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The Trouble with Valuing Energy Companies

Pegging normal energy prices and shifting cost structures make these firms difficult to value accurately, says Morningstar International Manager of the Decade David Herro.

The Trouble with Valuing Energy Companies
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John Coumarianos: Another thing that jumps out about your portfolios, or that is noticeable, is the energy exposure. You've been light on it, I think, for most of the decade. And that hurt you a bit in '07, I believe, at least relative to your peers. Talk about how you view energy and how difficult it is to value energy companies.

David Herro: Well, energy is not something we naturally shy away from, but you kind of are getting at the point of it. They're very difficult to value accurately, because they're dependent upon the price movements of a commodity. So what we start off with is we try to estimate what is the normal price of the commodity when we're trying to price one of these businesses.

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John Coumarianos does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.