Gulf Oil Takeover Case Study Solution Example

Abstract

We expose the difficulties we encountered to obtain from industry environmental information that is crucial for impact studies and decision-making related to the potential development of offshore oil and gas in the Gulf of St. Lawrence, Canada. This case concerns the information disseminated by the oil company Corridor Resources that there are six persistent, natural oil seeps emanating from the flanks of the Old Harry geological structure in the Gulf of St. Lawrence. According to Corridor, these seeps rise through the water column and appear at the sea surface directly above the prospect, forming permanent oil slicks visible from satellite imagery. Corridor believes this is an indication that the Old Harry prospect contains oil. While this information might be credible, it has been impossible for us to verify its accuracy because the sources are kept secret under the argument of “commercially sensitive.” Yet, such information about the possible presence of natural oil and its sources is essential to obtain and to verify in order to construct a reliable baseline initial state against which any new man-made oil contribution resulting from eventual oil and gas development could be compared with, and impacts on the marine environment, ecosystem, and people be then truly assessed. We describe the legal, economic, and political contexts in which withholding this information might happen, and we take a critical look at its impact on scientific research as well as on decision-making in society.

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Gulf Oil Corporation – Takeover case 1 Gulf Oil case analysis The Gulf oil corporation case focuses specifically on the economics of the firm’s exploration and development (“E & D”) efforts. Gulf’s other business sectors are not discussed in the case; we assume that the operations of these other sectors would remain relatively unchanged following a takeover. Substantive issues – this case provides students with an opportunity to evaluate why large premiums can be justified in takeovers of large public corporations. Value the economic benefits associated with a decision to eliminate the exploration and development activities of the Gulf Oil Corporation. Pedagogical Objectives – a key question is how Socal can justify a huge premium over market value to acquire Gulf. In the Gulf case, value enhancements to Socal are possible as a result of a complete change in the strategy for managing Gulf. The strategy change involves liquidating Gulf’s oil and gas reserve position rather than spending $2.2 billion per year to replace its reserves. This valuation exercise shows why Gulf was highly vulnerable to a takeover, and why firms attempting the takeover of Gulf could rationally offer a 100% premium. Some background : For many years Gulf concentrated its exploration and development efforts outside US. While oil-finding costs were lower abroad, reserves found in these locations were vulnerable to both expropriation and confiscatory taxes. From 1980-1982 exploration expenses rose from $561 to $727 million. In 1982 Gulf attempted to acquire Cities Services to bolster reserves via acquisition rather than through discovery, but decided that $63 per share was too high. Cities Services agreed to be acquired from Occidental Petroleum a few weeks after Gulf’s aborted offer, at a price of approximately $53 per share. In 1983 Mesa Petroleum (T. Boone Pickens) proposed an alternative to Gulf CEO James Lee’s reserves rebuilding strategy: Mesa’s (and, also, Arco’s, KKR’s & SOCAL’s) alternative strategy focused on building shareholder wealth by eliminating Gulf’s exploration and development To determine if Gulf’s exploration and development effort adds to shareholder value we estimate seven key variables: General rate of inflation – to estimate growth of direct costs Rate of inflation for oil prices – to estimate growth of oil revenues Cost of capital for the firm undertaking the oil exploration and development activity Average time period from cash outlay to cash recovery for oil exploration & development expenditures Expected current finding cost for oil reserves Present value of the tax shelters associated with the finding cost outlays

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