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Event Study

C & J Energy Services Inc.


(CJES)

Dustin Grove
FIN333
11/22/13

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Part 3:
Negative Earning Surprise
This event study is focused around C & J Energy Services Inc.s quarter 1 announcement on
projected future dividends on May 2, 2013. The numbers derived from the event study are
concentrated on the days around the announcement date (30 over and 30 under).
Analyst
1
2
3
4
5
6
7
8
9
10
11
12
Forecast
StanDev
Actual
$ Surprise
tSurprise

Estimate
$0.60
$0.59
$0.57
$0.57
$0.57
$0.56
$0.55
$0.55
$0.54
$0.53
$0.53
$0.51
$0.56
0.02499
$0.46
($0.10)
-3.84

Figure 1

Each future earnings estimate came from a different analyst from a qualified firm. The forecast
amount was calculated by taking the average of the 12 analysts estimates, which ended up being
$0.56. The actual earnings reported by CJES on the announcement date, May 2, 2013, was $0.46
(found using Bloomberg). Using the forecast and actual amount, the surprise dollar amount is
calculated by taking the difference between the two (Actual Forecast). Subtracting $0.46 by
$0.56 equaled a $0.10 surprise dollar amount.

The surprise dollar amount does not have much significant analytic value until the standard
deviation is put into the equation to figure out the significance of the number. The standard
deviation taken from the entire set of estimates ended up being $.02. Using the standard
deviation and the surprise dollar amount the tSurprise is calculated ($ Surprise / Standard

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Deviation). The tSurprise came out to be -3.84, meaning the actual earnings were -3.84 standard
deviations away from the forecast earnings. Noting anything greater than or equal to 2 standard
deviations away is a considerable amount, -3.84 standard deviations away is a very significant
difference. This difference suggests that the actual earnings reported on the announcement date
were a very big surprise to the market.

Negative Earning Surprise Due to Fracturing Services


The conference call that took place on May 2, 2013 was headed by Josh Comstock, Chairman
and CEO of CJES as well as Randy McMullen, President and CFO of C & J Energy Services
Inc. CJES is the provider of premium hydraulic fracturing, coiled tubing, wireline, and other
services (LexusNexus Academic, 2013). The three main segments of CJES include Stimulation
& Well Intervention (which includes fracturing and coiled tubing), Wireline Services and
Equipment Manufacturing.

Josh started the conference by diving in right away to the lower than expected actual earnings.
The lower actual earnings were due to challenges face in the hydraulic fracturing market. With
significant market pressure towards the end of the first quarter, CJES had a hard time reacting
due to the short notice (LexusNexus Academic, 2013).
Next, Josh went into describing the companys goals for the next few terms, which were to
increase utilization and increase customer base. These goals will act to improve margin through
vertical integration in the company and cost controls (LexusNexus Academic, 2013). Their
primary focus when increasing customer base is to target the right customers. The right
customers are defined as customers who value quality service. An increase in market share of the
industry will result from the increasing customer base and also from increasing carbon footprint.

Both Josh and Randy touched basis on each sector of CJES, primarily their Wireline Services
and Coiled Tubing businesses. Both sectors had good results for quarter 1. The Coiled Tubing
business stayed fairly consistent, while the Wireline Services showed 60% increase in revenue,
setting a record. The large increase in Wireline Services revenue was a result of improved
utilization, increasing domestic basins, and targeted marketing.

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While the conference was dealing with the negative announcement of lower than expected actual
returns, some positive notes were added. Josh stated that CJESs performance showed resilience
when facing issues affecting the entire industry (LexusNexus Academic, 2013). He also went
into describing CJESs recent step in global expansion with the acquisition of Jim Prestige, Head
of International Development. Jims expertise in international markets is predicted to help
CJESs global expansion.

Randy McMullen concentrated more on the financial statement numbers during his presentation
by talking about the revenue, and gross margin. Quarter 1 showed a $276 million in revenue,
which was a 4% decrease from last quarter (LexusNexus Academic, 2013). This decrease was
due to the fracturing operations, as noted in the beginning for the reasoning of the lower than
expected actual earnings. The fracturing services poor performance of 6% decrease accounted
for 63% of the revenue decline in quarter 1 (LexusNexus Academic, 2013). Gross margin
decreased by 34% subsequently. The decrease in gross margin isnt necessarily a bad thing in
that it was offset by higher personnel and administrative costs due to the growth of CJES and
costs of vertical integration.

Overall, while CJES had a lower than expected actual earnings, the CJES clearly explained the
reasoning for the drop due to the very recent Fracturing Services market pressure. Both the
Coiled Tubing and Wireline Services showed solid performance, even setting a record for
revenue for Wireline. Josh predicts that the low earnings will stay steady for the near term or
two, but after that hopefully efforts will push it back up.

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Regression Output

Figure 2

The index model regression output calculates the beta by using the regression statistics. The
Multiple R value in the table is the coefficient of correlation. Multiple R being valued at .4035
shows that how much of the x output is reflected in the y output (1 being perfect). The R squared
value shows how much of the variation can be explained. The R squared was only 16.28%,
meaning that a vast majority of the variation in the model cannot be explained.

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Security Characteristic Line

R(CJES)-R(f) Line Fit Plot


4.0000%

y = 1.0655x - 0.0038
R = 1

2.0000%

-3.0000%

-2.0000%

0.0000%
-1.0000%
0.0000%

1.0000%

2.0000%

-2.0000%

Y
Predicted Y
Linear (Predicted Y)

-4.0000%

-6.0000%

-8.0000%

X Variable 1
Figure 3

Based on the security characteristic line graph (figure 3) and the regression output (figure 2), the
was calculated to be 1.0655. With the being above 1, at 1.0655, it can be inferred that
earnings price is more volatile than the market. Basing off the equation of k = Rf + (Rm-Rf),
CJESs earnings is more affected by the market risk premium.

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AR & CAR Graph


10.00%
5.00%
0.00%
-29 -27 -25 -23 -21 -19 -17 -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
-5.00%
-10.00%
-15.00%
-20.00%
-25.00%
ARcjes

-30.00%

CARcjes
-35.00%

The abnormal return and cumulative abnormal return graph shows the relation between the
returns of CJES that were excess of the risk free rate (Rf) and the way the investors to the news.
The middle point on the graph, point 0, signifies the announcement date of CJES (May 2, 2013).
The days leading up to the announcement date show that the market began to react to the
negative AR with a steady decline. Starting with around -26, the CAR began to show the market
reaction, signifying that there were negative expectations for CJESs earnings announcement in
the days to come.

Some positive abnormal returns added variability to the CAR line, but still continued on the
negative slope until the announcement date. The forecasted (estimated) earnings value was
$0.56, but the actual amount was $0.46. This big difference in the actual and forecasted amount
is reflected in the CAR line with a major drop, nearly a 13% drop during the next two days. The
actual earnings amount being a significant -3.84 standard deviations away from the forecasted
amount is displayed during day 0 to 2 with the big drop in CARs.

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Report of Individual ARs


Day
5
4
3
2
1
0
-1
-2
-3
-4
-5

Date
ARcjes
5/9/2013
2.45%
5/8/2013
1.71%
5/7/2013
2.46%
5/6/2013
-2.91%
5/3/2013
-2.59%
5/2/2013
-5.88%
5/1/2013
-1.53%
4/30/2013
0.70%
4/29/2013
1.16%
4/26/2013
0.20%
4/25/2013
-2.07%

CAR
[-1,3]
[0,3]
[-1,5]
[0,5]

Column1
-10.46%
-8.93%
-6.30%
-4.77%

Figure 5

Overall there were negative cumulative abnormal returns around the announcement date. The
ranges of [-1,3] and [0,3] shows that there was already a reaction on the day prior to the
announcement. The ranges of [-1,5] and [0,5] show that the days closer to the announcement
showed a more steep negative reaction based of a decreasing CARs the wider the range away
from the announcement date.
The ARs from -3 to 3 show the effect of the announcement on the abnormal returns. From the
range of -1 to day 2 there were all negative abnormal returns. This shows that the abnormal
returns started on -1, also reflected in the concentrated CAR table (figure 5), and ended on day 2,
which would be the reasoning for the increase in CAR values for the ranges veering farther away
from the announcement date.

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Works Cited
LexusNexus Academic. (2013, May 2). Retrieved November 22, 2013, from LexusNexus Academic.