Mw Petrolium

1.MW’s value to Apache and Amoco:

Amoco, one of the largest oil & gas companies in the 90’s, was looking for an opportunity to sell some of its assets in the middle of the margin curve to improve the profitability when depressed oil prices were crushing the energy companies. Apache, the industry production efficiency leader, was looking to grow by purchasing assets that would immediately improve its top line growth while enhancing the reserves. MW was an ideal company for Amoco to improve the margins considering the current margins. Simultaneously Apache would be able to improve its oil to gas reserves ratio to 40% and 60% from the current 20% and 80% and expand geographically, helping to improve its risk profile. Apache’s product efficiency and synergies will help in improving MW’s current margins.

2.APV Analysis:

Using an unlevered asset beta of .64, market risk premium of 5%, and the 10 year T-bill rate of 8.03%, we calculated the APV discount factor to be 11.23%. Historical data gives an estimated tax rate of 35.3% and an interest rate of 12.3%. The debt to capital ratio of 34% results in the equity to value ratio of 66%. Calculating levered beta (.78) and ROE (11.9%) results in the 10.3% WACC.

The above calculations lead us to the following options:

[APV Discount Rate] 11.23%.: Production CF, Proved Developed, Proved Undeveloped

[WACC] 10.3%.......................: Probable Reserves, Possible Reserves

[Interest Rate] 12.30%...........: Tax Shields

Assuming Apache would use the maximum leverage to purchase MW (50% of proved reserves), PV of the tax shields is $30.78M and PV of producing assets (reserves) is $529.61M, for a total value of $560M. The APV approach encompasses the expected FCF from all asset types - Proved, Probable, and Possible. This approach is biased towards higher valuation, because it assumes that the probable, possible, and other opportunities will produce revenues earlier in the forecast. Additionally, the APV approach does not take into account