MW Petroleum Corporation.docx - Valuation u2013 MW...

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Valuation – MW PetroleumExecutive Summary:Amoco Corporation is an integrated petroleum and chemical company valued at $28 billion in operating revenues in 1990. With the 1980s oil crisis, prices fell from $37/bbl in 1980 to $10/bbl in 1986. This affected Amoco’s profitability and as a result the company made the decision to consolidate its less profitable properties under a new free-standing company, MW Petroleum Corporation, which would then be marketed to other bidders. The most promising bidder, Apache Corporation, however faced a few financing challenges. Although MW would more than double Apache’s reserves and help diversify its portfolio (currently 20-80 oil to gas), Apache may not be able to obtain the leverage required to make the financing possible because its portfolio is considered risky based on the volatile price of gas. There are several options Apache can consider prior to negotiating the final contract. For instance, it does not need to buy all the properties Amoco has included in MW’s portfolio. It can shed some of the reserves it does not need and look at the value added by different types of properties depending on their net present value and investment commitments. Apache is now faced with the challenge of valuing each option and type of reserves MW contains to better understand their true value, as well as how they fit with Apache’s strategy and capital structure. Pros of acquisition:balance in oil-gas ratio diversifies Apache’s revenue stream, making it robust against the volatile price of gas; geographical diversification; MW’s properties are well-suited for Apache’s operations; lending environment is favorable (low inflation and interest rates)Cons of acquisition:MW is too large for Apache to finance; lenders are more conservative and cautious about giving out too much debt (capped at 50% of the value of proved reserves for oil and gas assets) Risk factors for Apache:volatile gas and oil prices; quantities of oil and gas to be produced from the MW fields; expenses of production; accuracy of Amoco’s maps and geological information;

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