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1、The NPV of Exploration We are going to try to determine the NPV of Gulfs investment in exploration Well do this for 1982 The aim is to see if they are a positive or negative NPV investment We also want to infer how they might be affecting the value Gulfs sharesFinance 203: Notes on Gulf1Why is Gulf
2、a Takeover Target? We are particularly interested in whether Gulfs investment in new reserves through exploration might make them at target If so how does this affect the premium a bidder might pay?Finance 203: Notes on Gulf2Getting started How quickly does exploration result in new reserves? Whats
3、the exploration cost of new reserves?Finance 203: Notes on Gulf3Finance 203: Notes on Gulf4Exploration Cost and Additions to ReservesFinance 203: Notes on Gulf5Exploration Cost and Additions to Reserves Its not clear from the information in the previous slide how much of a lag exists between explora
4、tion and the resulting additions to reserves There does seem to be a lag of at least a year and perhaps twoFinance 203: Notes on Gulf6Exploration Costs per BarrelTo be specific well use a one year lag,from this point on.Profits from Production We next determine the profits we might expect to earn fr
5、om a barrel of new reserves?Finance 203: Notes on Gulf7Finance 203: Notes on Gulf8After Tax Profits from OilFinance 203: Notes on Gulf9Tax Shelter from Capitalized Exploration ExpensesFinance 203: Notes on Gulf10WACCFinance 203: Notes on Gulf11WACC Debt, Equity and beta are for Gulf Rates are from t
6、he Economic Report of the President for the end of 83Finance 203: Notes on Gulf12NPV (Nominal) of Exploration in 1982Finance 203: Notes on Gulf13NPV in Nominal Terms Tax shelter from Expensed Exploration expenses in 82 is 50% of $727 million It was assumed that neither oil prices nor costs would gro
7、w in real terms over the period from 84 to 96. It was stated in the case that oil prices were not expected to rise (in real terms) over the next ten years.Finance 203: Notes on Gulf14NPV in Nominal Terms Real after tax profit for 86 to 96 is 83 after tax profit per barrel times 359/11 This is inflat
8、ed at 3% per year to get nominal after tax profits 359 is 1983 additions to reserves Assumed to be spread over 11 years starting 4 years after explorationFinance 203: Notes on Gulf15NPV in Nominal Terms Tax shelter from Capitalized Exploration expenses in 86 to 96 is the per barrel shelter of $3.20
9、times 359/11 note that this is not inflated Finance 203: Notes on Gulf16Per Share Cost of the Exploration Program continued indefinitely The Exploration Program has a negative NPV of $1.019 billion per year The present value computed as perpetuity of continuing exploration is $7.846 billion In compu
10、ting the perpetuity it was assumed that the exploration would grow at 4% per year Average growth of exploration from 80 to 83 was about 3.4%Finance 203: Notes on Gulf17Per Share Cost of the Exploration Program continued indefinitely With 165.3 million shares outstanding the per share cost of the exp
11、loration program is $47.47 per shareFinance 203: Notes on Gulf18Per Share Cost of the Exploration Program continued indefinitely If the market price of $43/share is determined with the expectation that the exploration will continue indefinitely, and indeed, grow at 4% then the share price is $47.47
12、lower than it would be if the exploration were discontinued Without exploration the stock would be worth $90.47 per share.Finance 203: Notes on Gulf19Per Share Cost of the Exploration Program continued indefinitely If the revenues are spread over 7 years instead of 11, the exploration program has a
13、negative NPV of $861 million per year The present value computed as perpetuity of continuing exploration is $6.626 billionFinance 203: Notes on Gulf20Per Share Cost of the Exploration Program continued indefinitely In this case, if the market price of $43/share is determined with the expectation tha
14、t the exploration will continue indefinitely, and indeed, grow at 4% then the share price is $40.09 lower than it would be if the exploration were discontinued Without exploration the stock would be worth $83.09 per share.Finance 203: Notes on Gulf21The Value of Gulfs ReservesFinance 203: Notes on G
15、ulf22The Value of Gulfs reserves Real after tax profit for 84 to 94 is 83 after tax profit per barrel times 3038/11 This is inflated at 3% per year to get nominal after tax profits 3038 is 1983 end reserves Assumed to be spread over 11 years starting in 84Finance 203: Notes on Gulf23The Value of Gulfs reserves Tax shelter from Capitalized Exploration expenses in 84 to 94 is the per barrel shelter of $2.94 times 3038/11 note that, once again, this is not inflated
