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Medium Merger & Acquisition Financial Analysis

Deepwater Inc

#Energy #Manufacturing
ProHub Comment

This case tests the candidate's ability to analyze an unfamiliar manufacturing process, build a comparative framework (with and without filter scenarios), and conduct financial ROI analysis. Strong candidates will systematically ask clarifying questions about product flows, competitive dynamics, and cost drivers before building quantitative models, while also considering strategic risks such as commodity price volatility and regulatory changes.

Estimated Time 26 minutes
Difficulty Medium
Source Chicago Booth
10 / 100
Our client, Deepwater, is an oil refinery firm looking at an investment in a filtering unit to transform residual oil into useful feedstock to produce gasoline (show Exhibit 1). The major input is crude oil which gets refined to gasoline. Deepwater would like your help in determining whether or not they should invest in the filtering unit.

Clarifying Information

  1. The usable output is gasoline.
  2. Oil 6 can be converted to feedstock and then gasoline.
  3. Residual is a waste product unless the filter is purchased. Residuals are leftovers (heavy oils).
  4. Gasoline is sold to a competitive market and the company has no influence on the price of gasoline.
  5. There is enough demand for gasoline.
  6. Fuel can be used to fire the different units. If fuel is not available, residual is used.
  7. The filter transforms residual into useful cracker feedstock.
  8. Many of Deepwater’s competitors have invested in this kind of filter unit.
  9. There are no significant environmental concerns with respect to the filter.
  10. There is no outside market for Oil 6 or feedstock.
  11. The client estimates an investment cost of $40M and a 20 year useful life of the filter (assume straight line depreciation).
  12. The client also estimates annual operating costs of $4M per year for the filter.
  13. With the filter we can make an additional 5,000 barrels/day at a contribution margin of $4/barrel.
  14. The plant operates 350 days per year.
Mock Interview
Interviewer

Our client, Deepwater, is an oil refinery firm looking at an investment in a filtering unit to transform residual oil into useful feedstock to produce gasoline (show Exhibit 1). The major input is crude oil which gets refined to gasoline. Deepwater would like your help in determining whether or not they should invest in the filtering unit.

You

Thanks. Before analyzing, I'd like to clarify a few key questions...

Interviewer

Good question. Let me provide some background information...

You

Based on this, I suggest analyzing from these dimensions...

AI Score
Structure Analysis Communication Business Sense Quantitative
Practicing...
Score coming soon
Practice this case with AI Mock Interview

Deepwater Inc. must decide whether to invest $40M in a filtering unit that converts residual oil (normally waste) into feedstock for additional gasoline production. The analysis requires comparing profitability with versus without the filter, conducting a payback period calculation ($40M investment ÷ $3M annual operating profit ≈ 13 years), and assessing strategic risks around price volatility and environmental regulations.

Key Insights:

  1. Build a structured comparison framework: Scenario A (without filter) vs. Scenario B (with filter) to isolate the filter’s impact on revenues and costs
  2. Identify the key cost trade-off: selling residual as waste versus buying external fuel versus using residual internally with the filter investment
  3. ROI calculation requires linking volume increase (5,000 barrels/day × 350 days/year) to contribution margin ($4/barrel) to derive annual profits, then calculating payback period and assessing against useful life
  4. Strategic analysis should address commodity price volatility, regulatory and environmental risks, and competitive dynamics (competitors already investing in similar units)
  5. After-tax profitability of $1M annually suggests the investment is sound, but sensitivity analysis on fuel and gasoline prices is critical given competitive market exposure