MFIN 357- MW- ASSIGNMENT 3 - 22 JUNE 2020 - Rev 0.docx -...

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Page 1 ENERGY FINANCE – CASE STUDY: MW Corporation SUBJECT: MW Petroleum Corporation (A) - CASE STUDY 1. Evaluate Amoco's and Apache's corporate objectives and strategies. Is it reasonable to expect that the MW properties are more valuable to Apache than to Amoco? What sources of value most plausibly account for the difference between buyer and seller? 1-a) Evaluate Amoco's and Apache's corporate objectives and strategies. In 1990, Amoco was the 5 th largest oil company in US with 28 billion $ of operating revenues and 1.9 billion $ of net income. The 1980s decade was a hard decade for the oil industry as Oil prices dropped. Since 1983, Amoco sold small properties that could be economically best operated by smaller and lower overhead independent companies. These sold properties were worth 750 million $. In the US, (85%) of Amoco’s gross margin was provided by ONLY (11%) of producing fields, and the remaining (89%) of the fields had high overhead and repair expenses. Amoco initiated a major restructuring strategy focusing only on the most attractive opportunities and properties including selling assets considered as non-strategic: 1- In 1989, Amoco sold 400 fields (1/3 of its portfolio) and (12%) of the leases (the least profitable fields for the company (tail of curve) (3%) of the company’s direct margin). 2- In January 1990, Amoco’s sold from the Middle Section of the Margin Curve properties (Worth = 1.2 billion $). Morgan Stanley was advising and assisting in the divesting strategy of Amoco by recommending: 1- Selling the properties in Regional Packages. 2- Spinning-off a new public company (Judged to Produce the highest value for the properties but It could take 2 or more years to accomplish). 3- Forming a joint venture. 4- Retaining the properties until depleted (!! Without making any new material investment!!) On the other hand, Apache Corp. was an independent oil and gas company, engaged in exploration, development, production of oil and natural gas in the US. It was considered as a good and efficient operator of small to medium sized properties as it had low costs. Raymond Planck, Apache Chairman’s strategy was to “RATIONALIZE and RECONFIGURE”, which is best defined by acquiring producing properties that Apache can make its operations more efficient. 1-b) Is it reasonable to expect that the MW properties are more valuable to Apache than to Amoco? Yes, MW petroleum properties are more valuable to Apache than to Amoco. MW properties importance to Apache: 1- MW properties suits well Apache operating capabilities. 2- MW was a large company that would more than double Apache’s reserves if acquired. 3- After the acquisition of MW, Apache’s ratio (OIL-GAS will change from 20-80 to 40-60). This was a desirable shift to Apache due to the high volatility in Gas prices in 1990 (falling about 50%).

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