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Sidi

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How would you structure this case?

Rock Energy, an Oil & Gas company, is evaluating the purchase of one of three oil fields in Latin America. After purchasing the rights to extract oil from one of these fields, Rock Energy will outsource the drilling activity. You have been brought in to identify the best investment for Rock Energy.

 How would you evaluate the three oil fields, and which oil field should Rock Energy purchase?

Rock Energy, an Oil & Gas company, is evaluating the purchase of one of three oil fields in Latin America. After purchasing the rights to extract oil from one of these fields, Rock Energy will outsource the drilling activity. You have been brought in to identify the best investment for Rock Energy.

 How would you evaluate the three oil fields, and which oil field should Rock Energy purchase?

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Hi Alex!

1. Clarify the objective of the client (it's mostly earning money, so I'll assume profits)

2. Clarify how the client would earn money from an oil field (probably the money they get for the crude oil minus the cost of getting it off the ground, net of any initial investment cost)

3. Compare the cash flows for all three options

  • Investment needed (purchasing price, operational investment needed despite outsourcing? ...)
  • Cost of operation (outsourcing fee? logistic costs to transport the crude? any additional operational costs?)
  • Revenue: how many barrels of oil can be extracted for each field in which time line? market price per barrel? any additional revenue streams (e.g., gas is usually extracted alongside oil)
  • Calculate operational profits (Revenues - operational costs), and then calculate break even point (how long will it take to outweigh initial investment cost?) --> the option with the earliest break even is the preferable option from a financial perspective
  • Don't forget to check whether required capabilites or risks differ among options. This might change the viability of options.

Cheers, Sidi

Hi Alex!

1. Clarify the objective of the client (it's mostly earning money, so I'll assume profits)

2. Clarify how the client would earn money from an oil field (probably the money they get for the crude oil minus the cost of getting it off the ground, net of any initial investment cost)

3. Compare the cash flows for all three options

  • Investment needed (purchasing price, operational investment needed despite outsourcing? ...)
  • Cost of operation (outsourcing fee? logistic costs to transport the crude? any additional operational costs?)
  • Revenue: how many barrels of oil can be extracted for each field in which time line? market price per barrel? any additional revenue streams (e.g., gas is usually extracted alongside oil)
  • Calculate operational profits (Revenues - operational costs), and then calculate break even point (how long will it take to outweigh initial investment cost?) --> the option with the earliest break even is the preferable option from a financial perspective
  • Don't forget to check whether required capabilites or risks differ among options. This might change the viability of options.

Cheers, Sidi

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Hello,

First of all I would identify what are all the factors and characteristics that you have to consider in order to understand the quantity of oild that you can obtain, the timing and the costs. Then I would compare the three oil fields considering these KPIs and the price.

Best,
Luca

Hello,

First of all I would identify what are all the factors and characteristics that you have to consider in order to understand the quantity of oild that you can obtain, the timing and the costs. Then I would compare the three oil fields considering these KPIs and the price.

Best,
Luca

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Hello!

On top of the layed-out approaches, given that is stated that there are 3 different oil fields, I would include a part of "oppportunity cost" of pursuing that specific one and not the others, on top some "exploration of the others".

Same applies to outsource vs. doing it in house.

Even if it´s not stated directly in the case, going the extra mile in terms of structure is alwways a plus.

Hope it helps!

Cheers,

Clara

Hello!

On top of the layed-out approaches, given that is stated that there are 3 different oil fields, I would include a part of "oppportunity cost" of pursuing that specific one and not the others, on top some "exploration of the others".

Same applies to outsource vs. doing it in house.

Even if it´s not stated directly in the case, going the extra mile in terms of structure is alwways a plus.

Hope it helps!

Cheers,

Clara

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