W Petroleum Corporation(A) 295029 cash flow projections for exploiting proved undeveloped reserves, excluding, once again, those reserves in Michigan and the Gulf of Mexico Probable reserves Geologic and engineering data showed some reserves to be potentially recoverable, but a lack of complete data or some unresolved uncertainty caused them to be classified as probable rather than proved reserves. Hence, production and cash flow forecasts for probable reserves often had to be"risk-weighted"based on available data and historical experience in comparable fields, to arrive at an estimate that reflected their expected value. Amounts actually covered could be higher or lower, depending on geology and on the nature and extent of recovery operations undertaken. For the properties in MW, Amoco and Apache each made their own independent estimates. Exhibit 5 presents production and cash flow projections for MW's probable reserves, excluding Michigan and the Gulf of Mexico. Exploiting probable reserves would require significant expenditures, exceeding $40 million in the first five years, for additional engineering to prove the reserves and then for subsequent development and production, mostly using secondary recovery techniques. As with undeveloped reserves, engineering and development expenditures could be deferred, at MWs option, for at least 5-7 years Possible reserves Possible reserves were speculative in that geologic and engineering data suggested the presence of significant amounts of oil or gas, but proving, developing, and recovering them was deemed fairly risky. Accordingly, these also had to be risk-weighted in order to arrive at production and operating forecasts. Exhibit 6 shows that expenditures estimated at more than decide to pursue them. Anticipated expenditures were high because advanced recon hould mw $100 million within the first five years would be necessary to recover these reserves should MW both secondary and tertiary, would be required to develop and produce possible reserves ' echniques, Other opportunities In addition to the existing reserves, there were other opportunities to create value from the properties in MW. Perhaps the most obvious, if not the easiest, was further exploration. Through MW, Apache would own or have access to sophisticated technical data gathered by Amoco. These data and further exploration of Mw acreage might lead to the discovery of new reserves. All parties agreed, however, that the possibility of a major new discovery in these geographic areas was remote and the value of the exploration opportunities was probably about $25 million. This figure was not expected to be a controversial part of the negotiations The remaining opportunities did not involve increasing reserves, but finding ways to ptimize production. Processes such as recompletion, plugback, well-deepening, and repair could b used on some existing wells to lower costs, extend well life, or increase the rate of production Likewise, skillful timing and application of secondary and tertiary recovery methods could improve production even for wells in good repair. Such opportunities had to be recognized and exploited by the operator in field as they arose. Their net cash flow effects were positive, but usually not large for any one well, and difficult to estimate. They are not included in the projections shown in Exhibits 3-6. More generally, Apache believed it would be possible to lower the costs, both direct and indirect, of operating the properties in MW Aggregate MW cash flows The production and cash flow estimates presented in Exhibits 3-6 for each of the different types of reserves are aggregated by year in Exhibit 7 to produce one possible picture of the whole company, under specific purchase price, energy price, investment, and operating assumptions. In particular, Exhibits 3-7 all exclude properties in Michigan and the Gulf of Mexico. Were these properties to be included at the time Apache bought MW, they almost certainly would be sold as soon as possible. Projected revenues were based on forecasts of oil and gas prices, which in turn were based on opinions offered by Morgan Stanley's economists(Amoco and Apache each also prepared private forecasts, for use internally). In late 1990, most forecasters predicted gradually rising prices for both oil and gas over the next fifteen years; they differedDO NOT COPY MW Petroleum Corporation (A) 295-029 5 cash flow projections for exploiting proved undeveloped reserves, excluding, once again, those reserves in Michigan and the Gulf of Mexico. Probable reserves xxx Geologic and engineering data showed some reserves to be potentially recoverable, but a lack of complete data or some unresolved uncertainty caused them to be classified as probable rather than proved reserves. Hence, production and cash flow forecasts for probable reserves often had to be "risk-weighted" based on available data and historical experience in comparable fields, to arrive at an estimate that reflected their expected value. Amounts actually recovered could be higher or lower, depending on geology and on the nature and extent of recovery operations undertaken. For the properties in MW, Amoco and Apache each made their own independent estimates. Exhibit 5 presents production and cash flow projections for MW’s probable reserves, excluding Michigan and the Gulf of Mexico. Exploiting probable reserves would require significant expenditures, exceeding $40 million in the first five years, for additional engineering to prove the reserves and then for subsequent development and production, mostly using secondary recovery techniques. As with undeveloped reserves, engineering and development expenditures could be deferred, at MW’s option, for at least 5-7 years. Possible reserves xxx Possible reserves were speculative in that geologic and engineering data suggested the presence of significant amounts of oil or gas, but proving, developing, and recovering them was deemed fairly risky. Accordingly, these also had to be risk-weighted in order to arrive at production and operating forecasts. Exhibit 6 shows that expenditures estimated at more than $100 million within the first five years would be necessary to recover these reserves should MW decide to pursue them. Anticipated expenditures were high because advanced recovery techniques, both secondary and tertiary, would be required to develop and produce possible reserves. Other opportunities xxx In addition to the existing reserves, there were other opportunities to create value from the properties in MW. Perhaps the most obvious, if not the easiest, was further exploration. Through MW, Apache would own or have access to sophisticated technical data gathered by Amoco. These data and further exploration of MW acreage might lead to the discovery of new reserves. All parties agreed, however, that the possibility of a major new discovery in these geographic areas was remote and the value of the exploration opportunities was probably about $25 million. This figure was not expected to be a controversial part of the negotiations. The remaining opportunities did not involve increasing reserves, but finding ways to optimize production. Processes such as recompletion, plugback, well-deepening, and repair could be used on some existing wells to lower costs, extend well life, or increase the rate of production. Likewise, skillful timing and application of secondary and tertiary recovery methods could improve production even for wells in good repair. Such opportunities had to be recognized and exploited by the operator in field as they arose. Their net cash flow effects were positive, but usually not large for any one well, and difficult to estimate. They are not included in the projections shown in Exhibits 3-6. More generally, Apache believed it would be possible to lower the costs, both direct and indirect, of operating the properties in MW. Aggregate MW cash flows xxxThe production and cash flow estimates presented in Exhibits 3-6 for each of the different types of reserves are aggregated by year in Exhibit 7 to produce one possible picture of the whole company, under specific purchase price, energy price, investment, and operating assumptions. In particular, Exhibits 3-7 all exclude properties in Michigan and the Gulf of Mexico. Were these properties to be included at the time Apache bought MW, they almost certainly would be sold as soon as possible. Projected revenues were based on forecasts of oil and gas prices, which in turn were based on opinions offered by Morgan Stanley's economists (Amoco and Apache each also prepared private forecasts, for use internally). In late 1990, most forecasters predicted gradually rising prices for both oil and gas over the next fifteen years; they differed