Harvard Business School
9 - 2 9 5 -029
Rev. November 21, 1994
MW Petroleum Corporation (A)
In late 1990, executives, engineers, and financial advisors working for Amoco Corporation and Apache Corporation began serious discussions about the sale to Apache of MW Petroleum Corporation, a wholly-owned subsidiary of Amoco Production Company. Amoco had transferred to MW certain of its own assets that it regarded as non-strategic. MW's size, location, and operations were all very attractive to Apache, which had grown nearly 30% per year since the mid-1980s, largely through acquisitions. The transaction being discussed with Amoco would be Apache's largest to date. It would more than double the size of Apache's current operations, as well as its reserves of oil and natural gas.
By the end of January 1991, Apache's executives and advisors were sufficiently familiar with the properties in MW to begin refining their estimates of operating and financial performance in order to structure a formal offer. Apache's chief financial officer, Mr. Wayne Murdy, knew that financing would be a challenge, given the size of the proposed transaction. In fact, the availability of external financing, bank debt in particular, was likely to impose some practical limits on both the amount and form of consideration that Apache could offer to Amoco. It was essential that Apache carefully evaluate MW, both the whole and its parts, and study the likely patterns of cash flows so that some creative financing alternatives could be developed.
Amoco Corporation was an integrated petroleum and chemical company based in Chicago, Illinois. With $28 billion in operating revenues and $1.9 billion in net income in 1990, Amoco was the fifth largest oil company in the United States. Its three primary businesses were oil and gas exploration and production (Amoco Production Company), refining and marketing (Amoco Oil Company), and chemical production (Amoco Chemical Company). During the 1980s, Amoco had been an active acquiror of oil and gas properties, particularly the latter. Its 1988 purchase of Dome Petroleum of Canada made Amoco North America's largest private holder of natural gas reserves and the second largest producer of natural gas. In 1990, Amoco produced 3.5 billion cubic feet per day (BCFd) of natural gas and 782 thousand barrels per day (MBd) of crude oil and natural gas liquids. Research Associate Barbara D. Wall prepared this case under the supervision of Professors Timothy A. Luehrman and Peter Tufano as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.
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This document is authorized for use only by Ting Gu in BUFN750 taught by Laurent Fresard from October 2012 to April 2013.
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MW Petroleum Corporation (A)
As of December 31, 1990, the company had estimated proved developed reserves totaling 5.1 billion barrels on an oil-equivalent basis.
The 1980s had been a difficult decade for the oil industry, Amoco included. [ Exhibit 1 summarizes historical financial data for Amoco during 1986-90.] From a high of over $37 per barrel in 1980, the price of oil on the spot market had fallen to just above $10/bbl in July 1986 and had recovered to only a little over $18/bbl by the end of the decade. Low prices depressed the profitability of oil companies, most of which responded with downsizing programs and other...