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Oil and Gas Equipment & Services. Module 3: Market Multiple Valuation. Jeff Ritter. Agenda. Brief Company Background Brief Review Module 2 Market Multiple Valuation Market Multiple Issues. World’s Largest Oil F ield C ompany. What does Halliburton do?.

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Oil and gas equipment services

Oil and Gas

Equipment & Services

Module 3: Market

Multiple Valuation

Jeff Ritter


Agenda

Agenda

Brief Company Background

Brief Review Module 2

Market Multiple Valuation

Market Multiple Issues


Oil and gas equipment services

World’s Largest Oil Field Company


What does halliburton do

What does Halliburton do?

  • Using the latest geological technologies, Halliburton creates data that helps their customers locate oil and natural gas.

  • When hydrocarbons are located, they provide solutions to determine if oil and gas can be produced.

  • If a well is determined to be viable, they provide the services that allow oil and gas companies to begin production. Throughout the life of the field, they help their customers maximize production and recovery, and they help them realize reserves from difficult geologic environments.

  • Halliburton also provides well intervention, pressure control, and pipeline and process services.


Module 2 review

Module 2 Review

B/S

Enterprise Operations

Reformulation

Financing

I/S

“Is the element part of enterprise operations or financing activities of Halliburton?”

  • Net Enterprise Assets (NEA)

    • Identify enterprise assets and liabilities

  • Net Financial Liabilities (NFL)

  • Enterprise Profit After Tax (EPAT)

  • Financing Expense After Tax (FEAT)


Market multiple valuation

Market Multiple Valuation

“Method of comparable”-U.S. Accounting Standards

  • Most commonly used method of valuation

  • First –pass, parsimonious indicator of value, as a stock screening device.

  • Steps in market multiple valuation:

    • Select summary performance measures

    • Select comparable companies

    • Compute the market multiple from the comparable companies market values’ and performance measures

    • Compute the target company’s value

    • Calculate equity value per share

  • Value = Summary performance measure X Market Multiple


Step 1 summary performance measures

Step 1: Summary Performance Measures

Input

Output

EPAT

NEA

Enterprise

Performance Measure*

Enterprise Value

Deduct Value Owed

to Debt Holders

  • Sales

  • NI

  • CI

  • Book Value

Equity

Performance Measure*

Equity Value

Output

Input

*May be based on current or forecasted performance measures


Step 2 select comparable companies

Step 2: Select Comparable Companies

  • Similar companies and requires consideration of capital structure (portion of the enterprise that is owned by debt holders vs. equity holders)

  • Similar growth, risk, profitability

  • All have the same year end dates

  • Issue: Capital Structure of Baker Hughes (Debt holders)


Step 2 select comparable companies1

Step 2: Select Comparable Companies

  • Other Issues:

    • Presumes the target company is not fairly valued, but comparable companies are fairly valued on the market.

    • Selecting the proper multiples

  • Arguments in favor:

    • Valued correctly on average

    • May be useful in valuing IPOs

    • Multiples are easy to calculate


Step 3 compute market multiples

Step 3: Compute Market Multiples

Example of information provided by group members for computations:

Market Value of Equity (Market Capitalization):

Price Per Share

$48.61

Shares Outstanding

848,230,000

Market Value of Equity

41,232,460,300

Enterprise Value:

Market Value of Equity

41,232,460,300

NFL

2,661,060,000

Enterprise Value

43,893,520,300


Oil and gas equipment services

  • Most commonly used performance measure for estimating company value is earnings

Steps*:

Determine multiple for BHI, SLB, TKPPY. EV/EPAT

Average comparable multiples

Estimate Enterprise Value of HAL with averaged multiples

EPAT of Halliburton X EPAT Market multiple = Enterprise Value

Enterprise Value – NFL = Equity Value

Equity Value/Common Shares Outstanding = Equity Value per share

*Same steps for all multiples


Oil and gas equipment services

1

2

1NEA X NEA market multiple

2Equity value/Common shares outstanding


Oil and gas equipment services

Commonly referred to as price to book ratio.

  • Should have similar capital structures

  • NEA is superior because of its focus on the enterprise


Oil and gas equipment services

  • Additional factors that reflect economic activities.

  • Potential to introduce volatility into income.


Oil and gas equipment services

Will not include in final analysis

  • Additional factors that reflect economic activities.

  • Potential to introduce volatility into income.


Oil and gas equipment services

Enterprise Value is chosen because sales is a driver of both debt and equity holders.

  • We feel the sales multiple is not an appropriate measure for this industry.

  • Insufficient research on cost structures

  • This multiple is more suitable for companies with negative earnings.

  • Large variation in comparables


Oil and gas equipment services

Will not include in final analysis

  • We feel the sales multiple is not an appropriate measure for this industry.

  • This multiple is more suitable for companies with negative earnings.

  • Large variation in comparables


Oil and gas equipment services

Market multiples extremely inconsistent so this multiple is most likely not ideal to evaluate the industry.

Research and development is important because the companies providing the services need to have superior methods/equipment to attract companies to hire them. Oil and Gas service companies are expected “to benefit from the increasing complexity and technological intensity of oil and gas exploration.”- Forbes.


Average of equity value per share

Average of Equity Value Per Share

  • Used the average equity value per share for enterprise multiples to calculate estimated appropriate value per share in the financial markets.

  • Why?

    • Estimation error for specific multiples is mitigated by other multiples.

    • Multiples that value equity directly is impacted by capital structure (leverage).

$50.26

With BV and NI included $49.34


Recommendation

Recommendation

Current

Share Price

Equity

Value Per Share

HOLD

$48.61

$50.26

Slightly undervalued

  • Assumes comparables are fairly valued

  • These multiples are not based on forward looking performance measures.

  • Large variations in equity value per share calculations

  • Large variations in multiples for different companies in each multiple calculation

Confidence LOW

Only benefit = it is easy


Issues to evaluate

Issues to evaluate

  • Additional analysis on

    • Capital and cost structures of each comparable

    • Technip’s IFRS accounting (Analysis without Technip results in an estimated share value of $55.49)

      • This would change the recommendation to buy

    • Appropriate weight of multiples

    • Sensitivity Analysis

  • Market multiple measures

    • Not satisfied with current measures we identified

    • Further analysis of each 10K to identify metrics important to this service industry


Oil and gas equipment services

Any Questions?


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