Pioneer Petroleum

In: Business and Management

Submitted By shukrim
Words 1582
Pages 7
I. Introduction and Article Overview

The article is about the inflation problem faced by United States in Sep 2005 because of the increase in the oil prices caused by external factors like Hurricanes, Katrina and Rita. There was an increase in the demand for the oil because of the Gulf Coast Hurricanes which disabled oil rigs, refineries & pipelines and posed them to finally shut down. On the other hand there was still tight supply of oil in the market. In this context analysts had different point of views and generally considered that global competition & vigilant Federal Reserve act to prevent from inflation as they believed that other prices showed no sign of breaking out of control but still they confess that consumers had to face higher prices. Some various indicators are also stated in the article to be the outcome of inflation, indicators were as follows: • Slow rise in Average wage of most of workers as compared to prices. • Low spending powers. • Interest rates will increase. • High Household debt. • Low savings. • Slow economic growth.

In this article, we also can reveal the effect of inflation on different work groups. Mainly work groups were divided in to two categories. First group of workers are Government personnel (military, Foreign Service and civilian federal retirees etc.). Government announced Cost of living adjustment (COLA) for them, in order to compensate them for inflation. Second group of workers are those who constitute about 80% of work force and were mainly for production and non-managerial work did not get any adjustment in their wages. In order to overcome the inflation, the article discussed that the Government already made various policy measures like: • Adjusted benefit payments • Increasing of the cost-of-living adjustment (COLA) based on the change in a variation of the CPI. •…...

Similar Documents

Pioneer Petroleum Corporation

...(separate to the stapled report) to the back of the case report. This work can be handwritten. It is strongly suggested that all team members bring their work to the meeting of the team; this will also help team members evaluate each member’s contribution. The write-ups are due at the beginning of class on the class when it is due. No late write-ups will be accepted. You may form your own group of three or four students. In your write-up please answer the following questions: 1. Does Pioneer estimate its overall corporate weighed average cost of capital correctly? If not, re-estimate the WACC (showing and/or explaining your calculations). 2. Should Pioneer use a single corporate cost of capital or multiple divisional hurdle rates in evaluating projects and allocating investment funds among divisions? Why or why not? If multiple rates are used, how should they be determined? 3. How should Pioneer set capital budgeting criteria for different projects within the same division? What distinctions among projects might be captured in these criteria? How should these different standards be determined? XIII. Capital Budgeting Process Report In this assignment, your group is required to select a firm and identify an individual within the firm with a good understanding of the firm’s capital budgeting process, and interview this individual to learn as much as possible about the capital budgeting......

Words: 4596 - Pages: 19

Pioneer Petroleum Case Analysis

...operations. Worldwide petroleum demand fell slightly in 2009, primarily due to lower North American and OECD Europe consumption (Figure 26), putting downward pressure on prices and revenues. People downgraded from higher fuel consuming vehicles to more fuel efficient cars. Further, companies reported reduced revenues due to lower product sales, leading to additional downward pressure on their revenues and bottom line. Additional reasons for reduced earnings from both FRS consolidated and FRS unconsolidated operations noted in public statements included foreign currency losses, an absence of trading gains, decreased refining and marketing margins, capital expenditures to produce clean fuels, lower sales, and lower refinery utilization rates. However, the companies also undertook several actions aimed at improving future profitability and increasing ability to process lower-cost crude oil, and divestitures of refinery and other assets. Independent Producers Independent oil and gas producers are those companies that only explore and/or produce crude oil and natural gas.  These companies focus on their core strengths to compete with the major companies.  They may have global operations and can range in size from under 25 to thousands of employees.  The Independent Petroleum Association of America, which represents these companies, has over 8,000 members. Typical independent oil and gas producers are Apache Corporation, Devon Energy Corporation, Pioneer Natural Resources and......

Words: 8994 - Pages: 36

Pioneer Petroleum

...Pioneer Petroleum Corporation One of the critical problems confronting management and the board of Pioneer Petroleum Corporation was the determination of a minimum acceptable rate of return on new capital investments, The company’s basic capital budgeting approach was to accept all proposed investments with a positive net present value when discounted at the appropriate cost of capital. At issue was how the appropriate discount rate would be determined. The company was weighing two alternative approaches for determining a minimum rate of return: (1) a single cutoff rate based on the company’s overall weighted average cost of capital, and (2) a system of multiple cutoff rates that reflected the risk-profit characteristics of the several business or economic sectors in which the company’s subsidiaries operated. The issue had assumed increased importance because of management’s decision to extend the use of the cutoff rate to the evaluation of existing operations and investments. It was planned to evaluate divisional managers on the basis of their net profits after the deduction of a charge for capital employed by the division. Pioneer Petroleum had been formed in 1924 through the merger of several formerly independent firms operating in the oil refining, pipeline transportation, and industrial chemical fields. Over the next 80 years, the company integrated vertically into exploration and production of crude oil and marketing refined petroleum products, and horizontally into......

Words: 1497 - Pages: 6

Pioneer Petroleum

...Pioneer Petroleum Corporation’s (PPC) has been through a diverse amount of changes throughout the years. They were originally were a merger of several different independent firms operating in the oil refining, pipeline transportation, and industrial chemicals fields. PPC then integrated vertically into exploration and production of crude oil and marketing refined petroleum products, but horizontally into plastics, agricultural chemicals, and real estate development. They decided to restructure the company into a hydrocarbons-based company, concentrating on oil, gas, coal, and petrochemicals. They needed to decrease their overall risk and optimize their overall performance and would only be able to by collaboration and coordination among their refining and marketing network divisions. PPC were spending billions of dollars on capital expenditures and were expecting an increase in the next year. These expenditures were allowing for the company to process heavy Alaskan crude oil more efficiently and also provided good returns. In the next five years, the company was going to need to meet new environmental standards, which meant more spending increases. Along with these expenditures and regulations were expected higher growths because now the company truly could utilize and capitalize on their strength. PPC’s management and board are weighing out two alternative approaches in order to determine a minimum rate of return. They had to decide if a single cutoff rate based on the...

Words: 778 - Pages: 4

Pioneer Petroleum

...Pioneer Petroleum Corporation Ryan Rhodes Dr. Bacon February 18, 2009 Table of Contents Introduction Background……………………………………………………………….. Pg. 3 Major Problems……………………………………………………………. Pg. 5 Analysis Alternative Courses of Action………………………………………………Pg. 6 Analysis of Alternatives……………………………………………………. Pg. 6 Conclusion Suggested Course of Action………………………………………………... Pg. 8 Introduction Background Pioneer Petroleum was formed in 1924 with the merger of several formerly independent firms which operated in the oil refining, pipeline transportation, and industrial chemical fields. Through the next sixty years, the company integrated vertically into exploration and production of crude oil and marketing refined petroleum products and horizontally into plastics, agricultural chemicals, and real-estate development. It was restructured in 1985 as a hydrocarbons-based company, concentrating on oil, gas, coal and petrochemicals. Pioneer at the time was one of the lowest cost refiners on the West Coast and had an extensive West Coast marketing network. In 1990, total revenue exceeded $15.6 billion and net income was over $1.5 billion. Pioneer was subject to extremely volatile prices in oil. Because of this, the management of Pioneer emphasized the importance of operational and financial flexibility to respond to any price swings. Pioneer spent about $3.1 billion on capital expenditures in 1990, and the forecast for 1991 was approximately $4.5 billion...

Words: 1584 - Pages: 7

Pioneer Petroleum Analysis

...Pioneer Petroleum Analysis Pioneer Petroleum Corporation's (PPC) has been through a diverse amount of changes throughout the years. They were originally were a merger of several different independent firms operating in the oil refining, pipeline transportation, and industrial chemicals fields. PPC then integrated vertically into exploration and production of crude oil and marketing refined petroleum products, but horizontally into plastics, agricultural chemicals, and real estate development. They decided to restructure the company into a hydrocarbons-based company, concentrating on oil, gas, coal, and petrochemicals. They needed to decrease their overall risk and optimize their overall performance and would only be able to by collaboration and coordination among their refining and marketing network divisions. PPC were spending billions of dollars on capital expenditures and were expecting an increase in the next year. These expenditures were allowing for the company to process heavy Alaskan crude oil more efficiently and also provided good returns. In the next five years, the company was going to need to meet new environmental standards, which meant more spending increases. Along with these expenditures and regulations were expected higher growths because now the company truly could utilize and capitalize on their strength. PPC's management and board are weighing out two alternative approaches in order to determine a minimum rate of return. They had to decide......

Words: 305 - Pages: 2

Pioneer Petroleum

...Pioneer Petroleum Cases Analysis  The Problem:  Pioneer Petroleum Corporation (PPC) has two major problems that are interfering with the goal of the firm to maximize shareholder wealth. The first is that PPC has been calculating their weighted average cost of capital incorrectly, by incorrectly calculating their after tax cost of debt and their cost of equity. This miscalculation has subjected PPC to more risk and has hurt the company’s ability to make appropriate investment decisions. This has also led PPC to accepting investment decisions that should not have been included within their acceptable range. Second, PPC has been using a single company-wide rate for their multi-divisional company. In either instance the company is not maximizing wealth.  Statement of Facts and Assumptions:  PPC has been calculating their after tax cost of debt using the coupon rate of 12% instead of the actual interest rate which is 8%. Taking the 8% interest rate into account, PPC’s actual cost of capital would be calculated as: [.08(1-.34)]= 5.28%. PPC has simply been using 10% (their equity growth rate) as their cost, but must instead either use the CAPM model to calculate their cost of equity, or the Dividend-growth model. If they use the CAPM model, which is the most accurate, their cost of equity will be: .078+.8(.1625-.078)=14.56%. Or they can use the Dividend-growth model and their cost of equity would be: (2.7/63)+.1=14.29%. Both are acceptable but, because the Dividend-growth......

Words: 670 - Pages: 3

Pioneer Petroleum

...Taylor Anderson INTRODUCTION Background Pioneer Petroleum was founded in 1924, through a merger within industrial, pipeline transportation, and refining fields. PP has evolved over the last 60 years into a company that now also works with agricultural chemicals, plastics, and real estate development concentrating in gas, oil, petrochemicals, and coal. In 1990, PP improved their coker and sulfur recovery facility to make their refining process more efficient and in turn has become one of the lowest cost refiners on the West Coast. Due to the refining process PP’s gasolines are among the most cleanest-burning in the industry. PP’s is also the producer of one-third of the world’s supply of methyl tertiary butyl ether (MTBE), which is a chemical used to make cleaner burning gasolines. They also produce one third of the world’s supply of MTBE. Major Issues The major issue that PP is facing right now is that the management board of PP is trying to decide whether to use a single cutoff rate or a system of multiple cutoff rates to determine the minimum acceptable rate of return on new capital investments. As of right now PP is using one single company-wide cutoff rate that is based on their overall weighted cost of capital. The current single rate system that PP is using has increased their overall risk by causing them to choose investment decisions in divisions with higher risk because they exceed the cutoff hurdle, while not investing in lower risk areas because they do......

Words: 1244 - Pages: 5

Pioneer Petroleum

...Cost of Capital _ Pioneer Petroleum Corporation Copyright © 1991 by the President and Fellows of Harvard College. Harvard Business School Case 292-011. One of the critical problems confronting management and the board of Pioneer Petroleum Corporation in July 1991 was the determination of a minimum acceptable rate of return on new capital investments. The company's basic capital budgeting approach was to accept all proposed investments with a positive net present value when discounted at the appropriate cost of capital. At issue was how the appropriate discount rate would be determined. The company was weighing two alternative approaches for determining a minimum rate of return: (1) a single cutoff rate based on the company's overall weighted average cost of capital, and (2) a system of multiple cutoff rates that reflected the risk-profit characteristics of the several businesses or economic sectors in which the company's subsidiaries operated. The issue had assumed increased importance because of management's decision to extend the use of the cutoff rate to the evaluation of existing operations and investments. It was planned to evaluate divisional managers on the basis of their net profits after the deduction of a charge for capital employed by the division. Pioneer Petroleum had been formed in 1924 through the merger of several for merely independent firms operating in the oil refining, pipeline transportation, and industrial chemicals fields. Over the next 60......

Words: 2080 - Pages: 9

Pioneer Petroleum

...Pioneer Petroleum is a multinational corporation that is in position to capitalize on investments all around the World. Within the industry Pioneer’s gasoline are among the cleanest burning fuels. They are better position than most to meet strict environmental guidelines as they currently have clean efficient running plants positioned to capitalize on less polluted products. Also Pioneer Petroleum is heavily involved in exploration and devilment. From 1924 to the present, pioneer has been able to expand both vertically and diversify horizontally. With such resources and capital, the company has to oversee so many opportunities and ventures. Presently the company is at odds over whether they should use a company wide cut off rate based on the overall weighted average cost of capital or if Pioneer should use multiple rates that reflect risk-profit characteristics of the several businesses or economic sectors. At first we must decide if the methodology used in computing the company’s overall weighted average cost of capital is just. Second, we should decide in which terms Pioneer adheres to future investments. Should they adjust discount rates for different divisions and projects and stay away from a universal cutoff rate? Third, the capital budgeting criteria must be set for different projects across Pioneer’s divisions. What distinctions among projects need to be noted and how the standards should be determined are all questions that arise from judging how to proceed......

Words: 1482 - Pages: 6

Pioneer Petroleum

...Ramon V. Del Rosario College of Business Master of Business Administration Financial Management FNC535M RCBC Plaza Room No. 526 “Big City Trust Company” Case Analysis & Corporate Strategy Group 4 Report Estepa, Joan Carla E. | Member | BSC Management, Corporate Focus | Reyes, Corinne Erlyn L. | Member | BA Humanities with Professional Certificate in Business Management | Yan, Lee Rainier C. | Member | B.S. Chemical Engineering | Dean Atty. Joe-Santos Balagtas Bisquera MBA Professor Case Analysis Executive Summary According to the case, Auto-Drive Company is developing an Auto-Drive which will be installed in cars, a technology that would switch cars into automatic pilot. This kind of advancement will make it impossible for the car to run off the road or into another car. Mr. Cooper, a senior trust officer at Big City Trust Company, finds this innovation very promising for the automobile industry and believes that this would be a great investment. He sees the benefits it could bring to customers and he saw a market for this technology. The new venture leads Mr. Cooper to study the Xerox and Polaroid Company methods on how these two companies financed their growth, since they are both successful innovators in their own fields. Mr. Richard Brainard, an analyst in the trust department was asked to gather and examine the facts and financial statements of the two companies they will need for the analysis for the period 1960-1964. This......

Words: 6027 - Pages: 25

Pioneer Petroleum

...Daniel Hughes FINA 450 MID TERM Pioneer Petroleum Corporation Case 2-27-13 Background: Formed in 1924 by a merger of several firms, Pioneer Petroleum Corporation (PPC) is in the business of refining oil, building pipeline transportation and creating industrial fields. Pioneer is currently one of the primary producers of crude oil in the United States and is one of the top producers of Alaska crude oil. PPC is currently the lowest cost refiner on the western side of the globe, and has been expanding capital investments in numerous countries. Pioneer began expanding beyond their current industry into several capital ventures. Some have included vertical investments through the production of crude oil to the marketing of refined petroleum products, and horizontal investment interests into real estate, agricultural chemicals and plastics. However, in 1985 the company was restructured and concentrated on oil, gas, coal and petrochemicals. PPC spends billions in capital expenditures each year and are currently expecting an increase in capital expenditures in the upcoming years. Last year’s (1990) revenues exceeded $15.6 billion with net income over $1.5 billion, and capital expenditures were about $3.1 billion. It is expected that next year’s (1991) will rise to $4.5 billion, with some of these expenditures resulting in more efficient processing of crude oil. Other capital expenditures directly relate to the new standards of government regulations. These capital......

Words: 1208 - Pages: 5

Pioneer Petroleum Corporation (Ppc)

...Company Background Pioneer Petroleum Corporation (PPC) was formed as a result of several independent firms that operate in oil refining, pipeline transportation, and industrial chemical field merging together. The company has been through several changes since it was established in 1924 and over the years it became an integrated company with many products and services such as plastics, agriculture chemicals, and real-estate development. In 1985, PPC became a hydro-carbons based company, concentrating on oil, gas, coal, and petrochemicals. PPC is also one of the primary producers of Alaskan crude giving it a 60% of their domestic petroleum liquid production. This gives PPC an advantage of being the lowest cost refiners in the West Coast by provide all of Alaskan crude oil, but it also requires a broad marketing network in the West Coast. Therefore, this integration required them to decrease their overall risk and optimize their overall performance through collaboration and coordination. Fact Pattern In 1991, PPC spend about $3.1 billion on capital expenditures and forecasted another capital expenditure of a $4.5 billion in 1991 (an increase from the previous year). However, it was largely due to these expenditures that the company was able to process heavy Alaskan crude oil more efficiently and also get a good return on their investment. For example, the light product yield in their refiners was higher than the industry average. Some of their investments were......

Words: 906 - Pages: 4

Pioneer Petroleum

...Pioneer Petroleum Case Analysis Pioneer Petroleum Cases Analysis The Problem: Pioneer Petroleum Corporation (PPC) has two major problems that are interfering with the goal of the firm to maximize shareholder wealth. The first is that PPC has been calculating their weighted average cost of capital incorrectly, by incorrectly calculating their after tax cost of debt and their cost of equity. This miscalculation has subjected PPC to more risk and has hurt the company’s ability to make appropriate investment decisions. This has also led PPC to accepting investment decisions that should not have been included within their acceptable range. Second, PPC has been using a single company-wide rate for their multi-divisional company. In either instance the company is not maximizing wealth. Statement of Facts and Assumptions: PPC has been calculating their after tax cost of debt using the coupon rate of 12% instead of the actual interest rate which is 8%. Taking the 8% interest rate into account, PPC’s actual cost of capital would be calculated as: [.08(1-.34)]= 5.28%. PPC has simply been using 10% (their equity growth rate) as their cost, but must instead either use the CAPM model to calculate their cost of equity, or the Dividend-growth model. If they use the CAPM model, which is the most accurate, their cost of equity will be: .078+.8(.1625-.078)=14.56%. Or they can use the Dividend-growth model and their cost of equity would be: (2.7/63)+.1=14.29%. Both......

Words: 346 - Pages: 2

Pioneer Petroleum

...Pioneer Petroleum Corporation's (PPC) has been through a diverse amount of changes throughout the years. They were originally were a merger of several different independent firms operating in the oil refining, pipeline transportation, and industrial chemicals fields. PPC then integrated vertically into exploration and production of crude oil and marketing refined petroleum products, but horizontally into plastics, agricultural chemicals, and real estate development. They decided to restructure the company into a hydrocarbons-based company, concentrating on oil, gas, coal, and petrochemicals. They needed to decrease their overall risk and optimize their overall performance and would only be able to by collaboration and coordination among their refining and marketing network divisions. PPC were spending billions of dollars on capital expenditures and were expecting an increase in the next year. These expenditures were allowing for the company to process heavy Alaskan crude oil more efficiently and also provided good returns. In the next five years, the company was going to need to meet new environmental standards, which meant more spending increases. Along with these expenditures and regulations were expected higher growths because now the company truly could utilize and capitalize on their strength. PPC's management and board are weighing out two alternative approaches in order to determine a minimum rate of return. They had to decide if a single cutoff rate......

Words: 288 - Pages: 2