Gulf Oil Corp

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Gulf Oil Corp.--Takeover Summary of Facts o George Keller of the Standard Oil Company of California (Socal) is trying to determine how much he wants to bid on Gulf Oil Corporation. Gulf will not consider bids below $70 per share even though their last closing price per share was valued at $43. o Between 1978 and 1982, Gulf doubled its exploration and development expenses to increase their oil reserves. In 1983, Gulf began reducing exploration expenditures considerably due to declining oil prices as Gulf management repurchased 30 million of their 195 million shares outstanding. o The Gulf Oil takeover was due to a recent takeover attempt by Boone Pickens, Jr. of Mesa Petroleum Company. He and a group of investors had spent $638 million…show more content…
Production in 1983 was 290 million composite barrels, and this was assumed to be constant until 1991 when the remaining 283 million barrels are produced. o Production costs were held constant relative to the production amount, including depreciation due to the unit-of-production method currently used by Gulf (Production will be the same, so depreciation amount will be the same) o Because Gulf uses the LIFO method to account for inventory, it is assumed that new reserves are expensed the same year that they are discovered and all other exploratory costs, including geological and geophysical costs are charged against income as incurred. o Since there will be no more exploration going forward, the only expenses that will be considered are the costs involved with production to deplete the reserves. o The price of oil was not expected to rise in the next ten years, and since inflation affects both the selling price of oil and the cost of production, it cancels itself out and was negated in the cash flow analysis. o Revenues minus expenses determined the cash flows for years 1984-1991. The cash flows cease in 1991 after all oil and gas reserves are liquidated. The cash flows derived account for the liquidation of the oil and gas assets only, and do not account for liquidating other assets such as current assets or net properties. The cash flows were then discounted by net present value using Gulf 's cost of capital as the discount rate. Total cash flows until
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