MW PETROLEUM 2020 CASEADESOYE ADENIJI (MBA)Questions:1.Evaluate Amoco's and Apache's corporate objectives and strategies. Is it reasonable toexpect that the MW properties are more valuable to Apache than to Amoco? Whatsources of value most plausibly account for the difference between buyer and seller?Evaluate Amoco's and Apache's corporate objectives and strategiesDivestment: Amoco adopt major restructuring to better focus on its most attractiveproperties and opportunities, including selling asset regarded as non-strategic. Apache, onthe other hand, has low costs and is an efficient operator of small to medium-sizedproperties. The company has grown significantly in recent years by acquiring less well-runproperties through its “rationalize and reconfigure” strategy.Is it reasonable to expect that the MW properties are more valuable to Apache than toAmoco?Yes. The MW Corporation is more valuable for Apache, because it would bring benefit forthem by expanding their properties and generating income through the stabilization of abetter oil-gas ratio, a diversified geographic location, and an increase in the number of oiland gas reserves. Yet, if MW remains with Amoco then it would be part of the leastprofitable properties. Apache's main source of value is to expand and diversify their assetbase while the Amoco's main source of value is to limit their cost, and eliminate thebusiness with a less profitable. In essence, acquiring MW would be the most beneficial forApache because not only will it be good for production, but also with enlarging the ability ofApache to take on more debt.What sources of value most plausibly account for the difference between buyer and seller?Souces of valueBuyer (Apache)Seller (Amoco)1.It sees the acquisition as anopportunity for growth andgeographic diversification,to add further stability tothe company, and toincrease its reserves.It is merely interested inselling MW for a profit2.Economy of scaleLow cost structureIt cannot manage propertieswith high cost profitably3.Corporate objectiveand managementan efficient operator ofsmall to medium-sizedproperties.Amoco does many thingswell, but managing smaller,marginally productive oiland gas fields apparently
isn’t one of them.2.Structure and execute a discounted cash flow valuation of all the MW reserves usingAPV. How much are the reserves worth? Is your estimate more likely to be biased high orlow? What are the sources of bias?Assumptions:i.Apache will borrow up to the 50% ceiling mentioned on page 7 of the case to financeany acquisition of MW Petroleum.