Framco Resources is an independent oil and natural gas company that engages in the acquisition, development, and exploitation of onshore North American oil and natural gas properties. The company has followed a strategy of growth through the development of its inventory of drilling locations and exploitation projects, and selectively pursuing acquisitions. The firm€™s current management team first purchased a significant owner-ship interest in Framco (which was a public entity) in December 1997 and since then has achieved substantial growth in reserves and production. In 2003, the company was taken private through a buyout financed using debt capital and equity capital provided by a private equity partner. Late in 2005, Framco€™s board decided that the time was right for the firm to become once again a public entity by doing an IPO of its shares. Framco€™s board selected an investment banker, who prepared a preliminary ­analysis of possible offering prices for Framco€™s shares, found in Exhibits P8-11.1 and P8-11.2.

The valuation analysis utilizes valuation ratios based on the current enterprise values of five independent oil and gas companies and three key valuation metrics that are commonly used in the industry: estimated reserves; estimated earnings before interest, taxes, depreciation, amortization, and maintenance capital expenditures (EBITDAX); and firm free cash flow. Exhibit P8-11.2 contains estimates of Framco€™s equity and enterprise valuation that would correspond to different IPO share prices. This analysis is based on the assumption that Framco will sell 51.6 million shares of stock for a price of $ 20 to $ 30 per share. To complete the comparative analysis, Framco€™s CFO provided the investment banker with the necessary estimates of his firm€™s proved reserves for 2005, EBITDAX for 2006 and 2007, and free cash flow:

a. Calculate the valuation ratios found in Exhibit P8-11.1 using Framco€™s valuation metrics for each of the alternative IPO prices found in Exhibit P8-11.2.
b. Based on your calculations ( and assuming the valuation metrics are used by investors to make value comparisons among independent oil and gas firms), what price do you think Framco€™s shares will command at the time of the IPO?
c. The actual offering price for Framco€™s shares is not set until the pricing meeting with the investment banker the night before the offering date. At this meeting, the investment banker has not only updated comparables data such as that found in Exhibit P8-11.1 but also has indications of interest for purchasing the new shares ( the book). In addition, Framco€™s investment banker reviewed Framco€™s most recent estimates of the valuation metrics, which were virtually identical to the estimates found in Exhibit P8-11.1. However, the book was quite strong, indicating an oversubscription for the 51.6 million shares at prices at the upper end of the range of prices found in Exhibit P8-11.2. Should Framco try to raise the offering price outside the original range set forth in Exhibit P8-11.2? Explain your answer.

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Finn Characteristics (nlions) inn Vahuation Ration Eaterprbe E EBIT. ERIT CahE EBIT EBIT Cash Company Coayanyi Sns7 7,311 sazio $2.873 Χ940 S281 640 7.5 69) Company, 2128) 720) Mos 3299 3502295 559 645碼 Company 3 781411 Company 4 20 222 Conpany 5 Value Reserves DAX DAX Reserves DAXDAX 34781 1411 601 330 796 794 10.62 2355 460 309 241 2.95 283 295 512 590 9.77 Mean 66 7.157 Median Fiem free cash dow is calculated in the tal way and incudes company estinutes of maiatenance capital espendsiu Espected IPO Share Pice Diluled shares ottaadag (milioas) 5160 516) 51시 5L60 5lio 51.60 Equity value (nllioss) Enterprise valse (oas Net debt equals interea-bearing debt les cash $250000) The ine.barig debt total deciaes with increasg 1082 1135 $238 1342 144S 1 1.772 $184 1875 927$1974 $2030 IPO share prdioes becanse half the additionl peoeeds resuhing fom abighet prioe are wed to setize Fracsoo's debt Valuation Metric 2005E proved reserves 2006E EBITDAX 2007E EBITDAX Firm free cash flow Framco Estimates $700 million $302 milliorn $280 million $191 million