Case Study: Gulf Oil Corporation Essay Sample

per portion clearly demonstrates the poor job done by Mr. Lee's management of Gulf. This occurred during a period when petroleum prices rose from $5.76 in 1976 to $22.

In 1983, the number is 42. However, this is only one aspect of the analysis. Let's consider other perspectives. If we look at exhibit 3.

The company's ratio of replacing its militias, on average over seven years, was 0.85, indicating that it consumed its militias to a great extent. This ratio below 1 implies that the company produced more than it developed in terms of militias.

If Gulf continues to operate in this manner, its estimated longevity would be only 8 years. The estimated reserve life in 1983 is calculated by dividing accumulated reserves by production, which results in 2.313 divided by 290, equaling 8 years. Other indicators, such as return on assets and equity, which can be inferred from exhibit 7, indicate that the company's performance is below the industry average.

The return on assets for Gulf over a seven-year period was 6%, compared to 7.2%. Similarly, the average return on equity was 12.4%, compared to the industry norm of 16.8%. These indicators demonstrate why the market undervalued Gulf's stocks so significantly. If we calculate the net tangible assets per share basis.

We will discover that it is $112.9 compared to $43. It's not a surprising fact looking at the poor asset management. Net Total Assets per share= (Total Assets-Long term debt) / Number of shares. NTA per share= ($21 Billion-2.

Despite a poor performance, Gulf's management has consistently paid high dividends to shareholders in order to create the perception of strong performance. This strategy has effectively increased the

value of Gulf's shares in a short period of time. It is worth investigating how Pickens was able to benefit from the royalty trust concept, considering these circumstances.

Why did he offer such a high premium? The value of Gulf shares increased significantly due to unethical actions and had no correlation with the company's performance. To emphasize an intriguing fact, Gulf's trading volume almost doubled just one week before Pickens made his partial takeover bid.

Investors were interested in acquiring portions of Gulf for several reasons, one of which could be the implementation of the royalty trust structure that Pickens wanted to introduce. Pickens, a notorious corporate raider, primarily gained profits by acquiring portions of companies and selling them at a higher price, thereby generating capital gains. The implementation of the royalty trust structure would lead to a significant increase in EPS (earnings per share) as it allowed the company to enjoy tax benefits.

Overall, the main advantage of setting up a trust to manage oil and gas income is that the trust's earnings are not subject to corporate taxation before dividends are distributed, despite the owners benefiting from limited liability. Generally,

Once the corporate revenue enhancement has been paid, companies have the option to either keep their profits or distribute them to shareholders as dividends. Individual shareholders are directly subject to personal income tax on corporate dividends at a certain rate. If the market value of stocks increases due to retained earnings, any gains are subject to capital gains tax when the shares are sold by the shareholders. Therefore, Pickens should have implemented this concept in Gulf.

According to the given information, the monetary value of royalty trust portions

would have been approximately $134. This value is calculated using the P/E ratio of Gulf Shares in 1983, which is P=$43 and EPS=$5.5, resulting in a ratio of 7. Additionally, due to corporate tax freedom, the new NPAT would be $2.

85 billion NPAT is equal to $0.915 + $1.933, resulting in a total of $2.85 billion. The new EPS is calculated by dividing $2.85 billion by 0.165, resulting in $17.

23New Price= New EPS*P/E= $ 17. 23*7. 8= $ 134 That is why Pickens was prepared to offer $ 65 and why there were numerous individual investors willing to acquire Gulf's shares prior to Pickens's offer. Pickens' net capital gains on a per-share basis from the sale of Gulf shares, after implementing the royalty trust structure, would have been $ 34. After-tax capital gains per share= ($ 134- $ 65) *0.

5= $34.53. How much should Keller of Socal offer for Gulf portions? In contrast to Pickens, Keller of Socal desired to acquire Gulf in order to manage it. This was one of the reasons why the management of Gulf preferred being acquired by Socal rather than by Pickens of Mesa.

There was a desire to neutralize the company and gain substantial capital gains from selling portions of the royalty trust. Gulf Management did not want to accept any offers below $70, so Keeler proposed offering $80 for Gulf portions. Socal was also in a position to offer $80.

Many banks are willing to offer loans due to the low pitching ratio of the company.