Permian Partners (PP) produces from aging oil fields in west Texas. Production is 1.84 million barrels...

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?

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jeff jeffy answered 1 year ago

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