Module Code & Title :- 6008LBSBSC Strategic Corporate And Project Finance
Assessment Type :- Assignment Written Report
Word Count :- 3000 words
Company Background :-
UK Oil Plc are involved in up stream oil exploration and production in the North Sea United Kingdom.
6008LBSBSC Strategic Corporate And Project Finance Assignment – UK
Their current finance structure is detailed below:
Last year’s Profit Before Tax was £500M and this level of profit is expected to continue from existing business at least in the short-term.
Ordinary shareholders have previously received the following dividends:
o 3 years ago – 5%
o 2 years ago – 6%
o 1 year ago – 6.5%
Current Market Price Per Ordinary Share: £3.50
Future Strategy :-
The Board of UK Oil are considering their future strategy.
Despite the challenges facing the sector declining UK oil reserves volatile oil prices pressure from US shale producers volatile demand coupled with a high cost base and environmental risks the Board feel they must invest in order to grow the business.
The Board are willing to invest up to £350 million and require your evaluation of the following potential Project together with evidence based justified recommendations:
The Development & Operation of a New Oil Reservoir in the North Sea
Schedule of Activities, Immediate Predecessors & Durations (O = Optimistic, M = Most Likely, P = Pessimistic)
Activity A: Geological Studies
Geological studies lasting 12 months have just been completed at a cost of £20 million.
Seismic and geological studies have cast doubt on the amount and quality of oil available for extraction i.e. it may not provide 8,000,000 barrels per annum for 25 years as initially thought.
In summary without going into technical detail we could:
1. Under take the investment immediately in the hope that the amount and quality of oil is available. How ever completed studies estimate that there is only a 0.35 chance that the amount and quality of oil suggested is available for extraction.
2.Carry out Further Tests which would delay the Board’s decision by 1 year and cost $50M and then decide whether or not to drill. The estimated probability of the test yielding positive results is 0.30 in which case there would be a 0.70 probability of success. If the tests are negative there is then only a 0.20 chance of success.
This may also give time to form a Strategic Alliance with a partner operational and/or financial to share cost risks and know how. The form of Strategic Alliance has yet to be decided.
1. Sell the Drilling Rights to a third party another oil company:
2. either immediately, for US$ 45 million, or
3. after the Further Tests together with the Test Results for:
o US$140 (assuming the tests were positive), or
o US$ 20 (if the tests prove negative)
The project is now entering the Technical & Financial Evaluation Stage Activities B & C
Activity B: Technical Evaluation
Production & Chemical Engineers will be asked to evaluate the feasibility of the project over the next 3 months
Your task is to present a Financial Evaluation & Recommendations to the Board in 3 months’ time to assist in their decision making. In this respect you should base your initial assessment on 8,000,000 barrels per
annum for 25 years.
Activity D: Board Consideration
The Board will consider both the Technical & Financial Evaluations before making their decision whether or not to proceed with the project.
Should the Board decide to proceed the Project will move on to Activities E through to J as detailed below
Activity E: Safety Report :-
A shortage of safety engineers in the sector may well prove critical to the timely start of the project though this could be solved by moving suitably qualified staff from other activities, though it is uncertain whether this action would then delay the project.
Activity F: Hire & Training of Labour
Activity G: Site Preparation
Associated costs of Activities F & G are included in Other Costs detailed below
Activity H: Delivery & Construction of the Oil Platform including Drills Pumps Pipelines etc
Two suppliers have been identified, British Oil Machinery who have quoted £315,000,000 and Munchen Machinery Germany who have quoted of €350,000,000.
CAPEX will of course by eligible for the any Tax Allowances.
Details of the contract have yet to be agreed but UK Oil will clearly need to reduce the risks associated with the tender and performance of the contract particularly as both contractors may require an advanced
payment of 10%.
Activity I: Drilling & Production Costs
Annual Drilling & Production Costs for this project are expected to be in line with previous projects detailed below though drilling rates could affected by oil prices:
Activity J: Sales
The additional crude oil 8,000,000 barrels per year for the next 25 years will be sold to various oil refineries including a number of new customers in Europe.
All Other Costs
All other costs associated with the project Indirect Labour Administration Marketing etc are estimated to be £20,000,000 per year increasing through out the project in line with UK inflation rates.
6008LBSBSC Strategic Corporate And Project Finance Assignment – UK
Financing the Project
The Method of Finance has yet to be agreed and the Board seek your advice on whether or not to finance your proportion of the investment by means of
i. 100% Equity, or
ii. 100% Debt, or
iii. A Combination of Equity & Debt
In this respect:
Equity Finance :-
If we decide to Issue Shares to finance part or all of the project we would need to make a Rights Issue. Part Equity finance may involve changing the terms of the Rights Issue.
Under writing Fees Issue Fees charged by our Investment Bank would be £5 million regardless of the size of the issue. They have suggested that a share price in the region of £1 to £1.25 would result in a successful issue.
Bank Loan
The bank have provisionally agreed to finance the project.
Sterling Loans will be provided at the following Interest Rates:
i. Base + 6.25% p.a. or
ii. Fixed 7.5% p.a. for 5 years at a fee of £1 million
The bank will require security and will charge an additional Security Arrangement Fee of £3 million
Currency Loans would be provided at similar rates how ever the Security Arrangement Fee would be £3.25 million
Bonds
If we choose to issue a bond. S & P would charge a rating fee of £5 million and a further £5 million for under writing the issue, regardless of the size of bond. Our likely credit rating is BBB+
6008LBSBSC Strategic Corporate And Project Finance Assignment – UK
Required
Written Report
With reference to on-going market and economic conditions submit a 3,000 word Report via Canvas providing:
1. a detailed evaluation of the proposal in the light of on-going market and economic conditions considering:
o Strategic Management
o Corporate Financial Management
o Risk Management &
o Project Management
2.evidence-based recommendations
o whether you would undertake the Project and
o how you would Finance the Project
6008LBSBSC Strategic Corporate And Project Finance Assignment – UK
Word Count:
With only 3,000 words your report should be concise and to the point.
Much of your evaluation may not appear in the final report, though it will be evident from what you write that you have engaged in detailed evaluation and analysis.
Help
German = 350,000,000 EUR = £301,670,250.00
British = £315,000,000
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