Amoco wanted to sell MW petroleum to Apache, and this acquisition was quite worth for the both companies. Amoco being a large company wanted to focus more on attractive and productive properties instead of the small properties with the high cost structure. On the other hand, Apache was quite good at the attracting the small- to medium-sized properties and making them cost efficient using its strategies. Aggregative MV reserves have been valued using the discounted cash flow approach. Proved Developed reserves already producing oil and gas, and are quite certain and hence are considered as assets in place. While the reserves including the proved undeveloped, probable and possible reserves carry real options, which have been evaluated using Black Scholes Option Pricing Model. This approach has been compared with that of discounted cash flow approach. Riskiness of these options has been discussed in all three cases. Timing of the exercising these options has been discussed to find out when Apache would be better off exercising or delaying the options. This acquisition with all the options along with other opportunities and exploration options look quite valuable for Apache to acquire and would also make a good value for Amoco.
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 differences in the buyer and the seller?
2. Structure and execute a discounted cash flow valuation of the MW reserves. How much are the reserves worth? Is you estimate more likely to be biased high or low? What are the sources of bias?
3. How would you structure an analysis of NW 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 than a discounted cash flow valuation?
4. How risky are the assets that underlie the options? How might estimates of volatility be developed? How much are these assets worth if valued as options?
5. Assuming the sale goes through, how should Apache think about exercising each of the various options? When should it do so?
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