In: Finance
Permian Partners (PP) produces from aging oil fields in west
Texas. Production is 1.84 million barrels per year in 2018, but
production is declining at 5% per year for the foreseeable future.
Costs of production, transportation, and administration add up to
$25.40 per barrel. The average oil price was $65.40 per barrel in
2018.
PP has 7.4 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 $25.40. Also, ignore taxes.
a. Assume that oil prices are expected to fall to
$60.40 per barrel in 2019, $55.40 per barrel in 2020, and $50.40
per barrel in 2021. After 2021, assume a long-term trend of
oil-price increases at 3% per year. What is the ending 2018 value
of one PP share? (Do not round intermediate calculations.
Round your answer to 2 decimal places.)
b-1. What is PP’s EPS/P ratio? (Do not
round intermediate calculations. Round your answer to 4 decimal
places.)
b-2. Is it equal to the 7% cost of capital?