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A popular Wendy's commercial in the 80s made famous the question: "Where's the beef?" Good one. And here's an even better one: "Where's the alpha?" You might want to whip this one out the next time you meet with your portfolio manager.
Alpha is the over-and-above-the-expected return. It is the "value added." Therefore, it makes sense that a positive alpha means an investment has outperformed its market-predicted return, while a negative alpha would mean just the opposite. The expected return is calculated by a formula that takes into account the investment's level of unavoidable risk (aka beta).
Ever stepped into an elevator and after the doors close you become aware of an almost-suffocating scent coming from the woman next to you who must have bathed in perfume? Well, as you know, once the doors close you can't escape the smell until the ride is over. This is similar to beta, which is risk that can't be reduced or diversified away. A measure of "systematic" or market related risk, beta is used as a measure relative to a certain index -- such as the S&P 500.
So, for example, let¿s say your portfolio is managed to compete against the S&P 500. If you generate a better return than the index while not taking on added risk (standard deviation of returns) then you get alpha. Low beta means the market-related risk is low and vice versa for high beta.
Another example, let's say a mutual fund or stock has a beta of 1.5 relative to the S&
P500 ¿ that means it is 1.5 times as risky. So, over time, if the S&P 500 goes up 1%, your portfolio should be up 1.5%
plus (one can hope) some percentage of alpha. If the S&P 500 is down 1%, your portfolio should be down 1.5%.
Alpha
and beta are based off of linear regression of a set of data. Warning: this may cause a high school fifth-period flashback,
but it will be over before you know it:
The equation for a line is Y = a + bX.
a = alpha (the Y intercept - the added
value)
b = Beta (the coefficient you multiply X by)
X = S&P 500 (in this case)
Y = your portfolio
Home / Markets / Industries / Energy
Friday, May 16, 2008
Fitch Upgrades Devon Energy Corporation to 'BBB+'; Outlook Stable
Comtex
CHICAGO, May 16, 2008 (BUSINESS WIRE) ----Fitch Ratings has upgraded Devon Energy Corporation's (Devon) Issuer Default Rating (IDR) to 'BBB+' from 'BBB'. The rating upgrade reflects the robust credit profile of the company and the anticipated debt reduction to occur in 2008.
In addition, Fitch has upgraded Devon's ratings as follows:
Devon Energy Corporation:
--Long-term Issuer Default Rating (IDR) to 'BBB+' from 'BBB';
--Senior unsecured notes to 'BBB+' from 'BBB';
--Preferred stock to 'BBB-' from 'BB+';
--Short-term IDR at 'F2';
--Commercial paper (CP) remains at 'F2'.
Devon Financing Corporation U.L.C.:
--Senior unsecured notes to 'BBB+' from 'BBB'.
PennzEnergy Company:
--Senior unsecured notes to 'BBB+' from 'BBB'.
Ocean Energy:
--Senior unsecured notes to 'BBB' from 'BBB-'.
The Rating Outlook has been revised to Stable.
The senior unsecured notes assumed in the Ocean Energy acquisition have note been explicitly guaranteed by Devon and is the primary driver for the one notch differential in the ratings.
Devon's ratings are supported by the company's sizable reserve base and production profile, the significant cash generation coming from the company's midstream operations, strong one- and three-year organic reserve replacement rates at very competitive F&D cost and the company's continued efforts to reduce debt. Additionally, Devon continues to have a strong portfolio of upstream projects which are expected to enable the company to continue to increase reserves and production. These opportunities include lower risk reserves associated with the company's onshore U.S. and Canada properties balanced against the longer-term opportunities associated with the company's Gulf of Mexico (GOM) and remaining international opportunities.
Offsetting concerns focus on the potential for the company to pursue further acquisitions, increased shareholder friendly activities and expectations of sizable capital expenditures to support long lead-time projects which increase the company's exposure to near-term commodity price falls. Mitigating factors to these concerns stem from the strong performance of the company's existing asset base which is expected to reduce the near-term need to pursue acquisitions. Additionally, strong stock performance combined with the excess cash flows being generated in the current robust commodity price environment reduce concerns related to shareholder friendly activities.
Devon is one of the largest independent oil and gas producers in North America with an estimated 2.5 billion barrels of oil equivalent (boe) of proven reserves at year-end 2007. Devon also gathers, processes, and markets its own and third party oil and gas production (including the extraction of natural gas liquids from the gas production) through its midstream business segment. In 2007, the midstream segment generated a robust $509 million in EBITDA for Devon. Of note is that Fitch assigns $750 million of debt to Devon's midstream business and given the strong performance of the segment, this remains conservative. Credit metrics have remained strong with EBITDAX-to-interest coverage of 15.2 times (x) for the 12 months ending December 31, 2007 and leverage as measured by debt-to-EBITDAX of 1.0x. Fitch estimates Devon's debt to boe of proven reserves totaled $2.68/boe and debt to proven developed reserves was $3.57/boe at year-end 2007. Both of these leverage metrics include an equity credit for the DECS and allocation of debt to midstream operations.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
SOURCE: Fitch Ratings
Fitch Ratings Adam M. Miller +1-312-368-3113, Chicago Sean Sexton, CFA, +1-312-368-3130, Chicago Brian Bertsch, +1-212-908-0549, Media Relations, New York
Copyright Business Wire 2008
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