Case Study: Gulf Oil Corporation

1061 Words Oct 11th, 2006 5 Pages
1. Evaluate the economics of Gulf's exploration and development program in net present value terms. How do Gulf's outlay for exploration and development compare to cash returns Gulf generates from these activities.

If we evaluate the performance of Gulf's management for the period from 1976 to 1983, we will find out that the management basically did not run the company properly. Many indicators prove the fact the management's efforts in spending huge amount of money in exploration and development activities did not yield their benefits. The analysis will cover numerous set of financial indicators in order to present the full picture of Gulf's management's performance.

For the period of 7 years, the management spent $15.1 Billion in
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The concept of royalty trust would results in a huge increase in EPS since the concept of royalty trust enabled the company to enjoy tax benefits. In general, the basic advantage of setting up a trust to distribute oil and gas income is that the trust revenues are not subject to corporate taxation before any dividends are distributed, even though the owners enjoy the benefit of limited liability. Generally, once the corporate tax has been paid, firms can retain their earnings and/or distribute them to their stockholders as dividends. Corporate dividends paid to individuals are subject immediately to the personal income tax at a rate. To the extent that the market value of stock is enhanced through retained earnings, the increased value is taxed as capital gains when stockholders sell their shares. So should Pickens have implemented this concept in Gulf, the prices of royalty trust shares would have been around $134, which is derived as per below:

P/E Gulf Shares (1983) =P $43/ EPS $5.5=7.8

As a result of corporate tax exemption, new NPAT would be $2.85 Billion.

New NPAT= $0.915+$1.933=$2.85 Billion

New EPS= $2.85 Billion/ 0.165=$17.23

New Price= New EPS*P/E= $17.23*7.8=$134

That was the reason why Pickens was ready to offer $65 and why there were so many individual investors willing to acquire the shares of Gulf on the eve of Pickens's

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