Pioneer petroleum
INTRODUCTION
Background
Pioneer Petroleum was founded in 1924, through a merger within industrial, pipeline transportation, and refining fields. PP has evolved over the last 60 years into a company that now also works with agricultural chemicals, plastics, and real estate development concentrating in gas, oil, petrochemicals, and coal. In 1990, PP improved their coker and sulfur recovery facility to make their refining process more efficient and in turn has become one of the lowest cost refiners on the West Coast. Due to the refining process PP’s gasolines are among the most cleanest-burning in the industry. PP’s is also the producer of one-third of the world’s supply of methyl tertiary butyl ether (MTBE), which is a chemical used to make cleaner burning gasolines. They also produce one third of the world’s supply of MTBE.
Major Issues The major issue that PP is facing right now is that the management board of PP is trying to decide whether to use a single cutoff rate or a system of multiple cutoff rates to determine the minimum acceptable rate of return on new capital investments. As of right now PP is using one single company-wide cutoff rate that is based on their overall weighted cost of capital. The current single rate system that PP is using has increased their overall risk by causing them to choose investment decisions in divisions with higher risk because they exceed the cutoff hurdle, while not investing in lower risk areas because they do not exceed the hurdle rate. In addition PP has not been calculating their weighted cost of capital correctly. This has caused them to invest in riskier areas rather than those with greater chance of having a positive net present value. PP needs to reevaluate which method to use as well as how to correctly compute WACC.
Analysis
As stated before PP has been weighing two alternatives options to calculate the minimum acceptable rate of return on their capital investments. As of right now PP’s approach is to
Background
Pioneer Petroleum was founded in 1924, through a merger within industrial, pipeline transportation, and refining fields. PP has evolved over the last 60 years into a company that now also works with agricultural chemicals, plastics, and real estate development concentrating in gas, oil, petrochemicals, and coal. In 1990, PP improved their coker and sulfur recovery facility to make their refining process more efficient and in turn has become one of the lowest cost refiners on the West Coast. Due to the refining process PP’s gasolines are among the most cleanest-burning in the industry. PP’s is also the producer of one-third of the world’s supply of methyl tertiary butyl ether (MTBE), which is a chemical used to make cleaner burning gasolines. They also produce one third of the world’s supply of MTBE.
Major Issues The major issue that PP is facing right now is that the management board of PP is trying to decide whether to use a single cutoff rate or a system of multiple cutoff rates to determine the minimum acceptable rate of return on new capital investments. As of right now PP is using one single company-wide cutoff rate that is based on their overall weighted cost of capital. The current single rate system that PP is using has increased their overall risk by causing them to choose investment decisions in divisions with higher risk because they exceed the cutoff hurdle, while not investing in lower risk areas because they do not exceed the hurdle rate. In addition PP has not been calculating their weighted cost of capital correctly. This has caused them to invest in riskier areas rather than those with greater chance of having a positive net present value. PP needs to reevaluate which method to use as well as how to correctly compute WACC.
Analysis
As stated before PP has been weighing two alternatives options to calculate the minimum acceptable rate of return on their capital investments. As of right now PP’s approach is to
Bibliography: Ruback, Richard S. "Pioneer Petroleum." Pearson Custom Business Resources. Ed. Frank Bacon. Boston: Pearson Learning Solutions, 2011. 65-69. Print.