Case Study (Midland Energy)
Midland Energy Resources Inc. is one of the global firms operating in the large energy industry. For instance, the company aims at maximizing its profits, not forgetting its focus on value maximization. Between 2004 and 2007, the company experienced exponential growth. Besides, Midland Energy Resources Inc. aims at making additional investments in its effort to grow and expand its operations. Indeed, the energy-producing company heavily relies on cost-of-capital estimates in making its asset appraisals analysis and stock-repurchase decisions, to mention a few. The paper explores the core challenges facing Midland Energy Resources Inc., and discuss the solutions for the company.
Challenges/Arguments/ Decisions
Indeed, numerous analysis within Midland Energy Resources Inc. was done using the company’s cost-of-capital estimates. Initially, the company’s cost estimates were done by the corporate treasury staff at either its corporate or business unit levels. However, the treasury’s estimates were often criticized since most of its assumptions and inputs were challenged by the company’s division president’s and controllers. Further, being one of the leading energies producing companies globally, the company expected the demand for energy products to go up significantly following the rapid increase in the global population. In 2007, the company prospected that the current global economic growth would stimulate an increase in its core products in the future. Midland Energy Resources Inc. has a challenge of growing its production capabilities and expanding its production capacity to meet the increasing demand for its products. Further, in the year 2005, the company’s refining and marketing division did face stiff competition from rivals operating in the energy industry. The stiff competition was brought forth by the relatively high commoditized company products.
Solutions
In the effort of inhibiting the existing criticism of the company’s cost-of-capital estimates, the company assigned Mortensen, a senior analyst, the task of estimating the company’s cost-of-capital, an action that significantly improved on the estimated values regarding the firms cost-of-capital. For instance, the energy company extensively used the cost-of-capital estimates provided by Mortensen to do performance evaluations. In the effort to meeting the increased demand for its products, Midland Energy Resources Inc. adopted distinct strategies that were meant to increase its overall production volumes in its various divisions. Firstly, Midland Energy Resources Inc. made considerable investments to acquire additional promising properties to boost its production capabilities. Second, the energy-producing company actively engaged in developing its undeveloped reserves and, most importantly, expanding its actual production. Indeed, Midland Energy Resources Inc. did incur more than $8 billion in capital spending by the end of 2008. Importantly, Midland Energy Resources Inc. make value-creating investments that spur its rapid growth. Midland Energy Resources Inc. adopted more advanced technologies that greatly improved its production efficiencies. The company analysts also advised the company that combining enabling technologies and the commonly referred to as vertical integration would make the firm outdo its competitors, thus assuming the market leader position. It is also essential to note that Midland Energy Resources Inc. also optimized its capital structure.
Conclusion
In conclusion, Midland Energy Resources Inc. aims at maximizing its profits, not forgetting its focus on value maximization. Midland Energy Resources Inc. made substantial investments to acquire additional promising properties to boost its production capabilities. Besides, the energy-producing company actively engaged in developing its undeveloped reserves and, most importantly, expanding its actual production.
Work Cited
Luehrman & Joel. Midland Energy Resources, Inc. Cost of Capital, 2009.