Essay about Gulf Oil Corp. – Takeover

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Executive Summary
Given the facts in the information provided, we do not feel that an offer of more than $64.17 per share is justified. We recommend that management still submit this bid even though it will probably be rejected. Gulf Oil may be forced to accept a bid lower than $70 per share in the event financing falls through for competitors or other unforeseeable circumstances evolve, such as regulation by FTC. The numbers presented below are reliant upon estimates, which makes the findings highly sensitive to changes in the economic environment. For example, if average inflation over the life of the project is 5.8%, then the resulting savings would justify a bid of $70.10 per share. In addition, using 1983 performance would
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Using the data from Exhibit 1, we estimate that these are $2,054 million for 1983. We then looked in Exhibit 2 to see they produced 290 million barrels in 1983, which brings extraction cost per barrel to $7.08.
Average Time to Produce Reserves
In this industry, discoveries are not immediately realized as it takes years to bring reserves to the market. To determine how long proven reserves of the company sit in the ground prior to extraction, we take total recoverable reserves and divide by annual production. We assume that both average annual production and new reserves are equal to 275 million barrels per year. The footnote to Exhibit 2 says that Gulf reserves in 1983 should be reduced by 725 million barrels due to expropriation in West Africa, which reduces 3.038 billion barrels to 2.313 billion barrels. Given these figures, we calculate the average time proven reserves sit in the ground before extraction is 8.41 years.
Rate of Inflation
It stands to reason that if investors are requiring a 12% return on Treasury bills, then they expect high inflation rates. If they are going to give a loan (even risk free), then they want to make a return, or they would otherwise just keep cash. Since the return required on risk free investments is 12%, we can see that investors want a return that outweighs the risk of high inflation. Using the Consumer Price Index information from the case (Exhibit 3), we determined average inflation for this period is 8.37%.

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