Valuation is the estimation of an asset’s value, whether real or financial, based on variables perceived to be related to future investment returns, on comparison with similar assets, or, when relevant, on estimates of immediate liquidation proceeds (Pinto, Henry, Robinson, Stowe; 2010). Correct valuation of real assets can present challenges to financial analysts. Different models can be used to arrive at the closest estimate of value and yet certain issues will always arise. This case attempts to tackle two approaches in real asset valuation: Discounted Cash Flow (DCF) analysis and the issues surrounding such, as well as the Black-Scholes Model for Real Options. Questions to be addressed in the study are:

1. Evaluate Amoco’s and …show more content…

What sources of value most plausibly account for the difference between buyer and seller?

AMOCO
APACHE
Growth Stage

MATURE
5th largest oil company in the U.S.

GROWTH
Operator of small-to-medium sized properties

Objectives
To increase profitability
To increase size/growth

Strategy

Divestment: major restructuring to better focus on its most attractive properties and opportunities (includes selling assets regarded as non-strategic)

“Rationalize and reconfigure”
-Acquiring producing properties whose operations they can control and quickly make more efficient

Yes, considering Amoco’s and Apache’s corporate objectives and growth stage, I can say that MW properties are more valuable to Apache than to Amoco. Amoco is already at the mature stage, and its current strategy is aimed at divestment (major restructuring to better focus on its core businesses) - MW properties no longer form part of such core businesses. Amoco is merely interested in selling MW for a profit, where as Apache sees it as an opportunity for growth and geographic diversification, to add further stability to the company, and to increase its reserves. Furthermore, Apache’s revenues are highly dependent on natural gas (current portfolio has an oil-gas ratio of 20-80), and with the increased volatility in natural gas prices, Apache would benefit from acquiring properties with a large concentration of non-gas assets. 2. Structure and execute a DCF