MW Petroleum Corp A Case Solution

Case Solution

Amoco Corp. is settling to promote a wholly-possessed subsidiary, MW Petroleum, to Apache Corp. MW has large reserves of coal and oil made up of many characteristics at different stages of engineering, development, and production. The recommended acquisition can be a large one for Apache and poses several important financing and valuation problems. This case focuses mainly on valuation.

Excel Calculations

Probable Reserves: Production and Cash Flow Projections ($ millions except as noted)

Possible Reserves: Production and Cash Flow Projections ($ millions except as noted)

Comparison of the values (Ignoring the financing effects)

Total Present Value

Development Capex

PV Capex

Total PV

Total Cash Flows

Total Present Value

Option valuation

Time to expiration 

Risk free rate

Volatility

d1

N(d1)

d2

N(d2)

Call value

Questions Covered

Evaluate Amoco's and Apache's corporate objectives and strategies. Is it reasonable to expect that the MW properties are more valuable to Apache than to Amoco? What sources of value most plausibly account for the differences in the buyer and the seller?

Structure and execute a discounted cash flow valuation of the MW reserves. How much are the reserves worth? Is you estimate more likely to be biased high or low? What are the sources of bias?

How would you structure an analysis of NW as a portfolio of "assets in place" and options. Specifically, which parts of the business should be regarded as "assets in place" and which as options? What kinds of options are present? Should this approach yield a higher or lower value than a discounted cash flow valuation?

How risky are the assets that underlie the options? How might estimates of volatility be developed? How much are these assets worth if valued as options?

Assuming the sale goes through, how should Apache think about exercising each of the various options? When should it do so?