Oil and Gas Equipment & Services

1. Oil and Gas Equipment & Services Module 8: Valuation Using Abnormal Enterprise Income Growth Model Jeff Ritter

2. Agenda • Brief Review Module 4: Forecast assumptions • Module 8: Abnormal Enterprise Income Growth • The model • Compared to DCF and Residual Enterprise Income • Issues

3. World’s Largest Oil Field Company

4. Module 12 Module 4 Parsimonious forecasting Full informational forecasting Difference Level of detail used to form assumptions

5. 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”

6. Analyst Expectations for Halliburton

7. Rig and Well Counts

9. 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”

10. 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.

11. 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)

12. Accounting Based Valuation Models Module 8 Module 7 Abnormal Enterprise Income Growth Model Residual Enterprise Income Model Difference Accounting Anchor Employed Next year’s EPAT Current NEA

13. Abnormal Enterprise Income Growth Model • Utilizes the readily available accounting information • Focus of analysts and investors • Comparison cum-free-cash-flow earnings next year to the expected amount of earnings given this period’s earnings. • Adjustment element captures earnings that may reasonably be expected to accrue outside the enterprise as a result of the reinvestment of distribution FCF t-1

17. Abnormal Enterprise Income Growth Model Enterprise Value Total to be Capitalized WACC $45,617,000,000 $4,354 9.55%

18. Abnormal Enterprise Income Growth Model

19. DCF Model

20. Residual Enterprise Income

21. Does DCF1=REI2=AEIG3? EV DCF EV REI EV AEIG $45,617,000,000

22. Mathematically equivalent

23. Primary Benefit of Abnormal Enterprise Growth Model • Less reliance on “continuing value” • Only 23.47% based on continuing value compared to 79.62% and 44.81% • Why is this a benefit? • Prefer shorter horizon because the farther we forecast into the future, the less confidence we have in our estimates.

24. Key Point: The horizon must be sufficient to achieve steady state • Abnormal enterprise income growth achieves steady state in year T (2020): • requires two years of NEA growing at the sales growth rate and one year of EPAT growing at the sales growth rate. • DCF & REI achieve steady state in year T-1 (2019)

25. Enterprise Value Valuation Calculation $45,617,000 $48,795,790 Slightly overvalued

26. Issues • No issues with the computation of the Abnormal Enterprise Growth model Other issues that may impact my enterprise value results: • Forecasted growth for continuing value. • Is 5% too aggressive? • WACC • Difference between Bloomberg and my calculated WACC: 11.5% vs 9.55% • 2013 data was released recently and Halliburton participated in a share buy back program. Halliburton purchased approximately 80 million shares. Reducing shares outstanding from 930 M to 850 M. • Does this have an affect on any prior analysis?

27. Any Questions?