Question
You have been asked to analyze the value of an oil company with substantial oil reserves. The estimated reserves amount to 10 million barrels and
You have been asked to analyze the value of an oil company with substantial oil reserves.
The estimated reserves amount to 10 million barrels and the estimated cost of developing
these reserves today is $120 million. The current price of oil is $20 per barrel, and the average production cost is estimated to be $6 per barrel. The company has the rights to these reserves for the next 20 years, and the 20-year bond rate is 7%. The company also proposes to extract 4% of its reserves each year to meet cash flow needs. The annualized standard deviation in the price of the oil is 20%. What is the value of this oil company?
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