At a Time When Natural Gas and Oil Prices Were

question 130

Essay

At a time when natural gas and oil prices were at record levels, oil and natural gas producer, Andarko Petroleum, announced on June 23, 2006 the acquisition of two competitors, Kerr-McGee Corp. and Western Gas Resources, for $16.4 billion and $4.7 billion in cash, respectively. These purchase prices represent a substantial 40 percent premium for Kerr-McGee and a 49 percent premium for Western Gas. The acquired assets strongly complement Andarko's existing operations, providing the scale and focus necessary to cut overlapping expenses and to concentrate resources in adjacent properties. What do you believe were the primary forces driving Andarko's acquisition? How will greater scale and focus help Andarko to reduce its costs? Be specific. What are the key assumptions implicit in your argument?

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Definitions:

Manufacturing Overhead

All indirect costs associated with the production process, including utilities, rent for the production facility, and salaries of production supervisors.

Raw Materials

The basic substances from which products are made, typically used in the initial stages of the manufacturing process.

Work in Process

Inventory representing partially completed goods, which are still undergoing manufacturing processes.

Indirect Materials

Materials that are used in the production process but are not directly traceable to a finished product.