Senior Seminar - Test 1 - Revised

Front 1

Capital Budget

Back 1

Money you use to grow your company (spending budget)

Front 2

Book value v. market cap

Back 2

- 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

Front 3

Best way to grow a company's stock price

Back 3

increase reserves in place

Front 4

Factors affecting the buy-versus-drill decision for managers:

Back 4

- 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

Front 5

Wall Street's view on decisions to make acquisitions:

Back 5

It's a good time if they are plentiful and cheap, and it's a bad time if they are scarce and expensive.

Front 6

High oil prices make acquisitions:

Back 6

both plentiful and expensive

Front 7

Finding costs

Back 7

The capital costs associated with finding and developing oil and gas reserves.

Front 8

Important factors for investors to consider when determining whether companies should buy or drill:

Back 8

finding costs, production rates, reserve life and extraction costs

Front 9

New wells: cost and production

Back 9

higher rates of production, lower per-unit operating expenses, faster payouts and higher rates of return than older wells

Front 10

Older wells: cost and production

Back 10

higher per-unit operating costs, a longer payout and a lower rate of return than a new well.

Front 11

After-tax returns: new v. old wells

Back 11

although the cost for an acquisition may be less than a new drilling project, after-tax returns are generally lower

Front 12

Resource Plays

Back 12

low-risk, repeatable drilling plays such as tight gas sands, gas shales and coalbed methane; Wall Street's preference for growing a company

Front 13

Advanced 3-D seismic

Back 13

has enabled some operators to match structure with porosity development in the reservoir which has dramatically improved drilling success rates

Front 14

For companies that don't have enough quality acreage to consistently grow through the drillbit, acquisitions are

Back 14

necessary to replenish drilling inventory

Front 15

reasonable rate of multi-year growth for E&P company

Back 15

5% to 10%

Front 16

Examples of resource plays

Back 16

Canada's tar sands and coal-bed methane

Front 17

Deleverage

Back 17

- 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

Front 18

Premium

Back 18

- 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.

Front 19

legacy assets

Back 19

an asset that a company has had for a long time

Front 20

Equity and debt financing

Back 20

The equity portion is funded by issuing common stock and the debt portion is funded by bank loans.