Reference no: EM132451590

Part 1 to be answered in writing

Question 1. In a brief paragraph, introduce the issue presented in the case.

Question 2. What historical period does the case represent? Examine Exhibit 8 for price histories of crude oil and natural gas. What's the price environment for the two commodities, relatively favorable or relatively unfavorable from a producer's perspective?

Question 3. Examine Table A for the composition of MW reserves. What are your thoughts regarding the property? Is it a prospective property overall?

Question 4. Is it plausible, given the facts, that Apache can operate the MW properties at a lower cost than Amoco? Why / why not?

Question 5. Examine the projections in Exhibits 3 - 7. Were they made by prudent, unbiased parties? Is it plausible to consider these estimates conservative? Were these estimates made with the assumption that the MW properties would be operated by Apache, or without?

Question 6. In a brief paragraph, describe the general lending environment at the time when the case takes place. Were banks eager to lend to upstream energy companies? Why / why not?

Part 2 to be performed in the "Solutions" tab of the associated Excel template

Question 7. Value the cash flows presented in Exhibit 7 as if they were fully financed by equity. That is, discount these cash flows at the equity cost of capital of 13%.

Question 8. Calculate the value of MW proved developed (PD) reserves at the current oil and gas prices. Use cash flows from Exhibit 3 and discount at 13%.

Question 9. Repeat the previous step for proved undeveloped reserves (PUD) using cash flows from Exhibit 4 and discount rate 13%.

Question 10. Calculate the total value of proved reserves PD + PUD.

Question 11. Considering that the bank would be unlikely to lend over 50% of the acquired proved reserves, what's the maximum amount of debt capacity of the deal?

Question 12. Consider MW's Cash Flow from Operations (OCF), line 17 in Exhibit 7. Calculate the average annual growth of OCF.

Question 13. Assume Apache will raise 200 million of debt initially, with the Coupon rate 14% and the Cost of Debt 12%, based on its current credit rating. Calculate the present value of the possible tax shields generated by Apache from debt given that the corporate tax rate for Apache is 36%.
PV(Tax Shields from Debt) = Debt Raised * Coupon Rate * Tax Rate /(Cost of Debt - OCF Growth Rate)

Question 14. Page 5 of the case talks about "Other opportunities" to create value from MW. What are those, and what's the estimated value of those opportunities?

Question 15. Add the values obtained in steps 7, 13, and 14. What's the total value of the deal?

Attachment:- MWPetroleum.rar