Acquired in 2019, Newfield Exploration was primarily a U.S. based oil and gas exploration and production company.
A company creates wealth for its long-term shareholders in 2 main ways - through dividend payments and through the accumulation of retained earnings. This graph shows the accumulation of per-share equity of long-term shareholders (green bars), which consists of the retained earnings plus all capital invested in the company, and the cumulative dividends the company has paid over time per share of its stock (blue bars).
In the words of Warren Buffett: "We're looking for... businesses earning good returns on equity while employing little or no debt."
Return on equity is a key metric of financial performance, indicating a company's ability to generate earnings using shareholder capital. Over time, ROE is one of the major determinants of the rate at which a company creates shareholder wealth. The average ROE for large U.S. companies is 12%, and many investors use it as a threshold for attractive investments.
Companies can boost ROE by increasing leverage, which reduces the safety of the investment. Therefore, it is useful to look at the return on assets (ROA), which measures a company's earning power regardless of its capital structure. A widening gap between ROE and ROA may be a warning sign that should be thoroughly investigated.
Earnings per share is a popular metric used to value a company (using P/E ratio); growth in EPS is often used to judge company growth potential. However, many investors believe that EPS is an inferior metric to ROE, because it ignores the amount of capital the company used to generate earnings.
Free cash flow shows how much cash a company generates from operations, above and beyond what is required to maintain or expand its productive assets. This cash can be returned to investors, or spent by management on growing the company or paying back its debts.
Balance sheets of many companies contain intangible assets such as goodwill, trademarks, patents, etc. Many investors consider intangibles more difficult to value than physical assets. If intangible assets had been valued incorrectly, they must be impaired, resulting in a loss charged against shareholder equity. This chart demonstrates the potential loss to shareholder equity from such impairments.
Companies often use debt financing to increase their return on equity. However, as the amount of debt financing increases relative to the amount of equity financing, the company becomes more sensitive to down turns and other negative events. As a result, many investors use the ratio of debt to equity as a measure of a company's financial risk, and avoid companies that have this ratio above 1.
This chart shows shareholder equity as a percentage of total assets, allowing investors to judge the overall leverage. Companies with a higher proportion of equity can be viewed as safer investments. This metric is particularly important for highly leveraged institutions, such as banks, where it must be at least 4% according to government regulations.
The ratio of current assets to current liabilities is known as the current ratio. This metric is a quick measure of the company's ability to pay its short-term obligations. A current ratio below 1 is a warning sign that should be investigated, especially for companies that cannot count on adequate cash flow from operations.
This chart shows the cumulative dilution of investor ownership in a company over time. Dilution reduces an investor's participation in the future earnings. Dilution increases when a company issues new shares, and decreases when a company buys its shares back. Many investors avoid companies with large chronic dilution.
analysis provides insight into factors affecting the Return On Equity of a company.
The DuPont equation decomposes ROE as follows:
ROE = (Net margin) * (Asset turnover) * (Asset to equity ratio)
Net margin indicates operating efficiency, Asset turnover measures the total asset use efficiency, and the Asset to equity ratio is a measure of financial leverage.
The dividend payout ratio tells investors what percentage of earnings a company returns to shareholders, and what percentage it retains and reinvests. This ratio represents a major capital allocation decision by the company, and can be used to judge management rationality. Rational management should pay out all earnings that cannot be productively reinvested. Therefore, a low dividend payout ratio for a profitable company with a low growth potential may be a warning sign.
Many investors use the P/B ratio as a quick way of judging company valuation. Value investors - followers of Graham and Dodd - specifically seek out companies with low P/B ratios. However, investors should be careful not to make investment decisions on this metric alone, without considering a company's earning and growth potential, since a low P/B ratio can be a sign of a bleak future for the business.
P/E ratio is a popular way of making a quick judgment of a company valuation. Value investors - followers of Graham and Dodd - often seek solid companies with low P/E ratios as investment opportunities. However, P/E ratio represents an oversimplified approach to business valuation, and can often lead to incorrect investment decisions.
The Company filed a "universal shelf" registration statement with the Securities and Exchange Commission with respect to the offering and sale of an array of debt and equity securities in July 1998 in order to better position itself to take advantage of future opportunities and to provide additional financing alternatives. In September 1998, the Company completed the sale of four million newly issued shares of its common stock under this registration statement. The Company used the $83 million of net proceeds to reduce outstanding debt under its Credit Facility.
The unaudited pro forma results also give effect to our January 23, 2001 acquisition of Lariat Petroleum, Inc. as if the acquisition had occurred on January 1, 2001. The total consideration for the acquisition was approximately $333 million, inclusive of the assumption of debt and certain other obligations of Lariat. The consideration included the issuance of approximately 1.9 million shares of our common stock valued at $68 million. For financial accounting purposes, we allocated $438 million to oil and gas properties, which included a $105 million step-up associated with deferred income taxes. Prior to our acquisition of Lariat Petroleum in January 2001, Warburg, Pincus Ventures, L.P. (WPV) owned approximately 88% of the outstanding capital stock of Lariat on a fully diluted basis. WPV received cash proceeds for its stock of approximately $78.6 million and 1,864,735 shares of our common stock inthe acquisition. WPV also received approximately $39.1 million as repayment in full of notes payable by Lariat to WPV. In connection with the acquisition, we entered into a registration rights agreement with the former stockholders of Lariat that received our common stock in the acquisition, including WPV. Pursuant this agreement, we filed a shelf registration statement under the Securities Act to register the reoffer and resale of these shares of common stock. We are required to maintain the effectiveness of the registration statement for the shorter of two years and the date upon which all of the shares covered by the registration statement have been sold. In addition, we agreed to provide customary indemnification and contribution for the benefit of the other parties to the registration rights agreement, including WPV. The sole general partner of WPV is Warburg, Pincus & Co. (WP & Co.). Warburg Pincus LLC (WP LLC) manages WPV. Howard H. Newman, one of our directors, is a general partner of WP & Co and a Vice Chairman, Managing Director andmember of WP LLC. Three private equity funds (the WP funds) managed by WP LLC held all of the outstanding preferred stock of EEX prior to our acquisition of EEX and received an aggregate of 4,700,000 shares of our common stock in exchange for their EEX preferred stock in the acquisition. Concurrently with the execution of the merger agreement to acquire EEX, we entered into a registration rights agreement and a voting agreement with the WP funds. Pursuant to the registration rights agreement, we filed a shelf registration statement under the Securities Act to register the reoffer and resale of the shares of our common stock received by the WP funds in the acquisition. We are required to maintain the effectiveness of the registration statement until all of the shares of our common stock received by the WP funds in the acquisition have been sold or until such time as such shares are eligible for resale under Rule 144(k) under the Securities Act. In addition, if we propose to file a registration statement or a prospectus supplement to an already effective shelf registration statement with respect to an underwritten public offering of our common stock, the WP funds have the right to include their shares of our commons stock in the registration, subject to certain limitations. We also agreed to provide customary indemnification and contribution for the benefit of the WP funds. Pursuant to the voting agreement, we paid the WP funds $62,500, representing 50% of the filing fee paid by the WP funds in connection with antitrust filings they made in connection with the acquisition.
Issued 25.3 million additional shares of common stock through a public equity offering and received proceeds of approximately $815 million, which were used primarily to repay all borrowings under our credit facility and money market lines of credit.
Encana Corporation (TSX, NYSE: ECA) announced that it has completed its acquisition of Newfield Exploration Company in an all-stock transaction valued at approximately $5.5 billion.