MW corporation

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MW Petroleum Corporation (A)

1. Structure and execute a DCF valuation of all the MW reserves using APV. How much are the reserves worth? Is your estimate more likely to be biased high or low? What are the sources of bias?

Answer:

The DCF valuation of all the MW reserves using APV indicates that the net worth of the portfolio is around $516.30 million.

The estimate is more likely to be biased on the higher side.

REVENUES:

The data for the projections was collected by Morgan Stanley and Amoco. Thus, the probable undeveloped and possible reserves estimated may be different from the actual reserves. Amoco can get higher valuation by projecting higher reserves.

Also, Amoco and Morgan Stanley projected that the price of a oil barrel will continue to rise for the next 15 years from the current price of $ 20.4 per barrel to $ 44.3 per barrel. This increasing value of per barrel can significantly increase the valuation of the oil fields.

COSTS:

The costs in the projections were estimated based on the historical costs and cash overhead savings that Amoco expected to save from the sale of MW petroleum. However, Apache had very low costs and was an efficient operator of properties. Also, since the MW fields were operated by Amoco; this would result in more potential savings to Apache.

However, due to the more pronounced impact of oil price per barrel, the estimate is likely to biased on the higher side.

The DCF valuation using APV is shown in the next page.

Interest tax shields: Assumed coupon on debt
12.32%
Assumed initial debt
182.7
Year 1 interest
22.5
Tax rate
36%
Year 1 tax shield
8.1
Assumed cost of debt
12.00%
Growth rate
-4.06%
Value of tax shield (perpetuity)
50.4

Value of "Additional assets"
25.0

Total value of MW
516.3

2. How would you structure an analysis of MW as a portfolio of assets-in-place and options? Specifically, which parts of the business should be

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