Question 3: Business Applications Case; Performing ratio analysis using real-world data

Companies in the gas and oil business use a lot of property, plant, and equipment. Not only is there the significant investment they must make in equipment used to find, extract, and process the oil and natural gas, but they must also purchase the rights to the energy reserves themselves.

Chesapeake Energy Corporation We own interests in approximately 22,700 oil and natural gas wells. ... Our daily production for 2016 averaged 635 mboe, ... One mboe is the energy equivalent to that in 1,000 barrels of oil.

Anadarko Petroleum Corporation Anadarko Petroleum Corporation is among the worlds largest independent exploration and production companies, with approximately 1.7 billion BOE of proved reserves at December 31, 2016. One BOE is equivalent to the energy contained in one barrel of oil. Page 473

The following information was taken from the companies December 31, 2016, annual reports. All dollar amounts are in millions.

	Chesapeake Energy Corporation	Anadarko Petroleum Corporation
Sales	$ 7,872	$ 7,869
Depreciation and depletion costs	1,107	4,301
Property, plant, and equipment
(net of accumulated depreciation)	10,609	32,168
Total assets	13,028	45,564
Depreciation method	Straight-line	Straight-line
Depletion method	Units of production	Units of production
Estimated life of assets
Buildings	10 to 39 years	up to 40 years
Machinery and equipment	3 to 20 years	3 to 15 years
Net income	$(4,401)	$(3,071)

Required

1. Calculate depreciation costs as a percentage of sales for each company.
2. Calculate property, plant, and equipment as a percentage of total assets for each company.
3. Based only on the percentages calculated in Requirements a and b, which company appears to be using its assets most efficiently? Explain your answer.
4. Calculate the return-on-assets ratio for each company. Based on this ratio, which company appears to be using its assets most efficiently? Explain your answer.

Identify some of the problems a financial analyst would encounter in comparing the use of long-term assets at Chesapeake versus Anadarko