University of Washington
Graduate School of Business

Finance 553

Midterm Assignment

Rocky Higgins
February 10, 2004

In less than five, double-spaced, typewritten pages, plus any exhibits, please answer the following questions about MW Petroleum Corp. This assignment is worth a maximum of 100 points.

1. (10 points.) Apart from any quantitative analysis, are there any reasons to anticipate that Apache Corporation’s acquisition of MW Petroleum might be a positive net present value activity for Apache, for Amoco? Explain.

This looks like an attractive deal for both parties. Amoco does many things well, but managing smaller, marginally productive oil and gas fields apparently isn’t one of them. This is a chance to unload some properties that because of their high cost structure, Amoco can’t manage profitably.
Apache, on the other hand, has low costs and is an efficient operator of small- to medium-sized properties. The company has grown significantly in recent years by acquiring less well-run properties and applying its “rationalize and reconfigure” strategy. The MW Petroleum properties appear to offer the opportunity to continue this strategy.
If Amoco can strike a price wherein Apache shares some of its operating savings with Amoco, both parties can generate positive net present values from the transaction.
Acquisition of MW Petroleum may also reduce the volatility of Apache’s cash flows by making them less dependent on gas. Although this may not benefit shareholders directly, it will likely enable management to sleep better and might increase Apache’s borrowing capacity, thereby benefiting shareholders indirectly.

2. (10 points.) Whose projections appear in the case exhibits? From Apache’s perspective, is there any reason to believe these numbers might be biased one way or another? Does the value of MW Petroleum derived from