Midland Energy Resource

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Midland Energy Resources, Inc.: Cost of Capital

Background Information:
➢ Janet Mortensen, Senior vice preside of project finance for Midland Energy Resources ➢ Midland Has three divisions
o Exploring and Production(E&P)
o Refining and Marketing (R&M)
o Petrochemicals
➢ 2006 Operating Revenue-$248.5 billion Operating Income- $42.2 billion ➢ Estimated Cost of Capital used to analyses
o Asset appraisal for capital budgeting
o Asset appraisal for financial accounting
o Performance assessments
o M&A proposals and stock repurchase decisions
➢ 2002 Mortensen was asked to estimate cost of capital in connection with a large proposed share repurchase. 6 month later , she was asked to corporate and divisional cost of capital ➢ After so many years her estimated became the de facto standard in many analyses. ➢ Once she realized this she was considering appending a sort of “user’s guide” to the 2007 set of calculations.

Midlands Operation

Exploration & Production

➢ Extracted approximately. 2.10 million. Barrels of oil per day-6.3% increase over 2005 production. ➢ Approximately 7.28 billion cubic feet of natural gas per day –slightly less than 1% increase over 2005 production ➢ $22.4 billion of rev. and after-tax earning of $12.6 billion ➢ E&P was Midlands most profitable business and it net margin over the previous five years was among the highest in the industry. ➢ Capital Spending in E&P was expected to exceed $8 billion in 2007 & 2008

Refining and Marketing

➢ Ownership Interest in 40 refineries w/ capacity of 5 million barrels a day ➢ Measure by revenue Midland refinery and marketing business was the company’s largest ➢ Global revenue for 2006 was $203 billion-1.8% decrease from 2005 ➢ Most refinery output was gas sold for automobiles

➢ 120,000 barrels of base-stock lubricants per day
➢ Advanced Technology and...
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