Gulf Oil Analysis
I.
Statement of Problem & Alternatives
George Keller of the Standard Oil Company of California (Socal) is considering how much to bid for Gulf Oil Corporation (Gulf), which is currently in the middle of a bidding war. Gulf is unwilling to consider bids below $70 per share even though their share price was $39 at the time Boone Pickens began purchasing shares in the hopes of a takeover. II. Statement of Facts and Assumptions Under the direction of James Lee, Gulf pursued a twofold strategy. First, Gulf renewed its focused on oil whereas in the past, Gulf had developed into an energy conglomerate through various acquisitions of coalmines, uranium mines, and synthetic fuel plants. These ventures would be de-emphasized going forward. For second part of the strategy, Gulf planned to implement a policy of increased expenditures on exploration and development (E&D). During the years leading up to the takeover attempt, Gulf more than doubled its exploration outlays. While Gulf was continuing with its ambitious E&D program, the real price of oil and natural gas declined from 1982 through 1983. As 1984 began, almost all industry experts were in agreement that the price of oil (in constant dollars) was not expected to change for the following 10 years. Lee trimmed exploration expenditures in 1983 in response to these changing fundamentals. Even at the reduced level, spending for exploration in real terms equaled or exceeded that of every year before Lee’s arrival except one. Based on this picture, Socal needs to value Gulf. There are several sources of value that can be considered: the value of Gulf’s petroleum reserves; the cost savings related to the immediate suspension of Gulf’s E&D program; the tax benefits associated with additional leverage; the value added by shortening the recovery lag; and the value of any adverse effects due to the acquisition of Gulf by a competitor1.
1
In addition to calculating Gulf’s reserve value, Socal needs to be mindful of its
Statement of Problem & Alternatives
George Keller of the Standard Oil Company of California (Socal) is considering how much to bid for Gulf Oil Corporation (Gulf), which is currently in the middle of a bidding war. Gulf is unwilling to consider bids below $70 per share even though their share price was $39 at the time Boone Pickens began purchasing shares in the hopes of a takeover. II. Statement of Facts and Assumptions Under the direction of James Lee, Gulf pursued a twofold strategy. First, Gulf renewed its focused on oil whereas in the past, Gulf had developed into an energy conglomerate through various acquisitions of coalmines, uranium mines, and synthetic fuel plants. These ventures would be de-emphasized going forward. For second part of the strategy, Gulf planned to implement a policy of increased expenditures on exploration and development (E&D). During the years leading up to the takeover attempt, Gulf more than doubled its exploration outlays. While Gulf was continuing with its ambitious E&D program, the real price of oil and natural gas declined from 1982 through 1983. As 1984 began, almost all industry experts were in agreement that the price of oil (in constant dollars) was not expected to change for the following 10 years. Lee trimmed exploration expenditures in 1983 in response to these changing fundamentals. Even at the reduced level, spending for exploration in real terms equaled or exceeded that of every year before Lee’s arrival except one. Based on this picture, Socal needs to value Gulf. There are several sources of value that can be considered: the value of Gulf’s petroleum reserves; the cost savings related to the immediate suspension of Gulf’s E&D program; the tax benefits associated with additional leverage; the value added by shortening the recovery lag; and the value of any adverse effects due to the acquisition of Gulf by a competitor1.
1
In addition to calculating Gulf’s reserve value, Socal needs to be mindful of its