ofitsundevelopedreserves.Again,thecostsmightbe
higherforsomereservesthanforothers,andwecan
use a weighted average cost.- Life of the option. A firm will probably have
different lives for each of its reserves. As a
consequence,wewillhavetouseaweightedaverage
of the lives of the different reserves.
13 - Variancein thevalueoftheasset.Here, thereisa
strongargumentforlookingatonlytheoilpriceas
thesource ofvariance, sinceafirm shouldhavea
muchmorepreciseestimateofitstotalreservesthan
it does of any one of its reserves. - Dividendyield(costofdelay).Aswithanindividual
reserve,afirmwithviablereserveswillbegivingup
thecashflowsitcouldreceiveinthenextperiodfrom
developingthesereservesifitdelaysexercise.This
cash flow, stated as a percent ofthe value of the
reserves, becomes the equivalent of the dividend
yield.
Thedevelopmentlagreducesthevalueofthisoptionjustasit
reduces the value of an individual reserve. The logical
implicationisthatundevelopedreserveswillbeworthmore
atoilcompaniesthatcandeveloptheirreservesmorequickly
than at less efficient companies.
ILLUSTRATION12.7:ValuinganOilCompany—GulfOil
in 1984
GulfOilwasthetargetofatakeoverinearly 1984 at$70per
share(ithad165.30millionsharesoutstandingandtotaldebt
of$9.9 billion). Ithad estimatedreserves of3,038 million