Progressive Exploration and Production Company
7 Pages Posted: 5 Nov 2007 Last revised: 11 Sep 2008
Date Written: November 5, 2007
James Kingsley, a financial analyst for Progressive Exploration and Development Company, has been asked to join a team that will analyze the possible acquisition of a sizable oil field in southeastern Oklahoma. To prepare for the task Mr. Kingsley constructs a spreadsheet model of the economic implications of investing in an early stage E&P project.
The case provides the opportunity for the following types of student analysis:
1. Forecast project cash flows for an E&P project including the incorporation of an allowance for depletion expenses and the payment of both ad valorem and severance taxes which you may assume are tax deductible for income tax purposes.
2. Calculate alternative measures of project value creation including net present value and internal rate of return. Use these measures to arrive at a conclusion regarding whether to undertake the investment.
3. Use sensitivity analysis to determine the key value drivers that contribute most to the success or failure of the investment proposal.
4. Use simulation analysis to better understand the potential risks inherent in the investment. Specifically, the fundamental risks associated with the quantity of oil and the price at which it can be sold.
Keywords: Valuation, Real Options, Uncertainty, Simulation
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