Midland Energy Resources Case Analysis
Midland Energy
Resources Case
Analysis
Midland Energy Capital Planning
Model
• Fund significant overseas growth
• As domestic natural resources dwindle, overseas investments are the main drivers of growth for
Midland. These investments are analyzed and evaluated is US dollars (foreign cash flows are converted to US dollars) and have a US dollar discount rate applied to them. In 2006, 77.7% of
Midland’s total earnings from equity affiliates came from non-US investments.
• Invest in value creating projects across all divisions
• Midland generally used traditional discounted cash flow methods to evaluate potential projects and investments. Some overseas projects were analyzed as streams of future equity cash flows, and were discounted based on cost of equity as a result. Once funded, a project/investment’s performance was measure in two ways. The first being actual performance vs forecasted plan over 1, 3, and 5 year periods, and the second being Economic Value Added (EVA). EVA was calculated as:
EVA = EBIT(1-t) – WACC(period capital expenditure)
Midland Energy Capital Planning
Model
• Optimize capital structure
• Midland primarily optimized its capital structure by taking advantage of the borrowing capacity inherent in its energy reserves and long term assets, such as refining facilities. Midland maintained an optimal debt level which was based on energy prices and its own stock prices.
This practice allowed them to shield additional profits from taxes. In addition to prudent utilization of the debt capacity inherent to the industry, Midland also had unique ways to strengthen its balance sheet via its access to global financial and commodity markets. A group in-house traders actively managed a variety of risks via the securities and commodities market.
• Opportunistically repurchase undervalued shares
• Midland regularly estimates the intrinsic values of it’s stock and when prices fall below this internally calculated intrinsic value, has considered
Resources Case
Analysis
Midland Energy Capital Planning
Model
• Fund significant overseas growth
• As domestic natural resources dwindle, overseas investments are the main drivers of growth for
Midland. These investments are analyzed and evaluated is US dollars (foreign cash flows are converted to US dollars) and have a US dollar discount rate applied to them. In 2006, 77.7% of
Midland’s total earnings from equity affiliates came from non-US investments.
• Invest in value creating projects across all divisions
• Midland generally used traditional discounted cash flow methods to evaluate potential projects and investments. Some overseas projects were analyzed as streams of future equity cash flows, and were discounted based on cost of equity as a result. Once funded, a project/investment’s performance was measure in two ways. The first being actual performance vs forecasted plan over 1, 3, and 5 year periods, and the second being Economic Value Added (EVA). EVA was calculated as:
EVA = EBIT(1-t) – WACC(period capital expenditure)
Midland Energy Capital Planning
Model
• Optimize capital structure
• Midland primarily optimized its capital structure by taking advantage of the borrowing capacity inherent in its energy reserves and long term assets, such as refining facilities. Midland maintained an optimal debt level which was based on energy prices and its own stock prices.
This practice allowed them to shield additional profits from taxes. In addition to prudent utilization of the debt capacity inherent to the industry, Midland also had unique ways to strengthen its balance sheet via its access to global financial and commodity markets. A group in-house traders actively managed a variety of risks via the securities and commodities market.
• Opportunistically repurchase undervalued shares
• Midland regularly estimates the intrinsic values of it’s stock and when prices fall below this internally calculated intrinsic value, has considered