activity • Competitive forces within the business environment • Individual product level: Oil and Gas Services • Trends in manufacturing costs: Oil and Gas equipment services manufacturing cost increasing • Logistical requirements

  21. Forecasting • Measured: • enterprise level • segment, division or product line. Sales growth forecasting • Assumptions: • revenue growth • expense change in relation to revenue. • EPM components EPAT forecasting • Assumptions: • Relation between B/S accounts and revenue • Components of EATO Balance sheet forecasting

  22. Forecasting Sales Revenue • Most crucial and difficult estimate • All other enterprise income statement and B/S accounts derive directly or indirectly • Both EPAT and NEA change with with revenue • Revenue growth impact: • Lead: Inventory • Grow concurrently: Income statement , A/R • Lag: plant assets (only when growth is sustainable)

  23. 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”

  24. Volatile Historical Sales Growth

  25. Analyst Expectations for Halliburton

  26. Rig and Well Counts

  27. 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 continue 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% Includes GDP Growth 3% and inflation considerations 1.5%.

  28. Refining the EPM Analysis with EPAT from sales, does not result in a significant difference • We expect EPM will remain at approximately 10% • Competition entry by small companies will prevent an increase in this area

  29. Observation Growth then decline • We expect EATO forecast of 1.61 • Extracting is becoming more complex and we expect additional NEA to generate less sales dollars

  30. Assumptions Sales Growth 7.2% EPM 10% EATO 1.61 *Calculating to the nth decimal place looks more professional but does not make the results more accurate.

  31. Issues • 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. • Look at additional information because sales growth is consistent in the industry, but the pattern needs further analysis. • Technip metrics are not consistent with the other firms (Eliminate)

  32. Any Questions?

More Related