Question

Question 3: Business Applications Case; Performing ratio analysis using real-world data

Companies in the gas and oil business use a lot of property, plant, and equipment. Not only is there the significant investment they must make in equipment used to find, extract, and process the oil and natural gas, but they must also purchase the rights to the energy reserves themselves.

Chesapeake Energy Corporation “We own interests in approximately 22,700 oil and natural gas wells. ... Our daily production for 2016 averaged 635 mboe, ...” One “mboe” is the energy equivalent to that in 1,000 barrels of oil.

Anadarko Petroleum Corporation “Anadarko Petroleum Corporation is among the world’s largest independent exploration and production companies, with approximately 1.7 billion BOE of proved reserves at December 31, 2016.” One “BOE” is equivalent to the energy contained in one barrel of oil. Page 473

The following information was taken from the companies’ December 31, 2016, annual reports. All dollar amounts are in millions.

	Chesapeake Energy Corporation	Anadarko Petroleum Corporation
Sales	$ 7,872	$ 7,869
Depreciation and depletion costs	1,107	4,301
Property, plant, and equipment
(net of accumulated depreciation)	10,609	32,168
Total assets	13,028	45,564
Depreciation method	Straight-line	Straight-line
Depletion method	Units of production	Units of production
Estimated life of assets
Buildings	10 to 39 years	up to 40 years
Machinery and equipment	3 to 20 years	3 to 15 years
Net income	$(4,401)	$(3,071)

Required

1. Calculate depreciation costs as a percentage of sales for each company.
2. Calculate property, plant, and equipment as a percentage of total assets for each company.
3. Based only on the percentages calculated in Requirements a and b, which company appears to be using its assets most efficiently? Explain your answer.
4. Calculate the return-on-assets ratio for each company. Based on this ratio, which company appears to be using its assets most efficiently? Explain your answer.

Identify some of the problems a financial analyst would encounter in comparing the use of long-term assets at Chesapeake versus Anadarko

Answer 1

Answer (a):

Chesapeake Energy Corporation Depreciation costs as a percentage of sales = 1107 / 7872 = 14.06%

Anadarko Petroleum Corporation Depreciation costs as a percentage of sales = 4301 / 7869 = 54.66%

Hence:

Chesapeake Energy Corporation Depreciation costs as a percentage of sales = 14.06%

Anadarko Petroleum Corporation Depreciation costs as a percentage of sales = 54.66%

Answer (b):

Chesapeake Energy Corporation:

Property, plant, and equipment as a percentage of total assets = 10609/13028 = 81.43%

Anadarko Petroleum Corporation

Property, plant, and equipment as a percentage of total assets = 32168 / 45564 = 70.60%

Hence:

Chesapeake Energy Corporation Property, plant, and equipment as a percentage of total assets =81.43%

Anadarko Petroleum Corporation Property, plant, and equipment as a percentage of total assets = 70.60%

Answer (c):

Based on above:

As Chesapeake Energy Corporation appears to be using its assets most efficiently.

In spite of having a higher PPE to Total asset %age, Chesapeake Energy Corporation is having much lower

depreciation costs as a percentage of sales.

Answer (d):

Return on assets = Net Income(loss) / Total assets

Chesapeake Energy Corporation Return on assets = (4401)/ 13028 = (33.78%)

Anadarko Petroleum Corporation Return on assets =  (3,071) / 45,564 = (6.74%)

Based on this ratio alone, Anadarko Petroleum Corporation appears to be using its assets most efficiently.

Both the companies are incurring losses but Chesapeake Energy Corporation is incurring much higher %age of loss on smaller base of assets as compared to %age loss on assets of Anadarko Petroleum Corporation.

Problems a financial analyst would encounter in comparing the use of long-term assets at Chesapeake versus Anadarko:

As is obvious, Anadarko Petroleum Corporation is having much higher long term assets as compared to lont term assets of Chesapeake Energy Corporation.

As given:

Companies in the gas and oil business use a lot of property, plant, and equipment. Not only is there the significant investment they must make in equipment used to find, extract, and process the oil and natural gas, but they must also purchase the rights to the energy reserves themselves.

Anadarko Petroleum Corporation has approximately 1.7 billion BOE of proved reserves at December 31, 2016.

Financial analysts may have to look at composition of long term assets and analyse operating assets and reserves.

Further financial analyst have to also analyse age of assets as this will significatly influence return on assets. As a company with aged assets will lower asset value.