What Is Gulf Worth?

Gulf Oil Corporation

Time lag in reserve use
Barrels 3,038 725 2,313

End of 1983, Gulf reserves (Ex 3) less projected expropriations Estimated reserves

1983 production of 290 barrels suggests it takes about 8 years (2,313/290) to produce discovered oil. We’ll thus use an eight-year cycle.

Gulf Oil Corporation

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What is Gulf worth?
To assess their value we proceed as follows. 1. Identify key assumptions.

Finding cost per barrel
E&D outlays usually take a year to produce reserves. 1981 + 82 E&D outlays (Ex. 2) 1982 + 83 reserves (Ex. 3) Finding cost estimate $2,696 + $2,646 = $5,342 314 + 359 = 673 bl $5,342/673 = $7.94

Gulf Oil Corporation

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Gulf Oil Corporation

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A. Assessing value from E&D losses
Profits per barrel: Less cost
of finding a barrel Plus after tax profit per barrel Plus tax shields per barrel Yields net profits per barrel Annual losses (@336 barrels per year) = 336x(net profits bl)

From E&D losses per barrel to losses in market value
Cost of finding a barrel After tax profit per barrel Tax shields per barrel Net profits per barrel -$7.94

Gulf Oil Corporation

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After tax profit per barrel
Per (290) barrel $22.40 7.08 7.67 $7.67 $3.23

From E&D losses per barrel to losses in market value
Cost of finding a barrel After tax profit per barrel Tax shields per barrel Net profits per barrel -$7.94 $3.23 $1.72 -$2.99

Operating revenues (1983, Ex.1) Operating costs (Ex. 1: Production $792 + wellhead $601+ other $351) $2,054 Taxes (50%) Current value of profit PV of profits adjusted for 5% inflation, $7.67(1.05/1.17)8

Total $6,503

At 336 bl per year (Ex. 3 ’82-’83 average (314 + 359)/2 = 336 bl) annual losses are $2.99*336 -$1,006.00

Gulf Oil Corporation

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From E&D losses per barrel to losses in market value
Cost of finding a barrel After tax profit per barrel Tax shields per barrel Net profits per barrel -$7.94 $3.23

PV losses per share
Viewing the losses as a perpetuity, with the projected inflation arte and 17% RWACC, their total value is $1,007/(.17 - .05) = $8,390 With 165.3 million shares outstanding, per share losses are $8,390/165.3 = -$51

Gulf Oil Corporation

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Tax shields per barrel
Of the $7.94 finding cost estimate, we can deduct $2.10 now, and $5.84 at the end of 8 years. Multiplying these by the 50% tax rate, then taking their present value

Stock price assessment
Shutting down Gulf’s E&D, saves $51 per share Add to current $39, yields $89, justifying the $80 bid At 13% WACC, per share loss is $42.16, so $80 is reasonable.

$2.10*(0.5)/(1 + .17) $5.84*(0.5)/(1 + .17)8 Yields today’s tax benefits

$0.88 0.84 $1.72

Time lag (8, 7, 6); Price ($50, $42, $32) Inflation (0%, 5%, 10%); Price ($68, $50, $25)

Gulf Oil Corporation

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B. Using a growth formula
We first must estimate the value drivers

bs
Change in working capital, 1976-1983 Capital expenditures, 1976-1983 Total expenditures, 1976-1983 Total EBIT, 1975-1983 After 50% tax So bs =$7,144/$13,417 = 53.25% -$710 $7,854 $7,144 $26,833 $13,416.5

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X0 = EBIT0
Initially, EBIT 1983, from Gulf’s Financials data EBIT0 = $2,990

r*

r* = EBIT(1976-’83)(1 – T)/Expenditures (1976-’83) Ebit(1976-’83)(1 –T) ($2,990 - $2,886)(1 - .5) $52 Expenditures (1976-’83) $7,144 So r* = 0.73%

Gulf Oil Corporation

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Tax rate
I’ll use the suggested 50%

Gulf’s rWACC and possible segment r*s r*Other 20%

Return

15%

r*Wacc

10%

5%

r*E&D
0%
Other segemnt investment E&D investment

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g = br*
Note we require that g = bxr*, g = (0.532)x(0.73) = 0.39%

Value
This yields a present value of the terminal value estimate Of Value of growth stream the next ten years Gulf value estimate $3,456 $3,838 $7,294

Gulf Oil Corporation

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n
I’ll use the given n = 10 years Value of assets in place $80

In sum

Price

=

+

Growth options/ opportunities $40

$40

=

-

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Sum
EBIT0 = $2,990 T= 0.50 bs = .5325 r* = 0.73 gs = 0.39 n = 10 RWACC = 13% gc = 0% bc = 0% r*c = 0%

What happened?
SoCal acquired reserves, their price fell 9% then rebounded SoCal planned to cut debt ratio back to 30% They kept reserves and cut E&D Cut 10,000 jobs (10,000x30,000(1-.5) /(.17-.05) = $7.50 shr. Mesa made $750 million

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