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guideline company method, would be used most appropriately to
value the True Oil interests. Mr. Kimball rejected the
discounted cash-flow method because he believed it was too
difficult to forecast the future prices of oil and gas needed to
estimate future revenues and cash-flows. He also rejected the
transaction method because he found no data on transactions of
companies with operations similar to True Oil. Mr. Kimball did
not apply the asset accumulation approach; instead, he used the
stipulated physical volume of True Oil’s proved reserves,
measured in barrels of oil-equivalent, to derive the reserve
multiple used in the guideline company method.
Mr. Kimball first identified eight guideline companies from
the crude oil and natural gas industries, focusing on companies
generally in the same geographic area (Rocky Mountain territory)
as True Oil.
Mr. Kimball then focused his analysis on five market
multiples: Earnings before interest and taxes (EBIT); earnings
before depreciation, interest, and taxes (EBDIT); revenues;
tangible book value of invested capital (TBVIC); and reserves
(BOE). He calculated these multiples and True Oil’s financial
fundamentals over two time periods, the latest fiscal year and a
simple average of the preceding 5 fiscal years. Mr. Kimball
placed a weight of 20 percent on each earnings multiple (EBIT,
EBDIT, and revenues), 30 percent on the reserves multiple, and 10
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