Produces from aging oil fields in west texas

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Reference no: EM131870315

Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.91 million barrels per year in 2016, but production is declining at 8% per year for the foreseeable future. Costs of production, transportation, and administration add up to $26.10 per barrel. The average oil price was $66.10 per barrel in 2016.

PP has 8.1 million shares outstanding. The cost of capital is 10%. All of PP’s net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $26.10. Also, ignore taxes.

a. Assume that oil prices are expected to fall to $61.10 per barrel in 2017, $56.10 per barrel in 2018, and $51.10 per barrel in 2019. After 2019, assume a long-term trend of oil-price increases at 6% per year. What is the ending 2016 value of one PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b-1. What is PP’s EPS/P ratio?

b-2. Is it equal to the 10% cost of capital?

Reference no: EM131870315

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