Mw Petroleum Case Study

2969 Words May 7th, 2010 12 Pages
In less than five, double-spaced, typewritten pages, plus any exhibits, please answer the following questions about MW Petroleum Corp. This assignment is worth a maximum of 100 points. 1. (10 points.) Apart from any quantitative analysis, are there any reasons to anticipate that Apache Corporation’s acquisition of MW Petroleum might be a positive net present value activity for Apache, for Amoco? Explain. This looks like an attractive deal for both parties. Amoco does many things well, but managing smaller, marginally productive oil and gas fields apparently isn’t one of them. This is a chance to unload some properties that because of their high cost structure, Amoco can’t manage profitably. Apache, on the other hand, has low costs and is …show more content…
The estimates of reserves and annual production figures were generated by independent petroleum engineers (presumably paid by Amoco). The forecasts of direct costs are based primarily on Amoco’s historical experience, and projected overhead is based on amounts Amoco itself expects to save by divesting MW. Recall, the basic premise of the transaction is that Apache can operate the fields more efficiently than Amoco. Because such efficiencies have not yet been incorporated into the projections, there is reason to believe the direct costs are overstated from Apache’s perspective. Looking only at the direct costs, their overstatement suggests that the resulting valuation may be biased low. If so, the valuation will be below Apache’s maximum acquisition price, and Apache could bid above this figure and still generate a positive NPV. The valuation might be viewed more properly as Amoco’s reservation price, below which it should not sell. 3. (20 points.) Exhibits 3-7 contain cash flow projections for MW Petroleum. To what extent do these numbers represent free cash flows suitable for use in a discounted cash flow valuation? In particular, please comment on the treatment of overhead (line 8), financial

book DD&A (line 9), taxes (lines 11-14), Non-cash charges (line 16), and terminal value (line 20). Although one might quibble with some details, I find the exhibits properly represent the free cash flows suitable