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Oil&GasMergerModelsandLBOModels:KeyDifferences
MergermodelsandLBOmodelsarealmostexactlythesameforoil&gascompaniesyourestillmaking purchaseassumptions,combiningandadjustingbalancesheets,modifyingthe3statements,andsoon. YoustillcareaboutIRRinanLBOandaccretion/dilutioninamergermodelandyoustillcalculatethemin thesameway. Soratherthangoingoverhowtobuildthesemodels,wereonlygoingtopointoutthekeydifferenceshere.

Assumptions
Itsprettymuchthesameasfornormalcompanies. LBOResourcePrices: Themaindifferenceisthatyoumayhavean Gas Oil/NGL Hedged additionalassumptionforcommodityprices: $perMcf $perBbl Price% $ 7.00 $75.00 110.0% Ifyoudothisinamergermodel,youneedtousethe samepricesforthebuyerandthesellerorthemodel PriceCasedUsedinLBO: LBO wouldntmakeanysenseoilcantbe$75perbarrel foronecompanyand$50perbarrelforanother. Oil&gascompaniestendtobehighlyleveragedalready,sooftenyoucannotassumemuchforthedebtto financethetransactionineitheramergermodeloranLBOmodel. Otherthanthat,yourestillassumingapurchaseprice,%cash/debt/stock(orjustcash/debtfortheLBO), interestratesonthecash/debt,andsoon.

PurchasePriceAllocation&BalanceSheetAdjustments
YoustillcalculateGoodwill,adjustforPP&EandIntangiblewriteups,writedownexistingDTLs/DTAs,and createanewDTLinthesameway. FixedAssetWriteUp: OnedifferenceisthatforthePP&Ewriteup, PP&EWriteUp%: 5.0% ratherthanjustestimatinga510%increaseover PP&EWriteUpAmount: 1,597 theexistingbalance,youmightbaseitonthePV10 DepreciationPeriod(Years)Book: 8 estimateinthecompanysfilings. YearlyDepreciationExpenseBook: 200 WedidnotdoitthiswayinthemodelbecauseXTOsPV10valuewasfarbelowthevalueoftheProved Reservesonitsbalancesheet,butthatisoneoption.

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Youcombinebalancesheetsexactlythesamewayinamergermodeladdupalltheitemsindividually, subtractcashused,takeintoaccountthewriteupsandwritedowns,addinnewGoodwill,IntangibleAssets, andCapitalizedFinancingFees,modifythedebtasappropriate,andwipeoutthesellersShareholdersEquity. ThesameappliestothebalancesheetadjustmentsinanLBOmodel,butthereyourejustadjustingthe companysbalancesheetbyitselfratherthanaddinganothercompanysbalancesheet.

AcquisitionEffects
Exactlythesameasforanormalcompany:synergies,foregone DepreciationofPP&EWriteUp: interestoncash,newdebtinterestexpense,newamortization AmortizationofIntangibles: expense,newfinancingfeesamortization,newdepreciationfrom AmortizationofFinancingFees: PP&Ewriteup,andadditionalsharesoutstanding. OperatingExpenseCostSavings: ThoseapplytotheLBOmodelaswell,exceptforthesynergies,foregoneinterestoncash(sinceyoudont calculateEPSaccretion/dilutionthere),andtheadditionalsharesoutstanding. YoucouldstillmakeassumptionsforitemslikecostsavingsandasponsormanagementfeeinanLBOaswell.

MergerModel:Synergies
Thisiswherethemergermodelismostdifferentfor oil&gascompanies. RevenueSynergies:Theseareproblematicfornatural resourcecompaniesbecauseyoucantassumethatoil orgaspriceswillclimbposttransaction.Companies havenocontroloverthepricestheyget,soyoucould notassumeapriceincreaseasyoumightfornormal companies. Youcouldassumeaproductionincrease,butnewoil wellsandfieldstakeyearstocomeonlinesoevenif productiongoesup,itwonthaveanimpactona35 yearmodel. Bottomline:Revenuesynergiesareevenlessrelevant foroil&gascompaniesthantheyarefornormal companies. ExpenseSynergies:Fortraditionalcompaniesyou mightassumeareductioninforce(layingoff
TransactionAssumptionsCostSynergies Projected 2011

December31, TotalAnnualProduction(Bcfe):

2010

2012

1,149.7 1,264.7 1,390.6

ExpensesPerMcfeofProduction($asStated): Production: $0.95 Taxes,Transportation&Other: 0.65 Exploration: 0.07 DD&A: 3.00 Accr.ofAssetRetirementObli.: 0.05 0.22 G&A(Exc.StockBasedComp.): Acquisitions: 0.50 Development&Exploration: 3.39 OtherPropertyAdditions: 0.60 TotalExpensesPerMcfe: $9.43

$0.95 0.70 0.07 3.00 0.05 0.23 0.50 3.50 0.60 $9.60

$1.00 0.70 0.07 3.00 0.05 0.24 0.50 3.50 0.60 $9.66

NetReductioninPerMcfeExpensesDuetoIncreasedScale: Production: 0.07 0.07 0.07 G&A(Exc.StockBasedComp.): 0.02 0.02 0.02 $0.09 $0.09 $0.09 TotalReducedExpensesPerMcfe: NewTotalExpensesPerMcfe: IncreaseinOperatingIncome: $9.34 $9.51 $9.57 $ 103 $ 114 $ 125

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employees),operatingleaseconsolidations,areductioninCapEx,andsoon. Ifyouhaveenoughinformationtodoso,youcouldstillmaketheseassumptionsforoil&gascompanies especiallyiftheyindicateinthedealannouncementthattheyexpectacertainamountofsynergiesorwillbe reducingCapExorheadcountbyacertainamount. Butmostexpensesforoil&gascompaniesareonaunitofproductionbasis,soyoucouldalsomakesynergy assumptionsbasedonthose. Example:Duetoincreasedscale,thesellersproductioncostsperMcfewillnowbe$0.95ratherthan$1.00. That,inturn,correspondstoanannualcostsavingsof$100millionbasedonannualproductionofsuchand such. Seethediagramonthepreviouspageforanexampleofhowtocalculatethesesynergies.

Modifying/Combiningthe3Statements
Thispartisalmostexactlythesamemodifytheincomestatementfortheacquisitioneffects,makesurethat debtandthenewassetsarebeingtrackedproperlyonthebalancesheet,andthatyoureaddingbackallthe noncashcharges(newandold)onthecashflowstatement. OnedifferenceinthemergermodelisthatifyouhaveaSuccessfulEffortscompanybuyingaFullCost companyorviceversa,youneedtoadjustthefinancialstatementsfortheExplorationexpense. Example:Afullcostcompanyisbuyingasuccessfuleffortscompany.Thesuccessfuleffortscompanyhasan Explorationexpenseof$100onitsincomestatement. InthisscenarioyoudhavetoremovetheExplorationexpensefromthecombinedincomestatementand insteadcapitalizeitandaddittoCapExonthecashflowstatement.

LBOModel:CreditStatisticsandRatios
ItsprettymuchthesamehereyourestilllookingatLeverageRatios(TotalDebt,NetDebt,SeniorDebt,and soondividedbyEBITDA)andInterestCoverageRatios(EBITDAdividedbyTotalInterest,NetInterest,or CashInterest). Twopointstobeawareof: 1. YounormallyuseEBITDAratherthanEBITDAXbecauseEBITDAisthestandardforallthingsdebt related;alsokeepinmindthatExplorationisstillacashexpenseandwillthereforereduceyourability topayinterestandrepaydebtprincipal.

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2. Itsreallyimportanttolookat(EBITDACapEx)inadditiontoEBITDAforalltheseratiosbecauseoil &gascompanieshaveveryhighCapExrequirements.Eveniftheleverageratiosandinterestcoverage ratiosdonotlookbadbasedonEBITDA,theymightlookmuchworsebasedon(EBITDACapEx).

MergerModel:ContributionAnalysis
Inatraditionalcontributionanalysis,youdlookathowmuchrevenue,pretaxincome,operatingincome,net income,EBIT,EBITDA,andsoonthebuyerandsellerarecontributingtothecombinedcompany. Forexample,youmightseethatthebuyerhas$900millioninEBITDAandthesellerhas$100millionin EBITDA,andbasedonthatyoumightsaythatthebuyershouldown90%ofthecombinedcompany. Thelogicisthesameforoil&gascompanies,butyouuseadifferentsetofmetrics:NetAssetValue,Proved Reserves,andDailyProductionarethebestexamples. Theonlytrickhereistomakesureyourecomparingapplestoapplese.g.ifDailyProductionisinBOE, makesureyouconverttheproductionfrombothcompaniestoBOEratherthanleavingitinMcfe. Hereswhattheanalysismightlooklike:

ContributionAnalysis ExxonMobil&XTOEnergy
OwnershipDilutedShares2010: OwnershipDilutedShares2011:

E&PNetAssetValuePostTransaction:

NetIncome:2010: NetIncome:2011:

DailyProduction(MBOE)2010: DailyProduction(MBOE)2011:

ProvedReserves(MMBOE)PostTransaction: 80% 82% 84% 86% 88% 90% 92% 94% 96% 98% 100%

%ContributionfromBuyerandSeller

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CalculatingAccretion/DilutionandIRR
Theseareboththesameasfornormalcompanies.Combinethebuyerandsellerspretaxincomes,takeinto accountacquisitioneffects,applythebuyerstaxrate,anddividebythenewsharesoutstandingtofindthe newEPSandcalculateaccretion/dilution. ForIRR,usetheExcelIRRorXIRRfunctionbasedonthePEfirmsinitialequitycontributionandthenmake sureyouincludeanydividends/dividendrecapsandtheequityvalueonexit. PV10ProvedReserveValue: $115,156 $10,861 $ $ $126,017 Theonlydifferencehereisthatinamerger modelyoucanlookatoil&gasspecific NetUndevelopedAcres(MM): 71.92 1.55 EstimatedValuePerAcre: $150 $759 accretion/dilutionmetricssuchasNAVPer UndevelopedLandValue: $10,787 $ 1,174 $ $ $11,961 Share,DailyProductionPerShare,Proved E&PNetAssetValue: $125,943 $12,035 $137,978 ReservesPerShare,andsoon. BalanceSheetAdjustments: (30,094) (10,144) (29,741) TheExcelpasteinontherightshowsan DilutedShares(MM): 4,848.0 579.4 579.4 567.2 5,415.2 exampleofhowtocalculatetheNAV E&PNAVPerShare: $ 19.77 $3.26 $ 19.99 accretion/dilution: E&PNAVAccretion/Dilution: $0.22 E&PNAVAccretion/Dilution%: 1.1% Tobemorecomplete,youcouldalsolookat theotherbusinesssegments,applyamultipletothoseandaddthemtotheNetAssetValuesothatitsatrue EnterpriseValuemetricratherthanjusttheNetAssetValueoftheE&Psegment. TheNAVaccretion/dilutionismeaningfulnomatterwhatkindoftransactionitis,becauseyouretakinginto accountnewsharesissued,debtraised,andcashused(thelatter2areinthebalancesheetadjustments). DailyProductionandProvedReservesaccretion/dilutionaremostmeaningfulinanallstockdealbecause thesharecountwillactuallychangethere. Ifyourenotusingstockatall,thesemetricsarepointlessbecausethedealwillalwaysbeaccretivethereare nonewsharesandcash/debtdoesnotaffectproductionorreserves.

SensitivityTables
PurchasePricevs.NaturalGasPrices(5xEBITDAExitMultiple,ExistingDebtRefinanced,2xLeverage) NaturalGasPrices($/Mcf): 3.8% $ 4.00 $ 5.00 $ 6.00 $ 7.00 $ 8.00 $ 9.00 $10.00 40.0% (50.9%) (17.8%) (6.3%) 1.4% 7.2% 12.0% 16.1% 35.0% (51.1%) (17.2%) (5.6%) 2.1% 8.1% 12.9% 17.0% 30.0% (51.3%) (16.6%) (4.9%) 3.0% 8.9% 13.8% 18.0% 25.0% (51.5%) (16.0%) (4.1%) 3.8% 9.9% 14.8% 19.0% 20.0% (51.8%) (15.3%) (3.2%) 4.7% 10.8% 15.8% 20.0% 15.0% (52.1%) (14.6%) (2.4%) 5.7% 11.9% 16.9% 21.2% 10.0% (52.4%) (13.8%) (1.5%) 6.7% 12.9% 18.0% 22.3%

$58.09 56.01 53.94 51.86 49.79 47.71 45.64

Theideaisthesame:you lookathowthereturns andtheaccretion/dilution changebasedonthe purchaseprice,thedeal structure,%cashvs.% debtvs.%stock,synergies, andsoon.

PerSharePurchase Price&Offer Premium:

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Thekeydifferences: 1. Youcouldalsolookatcommoditypricesasoneofthevariablesinthesetables.Justmakesureyoure usingthesamepricecaseforthebuyerandsellerinamergermodel. 2. YouoftenassumeawiderrangeofexitmultiplesintheLBOsensitivitytablesbecauseoil&gasisa cyclicalindustryandyouhavenoideawherethecyclewillbewhenthePEfirmsellsthecompany.

WhatDifferences?
Asyoucansee,thesemodelsarenottremendouslydifferentforoil&gascompaniesthatiswhywewent throughthemquicklyinthismodelingcourse. Youarefarmorelikelytogettechnicalquestionsonaccounting,operatingmodels,andvaluationforoil&gas companies,sofocusonthosewhenyourepreparingforinterviews.