Pioneer Petroleum Case Study

Pioneer Petroleum

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Cost of Capital

Evan Kittson

02/25/14

Spring 2014

FINA 450

Table of Contents

INTRODUCTION 3

Background 3

Major Issues 4

ANALYSIS 4

Weighted average cost of capital 5

Divisional cost of capital 5

Major Issues 6

Recomendation 7

Additional material 8

References 8

Tables&Charts 9

INTRODUCTION:

Background:

In 1942, a merger of several companies formed PPC. PPC is in the business of creating industrial fields, refining oil, and building pipeline transportation. Currently, PPC is one of the top producers of Alaska crude oil, and are one of the primary producers of crude oil in the United States. Currently PPC is also the lowest cost refiner in the hemisphere, PPC has also been expanding capital investments in numerous countries. Through the production of crude oil to the marketing of refined petroleum products PPC has begun expanding beyond their current industry into several capital ventures. Some of the current capital ventures have included horizontal investment interests into real estate, agricultural chemicals and plastics, and vertical investments. In 1985, PPC was restructured and began concentrating on oil, gas, coal and petrochemicals.

In addition to the billions PPC spends on capital expenditures each year, they are currently expecting an increase in capital expenditures in the upcoming years. In 1990 PPC’s revenues were in excess of $15.6 billion with net income around $1.5 billion (Exhibit 2), and capital expenditures were right around $3.1 billion. In 1991 PPC’s capital expenditures are expected to rise to $4.5 billion, and some of these expenditures are expected to result in more efficient procession of crude oil. Additional capital expenditures are directly related to the new standards of government regulations. The additional capital expenditures, which allow PPC to process crude oil in a more efficient manner, will aid PPC in receiving a...