MW Petroleum Corporation

MW Petroleum Corporation (A)
Background:
In late 1990, the group of Amoco Corporation and Apache Corporation had begun talking regarding the possible acquisition of MW Petroleum from Amoco to Apache. MW Petroleum Corporation is a wholly owned subsidiary of Amoco Corporation which has its own reserves, management team and with full ownership in geologic and engineering data. MW Petroleum, a free-standing exploration company that was even as large as some of independent oil companies. It operated exploration and development for well, approximately working interests in 9,500 wells in 300 production areas. The growth of MW was very attractive to the other investors, which company grows 30% per year since mid-1980s, due to large acquisition. If the acquisition will push through, this will be one of the largest acquisition in that period because MW size was two times large compare to Apache’s current operation.

Amoco Corporation
Amoco Corporation was formerly Standard Oil Company (Indiana) was built in 1889 located at Whiting, Indiana, United States. The company was acquired by American Oil Company which founded in Baltimore in 1910 and incorporated in 1922. In 1998, Amoco merged with BP which one of the biggest oil company in England. The company contributes to the modern industry, their innovation was breaks into two parts, the gasoline tanker truck which used to designed to carry liquefied loads, dry bulk cargo or gases on roads and drive through filling is a facility which sells fuel and usually lubricants for motor vehicles.
Apache Corporation
Last 1954, Apache Corporation was founded in Minneapolis, Minnesota. It’s an American independent oil, gas and energy company. Apache is large multinational company, which regional offices and operations in U.S., Argentina, Canada, Egypt and United Kingdom. They explore, developed, and produced natural gas, crude oil and natural gas liquids. The company participated in drilling 1,087 gross wells, with 1,005 (92%) completed as
producers. Last January 2012, a subsidiary of Apache Energy Limited acquire 49% interest in Burrup Holdings Limited. They also acquired Wxxon Mobil Corporation’s Monil North Sea Limited assets including the Beryl field and related properties. 2
MW Petroleum Corporation before the Acquisition
MW is a wholly-owned subsidiary of Amoco, which they have separate own reserves, management team and with full ownership and wide-ranging geologic and engineerinf data. It operated exploration and development for well, approximately working interests in 9,500 wells in 300 production areas. The company composed of three reserves which are the proved, probable and possible reserves. Each reserve contributes different revenue to the company. An independent petroleum engineering consultants estimates 264 million barrels on an oil equivalent basis. It estimates that the Proves reserves can produce 180.8 MMBOE, Probable reserves can produce 25.8 MMBO and Possible Reserve estimates of 57.1 MMBOE. MW Petroleum Corporation after the Acquisition
The acquisition of Apache Corporation to MW Petroleum Corporation was one of the biggest highlights in Apache history. The deal close with the amount of $545 Million it triggers to double the size of Apache. It brought relative balance to Apache’s oil and gas reserves which strategize to partial hedge the oil price volatility. It shifted the center of Apache’s geographical mass to the Gulf Coast. The acquisition shows that a small firm can do a business with the majors and opens the door to large acquisition. They are continues to be a valuable contributor to their industry. It gives life to the strategy of “acquire and exploit”. 3
Case Question:
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 difference between buyer and seller? The Amoco Corporation plans were to reduce its capital and exploration that are not generating returns or the company not
having advantage with the returns. The intention of the company to review its assets with an eye toward selling properties or business lines that did not meet its long-term objectives. The demand for company’s products was in slow pace and oil and gas prices low. Apaches objective was to expand and rationalize their properties. Adhering to their strategy of growth was to develop and acquire oil and gas reserves. They are aiming to double their reserves in the future. This investment can lead them increase their asset and investors. Apache’s believed that achieving high profit could be realized by acquiring marginal properties and operating well with expertise. Therefore, the deal was likely to be a win-win situation for both parties, if they could reach a reasonable price to accept. Between the two companies, the MW Corporation was more valuable to the Apache, because it would give benefit to them to have expand their properties and generate income, unlike if it remains with the Amoco that it would be part of the least profitable properties. The Apache’s main source of value was to expand and diverse their asset base while the Amoco’s main source of value was to limit their cost, and eliminate the business with a less profitable.
Structure and execute a DCF valuation of all the MW reserves. How much are the reserves worth? Is your estimate more likely to be biased high or low? What are the sources of bias? DCF valuation was popular method used in valuing a company, project or asset by using time value of money. All estimated cash flow is discounted to present values using the discount rate which is the cost of capital incorporated with the risk of the project. The MW Petroleum Reserve is composed of Proved, Probable and Possible Reserves. By using the DCF valuation, the company value is worth $647.3 million. The company shows positive NPV and can consider accepting this project. If Amoco was willing to sell MW for less than $647.3 million, Apache would likely accept the offer as it presents a positive NPV investment. Conversely, if Amoco would not sell for less than $647.3 million, Apache may not execute the acquisition, as the investment would present a negative NPV at that time and would, therefore, reduce the overall value of the company. Year
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
PV
56.4001
63.37
48.21
26.63
34.79
42.47
44.25
40.9
39.71
32.72
28.48
26.81
22.71
19.43
95.4
Total PV
622.3
Additional
25
Total PV of MW
647.3
The estimate is more likely biased to be high since the projection of the oil and gas price growths are in positive trend. As we check the below projection of price growth of MW corp. The price projection for oil and gas are 5.75% and 7.89% respectively. It indicates that the price of oil and gas will be moving upwards for 15 years.
Price = Revenue/Production
Price Growth %
Year
Oil
Gas
1
2
5.54%
7.48%
3
5.62%
11.57%
4
3.60%
8.96%
5
9.71%
7.03%
6
5.11%
5.49%
7
4.77%
2.26%
8
3.77%
9.01%
9
4.77%
12.22%
10
6.27%
9.76%
11
7.14%
8.89%
12
7.17%
2.71%
13
3.58%
11.70%
14
9.11%
4.59%
15
4.58%
7.89%
Average
5.75%
7.89%
How would you structure an analysis of MW 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 that the DCF approach? The structure of MW as portfolio was divided in four parts which are the Proved Reserves- Developed, Proved Reserves- Undeveloped, Possible and Probable Reserve. MW assets in place are The Proved reserves – developed while the Proved Reserves- Undeveloped, Probable and Possible reserves are options. The kind of options available for Apache was option to execute the three probable reserves. They have the option whether to defer or push through the three possible projects. The Apache can decide when the time of exploration project will push through for Proved Reserves- Undeveloped, Probable and Possible reserves. If the option will push through for all the projects, the value of MW will be higher. If they defer the project no value will be added and expect a lower value of the company.
Execute the analysis you structured in Question 3, beginning with assets in place. How risky are the assets that underlie the options; i.e. how would you estimate SD for each? How much is the whole portfolio worth?
If we consider the asset in place which is the Proved Reserves- Develop, the value of the company would be $464.79 million since the reserve is proven that it can generate oil and gas, as well as the non-producing assets as if developed immediately. Real option valuation is more appropriate in evaluating investments under conditions of uncertainty that is the successfulness of the reserves in this case. It captures the value of the options embedded in each investment projects. significant development costs must be incurred to monetize the reserves
Reference:
http://web.archive.org/web/19980212073439/http://www.amoco.com/index.shtml 2 http://in.reuters.com/finance/stocks/companyProfile?symbol=APA http://www.apachecorp.com/News/Articles/View_Article.aspx?Article.ItemID=614 http://www.fundinguniverse.com/company-histories/apache-corporation-history/