Permian Partners (PP) produces from aging oil fields in west Texas. Production i
ID: 2714657 • Letter: P
Question
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.89 million barrels per year in 2013, but production is declining at 5% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.90 per barrel. The average oil price was $65.90 per barrel in 2013.
PP has 7.9 million shares outstanding. The cost of capital is 7%. All of PP’s net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $25.90. Also, ignore taxes.
Assume that oil prices are expected to fall to $60.90 per barrel in 2014, $55.90 per barrel in 2015, and $50.90 per barrel in 2016. After 2016, assume a long-term trend of oil-price increases at 3% per year. What is the PV of a PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is PP’s EPS/P ratio? (Do not round intermediate calculations. Round your answer to 3 decimal places.)
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.89 million barrels per year in 2013, but production is declining at 5% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.90 per barrel. The average oil price was $65.90 per barrel in 2013.
PP has 7.9 million shares outstanding. The cost of capital is 7%. All of PP’s net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $25.90. Also, ignore taxes.
Explanation / Answer
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.89 million barrels per year in 2013, but production is declining at 5% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.90 per barrel. The average oil price was $65.90 per barrel in 2013.
PP has 7.9 million shares outstanding. The cost of capital is 7%. All of PP’s net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $25.90. Also, ignore taxes.
Assume that oil prices are expected to fall to $60.90 per barrel in 2014, $55.90 per barrel in 2015, and $50.90 per barrel in 2016. After 2016, assume a long-term trend of oil-price increases at 3% per year. What is the PV of a PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is PP’s EPS/P ratio? (Do not round intermediate calculations. Round your answer to 3 decimal places.)
From 2017 Production declining at 5% per year for the foreseeable future and Revenue started increasing by 3% for forseeable future and cost remains constant.
Since production will decrease 5% per year while costs per barrel remain constant, the growth rate of expenses is: –5.0%
To compute the growth rate of revenues, we use the fact that production decreases 5% per year while the price of oil increases 3% per year, so that the growth rate of revenues is:
Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.89 million barrels per year in 2013, but production is declining at 5% per year for the foreseeable future. Costs of production, transportation, and administration add up to $25.90 per barrel. The average oil price was $65.90 per barrel in 2013.
PP has 7.9 million shares outstanding. The cost of capital is 7%. All of PP’s net income is distributed as dividends. For simplicity, assume that the company will stay in business forever and that costs per barrel are constant at $25.90. Also, ignore taxes.
a.Assume that oil prices are expected to fall to $60.90 per barrel in 2014, $55.90 per barrel in 2015, and $50.90 per barrel in 2016. After 2016, assume a long-term trend of oil-price increases at 3% per year. What is the PV of a PP share? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Present value per share $ b-1.What is PP’s EPS/P ratio? (Do not round intermediate calculations. Round your answer to 3 decimal places.)
EPS/P ratio b-2. Is it equal to the 7% cost of capital? Yes No a. Determine Net Income 2013 2014 2015 2016 2017 Production (million barrels) (Declining at 5% per year) 1.89 1.80 1.71 1.62 1.54 Price of oil/barrel $65.90 $60.90 $55.90 $50.90 $52.43 Costs/barrel $25.90 $25.90 $25.90 $25.90 $25.90 Revenue (Production x Price per Barrel) $124,551,000 $109,345,950 $95,350,028 $82,480,332 $80,707,005 Less: Expenses (Production x cost per Barrel) -$48,951,000 -$46,503,450 -$44,178,278 -$41,969,364 -$39,870,895 Net Income (= Dividends) $75,600,000 $62,842,500 $51,171,750 $40,510,969 $40,836,110 Present Value of Dividend for year 2014,2015,2016 Year Dividend PV @ 7% Present Value 2014 $62,842,500 0.9346 $58,731,308.41 2015 $51,171,750 0.8734 $44,695,388.24 2016 $40,510,969 0.8163 $33,069,017.78 $136,495,714.44From 2017 Production declining at 5% per year for the foreseeable future and Revenue started increasing by 3% for forseeable future and cost remains constant.
2017Since production will decrease 5% per year while costs per barrel remain constant, the growth rate of expenses is: –5.0%
-5.00%To compute the growth rate of revenues, we use the fact that production decreases 5% per year while the price of oil increases 3% per year, so that the growth rate of revenues is:
[1.03 × (1 – 0.05)] – 1 -2.15% Present Value of Dividend for year 2017 Present Value of Revenue 2017 = $80,707,005/(7%-(-2.15%) $882,043,772.99 Present value of Expenses 2017= 39,870,895/(7%-(-5%) -$332,257,462.03 Present Value of Dividend for year 2017 $549,786,310.96 Discounting Present value of Dividend ($549,786,310.96)/(1.07^3) $448,789,398.38 The total value of the company is:$136,495,714.44+$448,789,398.38 $585,285,112.82 Shares outstanding 7900000 shares Present value per Share= Net income / Shares outstanding $74.09 per share b. PP EPS/P Ratio EPS = 75,600,000/7900000 $10 Present value per Share (P) $74.09 PP EPS/P Ratio =$10/$74.09 12.92% No,It is not equal to 7% cost of capital.Related Questions
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