Birch Resources (a)
8 Pages Posted: 21 Oct 2008
Abstract
Birch Resources has been offered a "farm-out" deal to drill a well in Terrebonne Parish, Louisiana. It also has the option, if the well is successful, to drill a second well two years later. The A case focuses on the decision of whether or not to accept the deal, which requires the company to value the embedded option. The B case allows Birch the additional option of waiting an extra two years to decide whether or not to drill the second well. Valuing the deal now requires a far more complex and interesting model.
Excerpt
UVA-QA-0579
Rev. Mar. 30, 2011
BIRCH RESOURCES (A)
Randy Spade sat in his office looking over the proposed drilling program for the upcoming year. Spade had joined Birch Resources six months earlier, after working for almost 10 years as a reservoir engineer for King Oil, one of the largest exploration and production companies in the world. While Spade had enjoyed his work at King Oil, he eventually grew tired of the bureaucracy of a large company as well as the slow pace at which his managers were beginning to adopt new evaluative techniques. Spade was looking forward to using decision-analytic techniques to improve the drilling program results at Birch. With the beginning of the year only two months away, Spade was eager to get to work. The first drilling prospect to be analyzed was in Terrebonne Parish, Louisiana.
Spade's Background
While at King Oil, Spade had worked as part of a team of reservoir engineers to evaluate drilling prospects and to design the company's annual drilling program. At King, the team of reservoir engineers would meet monthly to evaluate potential drilling sites. Typically, the team would analyze reserve data and tests for a particular site, review production profiles from nearby drill sites, “gut-check” the potential site's value using current commodity prices, and then make a decision.
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Keywords: decision analysis, monte carlo simulation
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