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20 Cards in this Set
- Front
- Back
Capital Budget
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Money you use to grow your company (spending budget)
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Book value v. market cap
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- Book value is what you're worth (assets minus debts)
- Market cap is what the market thinks you're worth - should be a multiple of your book value if you're doing well - premium if market value > book value |
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Best way to grow a company's stock price
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increase reserves in place
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Factors affecting the buy-versus-drill decision for managers:
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- outlook for oil and gas prices
- current and future costs of finding and producing reserves - the quality of a company's existing drilling inventory - the availability of drilling rigs and experienced personnel to man them - opportunities to make reasonably priced acquisitions |
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Wall Street's view on decisions to make acquisitions:
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It's a good time if they are plentiful and cheap, and it's a bad time if they are scarce and expensive.
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High oil prices make acquisitions:
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both plentiful and expensive
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Finding costs
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The capital costs associated with finding and developing oil and gas reserves.
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Important factors for investors to consider when determining whether companies should buy or drill:
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finding costs, production rates, reserve life and extraction costs
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New wells: cost and production
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higher rates of production, lower per-unit operating expenses, faster payouts and higher rates of return than older wells
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Older wells: cost and production
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higher per-unit operating costs, a longer payout and a lower rate of return than a new well.
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After-tax returns: new v. old wells
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although the cost for an acquisition may be less than a new drilling project, after-tax returns are generally lower
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Resource Plays
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low-risk, repeatable drilling plays such as tight gas sands, gas shales and coalbed methane; Wall Street's preference for growing a company
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Advanced 3-D seismic
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has enabled some operators to match structure with porosity development in the reservoir which has dramatically improved drilling success rates
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For companies that don't have enough quality acreage to consistently grow through the drillbit, acquisitions are
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necessary to replenish drilling inventory
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reasonable rate of multi-year growth for E&P company
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5% to 10%
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Examples of resource plays
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Canada's tar sands and coal-bed methane
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Deleverage
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- If leverage is not furthering growth, a company will deleverage by selling assets to pay off debt on its balance sheet
- ex. Devon selling its international and Gulf of Mexico assets to decrease debt |
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Premium
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- The amount by which the stock sells above its par value
- ex. When Denbury bought Encore, they paid Encore shareholders $50 for each share held, including $15 in cash and $35 in stock. |
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legacy assets
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an asset that a company has had for a long time
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Equity and debt financing
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The equity portion is funded by issuing common stock and the debt portion is funded by bank loans.
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