Mw Petroleum

Discounted coin carry valuation of Aggregate militia Discounted Cash feed Valuation be Developed reserves Discounted Cash Flow Valuation Proved Undeveloped Reserves Discounted Cash Flow Valuation Probable Reserves Discounted Cash Flow Valuation Possible Reserves Question 3 To determine MW anele we would consider the assets in place and the plectrum tutelage assets discretely. The assets in place inhabit of the proved developed reserves since they are already producing a determinable measuring stick of oil and natural muck up, as surface as the non-producing assets as if developed directly (valued as the NPV of free cash flows).The expenditures associated with the proved developed reserves are besides known with some certainty since they represent primarily of maintenance and replacement price that follow experience based norms. The NPV is subjugate to good scathe try due(p) to volatility in oil and gas prices, as tumesce as disbelief regarding the di scount rate. The options consist of the delay in developing proved undeveloped, probable and assertable reserves. In the case of these assets, world-shaking developing costs must be incurred to legalise the reserves.In the case of the probable and manageable reserves, the estimated cash flows are already risk weighted to account for the uncertainty in producible reserves. The options on these reserves are clock options. By incorporating volatility in trade good prices oer time, Apache can value the might to postpone capital expenditures to develop the reserves until volatility in commodity prices returns to historic aims. It is important that Apache have some level of certainty regarding minimum likely commodity prices over time since these are long projects.These options yield a higher value than the DCF valuation (of the aggregate cash flows). Since we are considering these reserves as potential projects in years five through and through seven, we go for the Black-Schole s model to value the options. The option determine are inclusive of the project, i. e. non plainly the option alone. Question 4 The assets rudimentary the options are quite risky as demonstrated by the rising volatility presented in the case.Since Apache was primarily concerned with the oil assets, we used the highest recent oil price volatility of 50%. Since volatility is much(prenominal) a driver of option value, we overly performed a sensitivity analysis to judge how the projects plus options would be valued at different revenue levels as well as with differing volatility. Question 5 establish on the value of all the natter options derived in question 4, if the sale goes through then Apache Corporation would not illustration any of the options early.In doing so, they would incur significant financial hardship while bearing the risk of highly volatile cardinal assets. Given the potential financial manikin of this acquisition, as incorporated by the cost of capital, Apac he would benefit from observing prices develop over time. Our answer is based on the volatility which is assumed at 50%. establish on the sensitivity analysis it does not appear Apache would attempt to develop the feasible reserves within the 5-7 year timeframe.