Use of Stock Market Information in Damages Assessment– Recent Awards by Pablo T. Spiller University of California, Berkeley Compass Lexecon pspiller@compasslexecon.com Energy Arbitration 2017 Conference – Houston April 28, 2017

Common Valuation Methods Used in Arbitration Awards Most common standard in treaty arbitrations is Fair Market Value Applies normally for expropriation or unfair treatment Common valuation methods: Income approach (DCF) Stock market approach

Use of Stock Market Information in Recent Arbitration Awards Yukos v Russia (2014) Integrated crude oil and natural gas company in Russia Rompetrol v Romania (2013) Crude oil and petrochemical refining company in Romania Crystallex v Venezuela (2016) Gold property in Venezuela Rusoro Mining v Venezuela (2016)

Stock Market Valuation Methods Example: “Spiller Bros. Oil Company” has its operating license rescinded on April 1, 2014 Most Simple Target company’s share price/market capitalization prior to breach For publicly-traded single-asset company (i.e., share price reflects market value of underlying asset) Must assess “last clean date” Adjust value as of “last clean date” to date of breach or valuation date Market multiples of peer companies Relative valuation based on market value of publicly-traded peer companies scaled to a common metric (or multiple) that is applied to target company Event study analysis Useful for identifying impact of measures on market value of target company if owned by a publicly-traded diversified parent company Assess impact of measure on company’s market capitalization by analyzing the impact of certain events on share price returns in comparison to returns of standard index (or indices) Least Simple

Applying Stock Market Valuation Method A “Spiller Bros. Oil Company” license terminated on 4/1/2014. Share price is $0.90 as of April 1, 2014 - but need to find “last clean date” Date of Valuation: April 1, 2014 “Spiller Bros. Oil Company” Share Price

Applying Stock Market Valuation Method A Regulatory agency announced on September 16, 2012 that it has suspended license review process; but-for share price of $8.00 as of April 1, 2014 Share Price at Last Clean Date ($6.00) Change in Industry Index to Valuation Date (33%) But-for Share Price at Valuation Date ($8.00) Last Clean Date: September 15, 2012 + = Date of Valuation: April 1, 2014 “Spiller Oil Company” Share Price But-for “Spiller Bros. Oil Company” Share Price based on evolution of relevant industry index

Applying Stock Market Valuation Method B Market multiples analysis requires review of peer company multiples as of date of breach or valuation date Market Multiple as of DoV Spiller Bros. Oil Company Reserves Implied Valuation x = $25/bbl (peer median) 10 mm bbls $250 mm x =

Applying Stock Market Valuation Method C If “Spiller Bros. Oil Company” is a subsidiary of a diversified oil & gas company that is publicly-traded, an event study can be used to estimate impact of measures-related announcements on returns Oil and Gas Industry Index Parent Company Share Price Dates on which announcements related to potential rescission of license are “dummied out” in event study

Recent Use of Stock Market Information in Recent Awards Yukos Crystallex Rusoro Rompetrol Tribunal Application Valuation based on market multiples as of November 2007 adjusted by industry index to valuation date Valuation based on market multiples as of valuation date, and company share price as of last clean date adjusted by industry index to valuation date Valuation based on maximum market capitalization prior to measures (but no adjustment to valuation date) Rejected event study analysis for failing to distinguish between all State actions and measures Excerpts from Awards In order to determine the value of Yukos on each of the two valuation dates, the Tribunal will now adjust Yukos’ value as of 21 November 2007 (USD 61.076 billion) by multiplying it by a factor that reflects the change in the RTS Oil and Gas index between 21 November 2007 and each of the two valuation dates. (Award, ¶1789) To determine the value of Crystallex on 13 April 2008, the Tribunal must start with the last price before the wrongful acts which negatively affected the company’s share price and then calculate what would have been the value as of the valuation date if Crystallex had been unimpeded by Respondent’s conduct. (Award, ¶891) An advantage of the Maximum Market Valuation is that there is no subjectivity in its calculation: it is simply the sum of Rusoro’s peak market capitalization plus (negative) net debt; the shortcoming is that this valuation was only reached for a very short period, in mid 2008, three years before the date of expropriation; taking into consideration the advantages and shortcomings, the Tribunal awards it a weighting of 25%. (Award, ¶789) The Tribunal was convinced by the argument of [Claimant’s experts] that the [Respondent’s expert] application of the event study method can offer no means of differentiating between the market effects of a company’s coming under investigation by the authorities for any legitimate purpose and the asserted incremental effects of illegalities that happened in the course of such an investigation. (Award, ¶286)

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