CASE ANALYSIS: PROJECT EVALUATION IN EMERGING MARKETS: EXXON MOBIL, OIL, AND ARGENTINA Harvard Case Solution & Analysis

Case Analysis: Project Evaluation in Emerging Markets: Exxon Mobil, Oil, and Argentina Case Solution

Introduction

            Exxon Mobil is the world’s largest integrated oil company working in almost 25 countries across the world. The company has 45 refineries and it works in drilling, extracting oil, and gas exploration. Moreover, the company has the capacity to produce 6.4 million barrels per day. The firm has recorded $36.9 billion in net profits over $328.6 of revenue in 2006. Apart from that,the company has a market capitalization of $344.5 billion. The company also provides and supply refined products to more than 35,000 station in about 100 countries. Lastly, it provides fuel to almost 680 airports and 220 ports.

Problem Statement

            The company’s executive staff received a report in which they found that there is an opportunity in Argentina as the region is full of oil and the company can make suitable and quantum profits from the region by drilling down and extracting oil. The opportunity will cost the company around 130 million while it will give some sounds profit for the company. Now, the analyst has been asked to evaluate the project and convince the management to pursue that opportunity for huge profits.

            The study will provide project evaluation through different techniques and aspects of financial management and it will also enable the reader to understand the pros and cons of the project while it will make an understanding about the feasibility of the project.

Project Evaluation

            There were numerous assumptions which were made by the analyst of the company to solve the situation (appendix 1). According to these assumptions,the per barrel selling price of oil will be $58, the corporate tax which the company will have to pay on the taxable income is 35%, the risk free rate in the Argentina economy is 4.4%, the market risk premium is 5%, the oil industry is having a beta of 0.69 and finally, the beta of Argentina market is 1.1 which is quite aggressive.

            There were several inputs which were inserted in the model to calculate the final results (appendix 2). These inputs include that the company will dig 100 wells which will have a useful life of six years while the production of each well will be 10 million barrel per year. The initial investment will be $70 and $60 million for drilling and processing the oil and the total investment will be around 130 million. Lastly, the operating expenses per barrel will be $7 per barrel.

Capital Expenditures and Profit & Loss Analysis

There were several workings and computations which the analyst did to get the output and final results regarding the feasibility of the project (appendix 3). It can be seen that the company is having a capital expenditure of $130 million in the first year while the company is earning a revenue of 58 million. OPEX are 7 million while the EBITDA is 51 million. The company will have a depreciation expense of 21.67 million inclusive of both the types of fixed assets i.e. drilling and facilities. Finally, the company will have a net profit of 19.1 million almost.

Cash Flow Estimation

            The cash flows are indicating that the company will have 41 million in cash flows from operating activities, 130 million of cash outflows from investing activities while no financing activities will be performed. Furthermore, the total and Cumulative cash flows are showing a negative balance of almost 90 million because of the initial investment. The cash flow are starting to become positive in the 4th year as they are showing a balance of 33 million in cumulative cash flows while almost 41 million in the year end cash flows. This indicates that the company will start to provide positive cash flows in the 4th year and after that it will provide positive cash flows till the last year................

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