Kerr Mcgee

Mark: 9/10 – Very Good, Well Done

Kerr-Mc Gee case

1) Is Kerr-McGee undervalued? Answer this question by examining EV/Revenue,

EV/EBITDA, and EV/BOE. (Exhibit 16)

EV

EV/Revenue EV/EBITDA

EV/BOE

Kerr-McGee

13683

2,69

5,10

11,23

Anadarko

19218

3,20

4,37

8,12

Apache

20415

3,83

4,99

10,54

Burlington Resources

19436

3,48

4,74

9,71

Canadian Nat Res.

15602

2,82

4,67

10,31

Devon

25674

2,77

4,25

12,36

EnCana

34045

2,76

6,36

15,16

EOG Resources

9885

4,33

5,65

10,50

Nexen

9269

3,09

5,35

13,13

28333

2,41

4,84

11,19

Pioneer Nat Res.

7821

4,25

5,56

7,65

Talisman Energy

13256

2,68

4,96

10,67

Average of Competitors

18450

3,24

5,07

Median of Competitors

17410

3,09

4,96

Occidental Petroleum

10,85

10,54

There is no substantial differences between Kerr-McGee EV multiples and its

competitors. Thus, according to this analysis, it does not seem that Kerr-McGee is

undervalued.

2) Discuss the drawbacks of using EV multiples to value Kerr-McGee relative to

the comparable firms.

Using EV multiples to value Kerr-McGee relative to the comparable firms have several

disadvantages.

First of all, even though markets are usually right on average, a proportion of securities

are undervalued and overvalued. Thus, our analysis could be distorted if the markets make

mistakes in aggregate for the considered firms.

Secondly, this method reflects market perceptions and moods. Thus, even though our

analysis could be very useful for short term discussion, it is less appropriate for long term

investors.

3) Value the following parts of the Icahn-JANA proposal:

- Sell forward a portion of the oil and gas reserves in a VPP

1. Use DCF analysis

2. Cash inflows: VPP proceeds (p.5 proposal point #2)

3. Cash outflows: Lifting costs and Taxes (p.4 and Exhibit 10 for

lifting...