4. Valuation Services
Expert, technical, and experienced Valuation Services is
the most critical element at the front-end of a workout
situation.
Oil and Gas Reserves, Production Contracts, and
Commodity Derivatives Valuations
Buy-side and Sell-side valuation support
Distress, bankruptcy, & restructuring advisory services
Private placements
Special situations & bridge finance arrangements
Mergers, acquisitions, & divestitures support
5. Stochastic Analysis
Monte Carlo Simulation (“MCS”), in distressed situations, provides
decision makers with far more information than conventional analysis
can provide, because deriving an “expected value” with only a handful
of scenarios is not thorough.
• The impact of randomness is considered in the modelling of future cash flows,
• MCS can be done along with other more conventional valuation and analytical
techniques like market comps and precedent transactions,
• Best practices credit models post-2009 are Intensity Models, and these are all
MCS based,
• MCS can enhance the results produced by deterministic models and market
comps, and
• Default probability estimation is far more robust using MCS than it is with
conventional models.
More and better information, coupled with ranges of outcomes tied to
real inputs and assumptions, leads to better decision-making under
uncertainty.
6. Navigant’s Approach
We provide one-stop shopping that combines technical, financial, market,
and industry credentials to arrive at the most comprehensive solutions
possible to make the best lending and borrowing decisions under
uncertainty.
Stochastic
Cash Flow
Model
Reservoir
Economics
Simulation
Model
Capital
Markets
Input
Company
Specific
Factors
Stochastic
Commodity
Price
Model
7. Commodity prices are down, and have stayed down. Forward curves, right
now, do not break $65 for crude oil or $4.50 for natural gas on the long end.
Navigant takes a commodity-based focus when we do distressed debt work,
and will explore any and all potential solutions, such as:
• Re-equitize the borrower,
• Find buyers for the assets, and take out the financings,
• Provide first-loss protection to senior loans,
• Re-finance the borrower/loan with a Private Capital fund, and/or
• Sell the loan to a Private Capital fund.
Potential Solutions
8. Navigant’s team assesses the key areas of lender concern, including the
distressed borrower's current operating environment, liquidity position, and
business plan. Deep and broad expertise in commodity markets gives us a
distinct competitive advantage. In particular, we have sophisticated
quantitative finance expertise that is essential in situations where derivative
instruments are involved. Navigant will:
• Review and sensitize cash flow and capital expenditure projections,
• Perform due diligence, analyze collateral, and monitor portfolios,
• Assist in credit-crisis situations and suggest restructuring alternatives,
• Provide analytical support for futures, options, and other derivative
instrument novations, and
• Support securitizations and provide interim management services.
Restructuring Services for Lenders
9. Unlike most of our competitors, our team combines Wall Street banking,
corporate credit, treasury, engineering, and advisory experience.
This means Navigant provides the very best advice to corporate clients on
liquidity management, working capital initiatives, financial projections,
contingency planning, asset sales, and capital structure modifications.
We can also help to develop and implement turnaround plans that address
operational and financial issues, either in an advisory capacity or as interim
managers.
In all cases, our experts leverage the credibility that Navigant has earned
with key creditor constituencies.
Restructuring Services for Borrowers
10. Navigant will also prepare Solvency Opinions. Our letters typically indicate
to a company’s Board of Directors that, after analyzing a specific proposed
transaction, the company will be solvent, according to the following tests:
1. Balance Sheet
2. Cash Flow
3. Capital Adequacy
Restructuring Services for Boards
12. Technical Upstream Services
Opportunity Screening and Evaluation
Strategic framework and prospect screening, detailed analysis, and project
execution planning.
Economic and Capital Program Valuation
Reserves valuation, economic assessments, post-installation appraisals, risk
analysis and stochastic modeling.
Asset Exploration
Exploratory drilling, regulatory planning/administration, and environmental
agencies reporting.
Oil & Gas Asset Evaluation & Exploitation
Drilling, completion, testing, production initiation, operations execution, drill-
bit to sales project execution, regulatory planning, and administration.
Capital Project Design & Implementation
Infrastructure and production facilities development, planning and
scheduling, full field development, portfolio management, basic engineering
design, FEED, construction, procurement, PMO, engineering data
management, wastes management, and water management.
13. Technical Upstream Services cont’d
Operations Management
Artificial lift methods, facility assessment, completion techniques and
design, subsurface assessment and configuration, cost and expense
management/efficiency, well integrity, real-time operations optimization,
and integrated operations.
Reserve & Reservoir Engineering
Reserves re-assessment, recovery enhancement & production
optimization, reservoir management, and infill programs.
Asset Management
Operating asset rationalization, asset integrity management, and
turnaround optimisation.
Data Management & Innovation
Subsurface data management & data flow optimization, real-time data
management, and digital oilfield rationalization and optimization.
14. Terrence R. Manning
Director (SME), P.E.
Navigant Consulting
909 Fannin St. Suite 1900
Houston, TX 7010
Tel: 713.646.5078
Cell: 281.883.7406
terry.manning@navigant.com
Professional History
Navigant Consulting
Upstream Advisor/Practitioner
BBVA Compass Bank
Private Asset Management
Tristone Capital Advisors
Amoco Production Company
Amoco Canada
Education
BSc Chemical Engineering (1980),
University of Calgary, Alberta,
CAN
Finance & Accounting Courses -
MBA, Regis University,
Colorado, USA
Terrence (Terry) Manning is a Director in the Upstream Oil & Gas practice of Navigant Consulting. His
strengths include reservoir assessment, economic valuation, operational due diligence and program
execution from a engineering and financial perspective for oil and gas assets. As a subject matter expert
(SME) for the North America practice, Terry brings to client situations a very special combination of
strategic, financial, engineering, operating and transactional (acquisitions & divestitures – “A&D”) advisory
expertise. Mr. Manning is based out of the Houston office, and he has worked in the realms of asset
management and portfolio rationalization for more than three decades providing deep upstream oil and gas
industry knowledge and experiential application methodology.
A solutions-focused engineer practiced in oil and gas matters for over 36 years, Mr. Manning has acted in the
capacity of senior advisor for clients and companies in roles such as portfolio management, reserve
assessment and execution of hydrocarbon development programs, which have included, risk mitigation and
financial engineering and is accomplished at discrete financial and technical evaluation, including assessing
fair market value. Terry has directed and has been the architect for value improvement and optimization
initiatives, from the perspective of processes as well as continuous improvement in the execution of capital
programs. Terry has assisted with the valuation of assets, business units and enterprises in situations driven
by litigation, acquisition, divestiture and mergers related to acquire value for the client. Mr. Manning has
worked on a large number of transactional and valuation projects through his industry experience, as a
project leader, an advisor and a project contributor with an aggregate transaction value in the billions.
His current role at Navigant Consulting consists of engagements in the operational, financial and resource
related realms for upstream oil and gas interests – whether, private, public or institutional.
Notable assignments which Terry has been directly involved with:
» Petroleum engineering analysis and valuation of oil and gas assets leading to acquisition, development
and optimization
» Reservoir and Reserve engineering leading to development re-scheduling and portfolio rationalization
» Technical valuation and market value assessment for oil and gas assets for institutionally financed, asset
collateralized loans relating to senior debt and technical valuation for high risk lending leading to
recapitalization, consolidations and restructuring
» Within the last five (5) years, completed valuation and screening of more than 200 oil and gas
opportunities related to decision-making by investors and owners
Key Contact
16. Navigant’s Scoping Framework
Ask the Right Questions
1. Identify the risks.
• Commodity price volatility
• Foreign exchange rates
• Interest rate curve duration & convexity
• Credit risk
2. Quantify the risks.
3. Develop and draft a written hedge strategy.
4. What needs to be protected?
• Balance Sheet
• Regulatory Capital
• Income Statement
• Cash Flow
5. Execute trades.
6. Fair Value the derivative instruments.
7. Make the CVAs and document them.
8. Maintain proper compliance protocols.
9. Report properly under ASC 815, 820, and 825, and/or
IFRS 9 and 13.
10. Actively monitor and manage hedge positions.
Use Advanced Analytical Skills
Navigant uses the very latest in rigorous,
Quantitative Finance (“QF”) techniques.
• Monte Carlo Simulation (“MCS”)
• Finite Difference Methods
Make Credit Value Adjustments (“CVA”)
We use all methods to arrive at the best
answer for our Clients, not just the easiest
one.
• Bond spreads
• Credit Default Swap (“CDS”) quotes
• Moody’s/S&P/Fitch ratings
• Numerical methods
• Wrong Way Risk
• Right Way Risk
17. Derivatives & Hedging I
Initial Work
• Develop and model Client’s hedge strategy.
• Assist with, or do, model design and construction.
• Perform and document Credit Value Adjustments (“CVA”).
• Assist Client with structuring & trade execution, as needed.
18. Derivatives & Hedging II
Ongoing/Recurring Work
• Perform “Day One” or “Time Zero” valuations of hedge portfolio’s
derivative instruments, consistent with applicable standards.
• Provide to, or support Client with, recurring valuations.
• Monthly
• Quarterly
• Annually (not advisable)
• Assist Client with compliance program efforts, especially hedge
designation and documentation.
• Guide Client with SEC, CFTC, IRS, and other reporting
requirements.
• Design and implement a stress testing program.
19. Derivatives & Hedging III
Work at the Back End
Novation
• Navigant can assist Clients with the challenging novation process
in the event of a merger, acquisition, or divestiture.
Sales
• Exit valuations will need to be done-Navigant does this work for
its Clients.
Un-windings
• In order to negotiate un-windings from the best possible position,
simulations need to be run to find the right valuation and stress
points. Navigant will do this for Clients, or at least guide them in
the process.
Defaults
• In the event of defaults, Navigant stands side-by-side with its
Clients to do the analytical support work that must be done in
workouts.
20. Valuation Services I
Fixed-income products
• Fixed and floating rate instruments, bonds, swaps, caps and floors, FRAs and
other delta products.
• Yield, duration and convexity calculations.
• Bootstrapping to build up the yield curve from trading bonds and swaps.
• Curve stripping - Using reference rates & basis spreads, OIS discounting and
dual-curve stripping, cross-currency basis curves, and calculating the cost of
funds.
• Interpolation methods, including piece wise constant forwards, piece wise linear,
cubic splines, smart quadratics, quartics, and monontone convex splines.
• Stochastic interest rate models, one and two factors.
• Model Calibration - Fitting the yield curve in simple models.
• Data analysis - Examining interest rate and yield curve data to find the best
model.
21. Valuation Services II
Probabilistic methods for interest rates
• Using the Heath, Jarrow and Morton model, & modeling the yield curve.
• Determining risk factors of yield curve evolution and optimal volatility structure.
• Pricing interest rate derivatives by Monte Carlo Simulation.
• The Libor Market Model, and calibrating the reference volatility structure by
fitting to caplet or swaption data.
• The SABR Model - Managing volatility risks, smiles, & local volatility models.
• Using the SABR model and hedging stability.
• The Arbitrage Free SABR model - Reduction to the effective forward equation,
arbitrage free boundary conditions, comparison with historical data, and
hedging with the SABR model.
22. Valuation Services III
Credit risk and credit derivatives
• Structural and Intensity models used for credit risk.
• CDS pricing, market approaches, and implied default probability, recovery rates, & default
time modeling.
• Synthetic CDO pricing, using the default probability distribution, default correlation,
tranche sensitivity, & pricing spreads.
• CDO/copula modeling using XLS spreadsheets.
• Correlation and state dependence analysis.
• Credit Valuation Adjustment (“CVA”): CVA exposure, modeling exposure, collateral,
wrong way risk, & right way risk.
• Risk of default - The hazard rate, the implied hazard rate, the stochastic hazard rate and
credit rating, as well as capital structure arbitrage.
• Copulas - Pricing basket credit instruments by simulation.
• Statistical methods in estimating default probability - Ratings migration, transition
matrices, and Markov processes.
23. Valuation Services IV
Stochastic volatility and jump diffusion
• Mean-variance analysis, the Merton model, jump distributions, expectations and worst case
analysis.
• Non-probabilistic models - Uncertainty in parameter values versus randomness in
variables, & nonlinear equations.
• Static hedging - Hedging exotic target contracts with exchange-traded vanilla contracts,
optimal static hedging.
• Advanced Monte Carlo techniques - Low-discrepancy series for numerical quadrature. (We
use this for option pricing, speculation, and scenario analysis.)
24. Valuation Services V
Commodity derivatives
• Speculation using energy derivatives and risk management in energy derivatives.
• Cointegration - Modeling long term relationships, and statistical arbitrage using mean
reversion.
• Forecasting by using option prices - Volatility forecasting using historical asset prices and
current option prices.
• Inserting commodity option prices into ARCH models.
• Density forecasting - Criteria for good forecasts, estimating risk-neutral densities from
option prices, & risk-neutral to real-world densities.
• Geometric Asian options, continuous
• Arithmetic Asian options, continuous
• Geometric Asian options, discrete
• Commodity Swaptions
• Spread options
• Mean Reversion models
• Multi-Factor models
• Convenience Yield models
25. Contact: Thomas J. McNulty, FRM
thomas.mcnulty@navigant.com
713.646.5078
Tom McNulty leads Navigant’s Commodity Derivatives & Hedging Practice from our Houston office. He
began his career with Brown Brothers Harriman & Co. in New York. After completing the Corporate
Finance Analyst Training Program, he was assigned to the Money Desk where he was a Fed Funds and
Eurodollar trader and market maker. Mr. McNulty came to Houston after business school, and served in a
variety of corporate finance, risk management, and treasury roles with Enron International, Duke Energy
International, and Plains All American Pipeline. As an advisor and as a consultant, Mr. McNulty has assisted
roughly two dozen corporate, banking, and private capital firms with the challenges they face in dealing
with complex derivative instruments, including:
Hedge strategy
Model design
Credit Value Adjustments (“CVA”)
Structuring & Execution
Valuation
Compliance-Designation and Documentation
Reporting (ASC 815)
Stress Testing
Novation, Sales, Un-windings and Defaults
Over the course of his career in banking, industry, and consulting, Mr. McNulty has valued several hundred
derivative instruments with notional valuations in excess of $11 billion.
27. Navigant Consulting, Inc.
Business Description
Navigant Consulting, Inc. is a
specialized, independent
advisory firm that supports
companies, lenders,
institutional investors, legal
counsel, and government
agencies. The company focuses
on entities and industries
facing the challenges of
uncertainty, risk, distress and
significant change, and on the
issues driving these
transformations.
Ticker NCI (NYSE)
2014 Revenue $860 million
Professionals 3,500+
Headquarters Chicago, IL
Senior Management
■ Julie Howard, CEO and
Chairman, Navigant
■ Cindy Baier, CFO and EVP
■ Richard D. Hitt, Managing
Director, Head of Navigant’s
Corporate Finance Practice
Navigant Consulting, Inc. (“Navigant”)
NCI’s 2,500+ professionals maintain a presence in 45 cities internationally
throughout North America, Europe and Asia, including a significant concentration of
resources in Chicago, Houston, London, New York, and Washington DC.
28. Comprehensive Energy Complex Coverage
Commodity Hedge Funds
Energy Services
Energy Trading & Marketing
LNG
Oil and Gas - Upstream
Oil and Gas – Midstream
Power Generation, Transmission, & Distribution
Refined Products and Specialty Chemicals
Renewable Energy
29. Comprehensive Valuation Capabilities
We have valuation expertise across a range of structures. We commonly
value:
Investment grade debt
High yield and distressed debt
Complex securities
Hybrid securities
Common and preferred equity
Options, warrants & other derivatives
Partnership interests
Real estate and other tangible assets
Exotic options
Commodities and futures contracts
Interest rate and currency swaps
Earnouts and other contingent claims
Power Purchase Agreements
PIPE’s
Take or Pay contracts
Restricted stock
Oil and gas royalties
Mining interests
VPP’s
Intellectual property
IPR&D
Trade names
Goodwill
Customer relationship intangibles
Loan portfolios
Insurance reserves
Economic loss damages/lost profits
30. Our Strengths
Broad and deep expertise across the Energy Complex
We have consulting, banking, and corporate experience in diverse financial and commodity
markets, in addition to valuation & financial reporting technical capabilities. Our experienced
team includes MBAs, CPAs, CFAs, CBAs, ASAs, CAIAs, and MAI’s.
We are a one-stop shop, as we do complex commodity derivatives valuations alongside our
business and corporate valuation work.
Collaborative process
While our opinions are independent, you are involved throughout our process, because you
know your investments better than anyone. We want to understand your thinking, and we want
you to understand ours.
Thoroughness and accuracy
We give you more than just the conclusions. We give you thoroughly supported, accurate
valuation reports.
Integrity
We are only interested in getting to the right answer, employing generally accepted valuation
principles.
“Trusted Advisor” to our clients
Our clients view us as business partners, working together to establish best practices in valuation
and transaction work as competitive advantages for their firms.
What makes Navigant unique?
31. Accepted in the Marketplace
Our work has supported KPMG, PwC, Deloitte, E&Y, BDO, GT, and other
audit firms’ technical & audit staffs, undergoing detailed review of our fair
value analyses for financial reporting and tax purposes.
Our work has been reviewed and accepted by the SEC in numerous filings.
We have extensive experience defending our valuations before the IRS
(including Tax Court) and other tax and regulatory bodies.
Our senior professionals have performed technical reviews during their
tenure at the major accounting firms. We maintain continuing professional
relationships with current reviewers at these firms.
Our methodologies and findings have been presented to, and accepted by
numerous rating agencies, qualified institutional buyers and certified
investors.
Our professionals have published and spoken extensively on valuation
topics as they pertain to the investment community.
32. “Excellent communication”
“Very responsive from a process and analysis standpoint”
“Exceeds expectations in response time “
“Investors have reached out to Navigant on methods and assumptions and have only
provided positive feedback”
“Meets all schedules and deadlines”
“Provides creative ideas and suggestions”
References available upon request
What our clients say about us….