Mw Petroleum

Discounted bills go down military rank of Aggregate militia Discounted Cash Flow Valuation Proved Developed Reserves Discounted Cash Flow Valuation Proved Un essential Reserves Discounted Cash Flow Valuation Probable Reserves Discounted Cash Flow Valuation Possible Reserves Question 3 To value MW Petroleum we would consider the assets in emplacement and the option bearing assets discretely. The assets in place consist of the proved developed reserves since they atomic number 18 already producing a determinable quantity of c over and natural muff, as well as the non-producing assets as if developed now (valued as the NPV of free cash flows).The expenditures associated with the proved developed reserves are also known with some certainty since they consist primarily of aid and replacement costs that follow experience based norms. The NPV is subject to commodity price happen due to irritability in oil and gas prices, as well as uncertainty regarding the discount rate. The options consist of the stick up in developing proved undeveloped, probable and possible reserves. In the causal agent of these assets, signifi mountaint development costs must be bafflered to monetize the reserves.In the case of the probable and possible reserves, the estimated cash flows are already risk weighted to account for the uncertainty in producible reserves. The options on these reserves are timing options. By incorporating volatility in commodity prices over time, Apache can value the ability to postpone capital expenditures to develop the reserves until volatility in commodity prices returns to historical take aims. It is important that Apache have some level of certainty regarding minimum likely commodity prices over time since these are long-lived projects.These options yield a higher value than the DCF valuation (of the meat cash flows). Since we are considering these reserves as potential projects in age five by dint of seven, we use the Black-Scholes mode l to value the options. The option set are inclusive of the project, i. e. not just the option alone. Question 4 The assets underlying 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 employ the highest recent oil price volatility of 50%. Since volatility is such(prenominal) a driver of option value, we also performed a sensitivity depth psychology to evaluate how the projects plus options would be valued at different receipts levels as well as with differing volatility. Question 5 Based on the value of all the call options derived in question 4, if the sale goes through then Apache Corporation would not exercise any of the options early.In doing so, they would incur significant financial hardship while bearing the risk of super volatile underlying assets. Given the potential financial strain of this acquisition, as incorporated by the cost of capital, Apache would benefit from observing prices develop over time. Our answer is based on the volatility which is assumed at 50%. Based on the sensitivity analysis it does not appear Apache would tackle to develop the possible reserves within the 5-7 year timeframe.