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Valuation of investment projects by an international oil company: A new proof of a straightforward, rigorous method

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Listed:
  • Axel Pierru

    (IFPEN - IFP Energies nouvelles)

  • Denis Babusiaux

    (IFPEN - IFP Energies nouvelles)

Abstract

The problem studied is that of valuing investment projects of an international oil company subject to tax schemes that vary from one country to another. The existing disparities in the tax treatment of interest paid can lead the firm to seek an optimal allocation of its debt capacity among the various projects. In this context, the generalized ATWACC (After-Tax Weighted Average Cost of Capital) method presents numerous advantages over standard methods and is particularly well suited to the valuation of oil-field development projects where debt financing differs from the amount that would correspond to the debt ratio targeted by the firm at the corporate scale. In this paper, we discuss adapting the generalized ATWACC method to the specificities of the oil industry and offer new proof of its validity, based on a model that maximizes, under constraints, the firm's equity value.

Suggested Citation

  • Axel Pierru & Denis Babusiaux, 2009. "Valuation of investment projects by an international oil company: A new proof of a straightforward, rigorous method," Working Papers hal-02469498, HAL.
    • Handle: RePEc:hal:wpaper:hal-02469498
    Note: View the original document on HAL open archive server: https://ifp.hal.science/hal-02469498
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    References listed on IDEAS

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    1. Richard S Ruback, 2002. "Capital Cash Flows: A Simple Approach to Valuing Risky Cash Flows," Financial Management, Financial Management Association, vol. 31(2), Summer.
    2. Christophe Barret & Philippe Chollet, 1990. "Canadian Gas Exports : Modeling a Market in Disequilibrium," Working Papers hal-02432570, HAL.
    3. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
    4. Babusiaux, Denis & Pierru, Axel, 2001. "Capital budgeting, investment project valuation and financing mix: Methodological proposals," European Journal of Operational Research, Elsevier, vol. 135(2), pages 326-337, December.
    5. Denis Babusiaux & Axel Pierru, 2001. "De la solution d'un problème concret (projet d'investissement soumis à une fiscalité spécifique) à une avancée théorique (unicité des méthodes de calcul de Valeurs actuelles)," Revue économique, Presses de Sciences-Po, vol. 52(3), pages 717-727.
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