Writing Sample - Valuation Report

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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 Projecte
d
Projecte
d
Projecte
d
Projecte
d
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
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
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

19
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%
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%
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%

21
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

22
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

23
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/receivabl
e)
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

24
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.

25
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%

26
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

28
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.
Equity Market Value $1,353,201,291
Contingent liabilities discount 10.00%
Proportion of equity 25%
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.

29
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

30
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.
Equity Value $2,705,084,000
Contingent liabilities discount 5.00%
Proportion of equity 25.00%

31
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.

32
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)

33
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

34
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.

35
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
20.3 Asset-Based Approach

36
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

37
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.

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