Case Study: Gulf Oil Corporation
1. Evaluate the economics of Gulf's exploration and development program in net present value terms. How do Gulf's outlay for exploration and development compare to cash returns Gulf generates from these activities.
If we evaluate the performance of Gulf's management for the period from 1976 to 1983, we will find out that the management basically did not run the company properly. Many indicators prove the fact the management's efforts in spending huge amount of money in exploration and development activities did not yield their benefits. The analysis will cover numerous set of financial indicators in order to present the full picture of Gulf's management's performance.
For the period of 7 years, the management spent $15.1 Billion in exploration activities. By right, the amount spent should have resulted in an increase in the company's performance represented in an increase in shareholder's wealth. That was not the case with Gulf. The management of Gulf was spending huge amount of money without proper analysis, in a nutshell, they were showing careless attitude in managing assets of the company. This was reflected in huge market undervaluation of company's stock, which will be demonstrated later. Coming back to the expenditure on exploration activities, we will find out that on per share basis, it cost shareholders $91. The amount is derived as per below:
Per share exploration expenditure= Total exploration expenditure/ Number of sharers
Per share exploration expenditure= $15.1 Billion/ 0.165 Billion=$91
Now, let us look how much the price of the company increased for the period of 7 years. Referring to the exhibit 6, we will see that the company's share increased from $29 to $43, which mean $14 increase in share prices. $14 increase in price for $91 expenditure per share clearly shows the fact that the management of Gulf headed by Mr. Lee did a very poor job. And it happened in the environment, when the crude prices increased from $5.76 in 1976 to $22.42 in
If we evaluate the performance of Gulf's management for the period from 1976 to 1983, we will find out that the management basically did not run the company properly. Many indicators prove the fact the management's efforts in spending huge amount of money in exploration and development activities did not yield their benefits. The analysis will cover numerous set of financial indicators in order to present the full picture of Gulf's management's performance.
For the period of 7 years, the management spent $15.1 Billion in exploration activities. By right, the amount spent should have resulted in an increase in the company's performance represented in an increase in shareholder's wealth. That was not the case with Gulf. The management of Gulf was spending huge amount of money without proper analysis, in a nutshell, they were showing careless attitude in managing assets of the company. This was reflected in huge market undervaluation of company's stock, which will be demonstrated later. Coming back to the expenditure on exploration activities, we will find out that on per share basis, it cost shareholders $91. The amount is derived as per below:
Per share exploration expenditure= Total exploration expenditure/ Number of sharers
Per share exploration expenditure= $15.1 Billion/ 0.165 Billion=$91
Now, let us look how much the price of the company increased for the period of 7 years. Referring to the exhibit 6, we will see that the company's share increased from $29 to $43, which mean $14 increase in share prices. $14 increase in price for $91 expenditure per share clearly shows the fact that the management of Gulf headed by Mr. Lee did a very poor job. And it happened in the environment, when the crude prices increased from $5.76 in 1976 to $22.42 in