Intrinsic value of MEG Energy Corp. - MEG

Previous Close

$4.19

  Intrinsic Value

$2.94

stock screener

  Rating & Target

sell

-30%

  Value-price divergence*

-50%

Previous close

$4.19

 
Intrinsic value

$2.94

 
Up/down potential

-30%

 
Rating

sell

 
Value-price divergence*

-50%

*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of MEG stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 1.2

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -3.32
  60.00
  54.50
  49.55
  45.10
  41.09
  37.48
  34.23
  31.31
  28.68
  26.31
  24.18
  22.26
  20.53
  18.98
  17.58
  16.32
  15.19
  14.17
  13.26
  12.43
  11.69
  11.02
  10.42
  9.87
  9.39
  8.95
  8.55
  8.20
  7.88
  7.59
Revenue, $m
  1,862
  2,979
  4,603
  6,884
  9,988
  14,091
  19,372
  26,003
  34,144
  43,935
  55,493
  68,910
  84,249
  101,548
  120,823
  142,066
  165,257
  190,362
  217,341
  246,150
  276,746
  309,088
  343,143
  378,886
  416,300
  455,378
  496,128
  538,564
  582,717
  628,626
  676,342
Variable operating expenses, $m
 
  3,295
  5,091
  7,613
  11,046
  15,585
  21,426
  28,760
  37,763
  48,592
  61,376
  76,214
  93,179
  112,313
  133,630
  157,125
  182,774
  210,540
  240,379
  272,242
  306,081
  341,851
  379,517
  419,048
  460,427
  503,648
  548,717
  595,652
  644,485
  695,260
  748,035
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  2,323
  3,295
  5,091
  7,613
  11,046
  15,585
  21,426
  28,760
  37,763
  48,592
  61,376
  76,214
  93,179
  112,313
  133,630
  157,125
  182,774
  210,540
  240,379
  272,242
  306,081
  341,851
  379,517
  419,048
  460,427
  503,648
  548,717
  595,652
  644,485
  695,260
  748,035
Operating income, $m
  -461
  -316
  -488
  -730
  -1,059
  -1,494
  -2,053
  -2,756
  -3,619
  -4,657
  -5,882
  -7,304
  -8,930
  -10,764
  -12,807
  -15,059
  -17,517
  -20,178
  -23,038
  -26,092
  -29,335
  -32,763
  -36,373
  -40,162
  -44,128
  -48,270
  -52,590
  -57,088
  -61,768
  -66,634
  -71,692
EBITDA, $m
  39
  482
  744
  1,113
  1,615
  2,279
  3,133
  4,205
  5,522
  7,105
  8,974
  11,144
  13,625
  16,423
  19,540
  22,975
  26,726
  30,786
  35,149
  39,808
  44,756
  49,986
  55,494
  61,274
  67,325
  73,644
  80,235
  87,097
  94,238
  101,662
  109,379
Interest expense (income), $m
  0
  177
  296
  467
  709
  1,037
  1,472
  2,030
  2,732
  3,594
  4,630
  5,853
  7,273
  8,896
  10,727
  12,766
  15,014
  17,469
  20,125
  22,981
  26,029
  29,267
  32,690
  36,294
  40,076
  44,035
  48,171
  52,483
  56,974
  61,647
  66,505
Earnings before tax, $m
  -636
  -493
  -783
  -1,197
  -1,767
  -2,531
  -3,525
  -4,787
  -6,351
  -8,251
  -10,512
  -13,157
  -16,203
  -19,660
  -23,534
  -27,825
  -32,532
  -37,647
  -43,164
  -49,072
  -55,364
  -62,030
  -69,063
  -76,456
  -84,204
  -92,306
  -100,760
  -109,571
  -118,742
  -128,281
  -138,197
Tax expense, $m
  -207
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  -429
  -493
  -783
  -1,197
  -1,767
  -2,531
  -3,525
  -4,787
  -6,351
  -8,251
  -10,512
  -13,157
  -16,203
  -19,660
  -23,534
  -27,825
  -32,532
  -37,647
  -43,164
  -49,072
  -55,364
  -62,030
  -69,063
  -76,456
  -84,204
  -92,306
  -100,760
  -109,571
  -118,742
  -128,281
  -138,197

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  156
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  8,921
  14,053
  21,712
  32,470
  47,112
  66,468
  91,378
  122,657
  161,056
  207,240
  261,760
  325,047
  397,401
  479,002
  569,918
  670,122
  779,513
  897,934
  1,025,193
  1,161,084
  1,305,404
  1,457,962
  1,618,601
  1,787,199
  1,963,678
  2,148,011
  2,340,225
  2,540,398
  2,748,666
  2,965,217
  3,190,294
Adjusted assets (=assets-cash), $m
  8,765
  14,053
  21,712
  32,470
  47,112
  66,468
  91,378
  122,657
  161,056
  207,240
  261,760
  325,047
  397,401
  479,002
  569,918
  670,122
  779,513
  897,934
  1,025,193
  1,161,084
  1,305,404
  1,457,962
  1,618,601
  1,787,199
  1,963,678
  2,148,011
  2,340,225
  2,540,398
  2,748,666
  2,965,217
  3,190,294
Revenue / Adjusted assets
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
  0.212
Average production assets, $m
  7,876
  12,602
  19,470
  29,118
  42,248
  59,606
  81,944
  109,993
  144,428
  185,844
  234,736
  291,489
  356,374
  429,550
  511,080
  600,939
  699,036
  805,231
  919,352
  1,041,214
  1,170,634
  1,307,442
  1,451,497
  1,602,688
  1,760,948
  1,926,251
  2,098,620
  2,278,127
  2,464,894
  2,659,088
  2,860,928
Working capital, $m
  97
  -69
  -106
  -158
  -230
  -324
  -446
  -598
  -785
  -1,011
  -1,276
  -1,585
  -1,938
  -2,336
  -2,779
  -3,268
  -3,801
  -4,378
  -4,999
  -5,661
  -6,365
  -7,109
  -7,892
  -8,714
  -9,575
  -10,474
  -11,411
  -12,387
  -13,402
  -14,458
  -15,556
Total debt, $m
  5,071
  8,445
  13,354
  20,250
  29,636
  42,043
  58,011
  78,060
  102,674
  132,278
  167,225
  207,792
  254,171
  306,477
  364,754
  428,985
  499,105
  575,013
  656,586
  743,692
  836,201
  933,991
  1,036,960
  1,145,031
  1,258,154
  1,376,312
  1,499,521
  1,627,832
  1,761,332
  1,900,141
  2,044,415
Total liabilities, $m
  5,634
  9,008
  13,917
  20,813
  30,199
  42,606
  58,574
  78,623
  103,237
  132,841
  167,788
  208,355
  254,734
  307,040
  365,317
  429,548
  499,668
  575,576
  657,149
  744,255
  836,764
  934,554
  1,037,523
  1,145,594
  1,258,717
  1,376,875
  1,500,084
  1,628,395
  1,761,895
  1,900,704
  2,044,978
Total equity, $m
  3,287
  5,045
  7,794
  11,657
  16,913
  23,862
  32,805
  44,034
  57,819
  74,399
  93,972
  116,692
  142,667
  171,962
  204,601
  240,574
  279,845
  322,358
  368,044
  416,829
  468,640
  523,409
  581,078
  641,604
  704,960
  771,136
  840,141
  912,003
  986,771
  1,064,513
  1,145,316
Total liabilities and equity, $m
  8,921
  14,053
  21,711
  32,470
  47,112
  66,468
  91,379
  122,657
  161,056
  207,240
  261,760
  325,047
  397,401
  479,002
  569,918
  670,122
  779,513
  897,934
  1,025,193
  1,161,084
  1,305,404
  1,457,963
  1,618,601
  1,787,198
  1,963,677
  2,148,011
  2,340,225
  2,540,398
  2,748,666
  2,965,217
  3,190,294
Debt-to-equity ratio
  1.543
  1.670
  1.710
  1.740
  1.750
  1.760
  1.770
  1.770
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.780
  1.790
Adjusted equity ratio
  0.357
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359
  0.359

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -429
  -493
  -783
  -1,197
  -1,767
  -2,531
  -3,525
  -4,787
  -6,351
  -8,251
  -10,512
  -13,157
  -16,203
  -19,660
  -23,534
  -27,825
  -32,532
  -37,647
  -43,164
  -49,072
  -55,364
  -62,030
  -69,063
  -76,456
  -84,204
  -92,306
  -100,760
  -109,571
  -118,742
  -128,281
  -138,197
Depreciation, amort., depletion, $m
  500
  798
  1,232
  1,843
  2,674
  3,773
  5,186
  6,962
  9,141
  11,762
  14,857
  18,449
  22,555
  27,187
  32,347
  38,034
  44,243
  50,964
  58,187
  65,900
  74,091
  82,750
  91,867
  101,436
  111,452
  121,915
  132,824
  144,185
  156,006
  168,297
  181,071
Funds from operations, $m
  -119
  305
  449
  646
  906
  1,242
  1,661
  2,175
  2,790
  3,512
  4,345
  5,291
  6,352
  7,527
  8,813
  10,209
  11,711
  13,317
  15,023
  16,827
  18,726
  20,719
  22,804
  24,980
  27,249
  29,609
  32,064
  34,614
  37,264
  40,016
  42,874
Change in working capital, $m
  -25
  -26
  -37
  -52
  -71
  -94
  -121
  -153
  -187
  -225
  -266
  -309
  -353
  -398
  -443
  -489
  -533
  -577
  -621
  -663
  -704
  -744
  -783
  -822
  -861
  -899
  -937
  -976
  -1,016
  -1,056
  -1,097
Cash from operations, $m
  -94
  331
  486
  698
  978
  1,336
  1,783
  2,327
  2,977
  3,737
  4,611
  5,600
  6,705
  7,924
  9,256
  10,697
  12,244
  13,894
  15,644
  17,490
  19,430
  21,463
  23,587
  25,803
  28,109
  30,508
  33,001
  35,590
  38,279
  41,072
  43,972
Maintenance CAPEX, $m
  0
  -498
  -798
  -1,232
  -1,843
  -2,674
  -3,773
  -5,186
  -6,962
  -9,141
  -11,762
  -14,857
  -18,449
  -22,555
  -27,187
  -32,347
  -38,034
  -44,243
  -50,964
  -58,187
  -65,900
  -74,091
  -82,750
  -91,867
  -101,436
  -111,452
  -121,915
  -132,824
  -144,185
  -156,006
  -168,297
New CAPEX, $m
  -140
  -4,727
  -6,868
  -9,647
  -13,131
  -17,358
  -22,338
  -28,049
  -34,435
  -41,416
  -48,892
  -56,753
  -64,884
  -73,176
  -81,530
  -89,859
  -98,097
  -106,195
  -114,121
  -121,862
  -129,420
  -136,809
  -144,055
  -151,191
  -158,259
  -165,303
  -172,369
  -179,507
  -186,766
  -194,194
  -201,840
Cash from investing activities, $m
  -131
  -5,225
  -7,666
  -10,879
  -14,974
  -20,032
  -26,111
  -33,235
  -41,397
  -50,557
  -60,654
  -71,610
  -83,333
  -95,731
  -108,717
  -122,206
  -136,131
  -150,438
  -165,085
  -180,049
  -195,320
  -210,900
  -226,805
  -243,058
  -259,695
  -276,755
  -294,284
  -312,331
  -330,951
  -350,200
  -370,137
Free cash flow, $m
  -225
  -4,894
  -7,180
  -10,181
  -13,996
  -18,696
  -24,328
  -30,908
  -38,420
  -46,820
  -56,044
  -66,010
  -76,628
  -87,807
  -99,460
  -111,509
  -123,887
  -136,543
  -149,441
  -162,559
  -175,889
  -189,436
  -203,217
  -217,256
  -231,586
  -246,247
  -261,283
  -276,741
  -292,672
  -309,129
  -326,165
Issuance/(repayment) of debt, $m
  -17
  3,391
  4,909
  6,896
  9,386
  12,407
  15,967
  20,049
  24,614
  29,604
  34,948
  40,567
  46,379
  52,306
  58,277
  64,231
  70,120
  75,908
  81,573
  87,106
  92,509
  97,790
  102,970
  108,071
  113,123
  118,158
  123,209
  128,311
  133,500
  138,809
  144,274
Issuance/(repurchase) of shares, $m
  0
  2,390
  3,533
  5,059
  7,024
  9,480
  12,468
  16,016
  20,137
  24,831
  30,085
  35,877
  42,178
  48,955
  56,173
  63,799
  71,803
  80,160
  88,850
  97,857
  107,175
  116,799
  126,732
  136,982
  147,560
  158,481
  169,765
  181,433
  193,510
  206,023
  219,000
Cash from financing (excl. dividends), $m  
  -17
  5,781
  8,442
  11,955
  16,410
  21,887
  28,435
  36,065
  44,751
  54,435
  65,033
  76,444
  88,557
  101,261
  114,450
  128,030
  141,923
  156,068
  170,423
  184,963
  199,684
  214,589
  229,702
  245,053
  260,683
  276,639
  292,974
  309,744
  327,010
  344,832
  363,274
Total cash flow (excl. dividends), $m
  -252
  886
  1,263
  1,774
  2,414
  3,191
  4,107
  5,157
  6,331
  7,614
  8,989
  10,434
  11,929
  13,454
  14,990
  16,521
  18,036
  19,524
  20,982
  22,405
  23,794
  25,153
  26,485
  27,797
  29,097
  30,392
  31,691
  33,003
  34,338
  35,703
  37,109
Retained Cash Flow (-), $m
  391
  -2,390
  -3,533
  -5,059
  -7,024
  -9,480
  -12,468
  -16,016
  -20,137
  -24,831
  -30,085
  -35,877
  -42,178
  -48,955
  -56,173
  -63,799
  -71,803
  -80,160
  -88,850
  -97,857
  -107,175
  -116,799
  -126,732
  -136,982
  -147,560
  -158,481
  -169,765
  -181,433
  -193,510
  -206,023
  -219,000
Prev. year cash balance distribution, $m
 
  139
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -1,364
  -2,270
  -3,285
  -4,610
  -6,288
  -8,361
  -10,859
  -13,806
  -17,216
  -21,096
  -25,443
  -30,249
  -35,501
  -41,183
  -47,278
  -53,767
  -60,636
  -67,868
  -75,453
  -83,381
  -91,646
  -100,247
  -109,185
  -118,463
  -128,090
  -138,074
  -148,430
  -159,173
  -170,319
  -181,891
Discount rate, %
 
  10.80
  11.34
  11.91
  12.50
  13.13
  13.78
  14.47
  15.20
  15.96
  16.75
  17.59
  18.47
  19.40
  20.37
  21.38
  22.45
  23.58
  24.75
  25.99
  27.29
  28.66
  30.09
  31.59
  33.17
  34.83
  36.57
  38.40
  40.32
  42.34
  44.45
PV of cash for distribution, $m
 
  -1,231
  -1,831
  -2,344
  -2,878
  -3,394
  -3,853
  -4,216
  -4,452
  -4,542
  -4,482
  -4,280
  -3,957
  -3,543
  -3,074
  -2,584
  -2,104
  -1,659
  -1,267
  -936
  -669
  -461
  -307
  -198
  -122
  -73
  -42
  -23
  -12
  -6
  -3
Current shareholders' claim on cash, %
  100
  48.0
  24.0
  12.4
  6.7
  3.7
  2.1
  1.3
  0.8
  0.5
  0.3
  0.2
  0.1
  0.1
  0.1
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0
  0.0

MEG Energy Corp. develops and produces in situ oil sands in Alberta, Canada. The company is developing oil recovery projects that utilize steam assisted gravity drainage extraction methods. It owns a 100% working interest in approximately 900 square miles of oil sands leases located in the southern Athabasca oil sands region of Alberta. The company also owns a 100% interest in the Stonefell Terminal, which offers 900,000 barrels of terminalling and storage capacity located near Edmonton, Alberta; and a 50% interest in the Access Pipeline, a dual pipeline to transport diluent north from the Edmonton area to the Athabasca oil sands area, as well as a blend of bitumen and diluent south from the Christina Lake Project into the Edmonton area. As of December 31, 2015, it had 3.0 billion barrels of proved plus probable bitumen reserves. MEG Energy Corp. was incorporated in 1999 and is headquartered in Calgary, Canada.

FINANCIAL RATIOS  of  MEG Energy Corp. (MEG)

Valuation Ratios
P/E Ratio -2.2
Price to Sales 0.5
Price to Book 0.3
Price to Tangible Book
Price to Cash Flow -10.1
Price to Free Cash Flow -4.1
Growth Rates
Sales Growth Rate -3.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -55.4%
Cap. Spend. - 3 Yr. Gr. Rate -42.5%
Financial Strength
Quick Ratio 9
Current Ratio 0
LT Debt to Equity 153.8%
Total Debt to Equity 154.3%
Interest Coverage 0
Management Effectiveness
Return On Assets -4.7%
Ret/ On Assets - 3 Yr. Avg. -6%
Return On Total Capital -5%
Ret/ On T. Cap. - 3 Yr. Avg. -6.4%
Return On Equity -12.3%
Return On Equity - 3 Yr. Avg. -14.1%
Asset Turnover 0.2
Profitability Ratios
Gross Margin 34.5%
Gross Margin - 3 Yr. Avg. 41.4%
EBITDA Margin -7.3%
EBITDA Margin - 3 Yr. Avg. -12%
Operating Margin -24.8%
Oper. Margin - 3 Yr. Avg. -5.4%
Pre-Tax Margin -34.2%
Pre-Tax Margin - 3 Yr. Avg. -33.5%
Net Profit Margin -23%
Net Profit Margin - 3 Yr. Avg. -29.2%
Effective Tax Rate 32.5%
Eff/ Tax Rate - 3 Yr. Avg. -130.1%
Payout Ratio 0%

MEG stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the MEG stock intrinsic value calculation we used $1862 million for the last fiscal year's total revenue generated by MEG Energy Corp.. The default revenue input number comes from 2016 income statement of MEG Energy Corp.. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our MEG stock valuation model: a) initial revenue growth rate of 60% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 10.8%, whose default value for MEG is calculated based on our internal credit rating of MEG Energy Corp., is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of MEG Energy Corp..
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of MEG stock the variable cost ratio is equal to 110.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for MEG stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.5% for MEG Energy Corp..

Corporate tax rate of 27% is the nominal tax rate for MEG Energy Corp.. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the MEG stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for MEG are equal to 423%.

Life of production assets of 15.8 years is the average useful life of capital assets used in MEG Energy Corp. operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for MEG is equal to -2.3%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $3287 million for MEG Energy Corp. - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 279.57 million for MEG Energy Corp. is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of MEG Energy Corp. at the current share price and the inputted number of shares is $1.2 billion.

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Stock chart of MEG Financial statements of MEG
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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