Structure and execute a DCF valuation of all the MW reserves using APV. How much are the reserves worth? Is your estimate more likely to be biased high or low? What are the sources of bias? Answer: The DCF valuation of all the MW reserves using APV Indicates that the net worth of the portfolio is around $516. 30 million. The estimate Is more likely to be biased on the higher side. The data for the projections was collected by Morgan Stanley and Amoco. Thus, the probable undeveloped and possible reserves estimated may be different from the ctual reserves.
Amoco can get higher valuation by projecting higher reserves. Also, Amoco and Morgan Stanley projected that the price of a oil barrel will continue to rise for the next 15 years from the current price of S 20. 4 per barrel to S 443 per barrel. This increasing value of per barrel can significantly increase the valuation of the oil fields. COSTS: The costs In the projections were estimated based on the historical costs and cash overhead savings that Amoco expected to save from the sale of MW petroleum. However, Apache had very low costs and was an efficient operator of properties.
Also, since the MW fields were operated by Amoco; this would result In more potential savings to Apache. likely to biased on the higher side. The DCF valuation using APV is shown in the next page. Interest tax shields: Assumed coupon on debt 12. 32% Assumed initial debt 182. 7 Year 1 interest 22. 5 Tax rate 36% Year 1 tax shield 8. 1 Assumed cost of debt 12. 00% Growth rate -4. 06% Value of tax shield (perpetuity) 50. 4 Value of “Additional assets” 25. 0 Total value of MW 516. 3 2. 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? The whole portfolio of MW consists of 5 parts: i. Proved developed reserves it. Proved undeveloped reserves iii. Probable reserves ‘v. Possible reserves v. Other opportunities options as capital expenditures are associated with proved undeveloped reserves, probable reserves and possible reserves, and the company can choose whether to make these expenditures basing on the then prevailing prices of oil and natural gas.