Essay on Mw Petroleum

1189 Words Apr 23rd, 2014 5 Pages
Company Name: MW Petroleum Amoco Corporation was the fifth largest oil company in United States with 28 billion in operating revenues and 1.9 billion in net income. The low oil prices in the 1980s depressed the profitability of many oil companies and most of which responded with downsizing and other cost cutting measures aimed at overhead expenses. Amoco had already sold more than 750 million worth of small properties, which it felt could be more economically operated by companies with low overhead costs. Amoco conducted an extensive study on capital structure and profitability in 1988 and found that 85% of its margin in United States was provided by 11% of its producing fields and rest had disproportionately high overhead costs and …show more content…
Unlevered Cost of Capital Ru= 12.54%
Average D/E ratio = 50.3% ~= 50%
Average Tax Rate= 35.44%
Cost of debt = 12.3% (From Exhibit 10, Moody’s Ba3 equivalent to S&P BB)
WACC = (0.5 x 12.54) + (0.5 x 12.3 x [1-35.44%]) = 10.24

APV= Unlevered NPV+ PV of Tax Shield
APV = 486.8 + 80.88= 567.68 M $
The estimate is most likely biased low as the initial debt value is fairly low. One reason is due to the assumption that additional assets are options and cash flow is mostly deriving from further exploration decisions. Another reason is the method chose to calculate the PV tax shield. To find the PV tax shield, the projected tax expenses was used, calculated the tax shield for each year, and discounted the tax shield with cost of debt. The market premium could be a source of bias as well. As the market premium increases, APV estimate tend to be lower than projected above The MW assets can be considered as a portfolio containing assets in place and real options. The Proved developed Reserves is considered to be the assets in place. The rest of the reserves like

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