Amoco’s strategy is to rationalize its operations by shedding assets that are not contributing significantly to the company’s gross margin. This is reasonable as both the direct costs and overhead cots are high. The company is very large and the management appears unable to manage the operations as they are right now. …
Apache on the other hand is seeking to grow. This is a good opportunity for the company to do so. This transaction would be beneficial to Apache the portion of MW Petroleum that Apache is considering is located in the same general area where the company currently operates and so consolidation will further reduce costs. This should allow for increased economies of scale in the form of reduced direct operating costs and even more so overhead costs for Apache. It is cheaper for Apache to buy an existing business as it has been doing rather than carry out exploratory drilling. This acquisition will also allow the company to diversify geographically its portfolio of assets which is important when the riskiness of the operations is considered. This diversification will somewhat help to stabilize Apache’s earnings even though both gas and oil prices are highly volatile. The acquisition of Amoco will also enhance Apache’s standing among US independents and lead to even further acquisition opportunities. The company is considering further growth opportunities in the future and this represents a stepping stone that will allow Apache some amount of bargaining power and would therefore put the company in a better position to compete with other companies.
It is reasonable to expect that the MV properties are more valuable to Apache than to Amoco because Apache will benefit from synergies and rationalization of expenses. Table 2 below shows the present value of the aggregate overheads that Apache could reduce substantially if the acquisition takes place. Amoco would be better off if it had cash in hand which the company could invest in more profitable ventures. Currently, the properties are not contributing substantially if any at all to the company’s overheads. Part 1 (b) The sources of value that most plausibly account for the difference between buyer and seller are: The exclusion of fields in Michigan and the Gulf of Mexico; Expected synergies; Other opportunities mentioned; and The beta value that was used. Exclusion of Fields in Michigan and the Gulf of Mexico Apache was only interested in fields containing approximately 78% of MW’s proved developed reserves and 75% of the Proved undeveloped reserves. These account for approximately $120 million of the difference. No details were given of the percentage of the probable and possible reserves that would be included in the fields in Michigan and the Gulf of Mexico. However, these could be substantial. Assuming that these fields are in the same proportion as the proved undeveloped reserves then the total value would be approximately $906 million. This is 294 million less then the $1.2 billion that Amoco indicated that the properties were worth. See APV Calculations in the Appendix. Table 1 Reserves Total (MMBOE) Proportion included in Purchase Value included in APV Total Value Proved Developed Reserves 155.2 78.22% 121.4 247,750,571.44 316,728,901.87 Proved Undeveloped Reserves 25.6 75% 19.2 151,257,604.86 201,676,806.48 Sub Total 399,008,176.30 518,405,708.35 Probable Reserves 75% 145,575,867.21 194,101,156.28 Possible Reserves 75% 145,125,191.13 193,500,254.84 Total 689,709,234.64 906,007,119.47 Synergies The synergies can be quantified as some overheads would be much reduced as well as some direct operating costs. The table below shows the present value of the projected aggregate overhead expenses. Apache is expected to save a substantial portion of this approximately $201 million. Table 2 Year Aggregate Overheads PV Factor (13%) PV Cash Flow 1 36.6 0.885 32.39 2 38.7 ...
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