Diversified Natural Gas

Project by:

Daniel ElzerNicholas

StarnesMichael GoekeMichael Marana

Industry Overview

-80%

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0%

20%

40%

60%

80%

100%Companies vs SPX Index

CHK US Equity SPX Index APA US Equity ECA US Equity

Retu

rn

2007 2008 2009 2010 2011 2012 2013 2014

Industry Overview

Diversified Natural Gas• Production, marketing, and

transportation• Economic forces of supply and

demand• Regulatory and geopolitical risks• Energy prices and the economy

Price/Book 1.6Price/Earnings 25.7Price/Sales 2.1ROE 6.3Debt/Equity 0.5Operating Margin 18%Revenue Growth, 3yr average

-11.8%

History of Natural Gas Diversified

• Technological advancement and commercial development

• Household and water heating, cooking, electricity• Supplies around 41% of energy used by U.S. industries• Cleaner environment and more efficient • Halliburton Oil Well Cementing Company, 1949

Fracking

• .• .• .• .

Future Projections

Company Overview

• Ticker Symbol: CHK• Market Price: $22.90.• Second largest natural gas producer in

the U.S.

History of Chesapeake Energy Corporation

• Founded in 1989• Aubrey K. McClendon and Tom L. Ward in Oklahoman City, OK• investment in the company was only $50,000.00

Qualitative Assessment• Chesapeake has hedged very well against the current fall in Natural Gas Prices• 16.09 billion current market cap• Acquisition, exploration, and development of properties for the production of

natural gas, oil, and natural gas liquids (NGL) from underground reservoirs in the United States.

• It owns interests in approximately 46,800 natural gas and oil wells. As of December 31, 2013 

Quantitative Analysis

2/20/0

87/9

/08

11/26

/084/1

5/099/2

/091/2

0/106/9

/10

10/27

/103/1

6/118/3

/11

12/21

/115/9

/129/2

6/12

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37/3

/13

11/20

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7/14

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CHK vs Natural Gas

NGA ComdtyCHK US Equity

Retu

rnEViews OLS Regression Output

EViews OLS Regression Output

Intrinsic ValueDCF Valuation CHK (1)

WACC 6.9%Cost of Equity 10.76%Weight of Equity .510

BETA 1.19Expected MKT Return 9.44%Risk Free 2.34%

Cost of Debt 2.21%Weight of Debt .388Cost of Preferred Equity 5.6%Weight of Preferred Equity .102

EBITDA Multiple 5.3x(+)PV of Future CFs (MM) $9,353(+)PV of Terminal Value (MM) $26,582Implied Enterprise Value (MM) $35,935(-)Current Net Debt & Pref Equity (MM)

$17,256

Equity Value (MM) $18,680(/)Shares Outstanding (MM) 665Intrinsic Stock Price $28.08

HOLD: (Market Price=$22.90) < (Intrinsic Value=$28.08)

Company Overview

• Ticker Symbol: APA• Market Price: $75.10 • CEO: G. Steven Farris • 1970: Company changed name to “Apache Corporation” to symbolize a movement to

more diversification

History of Apache Corporation

• Founded in 1954 in Minneapolis, MN.• Founders were Truman Anderson, Raymond Plank, Charles Arnao, and 41

shareholders • Initial equity was $250,000.00• Apache recently merged with Mariner Energy, acquiring assets in Deep-Water

Gulf of Mexico

Qualitative Assessment

• Apache holds over 27 million gross acres of land• Australia, Argentina, Canada, Egypt, United Kingdom and the United States• Apache holds a large amount of undeveloped land in Australia

Quantitative Analysis

2/20/08 2/20/09 2/20/10 2/20/11 2/20/12 2/20/13 2/20/14

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APA vs Natural Gas

NGA ComdtyAPA US Equity

Retu

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EViews OLS Regression Output

EViews OLS Regression Output

Intrinsic ValueDCF Valuation APA (1)

WACC 8.2%Cost of Equity 10.4%Weight of Equity .764

BETA 1.13Expected MKT Return 9.44%Risk Free 2.32%

Cost of Debt 1.386%Weight of Debt .236

Pretax Cost of Debt 2.31%Tax Rate 40%

EBITDA Multiple 4.8x(+)PV of Future CFs (MM) $1,176(+)PV of Terminal Value (MM) $38,103Implied Enterprise Value (MM) $39,279(-)Current Net Debt (MM) $10,816Equity Value (MM) $28,463(/)Shares Outstanding (MM) 376Intrinsic Stock Price $75.60

HOLD: (Market Price=$75.10) < (Intrinsic Value=$75.60)

Company Overview

• Ticker Symbol: ECA• Stock Price: $17.70• Incorporated in Canada

History of Encana Corporation• Founded 2002• Merger of PanCanadian Energy Corporation and Alberta Energy

Company Ltd• CEO: Douglas Suttles• Roots go back to 1800s• Divesting many of its assets to concentrate on core competencies

Qualitative Assessment

• 9.6 million acers of oil and natural gas reserves• 5.3 million acers are undeveloped• One of the largest Natural Gas explorer and developer

in Canada• Significant increases in Natural Gas liquids 71% growth

rate • Dropping Oil and Natural Gas prices are a cause for

concern

Quantitative Analysis

3/31/2008 3/31/2011 3/31/2014

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ECA vs Natural Gas

NGA ComdtyECA US Equity

Retu

rnEViews OLS Regression Output

EViews OLS Regression Output

Intrinsic ValueDCF Valuation ECA (1)

WACC 7.5%Cost of Equity 9.44%Weight of Equity .742

BETA .85Expected MKT Return (Canada)

10.75%

Risk Free 2.03%Cost of Debt 2.08%Weight of Debt .258

Pretax Cost of Debt

3.75%

Tax Rate 44.7%EBITDA Multiple 5.3x(+)PV of Future CFs (MM)

$168

(+)PV of Terminal Value (MM)

$21,589

Implied Enterprise Value (MM)

$21,757

(-)Current Net Debt (MM)

$4,558

Equity Value (MM) $17,199(/)Shares Outstanding (MM)

740.96

Intrinsic Stock Price $23.21

BUY: (Market Price=$17.70) < (Intrinsic Value=$23.31)