ArrowHead Solutions – Valuation and Profitability

ArrowHead Solutions Help Clients Project the Profitability of Their Assets and Companies

ArrowHead Solutions for Determining Asset Value

Projecting profitability and determining the value of an asset is hard. However, because of the high value of assets, it is important to get the right answer and to have confidence in the decision and the decision process. There are numerous issues around asset decisions that are important to be able to assess. Some examples are:

• We are thinking of adding an FCC to our Trinidad refinery? Will it be profitable if we do? What refineries are competing with ours? What are the correct pro formas for profitability and value? What are the right prices for crudes and products to put into these pro formas? Where should we get those prices? How do they occur in markets? How do we know they are right?
• We are thinking of building a gas combined cycle plant in New Mexico within WECC and contracting an interconnection (e.g., Tres Amigas) to ERCOT. Would that be profitable? Would we be sacrificing profits by selling through the interconnection to ERCOT if the interconnection cost were high? How much is such an interconnection truly worth? If we build the plant, what kind of price will we get in WECC? ERCOT? If the interconnection were built, would it merely act to equalize prices between regions and eliminate competitive advantage for us in one region versus the other? Should we seek a PPA, and if so what are the minimum acceptable terms?
• We are thinking of a shale investment in the Haynesville. Where will the gas price be going in the future and how much money will we make? What are the competitors for such an investment? LNG imports? LNG exports? Conventional gas? Reserve growth? Other shale gas? How will that competition depress the price we will get? Are prices in the Haynesville headed up? Is there so much gas available that prices are going to be chronically low?

How ArrowHead Solutions Help with Determining Asset Value

ArrowHead starts with base case assumptions and data (or with client assumptions and data) to calculate prices and quantities for the particular commodities needed for valuation pro formas. In particular, ArrowHead provides correct, integrated, multi-fuel, inter-temporal, probabilistic projections of key prices, bases, quantities, and capacity additions regionally throughout the world. Because of the model transparency (clients easily see the assumptions, the methodology, and the data) and the model methodology (sound economic science that matches the way markets really work, operationally and competitively), clients have strong confidence in the accuracy. ArrowHead consultants often help clients additionally by creating more extensive pro formas, helping them to seek financing, answering additional “What if” questions, facilitating endogenous consideration of risk and uncertainty, guiding competitor analysis, and expanding market detail in and around the particular asset in question.

ArrowHead Solutions for Acquisition/Divestiture

There are numerous issues around acquisitions and divestitures that are important to be able to assess. Some examples are:

If someone wants to buy our asset, what is the absolute minimum amount we should be willing to accept? What is the fair market value? If someone wants to sell us an asset, what is the absolute maximum amount we should be willing to pay? What is the fair market value? Proper fair market value assessment holds the key to making the right decision to buy or sell.

How ArrowHead Solutions Help

As with asset value and profitability, ArrowHead consultants perform standard or custom market calculations to provide correct valuation pro formas. We can do so probabilistically or deterministically using ArrowHead models, developing an authentic probability distribution over prices and quantities of the key commodities to determine fair market value. We also help with counterparty negotiations and presentations to convince them of the calculated value.

ArrowHead Solutions for Acquisition/Merger

What is our company (or a targeted acquisition by our company) worth from a fundamental, asset by asset profitability schedule? What is the smallest offer we should consider (or largest offer we should make for another company)?

How ArrowHead Solutions Help

Asset by asset roll-ups using correct market prices is the way to perform market-based valuation for a company. The value of a company is the collective value of its assets. ArrowHead applies the foregoing asset valuation method systematically to every asset in the company and sums them to get company fundamental value. (Summing the profitability of each asset yields the market-based, bottom-up, fundamentally derived value of the organization.) This augments other metrics such as comparable company analysis, income multiples, or intangibles. We do this probabilistically, providing joint probability distributions over individual and collective value. (With probabilities, one cannot just add things up. It is more complicated than that, and ArrowHead does it correctly.)