MW PETROLEUM
TITLE: MW Petroleum Corporation: A Valuation Approach on Real Assets
ABSTRACTOR SUMMARY
Valuation is the estimation of an asset’s value, whether real or financial, based on variables perceived to be related to future investment returns, on comparison with similar assets, or, when relevant, on estimates of immediate liquidation proceeds (Pinto, Henry, Robinson, Stowe; 2010).
Correct valuation of real assets can present challenges to financial analysts. Different models can be used to arrive at the closest estimate of value and yet certain issues will always arise.
This case attempts to tackle two approaches in real asset valuation: Discounted Cash Flow (DCF) analysis and the issues surrounding such, as well as the Black-Scholes Model for Real Options.
Questions to be addressed in the study are:
1. Evaluate Amoco’s and Apache’s corporate objectives and strategies. Is it reasonable to expect that the MW properties are more valuable to Apache than to Amoco? What sources of value most plausibly account for the difference between buyer and seller?
2. Structure and execute a DCF valuation of all the MW reserves. How much are the reserves worth? Is your estimate more likely to be biased high or low? What are the sources of bias?
3. 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 regarded as assets in place and which as options? What kinds of options are present? Should this approach yield a higher or lower value that the DCF approach?
4. Execute the analysis you structured in Question 3, beginning with assets in place. How risky are the assets that underlie the options; i.e. how would you estimate SD for each? How much is the whole portfolio worth?
5. Assuming a sale goes through, how does Apache exercise each of the various options? When should it do so?
BACKGROUND
In a case prepared by Barbara Wall at the Harvard Business School, entitled MW Petroleum
ABSTRACTOR SUMMARY
Valuation is the estimation of an asset’s value, whether real or financial, based on variables perceived to be related to future investment returns, on comparison with similar assets, or, when relevant, on estimates of immediate liquidation proceeds (Pinto, Henry, Robinson, Stowe; 2010).
Correct valuation of real assets can present challenges to financial analysts. Different models can be used to arrive at the closest estimate of value and yet certain issues will always arise.
This case attempts to tackle two approaches in real asset valuation: Discounted Cash Flow (DCF) analysis and the issues surrounding such, as well as the Black-Scholes Model for Real Options.
Questions to be addressed in the study are:
1. Evaluate Amoco’s and Apache’s corporate objectives and strategies. Is it reasonable to expect that the MW properties are more valuable to Apache than to Amoco? What sources of value most plausibly account for the difference between buyer and seller?
2. Structure and execute a DCF valuation of all the MW reserves. How much are the reserves worth? Is your estimate more likely to be biased high or low? What are the sources of bias?
3. 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 regarded as assets in place and which as options? What kinds of options are present? Should this approach yield a higher or lower value that the DCF approach?
4. Execute the analysis you structured in Question 3, beginning with assets in place. How risky are the assets that underlie the options; i.e. how would you estimate SD for each? How much is the whole portfolio worth?
5. Assuming a sale goes through, how does Apache exercise each of the various options? When should it do so?
BACKGROUND
In a case prepared by Barbara Wall at the Harvard Business School, entitled MW Petroleum
References: Equity Asset Valuation (Pinto, Henry, Robinson, Stowe; 2010) MW Petroleum Corporation A, (9-295-029; 1994)