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Valuation of Investment Projects by an International Oil Company: A New Proof of a Straightforward, Rigorous Method

18 Pages Posted: 3 Nov 2008  

Axel Pierru

King Abdullah Petroleum Studies and Research Center (KAPSARC)

Denis Babusiaux

Institut Francais du Petrole (IFP)

Abstract

The problem studied is that of valuing investment projects of an international oil company subject to tax schemes that vary from one country to another. The existing disparities in the tax treatment of interest paid can lead the firm to seek an optimal allocation of its debt capacity among the various projects. In this context, the generalised ATWACC (After-Tax Weighted Average Cost of Capital) method presents numerous advantages over standard methods and is particularly well suited to the valuation of oil-field development projects where debt financing differs from the amount that would correspond to the debt ratio targeted by the firm at the corporate scale. In this paper, we discuss adapting the generalised ATWACC method to the specificities of the oil industry and offer new proof of its validity based on a model that maximises, under constraints, the firm's equity value.

Suggested Citation

Pierru, Axel and Babusiaux, Denis, Valuation of Investment Projects by an International Oil Company: A New Proof of a Straightforward, Rigorous Method. OPEC Energy Review, Vol. 32, No. 3, pp. 197-214, September 2008. Available at SSRN: https://ssrn.com/abstract=1294995 or http://dx.doi.org/10.1111/j.1753-0237.2008.00150.x

Axel Pierru (Contact Author)

King Abdullah Petroleum Studies and Research Center (KAPSARC) ( email )

Riyadh, Central Province
Saudi Arabia

HOME PAGE: http://www.kapsarc.org/

Denis Babusiaux

Institut Francais du Petrole (IFP) ( email )

228 Avenue Napoleon Bonaparte
Rueil Malmaison 92852
France
33147526280 (Phone)
33147527066 (Fax)

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