Enterprise DFA™
-
Upload
olympia-castaneda -
Category
Documents
-
view
40 -
download
4
description
Transcript of Enterprise DFA™
- 1 -
OMP 1
Enterprise DFA™
Application of Dynamic Financial
Analysis in the Oil Industry
- 2 -
OMP 2
Discussion Outline
Background
Oil Company Imperatives
Problem Diagnosis
The Application of DFA
The Opportunities for Actuaries
- 3 -
OMP 3
Background
Stochastic Financial Modeling Not New Significant Academic Interest Standard in 1970’s Finance Texts Promoted Heavily by IBM et a
Did Not Gain Wide Acceptance in PracticeMiscast as Predictive ToolDifficult and Expensive to ImplementMeasuring / Understanding Risk Not Valued
- 4 -
OMP 4
Background
Considered Evidence that Long Term Forecasting Was Not Practical
Time
Res
ults
- 5 -
OMP 5
Background
New Focus in Investment ManagementEarnings Growth Was ThemeResults Now Handicapped on Risk
New Pressure From the MarketEarnings Predictability Managing Analysts’ Expectations
Managements Search for Tools to Understand / Manage Earnings Volatility
- 6 -
OMP 6
Oil Company Imperatives
Large Oil Company’s Stock Under PerformingManagement Believed It UndervaluedEarnings “Surprises” Had Hurt ValuesPerceived as High Risk Company
Board Losing Confidence in ManagementHuge Bets on High Risk ProjectsUnsure How Risks Managed“We Going to Lose the Ranch?”
- 7 -
OMP 7
Oil Company Imperatives
Project Undertaken to Evaluate Earnings
and Business Risks.
Objectives Included:Understand Earnings Forecast FailuresCommunicate Risks to BoardChange Market’s Perception of Company
Risk
- 8 -
OMP 8
Problem Diagnosis - Forecast Failures
EPS Forecasts Only Compiled by CorporateNo True Enterprise Model Roll Up Of Divisional ForecastsTied to Business Planning / Challenge
ProcessSignificantly Different Risk Levels / DriversEach Used its Own Economic AssumptionsForecasts were Deterministic Point Estimates
- 9 -
OMP 9
Problem Diagnosis - Board
Investment Project vs. Enterprise Focused
Analyses - Complex Issues
High Detail - Low Information
Lack of Context and Comparability
No Enterprise Level Conclusions
- 10 -
OMP 10
Problem Diagnosis - Market
Market Perceived Company High Risk v. Competitors
Reinforced by Earnings “Surprises”Low Appreciation for Risk Hedging
ProgramsResulted in Lower than Market P/E
- 11 -
OMP 11
Application of DFA
Project to Address Issues Using DFA Type AnalysisEnterprise Level Financial Model
Developed - Tied to Corporate PlansHigh Impact Variables IdentifiedAssumption Variability from Key ExecutivesDisaggregation Analysis Competitive Analysis Board Presentations
- 12 -
OMP 12
DFA Methodology
Enterprise Model
Common Environmental AssumptionsEconomic - Common for All SBU’s Non Management Controlled IssuesCorporate Financial Leverage
Strategy Based Management AssumptionsBusiness Unit BasedProbability of Strategy Implementation
- 13 -
OMP 13
DFA - Methodology
Exploration /Production
Coal / Power
Refining / Marketing
Chemicals
Economic Environment- Weather- Economic Growth- Supply Constraints- Spot Market Prices
Management Interventions
Enterprise Model Structure
- 14 -
OMP 14
DFA - Methodology
Economic - Non Management ControlledEnergy Price / Demand Drivers
» Weather» Economic Growth» Supply Conditions
Capital Markets Conditions
Corporate Financial StructuresFinancial LeverageHedging / Market Risk Control
Common Environmental Assumptions
- 15 -
OMP 15
DFA - Methodology
Exploration / ProductionProfitability of Existing ProductionSuccess of Exploration OpportunitiesProject Selection / New Market Growth
Refining & MarketingSales Growth in High Value FuelsExpansion in High Growth MarketsShut Refining in Low Growth MarketsReduce Unit Expenses
Business Strategies
- 16 -
OMP 16
DFA - Methodology
ChemicalsReduce Unit CostsRedesign Major ProcessesCommercialize New Technologies
Coal, Minerals & PowerIncrease Facility UtilizationMine ExpansionsExpand Electric Power Business
Business Strategies
- 17 -
OMP 17
DFA ResultsR
even
ues
Earnings per Share
x Consolidated Forecast
Earnings Forecast Failures
- 18 -
OMP 18
DFA ResultsR
even
ues
Earnings Per Share
x Consolidated Forecast
0
}
Capital Requirement
100
Earnings Forecast Failures
95% Confidence Level
x
Expected Value
Aggressive vs. Most Likely Assumptions Used in Forecasts
- 19 -
OMP 19
DFA ResultsR
even
ues
Earnings per Share
Expected Value
xWith Leverage
Without Leverage
x
Communicate Risks to Board
Financial Leverage Added High Risk and Small Earnings Gain
- 20 -
OMP 20
DFA ResultsR
even
ues
Earnings per Share
xx
x
Refining /Marketing
Chemicals
Exploration/Production
0
Communicate Risks to Board
x
Coal
Businesses Differ in Risk - Exploration Forecasts Aggressive
- 21 -
OMP 21
DFA ResultsR
even
ues
net
of
Hed
ge
Earnings per Share
xBase Strategy
x Hedge All Price Risk
0
Communicate Risks to Board
Energy Market Price Greatest Risk Source
- 22 -
OMP 22
DFA ResultsU
nit
Op
erat
ing
Cos
ts
Earnings per Share
x
0
Communicate Risks to Board
Strategies to Lower Costs Had Small Impact on Risk
- 23 -
OMP 23
DFA ResultsR
even
ues
Earnings % of Revenue0
Market Perception of Risk
Client Had Lower Risk than Most Competitors
Client
Comp. C
Competitor A
Competitor B
- 24 -
OMP 24
Opportunities for Actuaries
Risk Analyses are Central to Industrial Managers
DFA Type Analysis is High Value AddedActuaries Must Expand beyond
Technicians to become StrategistsIf Actuaries Don’t - Others Will
- 25 -
OMP 25
Preliminary DFA Results