MV PETROLEUM CORPORATION (A) Harvard Case Solution & Analysis

MV PETROLEUM CORPORATION (A) Case Solution

Problem Statement

This case relates to the valuation of one of the wholly owned subsidiaries of Amoco Corporation, the MW petroleum. This division owns a large number of gas and oil reserves and there are a number of properties owned by the company, which are basically at different stages of their engineering, production and development. This is one of the large acquisitions for Apache and if the transaction is financed through debt, then the company will have to analyze number of problems before making a final decision. The valuation needs to be performed on the basis of DCF and Black Scholes approaches for MW petroleum.

mw petroleum case solution

mw petroleum case solution

Analysis

First of all, the analysis has been performed by valuing all the reserves of the company aggregately but before that the corporate strategies and goals of the acquirer and acquire have also been analyzed as follows:
Corporate Objectives & Strategies of Amoco and Apache

The corporate objectives and the strategies of boththe companies are quite different. Amoco Corporation is a company which has already reached a maturity stage since it is the 5th largest oil and gas company in United States whereas, Apache Company is in the growth stage and it is currently the operator of small and the medium sized properties. The objectives of both the companies are also different. The objective of Amoco related to enhancing and increasing profitability whereas the objective of Apache is to basically increase the size of the company and grow. Lastly, the strategy of both the companies is also different where Amoco is currently engaged in divestment to focus on its most attractive areas of the business where as, Apache is focusing on re configuring and rationalization by acquiring more effect and controllable properties. Therefore, looking at these strategic initiatives of both the companies it could be said that MV petroleum is more important for Apache as compared to Amoco.
DCF Valuation of all MV Reserves

A range of assumptions have been made first of all as shown in the excel spreadsheet in order to perform the discounted cash flow valuation of all the reserves of the company. The MW petroleum subsidiary is composed of proved, probable and the possible reserves. The market risk premium has been assumed to be 5.5% and other information has been taken from the case with unlevered beta being 0.82 as the risk level would be same............................

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