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UCLA EXTENSION – BUSINESS VALUATION MGMNT X 430.132 – Professor Walton

WALTON DRILLING LLC VALUATION REPORT

By James Lin & Lea Jovanovic for ‘Mike’ (a seller) Spring Quarter 2013

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TABLE OF CONTENTS

1. Identification of the Interest Appraised page 4 2. Date of the Report page 4 3. Standard of Value page 4 4. Intended Use of the Report page 4 5. Name of Client page 4 6. Names of Appraisers page 4 7. Valuation Approaches Considered and Used page 4 8. Sources of Information Relied On page 4 9. Description of Business & Recent Developments page 6 10. Relevant Economic and Industry Analysis page 6 11. Risk Factors page 7 12. Disclosure Regarding Forward Projections page 8 13. Financial Outlook page 8

13.1 Selected Financial Data from 10K (2008-2012) page 8 13.2 Income Statement (2008-2012) page 9 13.3 Cash Flow (2010-2012) page 9

14. The Income Approach page 10 14.1 Net Cash Flow page 10 14.2 Discounting page 10 14.3 The Build-Up Model page 10 14.4 Risk-Free Rate page 10 14.5 Equity Risk Premium page 10 14.6 Size Premium page 11 14.7 Industry Adjustment page 11 14.8 Company-Specific Risk Adjustment page 11 14.9 Estimated Equity Discount Rate page 11 14.10 Weighted Average Cost of Capital page 11 14.11 Adjustments page 12 14.12 Assumptions page 12

15. The Market Approach page 16 15.1 Guideline Publicly Traded Company Method page 16 15.2 Guideline Companies Selection page 16

15.2 (a) Buyer’s Criteria page 16 15.2 (b) Appraisers’ Reasoning in Selecting the Guideline Companies page 16 15.2 (c) Guideline Companies page 17

15.3 Financial Statements Analysis page 17 15.3 (a) Comparable Financial Statements page 18 15.3 (b) Market Valuation Multiples page 24

15.4 The Guideline Transaction Method page 28 16. The Asset-Based Approach page 29

16.1 Adjusted Net Asset Value Method page 29 16.2 Discounts page 30

17. Discounts and Premiums page 31 17.1 Entity-Level Discounts page 31

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17.2 Shareholder-Level Discounts page 32 18. Subsequent Events page 34 19. Comments Regarding Approaches page 34 20. Conclusion as to Value page 35

20.1 Income Approach page 35 20.2 Market Approach page 35 20.3 Asset-Based Approach page 35 20.4 Weighting of Approaches page 35

21. Appraisers’ Certifications page 36 22. Qualifications of Appraisers page 36

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1. Identification of the Interest Appraised Walton Drilling is an independent oil and gas limited partnership, focused on the acquisition, exploitation and development of oil and gas properties for the purpose of generating cash flow to make distributions to their unit holders. Their assets consist primarily of producing and non-producing crude oil and natural gas reserves. 1 State of incorporation: Delaware.2 Title of each class: Common Units Representing Limited Partner Interests. Interest appraised: 25% (minority) interest in the company.

2. Date of the Report This report was submitted on Monday 17 June 2013.

3. Standard of Value The standard of value used in this report is fair market value, defined by the Treasury Regulations (20.2031-1(b)) as “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”3 According to the Revenue Rulings 59-60, our analysis has been formed with relevance to the following eight factors4: (a) The nature of the business and the history of the enterprise from its inception. (b) The economic outlook in general and the condition and outlook of the specific industry in particular. (c) The book value of the stock and the financial condition of the business. (d) The earning capacity of the company. (e) The dividend-paying capacity. (f) Whether or not the enterprise has goodwill or other intangible value. 239 (g) Sales of the stock and the size of the block of stock to be valued. (h) The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over-the-counter. 1 www.breitburn.com 2 www.breitburn.com 3 Laro, D., and Pratt, S., 2011. Business Valuation and Federal Taxes. Hoboken: John Wiley & Sons, Inc. 4 Wake Forest University, Palmiter, A., Rev. Ruling 59-60. [online] Available at: http://users.wfu.edu/palmitar/Law&Valuation/chapter%205/Documents/RevRul59-60.html [Accessed 14 June 2013]

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4. Intended Use of the Report The intended use of this report is to estimate the fair market value for tax purposes.

5. Name of Client Mike from Walton Drilling LLC (a seller).

6. Names of Appraisers James Lin and Lea Jovanovic.

7. Valuation Approaches Considered and Used This report was prepared upon considering and using the three recognized approaches to business valuation which are the income approach, the market approach and the asset approach. Please see ‘Conclusion’ for further detail.

8. Sources of Information Relied On Our conclusion was reached based on:

Site visits & management interviews, which took place every Monday of the month of May and June 2013, as well as Sunday 13 June 2013. Person interviewed: Richard Walton (in person).

Financial statements provided to us by Richard Walton (‘Selected Financial Data’ from

2008 until 31st December 2012).

Financial data obtained online on Walton Drilling LLC5, also Yahoo Finance, EDGAR, financial analyses and industry data by reliable sources such as Reuters, Booz & Co and Bloomberg.

5 i.e. we looked up BBEP online and used the information available.

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9. Description of Business & Recent Developments Walton Drilling LLC is a drilling company based in California, possessing oil and gas assets. It is also a drilling technology innovator, being the owner and inventor (patent pending) of a revolutionary drilling technology. Presently, natural gas extraction is done via directional drilling or horizontal drilling6 Walton Drilling LLC has invented a new way of locating and drilling resources, using airborne radar technology which can penetrate the earth, developed by a member of the company named Karl. Walton Drilling has also recently discovered $500 M of oil reserves in Canada. The recent income loss has been reported as being due from discontinued operations. According to Management, 2013 is looking very positive, with an expected increase in sales, long term contracts and less debt. Walton Drilling is not a publicly traded company and they have no plans for IPO.

10. Relevant Economic and Industry Analysis

According to a report by KPMG written in conjunction with Oxford Economics, “As a result of the “shale revolution” in the U.S., domestic dry gas production increased 25 percent from 2007 to 2012. According to the U.S. Energy Information Administration (EIA), domestic production of dry natural gas reached an all-time high of over 65 billion cubic feet per day (Bcf/d) in July 2012. Natural gas volumes continue to swell U.S. storage capacity with working natural gas in storage at 88 percent of total capacity.1 One important result of the surge in natural gas production is the natural gas price has become uncoupled from the oil price in the U.S. while natural gas is still priced off of crude oil in the rest of the world.”7 Technology particularly, offers a way to mitigate risks, which is very relevant to Walton Drilling. Moreover, an article by Booz & Co has found that8:

Oil and gas prices are set to level off in 2013; There is going to be a big industry shift, with diversified business models, giving away

to specialization by differentiation of capabilities; By 2020 oil prices will likely drop to US $70-$90 per barrel, though prices can vary

widely and gas prices are likely to stabilize around $5 per mcf;

6 Museum of the Earth, 2012. Understanding Drilling Technology. [online] Available at: http://www.museumoftheearth.org/files/marcellus/Marcellus_issue6.pdf [Accessed on 14 June 2013] 7 KPMG Global Energy Institute, 2012. US Oil & Gas Outlook. [online] Available at: http://www.kpmginstitutes.com/global-energy-institute/insights/2012/pdf/us-oil-and-gas-outlook.pdf [Accessed on 13 May 2013] 8 Click, C., Clyde, A., and Sharabura, S., (2012). 2013 Oil & Gas Industry Perspective. [online] Booz & Company. Available at: http://www.booz.com/global/home/what-we-think/industry-perspectives/display/2013-oilgas-industry-perspective?pg=all [Accessed on 13 May 2013]

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Specialization, efficiency, and well-run joint ventures are critical factors for growth in lean times – in 2013, generalists will be left behind (Walton Drilling has a huge competitive advantage at this angle).

Advice of the year by Booz & Company: oil and gas companies should focus on the capabilities that set them apart from competitors (in Walton Drilling’s case, that would be their innovative technology discovery).

11. Risk Factors The following has been borrowed from Noble Corporation’s 10K report available on EDGAR and applies to Walton Drilling: “Demand for drilling services depends on a variety of economic and political factors and the level of activity in offshore oil and gas exploration and development and production markets worldwide. […] Oil and gas prices are extremely volatile and are affected by numerous factors beyond our control, including:

laws and regulations related to environmental or energy security matters, including those addressing alternative energy sources and the risks of global climate change;

the political environment of oil-producing regions, including uncertainty or instability resulting from civil disorder, an outbreak or escalation of armed hostilities or acts of war or terrorism;

worldwide demand for oil and gas, which is impacted by changes in the rate of economic growth in the global economy;

the ability of OPEC to set and maintain production levels and pricing; •the level of production in non-OPEC countries;

the laws and regulations of governments regarding exploration and development of their oil and gas reserves or speculation regarding future laws or regulations;

the cost of exploring for, developing, producing and delivering oil and gas; the discovery rate of new oil and gas reserves; the rate of decline of existing and new oil and gas reserves; available pipeline and other oil and gas transportation capacity; the ability of oil and gas companies to raise capital; adverse weather conditions (such as hurricanes and monsoons) and seas; the development and exploitation of alternative fuels; tax laws, regulations and policies; advances in exploration, development and production technology; and the availability of, and access to, suitable locations from which our customers can

produce hydrocarbons.”

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12. Disclosure Regarding Forward Projections Certain statements and information in this Valuation Report may constitute “forward-looking statements.” The words “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward looking statements, which are generally not historical in nature. These forward-looking statements are based on our current expectations and beliefs concerning future developments. […] All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations […]Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. 9

13. Financial Outlook

13.1 Selected Financial Data from 10K (2008-2012)

9 from Breitburn Energy Partners 10K Report, year ending December 31st, 2012: http://files.shareholder.com/downloads/BBEP/2495457962x0xS1357371-13-3/1357371/filing.pdf

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13.2 Income Statement (2008-2013)

Note: this income statement is being used as Walton Drilling LLC’s Income Statement for the last 5 years and is the actual income statement of the company that Walton Drilling LLC is inspired from.10

13.3 Cash Flow (2010-2012)

source: http://finance.yahoo.com/q/cf?s=BBEP+Cash+Flow&annual

10 That being Breitburn Energy Partners.

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14. The Income Approach

We started with the income approach for the valuation of Walton Drilling LLC. In the income approach, we expected the company’s Net Cash Flow to grow in the future, and then we discounted these NCFs to their present value by using the Build-up Model which measures the cost of capital.

14.1 Net Cash Flow “The measure of economic benefits preferred by most professional valuation practitioners for use in the income approach is net cash flow.”11 We assume the net cash flows’ inflow at the end of every year.

14.2 Discounting Discounting requires calculation of what a given amount of dollars, to be received at some time in the future, will be worth in today’s dollar, meaning its present value, assuming the market requires a particular rate of return to attract funds to the investment. This calculation estimates what the investment’s future cash flows are worth to an investor in dollar today.

14.3 The Build-Up Model An important task in the income approach analysis is to estimate the discount rate, or the rate of return the market would require investing in Walton Drilling’s interest. CAPM model isn’t a good method to measure discount rate because the beta it uses is not a common concept for people without financial background, and also it fails to determine companies’ size premium. Therefore, we used the Build-up Model and assessed the following pieces to compile a bottom-line rate.

14.4 Risk-Free Rate – 3.03% The risk free rate is the rate of return available in the market on an investment free of default risk. We plugged in the 2.73% yield to maturity on 20-year Treasury bonds as of the date 06/10/2013. Treasury bonds are considered to be the appropriate estimation of a risk-free investment for valuation comparison purpose.12

14.5 Equity Risk Premium – 5% The equity-risk premium is the rate of return added to a risk-rate to reflect the additional risk of equity instruments over risk-free instruments. Normal estimates range from 2% to 7.5%. Here, we used an equity-risk premium based on DUFF & PHELPS US announcement on 02/28/2013 that is 5%.13

14.6 Size Premium – 8.42%

11 Laro, D., and Pratt, S., 2011. Business Valuation and Federal Taxes. Hoboken: John Wiley & Sons, Inc. page 164. 12 http://www.treasury.gov 13 Data from: http://0rz.tw/x0MUn

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The size premium reflects the risk of small companies relative to larger companies; in general, small companies are riskier than large ones. Estimation of the size premium usually falls in the range 3% to 9%. Here, we used the analysis of The New York Times – “Oil & Gas Drilling”14 US companies’ market capitalization data on 06/10/2013, assuming that the biggest company (Seadrill Ltd, $19200M) will use 3%, and the smallest company (Torrent Energy Corporation, $0.0459M) will use 9%. The market capitalization of BreitBurn15 / aka Walton Drilling is $1,844M on 06/14/2013; thus we can estimate the size premium of Walton Drilling to be 8.42%. <Calculation> (3%-9%) / (19200M-0.0459M) = (R-9%) / (1844M-0.0459M) R = 0.0958= 8.42%

19200M 1844M 0.0459M

3% 8.42% 9%

14.7 Industry Adjustment – 7.55% The industry adjustment is a metric derived from Ibbotson Associates, which provides a discount rate based on industry groups for use with the build-up model. We used an industry adjustment of 7.55% as industry premium for companies with SIC code 1381.

14.8 Company-Specific Risk Adjustment – -2% The company-specific risk adjustment captures any aspects of risk factors unique to the subject company. It is usually positive, but could be negative, and generally ranges between negative 2% and positive 5%. Here we chose a company-specific risk adjustment of -2% because the company just acquired new technology and is going to renew a lot of contracts this year.

14.9 Estimated Equity Discount Rate – 22% We determined an estimated equity discount rate of 22.0% by examining the different components of the build-up model.

14.10 Weighted Average Cost of Capital The market rate of return at which the projected cash flows should be discounted is the weighted average cost of capital (WACC). The components of the WACC are weighted at their respective market values, not the book values. We began with the estimated equity discount rate of 26.7%, which yielded a 15.16% weighted average cost of equity, providing a 56.76% total equity to total capital ratio. Given the remaining 43.24% ratio for total long-term debt to total capital, we assumed a 10.75% cost of debt, which, when timed, yielded a 1.19% weighted average cost of debt. The sum of the weighted average cost will be generated by adding these to weighted average costs, yielding a 18.18% WACC.

14 http://markets.on.nytimes.com/research/markets/usmarkets/industry.asp?industry=50131 15 http://ycharts.com/companies/BBEP/market_cap

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Figure: Build-up model and WACC calculation

Build-up Model

Risk-free Rate 3.03%

Equity-risk Premium 5.00%

Size Premium 8.42%

Industry Adjustment 7.55%

Company-specific Risk Adjustment -2.00%

Equity Discount Rate 22.00%

14.11 Adjustments Several financial adjustments were made to the company’s income statement that affects the overall equity value of our subject company. The following adjustments were accounted for when producing the pro forma statements: (1) Non-operating accounts: “(Gain) loss on sale of assets”, “Unreimbursed litigation costs”,

“Loss on interest rate swaps”, and “Other expense (income)”, we considered these four as non-operating items, and thus we eliminated them from pro forma income statement.

(2) Average data of 2008-2012: because we assumed growth rates applies on net incomes, we need a positive net incomes to generate pro forma income statement; therefore, we used the average data from year 2008-2012 as base, and then generated data year by year by multiple the growth rate.

14.12 Assumptions

(1) Projected revenues figures are estimated to grow by 15% for first 5 years, 10% for next 3 years, and 5% for perpetual, as per the comments made by Management.

(2) Operating costs, General and administrative expenses are estimated to have fixed proportions to revenues, thus have the same growth rate of revenues. Depletion, depreciation and amortization cost are considered to be in direct proportion with property, plant, and equipment in Balance Sheet, which is also related to revenues, making costs also share the same growth rate of revenues.

(3) Interest expenses have direct proportion with liabilities in balance sheet, which is also related to revenues, making interest expenses share the same growth rate of revenues. We also assumed that tax expenses have the same growth rates.

Figure: Pro Forma Income Statement Assumptions

Calculation of WACC Cost Weight Weighted Cost

Common Equity 22.00% 56.76% 12.49%

Long-term Debt 7.50% 43.24% 2.11%

Tax Rate 35%

WACC

14.60%

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Income Statement Average Projected Projected Projected Projected

Thousands 08~12 2013 2014 2015 2016

Oil, natural gas and natural gas liquid sales $369,659 $425,108 $488,874 $562,205 $646,536

Gain on commodity derivative instruments, net $80,605 $92,696 $106,600 $122,590 $140,978

Other revenue, net $2,932 $3,371 $3,877 $4,459 $5,127

Total revenues and other income items $453,196 $521,175 $599,351 $689,254 $792,642

Operating costs $160,955 $185,098 $212,863 $244,793 $281,512

Depletion, depreciation and amortization $129,320 $148,718 $171,026 $196,680 $226,182

General and administrative expenses $44,133 $50,752 $58,365 $67,120 $77,188

Operating income (EBIT) $117,159 $136,606 $157,096 $180,661 $207,760

Total interest $41,655 $39,766 $45,731 $52,591 $60,480

Income tax expense (benefit) $296 $340 $391 $450 $517

Net income (loss) $75,208 $96,499 $110,974 $127,620 $146,763

Figure: Pro Forma Income Statement Assumptions (continued)

Income Statement Projected

Projected

Projected

Projected

Projected

Thousands 2017 2018 2019 2020 2021

Oil, natural gas and natural gas liquid sales $743,517 $817,868 $899,655 $989,621 $1,039,102

Gain on commodity derivative instruments, net $162,125 $178,338 $196,171 $215,788 $226,578

Other revenue, net $5,896 $6,486 $7,135 $7,848 $8,241

Total revenues and other income items $911,538 $1,002,692 $1,102,961 $1,213,257 $1,273,920

Operating costs $334,408 $356,112 $391,723 $430,896 $452,441

Depletion, depreciation and amortization $260,110 $286,120 $314,733 $346,206 $363,516

General and administrative expenses $88,766 $97,643 $107,407 $118,148 $124,056

Operating income (EBIT) $238,924 $262,816 $289,098 $318,008 $333,908

Total interest $34,579 $76,507 $84,157 $92,573 $97,202

Income tax expense (benefit) $595 $654 $720 $792 $831

Net income (loss) $168,777 $185,655 $204,221 $224,643 $235,875

(4) Current Asset increases calculated from differences between former year and later year,

such as 13-average, 14-13, indicates cash outflows; on the other hand, current liabilities increases represent cash inflows.

(5) We assume the tax rate on net interest expenses is 35%.

Figure: Net Cash Flows statement Projected Projected Projected Projected

Thousands 2013 2014 2015 2016

Net income (loss) $96,499 $110,974 $127,620 $146,763

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Depletion, depreciation and amortization $148,718 $171,026 $196,680 $226,182

Current Assets increase ($20,844) ($23,970) ($27,566) ($31,701)

Current Liabilities increase $14,350 $16,502 $18,978 $21,824

PP&E Expenditure ($101,564) (116,798) ($134,318) ($154,466)

Interest expenses, net of tax $39,766 $45,731 $52,591 $60,480

Net Cash Flow $176,926 $203,465 $233,985 $269,082

Figure: Net Cash Flows statement (continued) Projected Projected Projected Projected Projected

Thousands 2017 2018 2019 2020 2021

Net income (loss) $168,777 $185,655 $204,221 $224,643 $235,875

Depletion, depreciation and amortization $260,110 $286,120 $314,733 $346,206 $363,516

Current Assets increase ($36,456) ($27,950) ($30,745) ($33,819) ($18,600)

Current Liabilities increase $25,098 $19,242 $21,166 $23,282 $12,805

PP&E Expenditure ($177,635) ($195,399) ($214,939) ($236,433) ($248,254)

Interest expenses, net of tax $69,552 $76,507 $84,157 $92,573 $97,202

Net Cash Flow $309,445 $344,175 $378,593 $416,452 $442,543

(6) We used WACC as discount rate and calculated the present value of each cash flow. We assume in 2013 the duration is only half year, meaning (1+rate)0.5 .

(7) The free cash flow after 2020 will have a stable perpetual grow rate of 5%. Using Gordon Growth Model formula = 2021 NCF/WACC-Growth rate, we can generate the perpetual cash flow.

Figure: Present value of cash flows of each year

Projected Projected Projected Projected Projected Projected Projected Projected Projected

Thousands 2013 2014 2015 2016 2017 2018 2019 2020 2020~

Free Cash Flow $176,926 $203,465 $233,985 $269,082 $309,445 $344,175 $378,593 $416,452 $4,315,685

Present Value $164,383 $154,936 $155,482 $156,031 $156,581 $151,973 $145,878 $140,028 $1,180,822

Sum of Present Value

$2,406,115

The enterprise value is $2,406,115,540, and we applied entity-level and shareholder-level discount stated in following part to discount to final value. Figure: Calculation of Equity Value for 25% interest

Enterprise Value $2,406,114,540

Liabilities on 2013 10-Q (March 31) $1,087,526,000

Equity Value $1,318,588,540

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Entity-level discount

contingent liabilities discount 10.00%

Key person discount 5.00%

Equity Value post Entity-level discount $1,120,800,259

Proportion of equity 25.00%

25% interest in Equity Value post entity-level discount $280,200,065

Shareholder-level discount

Minority discount 5.00%

Discount for lack of marketability 25.00%

25% interest in Equity Value post shareholder-level discount $196,140,045

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15. The Market Approach In this section, we compared Walton Drilling LLC to seven similar businesses in the oil and gas / drilling industry. Although every business is unique and there are many variables to consider, we believe that the comparable companies that we picked offer a solid basis of value. 15.1 Guideline Publicly Traded Company Method The guideline publicly traded company method compares prices relative to underlying financial data in day-to-day trades of minority interests in activity publicly traded companies. These interests may be found either on stock exchanges or the over-the-counter market. 15.2 Guideline Companies Selection

15.2 (a) Buyers’ Criteria

Speaking with our interested buyer Thomas Frump16, we received a set of criteria from them which was:

- Companies with positive net income in 2012 and positive earnings in 2012 - Companies only under SIC code 1381 or 1311 - Companies must be publicly traded with financial statements dating back to 2008 so

that we have five years available for comparison (2008 to 2012) - Size and revenue. Revenue must be between 100,000 USD and 1 million USD; while the

assets must be between 1 and 10 million USD.

15.2 (b) Appraisers’ Reasoning in Selecting the Guideline Companies In choosing our companies for the market approach, we looked at the following factors:

- companies under EDGAR SIC code 1381 (oil and gas drilling companies) - market cap, revenue (we did not want any companies too large) - products and services similarities - availability of financial data for 2008-2012 (we wanted to be able to look at five years

back and ignored companies that did not have a record dating back to 2008, such as Vanguard Natural Resources who had no drilling operations before 2010).

We felt that geography was not an important factor for our industry. We looked at many companies and narrowed it down to 7. We eliminated all the companies that did not have financials dating back to 2008 and until December 31, 2012. We also did not want to look at companies that are too big (such as Noble Corporation), even though they seemed like a good idea at the beginning. Some examples of companies we eliminated are: Noble Corporation (as aforementioned), Richfield Oil & Gas, Gulfstar Energy, Vanguard Natural Resources, Linn Energy, amongst others. Most were eliminated due to lack of financial data for all the 5 years we wanted (2008 to 2012), or because they were too large. We found this website to be useful in finding suitable companies:

16 Jenny and Alan.

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http://markets.on.nytimes.com/research/markets/usmarkets/industry.asp?industry=50131 , as we could compare market caps. We followed all of our criteria described above but decided we do not have to comply with Thomas Frump’s criteria on revenue and positive income for 2012. We did not find it applicable and believed we could do a sound market approach calculation even if our companies do not fit this criteria. We also researched published analysts’ opinions and articles on comparable companies using data available from the company Walton Drilling is inspired from.17

15.2 (c) Guideline Companies Our companies of choice are:

1. Precision Drilling Corporation: http://finance.yahoo.com/q?s=PDS 2. Ocean Rig UDW Inc.: http://finance.yahoo.com/q?s=ORIG 3. Pacific Drilling S.A.: http://finance.yahoo.com/q?s=PACD 4. Seadrill Partners LLC: http://finance.yahoo.com/q?s=SDLP 5. Hercules Offshore, Inc.: http://finance.yahoo.com/q?s=HERO 6. Vantage Drilling Company: http://finance.yahoo.com/q?s=VTG 7. Parker Drilling Co.: http://finance.yahoo.com/q?s=PKD

1. Precision Drilling Corporation Precision Drilling Corporation is a provider of contract drilling and completion and production services primarily to oil and natural gas exploration and production companies in Canada and the United States.

Precision Drilling is a company we found under SIC 1381. Company website: www.precisiondrilling.com

2. Ocean Rig UDW Inc

Ocean Rig UDW Inc. is a Marshall Islands-registered international offshore drilling contractor. The Company provides oilfield services for offshore oil and gas exploration, development and production drilling.

Ocean Rig UDW is a company we found under SIC 1381. Company website: www.ocean-rig.com

3. Pacific Drilling S.A.

Pacific Drilling S.A. operates as an offshore drilling contractor. The company provides ultra-deepwater drilling services to the oil and natural gas industry through the use of drilling rigs.

Pacific Drilling S.A. is a company we found under SIC 1381. 17 http://seekingalpha.com/article/870661-breitburn-energy-partners-leads-sector-with-9-4-yield

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Company website: www.pacificdrilling.com

4. Seadrill Partners LLC Seadrill Partners LLC (Seadrill Partners) is a limited liability company. The Company was formed to own, operate and acquire offshore drilling rigs. The Company's drilling rigs are under long-term contracts with oil companies, such as Chevron, Total, BP and ExxonMobil. The Company is also a holding company.

Seadrill Partners LLC is a company we found under SIC 1381. Company website: www.seadrill.com

5. Hercules Offshore Inc

Hercules Offshore, Inc., together with its subsidiaries, provides shallow-water drilling and marine services to the oil and natural gas exploration and production industry worldwide. It serves national oil and gas companies, integrated energy companies, and independent oil and natural gas operators.

Hercules Offshore Inc is a company we found under SIC 1381. Company website: www.herculesoffshore.com

6. Vantage Drilling Company

Vantage Drilling Company is an international offshore drilling company focused on operating a fleet of drilling units. The Company's primary business is to contract drilling units, related equipment and work crews primarily on a dayrate basis to drill oil and natural gas wells for its customers.

Vantage Drilling is a company we found under SIC 1381. Company website: www.vantagedrilling.com

7. Parker Drilling Company

Parker Drilling Company, together with its subsidiaries, provides contract drilling and drilling-related services in the United States, Latin America, Africa, the Middle East, the Asia Pacific, and Commonwealth of Independent States. It operates in six segments: Rental Tools, U.S. Barge Drilling, U.S. Drilling, International Drilling, Technical Services, and Construction Contract.

Parker Drilling is a company we found under SIC 1381. Company website: www.parkerdrilling.com

15.3 Financial Statements Analysis We used Walton Drilling’s financial statements for the years ended December 31, 2008 through December 31, 2012. To analyze the operation of Walton Drilling at the end of each year and over time, common size balance sheet and income statement were examined, from which financial and operating ratios were computed. Figure: Walton Drilling Common Size of Balance Sheet

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Common Size Dec. 31

ASSETS 2012 2011 2010 2009 2008

Current assets

Cash 0.15% 0.23% 0.19% 0.29% 0.11% Accounts and other receivables, net 2.33% 3.13% 2.77% 3.31% 2.13%

Derivative instruments 1.17% 3.58% 2.84% 2.90% 3.44%

Related party receivables 0.05% 0.18% 0.23% 0.11% 0.23%

Inventory 0.11% 0.20% 0.38% 0.30% 0.06%

Prepaid expenses 0.10% 0.09% 0.09% 0.30% 0.24%

Intangibles 0.00% 0.00% 0.00% 0.03% 0.12%

Other Current Asset 0.00% 0.00% 0.00% 0.00% 0.01%

Total current assets 3.90% 7.41% 6.49% 7.23% 6.34%

Equity investments 0.24% 0.32% 0.40% 0.41% 0.43%

Property, plant and equipment

Oil and gas properties 115.38% 110.86% 110.51% 104.46% 92.81%

Other assets 0.49% 0.58% 0.56% 0.39% 0.35%

PP&E Total 115.87% 111.44% 111.07% 104.85% 93.17%

Accumulated depletion and depreciation -22.86% -22.51% -21.84% -16.52% -10.15%

Net property, plant and equipment 93.02% 88.93% 89.23% 88.33% 83.02%

Other long-term assets 0.00% 0.00% 0.00% 0.00% 0.00%

Intangibles 0.00% 0.00% 0.00% 0.00% 0.02%

Derivative instruments (note 5) 1.89% 2.37% 2.62% 3.79% 9.88%

Other long-term assets 0.95% 0.96% 1.25% 0.23% 0.31%

Total long-term assets 2.84% 3.34% 3.88% 4.03% 10.22%

Total assets 100.00% 100.00% 100.00% 100.00% 100.00%

LIABILITIES AND EQUITY

Current liabilities:

Accounts payable 1.46% 1.17% 1.39% 1.08% 1.28%

Book overdraft 0.00% 0.00% 0.00% 0.00% 0.45%

Derivative instruments (note 5) 0.19% 0.38% 1.92% 1.02% 0.46%

Related party payables 0.00% 0.00% 0.00% 0.66% 0.00%

Revenue and royalties payable 0.76% 0.84% 0.85% 0.92% 0.91%

Salaries and wages payable 0.37% 0.59% 0.65% 0.52% 0.28%

Accrued interest payable 0.45% 0.27% 0.00% 0.00% 0.00%

Accrued liabilities 0.72% 0.61% 0.44% 0.46% 0.24%

Total current liabilities 3.95% 3.86% 5.25% 4.66% 3.61%

Credit facility (note 10) 11.83% 22.31% 11.81% 28.36% 33.20%

Senior notes, net (note 10) 25.92% 12.90% 15.55% 0.00% 0.00%

20

Deferred income taxes (note 12) 0.09% 0.12% 0.11% 0.13% 0.19%

Asset retirement obligation (note 13) 3.38% 3.54% 2.46% 1.86% 1.36%

Derivative instruments (note 5) 0.15% 0.13% 2.06% 2.54% 0.45%

Other long-term liabilities 0.16% 0.21% 0.12% 0.11% 0.13%

Total liabilities 45.48% 43.06% 37.35% 37.66% 38.95%

Commitments and contingencies (note 14)

Equity: 0.00% 0.00% 0.00% 0.00% 0.00%

Partners' equity (note 15) 54.52% 56.92% 62.63% 62.32% 61.03%

Noncontrolling interest (note 16) 0.00% 0.02% 0.02% 0.02% 0.02%

Total equity 54.52% 56.94% 62.65% 62.34% 61.05%

Total liabilities and equity 100.00% 100.00% 100.00% 100.00% 100.00%

Comment About assets, recently the company experienced plenty of assets acquisition and purchase, PP&E kept growing fast; however, the enormous proportion makes current assets only have little proportion, which indicates that the company may have cash liquidity problems if those PP&E cannot be transferred into cash within 3 days. About liabilities and equity, basically the interest expenses is a great cost for income, therefore the increase leverage of the company may increase the burden on interest cost. Figure: Walton Drilling Common Size of Income Statement

Common Size

2012 2011 2010 2009 2008

Revenues and other income items:

Oil, natural gas and natural gas liquid sales 97.84% 82.10% 89.42% 124.43% 58.25%

Gain on commodity derivative instruments, net 1.32% 17.00% 9.88% -25.11% 41.39%

Other revenue, net (note 8) 0.84% 0.90% 0.70% 0.67% 0.36%

Total revenues and other income items 100.00% 100.00% 100.00% 100.00% 100.00%

Operating costs and expenses:

Operating costs 46.28% 34.55% 40.11% 67.61% 20.19%

Depletion, depreciation and amortization 35.36% 22.38% 28.92% 52.15% 22.42%

General and administrative expenses 13.11% 11.10% 12.64% 17.75% 3.81%

(Gain) loss on sale of assets 0.11% -0.02% 0.00% 2.91% 0.00%

Unreimbursed litigation costs 0.00% -0.02% 0.39% 0.00% 0.06%

Total operating costs and expenses 94.87% 67.98% 82.06% 140.42% 46.49%

Operating income 5.13% 32.02% 17.94% -40.42% 53.51%

Interest expense, net of capitalized

interest 14.47% 8.15% 6.91% 9.19% 3.63%

Loss on interest rate swaps 0.26% 0.58% 1.26% 3.54% 2.50%

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Other expense (income), net 0.01% 0.00% 0.00% -0.05% -0.02%

Income (loss) before taxes -9.61% 23.29% 9.77% -53.10% 47.40%

Income tax expense (benefit) (note 12) 0.02% 0.25% -0.06% -0.75% 0.24%

Net income (loss) -9.63% 23.04% 9.83% -52.36% 47.16%

Less: Net income attributable to

noncontrolling interest (note 16) -0.01% -0.04% -0.05% -0.02% -0.02%

Net income (loss) attributable to the partnership -9.65% 23.00% 9.78% -52.37% 47.14%

General Partner's interest in net loss 0.00% 0.00% 0.00% 0.00% -0.25%

Net income (loss) attributable to limited partners -9.65% 23.00% 9.78% -52.37% 47.39%

Comment Due to huge PP&E amount, depreciation costs are heavy burden for income, too. Furthermore, revenues show a little unstable that Gain on commodity derivative instrument, which should not be a main source of revenues, sometimes occupy a great proportion in revenues.

15.3 (a) Comparable Financial Statements

We compared Walton Drilling to other guideline companies because they represent similar segment of the oil and drilling market. Each company bears some similarity to Walton Drilling and use of seven different companies provides a holistic view of Walton Drilling’s business. In the following section, we compared their Balance Sheet, Income statement, and some year ratios in 2012. For ease of comparison, we used financial statements from Yahoo! Finance because it has standardized financial statements for all public traded companies, otherwise the seven companies all have different accounts in their 10-K statements, which would have made it harder for us to compare accurately. Figure: comparable Balance Sheets

(Data from YAHOO! Finance) 2012

Thousands PDS ORIG PACD SDLP HERO VTG PKD WALTON

Asset

Current Asset

Cash and Cash Equivalents

$153,428 $354,687 $653,365 $19,400 $261,220 $506,241 $87,886 $4,507

Short Term Investments $0 $0 $0 $0 $0 $0 $0 $0

Net Receivables $511,748 $148,808 $152,299 $187,300 $189,061 $119,452 $177,304 $69,275

Inventory $13,847 $0 $49,626 $0 $0 $37,944 $28,860 $3,086

Other Current Assets $0 $93,639 $69,156 $34,400 $28,326 $25,208 $58,984 $36,797

Total Current Assets $679,022 $597,134 $924,446 $241,100 $478,607 $688,845 $353,034 $113,665

Long Term Investments $64,858 $156,309 $124,740 $49,400 $38,191 $31,320 $0 $62,214

Property, Plant and Equipment

$3,256,934 $5,392,287 $3,760,421 $2,103,000 $1,462,755 $2,717,506 $795,138 $2,711,893

Goodwill $311,893 $0 $0 $0 $0 $0 $0 $0

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Intangible Assets $6,127 $7,619 $0 $0 $0 $0 $0 $0

Other Assets $0 $71,765 $52,164 $8,000 $37,077 $92,536 $12,266 $27,722

Deferred Long Term Asset Charges

$0 $0 $32,157 $600 $0 $0 $95,295 $0

Total Assets $4,318,834 $6,225,114 $4,893,928 $2,402,100 $2,016,630 $3,530,207 $1,255,733 $2,915,494

Liabilities

Current Liabilities

Account Payable $399,800 $226,713 $99,169 $375,900 $158,763 $174,393 $141,866 $109,615

Short/Current Long Term Debt

$0 $209,317 $236,745 $0 $76,177 $31,250 $10,000 $5,625

Other Current Liabilities $0 $69,635 $66,142 $43,100 $26,483 $0 $0 $0

Total Current Liabilities $399,800 $505,665 $402,056 $419,000 $261,423 $205,643 $151,866 $115,240

Long Term Debt $1,224,059 $2,683,630 $2,034,958 $0 $798,013 $2,710,559 $469,205 $1,100,696

Other Liabilities $26,608 $17,402 $44,652 $967,100 $17,911 $45,520 $23,182 $103,142

Deferred Long Term Liability Charges

$487,689 $199,902 $97,014 $41,000 $56,821 $0 $20,847 $6,880

Minority Interest $0 $0 $0 $677,100 $0 $0 ($771) $0

Total Liabilities $2,138,157 $3,316,599 $2,578,680 $1,427,200 $1,133,868 $2,961,722 $664,329 $1,325,958

Stockholders' Equity

Common Stock $2,261,707 $1,317 $2,169 no data $1,607 $299 $19,818 $0

Retained Earnings ($44,814) ($553,995) $21,951 no data ($1,225,489) ($309,951) ($74,631) $0

Treasury Stock $0 $0 $0 $0 $53,100 $0 $0 $0

Capital Surplus $24,580 $3,489,018 $2,349,544 $0 $2,159,744 $878,137 $646,217 $0

Other Stockholder Equity ($60,796) ($27,825) ($58,416) $297,800 $0 $0 $0 $1,589,536

Total Stockholder Equity $2,180,677 $2,908,515 $2,315,248 $974,900 $882,762 $568,485 $591,404 $1,589,536

Total Lia. and Equity $4,318,834 $6,225,114 $4,893,928 $2,402,100 $2,016,630 $3,530,207 $1,255,733 $2,915,494

Figure: comparable Income Statements

(Data from YAHOO! Finance) 2012

Thousands PDS ORIG PACD SDLP HERO VTG PKD WALTON

Total Revenue $2,049,554 $941,903 $638,050 $613,900 $709,792 $471,472 $677,982 417,415

Cost of Revenue $1,248,670 $0 $331,495 $236,400 $438,084 $230,089 $527,081 $195,779

Gross Profit $800,884 $941,903 $306,555 $377,500 $271,708 $241,383 $150,901 $221,636

Operating Expenses

Research and Development

$0 $0 $0 $0 $0 $0 $0

Selling, General and Administrative

$127,195 $647,230 $45,386 $22,100 $60,643 $26,002 $46,052 $55,465

Non Recurring $0 $4,524 $0 $0 $108,216 $0 $0 $0

Others $308,853 $224,479 $127,698 $74,900 $166,426 $68,747 $0 $149,565

Operating income or Loss

$171,536 $65,537 $157,142 $280,500 ($63,577) $146,634 $106,823 $16,606

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Income from Continuing Operations

Total Other Income/Expenses Net

($249,835) ($37,622) $26,916 ($19,700) ($7,260) ($123,914) ($330) $3,945

Earning Before Interest And Taxes

$115,001 $28,048 $160,387 $260,800 ($70,837) $22,720 $104,519 $20,551

Interest Expense $87,204 $116,427 $104,685 $41,000 $79,172 $149,118 $33,542 $61,206

Income Before Tax $27,797 ($88,379) $55,702 $219,800 ($150,009) ($126,398) $70,977 ($40,655)

Income Tax Expense ($24,790) $43,957 $21,713 $31,500 ($23,005) $18,906 $33,879 $84

Minority Interest $0 $0 $0 ($32,500) $0 $0 $215 ($62)

Net Income $52,586 ($132,336) $33,989 $155,800 ($127,004) ($145,304) $37,313 ($40,801)

Depreciation $396,057 $260,940 $45,874 $63,200 $173,722 $81,849 $113,017 $149,565

EBITDA $511,058 $288,988 $206,261 $324,000 $102,885 $104,569 $217,536 $170,116

Figure: comparable Ratios

Comparing \ Code

Tax Rate = 35% PDS ORIG PACD SDLP HERO VTG PKD WALTON Mean Comm.

Activity Ratio 2012

Account receivable turnover (revenue/receivable)

4.01 6.33 4.19 3.28 3.75 3.95 3.82 6.03 4.42 above

Inventory turnover (Cost of revenue/inventory)

90.18 N/A 6.68 N/A N/A 6.06 18.26 63.44 36.92 above

Revenue to net working capital

7.34 10.30 1.22 (3.45) 3.27 0.98 3.37 (265.03) (30.25) below

Revenue to net fixed assets

0.63 0.17 0.17 0.29 0.49 0.17 0.85 0.15 0.37 below

Revenue to total assets

0.47 0.15 0.13 0.26 0.35 0.13 0.54 0.14 0.27 below

Performance Ratio 2012

Operating profit margin (EBIT/revenue)

5.61% 2.98% 25.14% 42.48% -9.98% 4.82% 15.42% 4.92% 11.42% below

Pretax income margin (EBT/revenue)

1.36% -9.38% 8.73% 35.80% -21.13% -26.81% 10.47% -9.74% -1.34% below

Net profit margin (NI/revenue)

2.57% -14.05% 5.33% 25.38% -17.89% -30.82% 5.50% -9.77% -4.22% below

EBITDA/revenue 24.94% 30.68% 32.33% 52.78% 14.50% 22.18% 32.09% 40.75% 31.28% above

Return-on-Investment Ratios 2012

Return on equity 2.41% -4.55% 1.47% 15.98% -14.39% -25.56% 6.31% -2.57% -2.61% above

Return on investment

2.79% -0.98% 2.27% 6.86% -4.30% -1.46% 5.36% -0.04% 1.31% below

Return on asset 2.53% -0.91% 2.08% 7.60% -3.75% -1.37% 4.71% -0.03% 1.36% below

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Leverage Ratios 2012

Total debt to total assets

49.51% 53.28% 52.69% 59.41% 56.23% 83.90% 52.90% 45.48% 56.67% below

Equity to total assets

50.49% 46.72% 47.31% 40.59% 43.77% 16.10% 47.10% 54.52% 43.33% above

Long-term debt to total capital

44.36% 49.93% 48.46% 63.35% 49.71% 82.90% 46.42% 43.24% 53.55% below

Equity to total capital

55.64% 50.07% 51.54% 36.65% 50.29% 17.10% 53.58% 56.76% 46.45% above

Fixed assets to equity

149.35%

185.40%

162.42%

215.71%

165.70%

478.03%

134.45%

170.61%

207.71%

below

Debt to intangible equity

98.05% 114.03%

111.38%

146.39%

128.45%

520.99%

112.33%

83.42% 164.38%

below

Liquidity Ratios 2012

Current Ratio 169.84%

118.09%

229.93%

57.54% 183.08%

334.97%

232.46%

98.63% 178.07%

below

Quick Ratio 166.38%

99.57% 200.39%

49.33% 172.24%

304.26%

174.62%

64.02% 153.85%

below

Time interest earned

131.88%

24.09% 153.21%

636.10%

-89.47% 15.24% 311.61%

33.58% 152.03%

below

Account receivable to sales

24.97% 15.80% 23.87% 30.51% 26.64% 25.34% 26.15% 16.60% 23.73% below

Account payable to sales

19.51% 24.07% 15.54% 61.23% 22.37% 36.99% 20.92% 26.26% 28.36% below

Comment Walton Drilling has competitive account receivable turnover and inventory turnover, which states that it has good ability to transfer inventory into cash. However, the profitability is not so outstanding, and due to property acquisition in 2012, performance ratios are not so surpassing, approximately a little below average. Also, Walton has comparably low current ratios.

15.3 (b) Market Valuation Multiples In the guideline publicly traded company method, the price is almost always the closing price of the companies’ stock on the valuation data. However, on occasion, such as in an extremely volatile market, it might be an average of sometime either immediately preceding, or preceding and following, the valuation date. Here, we use the following multiples: (1) Market Value of Investment Capital (MVIC) series: MVIC/Sales, MVIC/EBIT, and MVIC/EBITDA. (2) Price series: Price/Net Earnings, Price/Pretax Earnings, and Price/Book. We calculate comparable companies MVIC series and Price series multiples and choose the median to adjust. Then we use adjusted multiples to times Walton Drilling’s data, and we can get Walton Drilling’s MVIC value and Price of equity. (1) MVIC Series: We use data on June 4, 2013 from Yahoo! Finance to calculate Market Value of Invested Capital, which equals to Long-term Debt at the end of 2012 plus Market Value of Equity on June 4, 2013. The formula is: MVIC = Long-term Debt 2012 + (Market Price per share 2013 * Outstanding shares 2013). After calculating MVIC we use divide MVIC by sales, EBIT, and EBITDA from comparable Income Statements above to calculate those multiples. After, we take median as our multiple which is going to be adjusted.

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Figure: Market Value of Invested Capital Calculation

Symbol Market Market Value/Share

Shares outstanding

Long-term Debt

Market Value of Equity

Market Value of Invested Capital

Precision Drilling Corporation PDS NYSE $8.88 276,550,000 1,224,059,000 2,455,764,000 3,679,823,000

Ocean Rig UDW Inc. ORIG NasdaqGS $16.76 131,720,000 2,683,630,000 2,207,627,200 4,891,257,200

Pacific Drilling S.A. PACD NYSE $9.56 216,900,000 2,034,958,000 2,073,564,000 4,108,522,000

Seadrill Partners LLC SDLP NYSE $28.91 41,360,000 - 1,195,717,600 1,195,717,600

Hercules Offshore Inc. HERO NasdaqGS $7.00 159,480,000 798,013,000 1,116,360,000 1,914,373,000

Vantage Drilling Company VTG NYSE $1.94 302,060,000 2,710,559,000 585,996,400 3,296,555,400

Parker Drilling Co. PKD NYSE $4.60 118,870,000 469,205,000 546,802,000 1,016,007,000

Figure: MVIC Series multiples calculation

MVIC MVIC/Sales MVIC/EBIT MVIC/EBITDA

Precision Drilling Corporation 3,679,823,000 1.80 21.45 6.48

Ocean Rig UDW Inc. 4,891,257,200 5.19 74.63 14.98

Pacific Drilling S.A. 4,108,522,000 6.44 26.15 20.24

Seadrill Partners LLC 1,195,717,600 1.95 4.26 3.48

Hercules Offshore Inc. 1,914,373,000 2.70 -30.11 17.38

Vantage Drilling Company 3,296,555,400 6.99 22.48 14.43

Parker Drilling Co. 1,016,007,000 1.50 61.18 4.62

Mean 3.79 25.72 11.66

Variance 5.51 1209.43 44.71

Standard deviation 2.35 34.78 6.69

CV 0.62 1.35 0.57

Median 2.70 22.48 14.43

Adjustment Factors: We consider that in income statement, among comparable companies, if Walton Drilling is ranked No.4, it’ll have +10% adjustment; if it is ranked No.5, it’ll have -10% adjustment, and No.6, 7, 8, it will have -20%, -30%, and -40% adjustment. In income statement comparing Walton Drilling is ranked No.8 in sales (revenues), No.7 in EBIT, and No.4 in EBITDA. About weighted, we take Coefficient of Variance, which shows how separate the data is, as consideration. With larger CV, we put less weighted because we think the data is more separate and is less reliable due to more unstableness in this industry. Figure: Adjustment of multiples Median of

Pricing Multiple Adjustment Factor

Adjusted Multiple

Multiple Weighted

MVIC/Sales 2.70 -40% 1.62 30%

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MVIC/EBIT 22.48 -30% 15.74 25%

MVIC/EBITDA 14.43 10% 15.87 45%

(2) Price series We use data on June 4, 2013 from Yahoo! Finance to calculate price series multiples. We divide price of each company by Net Earnings, Pretax Earnings from comparable Income Statements above, and Book Values from June 14, 2013. After, we take median as our multiple which is going to be adjusted. Figure: Price series data of each company

EPS 2012 Pretax EPS 2012 Price per Share Book Value per Share 2013

Precision Drilling Corporation $0.19 $0.10 $8.88 $8.34

Ocean Rig UDW Inc. ($1.00) ($0.67) $16.76 $22.16

Pacific Drilling S.A. $0.16 $0.26 $9.56 $10.78

Seadrill Partners LLC $3.77 $5.31 $28.91 $24.77

Hercules Offshore Inc. ($0.80) ($0.94) $7.00 $5.77

Vantage Drilling Company ($0.48) ($0.42) $1.94 $1.48

Parker Drilling Co. $0.31 $0.60 $4.60 $5.00

Figure: Price Series Multiples Calculation

Price per Share Price/Net Earning Price/Pretax Earning

Price/Book

Precision Drilling Corporation $8.88 46.70 88.35 1.06

Ocean Rig UDW Inc. $16.76 -16.68 -24.98 0.76

Pacific Drilling S.A. $9.56 61.01 37.23 0.89

Seadrill Partners LLC $28.91 7.67 5.44 1.17

Hercules Offshore Inc. $7.00 -8.79 -7.44 1.21

Vantage Drilling Company $1.94 -4.03 -4.64 1.31

Parker Drilling Co. $4.60 14.65 7.70 0.92

Mean 14.36 14.52 1.05

Variance 850.74 1417.38 0.04

Standard deviation 29.17 37.65 0.20

CV 2.03 2.59 0.19

Median 7.67 5.44 1.06

Adjustment Factors Also, we found that in the income statement, among comparable companies, if Walton Drilling is ranked No.5, it’ll have -10% adjustments. In comparable income statement the Net income and pretax income both are ranked No.5, so we put -10% on both Price/Net Earnings and

27

Price/Pretax Earnings multiples. About Price/book ratio, we think there’s no performance effect on book value, so we don’t put any adjustment on it. About weighted, we also count on Coefficient of Variance. Figure: Adjustment of multiples Median Pricing

Multiple Adjustment Factor Adjusted

Multiple Multiple Weighted

Price/Net Earning 7.67 -10% 6.91 20%

Price/Pretax Earning 5.44 -10% 4.90 20%

Price/Book 1.06 0% 1.06 60%

(3) Combination of two series We use adjusted multiples to multiply Walton Drilling’s data. In MVIC series, sales, EBIT and EBITDA are projected data from the income approach of 2013; In Price series, Net Earnings and Pretax Earnings are projected data from income approach of 2013, too, and book value is from Yahoo! Finance, the book value of Walton Drilling18 as showed, $18.08 book value per share time 99.68 million outstanding shares, equals to $1,802,214,400. After we get MVIC of Walton Drilling, we subtract it by its long-term debt on the end on 2012, and we have the equity value of Walton Drilling. We also have equity market value, which is quite similar to MVIC series, directly from Price series. We put 65% on MVIC series and 35% on Price series because the CV in MVIC series is basically less than one in Price series. Figure: Equity Market Value Calculation

Selected Multiples Adjusted Multiple

Walton Fundamental

Multiple Weighted

Weighted Method Value

MVIC Series

MVIC/Sales 1.62 $521,175,000 30% $253,018,071

MVIC/EBIT 15.74 $136,606,000 25% $537,444,373

MVIC/EBITDA 15.87 $245,217,000 45% $1,751,306,905

Guideline MVIC $2,541,769,350

Long-term debt on 2012 $1,100,696,000

Value of Company Equity $1,441,073,350

Weighted 65%

Price Series

Price/Net Earning 7.67 $96,499,000 20% $19,299,800

Price/Pretax Earning 5.44 $96,839,000 20% $19,367,800

Price/Book 1.06 $1,802,214,400 60% $1,151,342,725

Guideline Price $1,190,010,325

Weighted 35%

18 aka Breitburn

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Equity Market Value $1,353,201,291

(4) The Equity Market Value is $1,353,201,291, and we will use entity-level and shareholder-level discount stated in following part to discount to final value. Notice that we are using market price, which is already the minority stock of the companies, as the result we don’t include minority discount in market-approach.

Figure: Calculation of Equity Value for 25% interest

Equity Market Value $1,353,201,291

Entity-level discount

Contingent liabilities discount 10.00%

Key person discount 5.00%

Equity Value post Entity-level discount $1,150,221,097

Proportion of equity 25%

25% interest in Equity Value post entity-level discount $287,555,274

Shareholder-level discount

Minority discount 0.00%

Discount for lack of marketability 25.00%

25% interest in Equity Value post shareholder-level discount $215,666,456

Data summary From 2012 financial statement: Long-term Debt, EPS, Pretax EPS; Sales, EBIT, EBITDA of comparable companies. From 2013 actual or projected data: Price per share (06/14), Shares outstanding (06/14), Market Value of Equity (06/14); Sales, EBIT, EBITDA, Pretax earnings, Net Earnings of Walton Drilling (projected).

15. 4 The Guideline Transaction Method The guideline transaction method consists of prices relative to underlying fundamental data in transfer of controlling interests in companies that may have been either public or private before the transfer of control. However, there’s no compiled source of transactions in minority interests in private companies because there is no market for them and there is a wide disparity in degree of marketability between minority interests in private companies and restricted stocks of public companies. For these reason, we did not use the guideline transaction method because we are attempting to value a minority interest in a private company, without any past transactions or buy-sell agreement.

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16. The Asset-Based Approach The asset-based approach is relevant for holding companies and operating companies that are contemplating liquidation or are unprofitable for the foreseeable future. Although we project that Walton Drilling will have positive net income in the future, their net income in 2012 was negative. As a result, we considered the asset-based approach to be somewhat reliable for Walton Drilling’s 2012 value. The two methods of asset-based valuation are “adjusted net asset value method” and “excess earnings method”. We do not believe that we can accurately generate the net tangible assets, normalized annual economic income, or capitalization rate for excess earnings, so the second method is ignored in this report. 16.1 Adjusted Net Asset Value Method This method involves adjusting all assets and liabilities to current values. After calculating the difference between the value of assets and the value of liabilities, we get the value -- which is the market value of equity, of the company. The adjusted net asset value encompasses valuation of all the company’s assets, tangible and intangible, whether or not they are presently recorded on the balance sheet. For most companies, the assets are valued on a going-concern premise of value. According to information from Management: Cash is as stated; other current assets have increased to $2 million; net PP&E has increased to $3.5 Billion; other assets have increased to $85 million; liabilities are as stated. Figure: Adjustment of Assets and Liabilities March 31, Adjustment As adjusted

Balance Sheet 2013

ASSETS

Cash $7,610,000 $0 $7,610,000

Other current asset 86,505,000 $113,495,000 $200,000,000

Net property, plant and equipment 2,714,397,000 $785,603,000 $3,500,000,000

Other assets 80,907,000 $4,093,000 $85,000,000

Total Asset 2,889,419,000 $903,191,000 $3,792,610,000

LIABILITIES&EQUITY

Current liabilities $135,574,000 $0 $135,574,000

Long-term liabilities $840,697,000 $0 $840,697,000

Other long-term liabilities $111,255,000 $0 $111,255,000

Partner's equity $1,801,893,000 $903,191,000 $2,705,084,000

Noncontrolling interest $0 $0 $0

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Total liabilities & equity $2,889,419,000 $903,191,000 $3,792,610,000

16.2 Discounts The adjusted net asset method produces a controlling interest value. Thus, discounts for both minority discount and lack of marketability are used to calculate 25% interest. We put higher minority discount in this method. Figure: Calculation of Equity Value for 25% interest

Equity Value $2,705,084,000

Entity-level discount

Contingent liabilities discount 5.00%

Key person discount 5.00%

Equity Value post Entity-level discount $2,434,575,600

Proportion of equity 25.00%

25% interest in Equity Value post entity-level discount $608,643,900

Shareholder-level discount

Minority discount 10.00%

Discount for lack of marketability 25.00%

25% interest in Equity Value post shareholder-level discount $395,618,535

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17. Discounts and Premiums After values have been determined using the income, market and asset-based approaches, such values may be adjusted by applicable discounts and/or premiums. There are two types of discounts: Entity-level discounts and Shareholder-level discounts. 17.1 Entity-Level Discounts The entity-level discounts should be deducted first because they affect the company as a whole. (1) Trapped-In Capital Gains Discount – 0%

This discount applies where a company is holding an appreciated asset and would have to pay capital gains on the sale of the asset. Since the Tax Reform Act of 1986, there is no way to avoid corporate capital gains tax. Furthermore, the IRS acquiesced to the holding in Estate of Davis v. Comm’r which holds that there is no legal prohibition against a trapped-in gains discount. In asset-based valuation, there is authority for the proposition that there should be a dollar-for-dollar reduction when calculating the asset-based value of the interest because the underlying assumption of an asset-based valuation is the premise of liquidation. However, even though the assets of Walton Drilling have appreciated, through equity interest selling, we will not be subject to capital gains tax. Also, from the Manager’s message, the company is not going to sell any of its assets in the future. Courts have typically denied discounts for this type of entity-level discount where there’s a lack of intent to sell. Therefore, we consider that the Trapped-in Capital Gains Discount should be 0%.

(2) Discount for Contingent liabilities – 10% for income & market approach; 5% for asset-

based approach We have received information from Management about a potential liability which ought to be included in this Valuation Report. It is related to an oil field in Louisiana which is owned by Walton Drilling, and located near a river which serves at the water supply for the town nearby. This is a town of 200 people and there have recently been 25 reported cases of cancer / melanoma. This is above average and the theory is that some of Walton Drilling’s petroleum products may have leaked into the river and contaminated it. This presents a risk of litigation, although no lawsuit has been filed as of the date of this report. If causation is established between the cancer in those 25 individuals and the river contamination from our petroleum products, Walton Drilling can / will be held liable for the cancer cases. It is impossible to estimate the figure this could potentially cost the company – 100 Million is a given estimate from Management, but again as of right now, this causation has not been established and there have been no lawsuits filed. As a result, we consider that the discount of contingent liabilities should be 10%, stating 10% about $110 million of equity value in income and market approaches, and 5% around $135 million of equity in asset-based approach. We looked at Estate of Adams v.

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Commissioner when we made our decision as this was a case where they had a pending lawsuit and the discount they administered there was substantially higher than the 10% discount we chose to apply, but the difference is that in Adams the lawsuit was already existing – in Walton Drilling, it is not.

(3) Key Person Discount – 5%

Some managers or leaders are so integral to a business that their departure from the business would depress its value. The loss of an entity’s key person or leader may be reflected in an adjustment to a discount rate or capitalization rate in the approaches. In general, the key person discount is expected as a percentage. By way of comparison, in Estate of Mitchell v. Comm’r, the court found that Paul Mitchell was a “very key person” and a 10% discount was applied. Estate of Rodriguez19 is also relevant to us because this was a case where the company had a life insurance on Rodriguez. Karl is a member of Walton Drilling and is the inventor of the airborne radar technology which will likely revolutionize the drilling industry. The patent is pending on this discovery and it is currently in Beta testing. The company has $2 million ‘key person’ insurance on Karl. He is without a doubt an important person to the company, but we also must note that his discoveries have already been ‘recorded’ (patent pending) and the technology has already been created – thus it is not completely a work in progress. Since 10% is for a “very key person”, we think the key person discount should be 5% for Karl, as he is important to the company, but not irreplaceable anymore. Estate of Rodriguez20 is also relevant to us because this was a case where the company had a life insurance on Rodriguez, and the existence of life insurance policies typically lower or eliminate the key person discount. Thus, we gave him only 5%.

(4) Portfolio Discount – 0%

A portfolio discount is applied to an interest in a company that holds disparate or nonhomogeneous operations and/or assets. The theory behind this discount is that investors prefer “pure plays” over packages of dissimilar assets. Thus, a discount is given to the portfolio to reflect the breakup value of the assets. Walton Drilling is homogenous in its assets / operations and is not considered a conglomerate. Therefore, we applied a 0% portfolio discount.

17.2 Shareholder-Level Discounts Shareholder-level discounts affect only a subset group of shareholders rather than the whole company. Thus, shareholder level discounts should be applied after entity-level discounts. There are four main shareholder-level discounts. (1) Lack of Marketability Discount – 25%

19 Estate of Rodriguez vs Commissioner (1989) 20 Estate of Rodriguez vs Commissioner (1989)

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Marketability is the ability to quickly convert property into cash at minimal cost. The discount for the lack of marketability is an amount or percentage deducted from the value of an ownership interest to reflect the relative absence of marketability. The generally accepted definition of marketability is the ability to convert an interest into cash within three days. An interest that lacks an active market is illiquid and the holder of such an interest will face uncertainty in the ability to liquefy the investment. For companies with no plan to be publicly traded, the discount of pre-1990 restricted stock studies is better suited. In pre-1990 restricted stock studies, average lack of marketability discounts is about 33.5%; the least is 25.8% in SEC overall average study, and the most is 45% in Standard Research Consultants study. On the other hand, we did not look at pre-IPO studies because Walton Drilling has no foreseeable plans for an IPO. There are few factors that will impact the size of the discount for lack of marketability (Mandelbaum case). First, companies that make distributions tend to have lower discounts for lack of marketability because the greater and more frequent the distributions, the less dependent the owner is on the ability to liquidate to receive a return on investment. Second, the longer the buyer of the shares must wait to liquidate the shares, the greater the discount. Third, higher levels of risk are associated with higher discounts. In Walton Drilling’s situation, the original discount should be around 33.5% because it has no plan for IPO; however, due to the reasons that (1) Walton Drilling is paying dividend these year and the 5 Year Average Dividend Yield is 15.2%; (2) Walton Drilling is going to have new technology and new contracts starting from this year; we subtract the discount to 25% to fit these two conditions.

(2) Minority Discount / Control Premiums – 5% for income approach; 0% for market

approach; 10% for asset-based approach In general, control shares are worth more than minority shares. A minority discount is a discount for lack of control applicable to a minority interest; a control premium is an amount or a percentage by which the pro rata share of value of controlling interest exceeds the pro rata value of a noncontrolling interest in a business enterprise, to reflect the power of control. Here, a minority discount is applicable on income approach for 5% because the income approach doesn’t reflect any minority interest inside; in the market approach for 0% because those “Prices” are already minority interest appeared in the market; 20% for the asset-based approach because the method actually produces a controlling interest value but not minority interest. Even though all four owners have the same 25% interest proportion of the company – which usually means no decision-making power, we are selling the interest of Mike, a member who has controlling power because as per Management’s information, Mike assured him that all the other partners are with him and will support whatever choices he makes. Therefore, we decide the discount should be 5%, 0% and 10% in each approach.

(3) Voting Versus Nonvoting Interests – 0%

In general, where there are large numbers of voting and nonvoting shares, the difference in value is quite small because the minority interests in the voting shares can have little on

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the control of the company. Empirical studies have shown differences ranging from 2-7% between voting and nonvoting classes. We didn’t apply any voting discounts here because all the four holders have the same interest proportions and the same voting right.

(4) Blockage – 0%

Blockage refers to an amount of a security such that, when offered for sale all at once, it would have a depressing effect on the market.

Here, we did not find any blockage discount because Walton Drilling is not yet a public traded company. Any amount of interest selling won’t affect the price of the interest.

18. Subsequent Events In general, events subsequent to the valuation data should not be taken into consideration when valuing business interests, unless an exception applies: (1) subsequent events are reasonably foreseeable as of the valuation date; (2) subsequent events are relevant to the valuation, with according adjustments made; (3) subsequent events are not used to arrive at valuation, but to confirm the conclusion of valuation; (4) subsequent events are related to property that is comparable to the property being value, and are probative of value; or (5) subsequent events may be evidence of value rather than something that reflect value. Management has indicated that there are no subsequent events that will affect the valuation.

19. Comments Regarding Approaches “Although the income approach is theoretically the best approach to business valuation, it requires estimates no matter projected financial statements or discount rate that are subject to potential disagreement. The market approach is different in that it relies on more observable data, although there can be and often are disagreements in what comparable companies should be chosen, how much adjustments should be applied, and which multiples should be selected to project final values. […] The asset-based approach is relevant for holding companies and operating companies that are contemplating liquidation or are unprofitable for the foreseeable future.” 21 Given the background we will use a combination of all three approaches:

We have put 30% weight on the income approach due to the reason that it’s technically the most sound valuation approach, and Management was very confident about the company’s growth rate; however, with an assumption which may create inaccuracy, we used average net income from 2008-2012 but not negative net income in 2012 to

21 Laro, D., and Pratt, S., 2011. Business Valuation and Federal Taxes. Hoboken: John Wiley & Sons, Inc.. Page 196 and page 243.

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generate projected net cash flow of following years -- which reduces the weight for the income approach.

We have put 55% weight on the market approach because it is the most objective way to observe companies’ value; although the market approach is more subjective than other approaches on deciding the multiples, adjustments, and weights, it is easier to be accepted when buyers and sellers all agree to choose those guideline companies.

We have only put 15% weight on the asset-based approach since it decides the real equity value for companies; but even though the net cash flow in 2012 is negative, Walton Drilling is profitable in the long-term. Consequently, using of asset-based approach is not appropriate, but still should be considered.

20. Conclusion as to Value Our final conclusion of value for a 25% interest in Walton Drilling is based on a 30%weight of the income approach, 55% weight of the market approach, and 15% weight of the asset-based approach. The final calculations are reproduced here:

20.1 Income Approach (1) Total Equity value of Walton Drilling = $1,318,588,540 (2) Entity-level Discount – Contingent Liabilities of 10% (3) Entity-level Discount – Key Person of 5% (4) Total Equity value post Entity-level discount = $1,120,800,259 (5) 25% interest of Equity Value post Entity-level Discount = $280,200,065 (6) Shareholder-level Discount – Minority of 5% (7) Shareholder-level Discount – Lack of Marketability of 25% (8) 25% interest of Equity Value post Shareholder-level Discount = $196,140,045

20.2 Market Approach (1) Total Equity value of Walton Drilling = $1,353,201,291 (2) Entity-level Discount – Contingent Liabilities of 10% (3) Entity-level Discount – Key Person of 5% (4) Total Equity value post Entity-level discount = $1,150,221,097 (5) 25% interest of Equity Value post Entity-level Discount = $287,555,274 (6) Shareholder-level Discount – Minority of 0% (7) Shareholder-level Discount – Lack of Marketability of 25% (8) 25% interest of Equity Value post Shareholder-level Discount = $215,666,456

20.3 Asset-Based Approach (1) Total Equity value of Walton Drilling = $2,705,084,000 (2) Entity-level Discount – Contingent Liabilities of 5% (3) Entity-level Discount – Key Person of 5% (4) Total Equity value post Entity-level discount = $2,434,575,600 (5) 25% interest of Equity Value post Entity-level Discount = $608,643,900 (6) Shareholder-level Discount – Minority of 10%

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(7) Shareholder-level Discount – Lack of Marketability of 25% (8) 25% interest of Equity Value post Shareholder-level Discount = $395,618,535

20.4 Weighting of Approaches 30% of Income Approach Value = 0.3 * $196,140,045 = $58,842,014 + 55% of Market Approach Value = 0.55 * $215,666,456 = $118,616,551 + 15% of Asset-based Approach Value = 0.15 * $395,618,535 = $59,342,780

FINAL VALUATION for 25% Interest in Walton Drilling = $236,801,345

21. Appraisers’ Certifications We certify that, to the best of our knowledge and belief:

- the statements of fact contained in this report are true and correct; - the reported analyses, opinions and conclusions are limited only by the reported

assumptions and limiting conditions and are our personal, impartial, and unbiased professional analyses, opinions and conclusions;

- We have no present or prospective interest in the property that is the subject of this report, and we have no personal interest with respect to the parties involved;

- We have no bias with respect to the property that is the subject of this report or to the parties involved with this assignment;

- Our engagement in this assignment was not contingent upon developing or reporting predetermined results;

- Our compensation for completing this assignment is not contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal;

- Our analyses, opinions and conclusions were developed, and this report has been prepared in conformity with the Uniform Standards of Professional Appraisal Practice;

- No one provided significant business and / or intangible asset appraisal assistance to the persons signing this certification.

Signed: LEA JOVANOVIC Signed: JAMES LIN

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22. Qualifications of Appraisers James Lin: James holds an undergraduate degree in geology and is currently enrolled in the Finance Certificate program at UCLA Extension. James has 1 year compulsory military service in Ministry of National Defense Financial Department Accounting room, and 3 months internship program in Development Bank of Singapore consumer banking. James also completed CFA level 1 test in 2012 Dec. Lea Jovanovic: Lea holds a law degree from a British university and has two years work experience in an investment advisory boutique focused on the oil and gas sector, Clermont Energy Partners LLP, based in London. Prior to that, she worked as a Research Assistant for a law professor, assisting him with topics such an anti-suit arbitration and res judicata and was published as a ‘Contributor’ for an article he wrote in the Journal of Business Law. She is finishing the General Business Certificate program at UCLA Extension this week.