6106LBSBW INTERNATIONAL CORPORATE FINANCE
6106LBSBW INTERNATIONAL CORPORATE FINANCE
Assessment
Deadline Date:
Feedback date
Coursework: UK Oil Plc
3,000 Report
(Verbal & Written)
Weight 100%
Verbal Report 20%
During the Week Commencing
13TH December 2021
Written Report 80%
By Midnight Friday
7th January 2022
Work submitted after this date will receive a Mark of 0%
Friday 28th January 2022
External Examiner Review:
Please note, the following assessment is subject to review and changes from the External Examiner.
The Module Leader will advise you via Canvas if there are any such changes, prior to starting your assessment but it is your responsibility to ensure that you attempt the correct assessment.
Here is a more detailed look at the Coursework
Company Background
UK Oil Plc are involved in upstream, oil exploration and production in the North Sea, United Kingdom.
Their current finance structure is detailed below:
Shareholder’s Equity £M
£1 Ordinary Shares 1,000
£1 6% Preference Shares 225
Retained Profits 700
1,925
Non Current Liabilities
Unsecured 6% Bond 2025 500
Secured Loan (Floating Rate 7%) 200 700
2,625
Last year’s Profit Before Tax was £200M 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:
3 years ago – 5%
2 years ago – 6%
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 Strategies/Projects, together with evidence-based, justified recommendations:
Option 1: The Development & Operation of a New Oil Reservoir in the North Sea
Option 2: The Merger or Acquisition of an Oil Refinery (Euro Refinery) located in Ireland
Option 3: Development of a Solar Power Generating Plant
The Board insist on the written report to be submitted no later than Midnight Friday 7th January 2022
Option 1: 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
Immediate Predecessors
Duration (months)
O
M
P
A: Geological Study
Completed
12
B: Technical Evaluation
A
2
4
10
C: Financial Evaluation
A
3
D: Board Consideration
B & C
1
2
3
E: Safety Report
D
1
4
7
F: Hire & Training of Labour
D
1
2
3
G: Site Preparation
E & F
3
5
10
H: Delivery & Construction of the Oil Platform
E & G
2
4
6
I: Pre Sale Drilling & Production
H
1
3
8
J: Sales & On-going Drilling & Production
J
On-going
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:
Undertake the investment immediately in the hope that the amount and quality of oil is available. However completed studies estimate that there is only a 0.35 chance that the amount and quality of oil suggested, is available for extraction.
Carry out Further Tests (which would delay the Board’s decision by 1 year and cost $50M) and then decide whether or not to drill. The estimated probability of the test yielding positive results is 0.30, in which case there would be a 0.70 probability of success. If the tests are negative there is then only a 0.20 chance of success.
This may also give time to form a Strategic Alliance with a partner (operational and/or financial) , to share cost, risks and know-how. The form of Strategic Alliance has yet to be decided.
Sell the Drilling Rights to a third party (another oil company):
either immediately, for US$ 45 million, or
after the Further Tests, (together with the Test Results) for:
US$140 (assuming the tests were positive), or
US$ 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
Activity C: Financial Evaluation
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 be affected by oil prices:
Previous Projects
Output (Barrels) 000
£ Costs £000
1
5,000
£100,000
2
5,500
£104,000
3
5,300
£101,000
4
5,600
£105,000
5
6,000
£115,000
6
5,750
£112,000
7
5,900
£110,000
8
6,100
£108,000
9
3,800
£80,000
10
4,750
£95,000
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 throughout the project in line with UK inflation rates.
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
100% Equity, or
100% Debt, or
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.
Underwriting 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:
Base + 6.25% p.a. or
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, however 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 underwriting the issue, regardless of the size of bond. Our likely credit rating is BBB+
Option 2: The Merger or Acquisition of an Oil Refinery (Euro Refinery Plc.) located in Ireland
Statement of Financial Position/Balance Sheet of Euro Refinery Plc as at 31.12.2020
€’000 €’000
Non Current
Accumulated depreciation (100,000)
323,000
Current Assets
Inventory/Stock 115,000
Accounts Receivable/Debtors 10,000
Prepayments 5,000
130,000
Current Liabilities
Accounts Payable/Creditors 22,000
Dividends 6,000
Overdraft 2,000
30,000 100,000
423,000
Non Current Liabilities
6% Bond 2025 100,000
Secured Bank Loan 50,000 150,000
273,000
Equity
Share Capital – €1 Ordinary Shares 250,000
Share Premium 14,000
Retained Profits 9,000
273,000
Sales & Earnings for the year ending 31st December 2020 :
Sales € 800,000,000
Gross Profit € 25,000,000
Net Profit € 9,000,000
Current Market Price per share €1.20
A Merger may be possible via a 1 for 1 Share Exchange.
An Acquisition of 80 – 100% of Euro Refinery at £1.30 per share would be financed by either a Rights Issue or Debt, via a Special Purpose Vehicle. It is believed that a Rights Issue would attract support provided the value of the right is over £1.50.
Potential Benefits of the M & A
In addition to the normal benefits and risks of an M & A it is hoped that the deal will enable the company to:
Increase Market Share and
Improve Efficiency & Reduce Existing Operational Costs
Increase Market Share
The M & A could secure the following additional annual sales/costs, (i.e. additional to existing sales):
UK Oil Plc: 1,000,000 m/b of Crude Oil to Euro Refinery Plc.
Euro Refinery Plc: Sales of Gasoline and Heating Oil using a 3-2-1 Crack Spread
Variable Costs:
UK Oil – as per previous production costs
Euro Refinery Plc - $5pb
Fixed Costs p.a.
UK Oil – £5 million
Euro Refinery Plc - €5 million
Improve Efficiency & Reduce Existing Operational Costs
The Refinery currently produce a number of products including the following types of Gasoline:
Gasoline
Min Octane
Selling Price per Gallon
Min Production (Gallons
per day)
Current Production
(Gallons per day)
Regular
87
$2.20
200,000
200,000
Super
89
$2.30
200,000
325,000
Power
91
$2.40
200,000
225,000
Gasoline is produced by Blending together three Materials.
The Materials can be blended in any proportion to produce Regular, Super or Power Gasoline provided the company meet the following production constraints:
Constraints:
Material Available
Minimum Production Requirement of 200,000 gallons per day of each Type of Gasoline
Minimum Octane Level of each types of Gasoline, detailed above
These materials are currently purchased from Norway at the following cost, by means of Confirmed Irrevocable Documentary Credit, payment 3 months after shipment and Documentary Credit Charges of 0.75% payable by the buyer
Material
Octane Rating
Cost per Gallon
C.I.F. Ireland
3 months after shipment
Capacity/
Purchases
(Gallons
per day)
1
83
$1.10
300,000
2
90
$1.35
400,000
3
95
$1.45
150,000
More efficient Blending of the Material may help to increase production
In addition, the Merger or Acquisition of the Refinery may reduce the Cost of Purchasing Material by using one of UK Oil’s existing suppliers (Russia or USA) rather than Norway. These suppliers have quoted:
Russia
Cost per Gallon
Terms of Payment
FOB Russia
Open Account
2 months after Shipment
Material
1
$1.03
2
$1.32
3
$1.40
USA
Cost per Gallon
Terms of Payment
C & F Ireland
D/A Payable1 month after shipment.
Collection charges 0.25% payable by the buyer
Material
1
$1.04
2
$1.32
3
$1.42
Shipping Costs are estimated to be $3,000,000 and Insurance Costs are charged at 1% of 110% of the C & F value
Option 3: Development of a Solar Power Generating Plant
Details of the Solar Power Generating Plant are not available at present
They will be posted on Canvas and Emailed to you, one week prior to the Written Report Submission Date
You are strongly advised to allow time for this
Required
1. Verbal Report (20%)
You need to Defend your Recommendation regarding Option 1 & Option 2 during a 15 minute meeting.
You may choose to prepare PowerPoint slides to clearly outline and justify your recommendation.
The meeting will take place during the Week Commencing 13th December 2021
Written Report (80%)
With reference to on-going market and economic conditions submit a 3,000 word Report via Canvas providing:
a detailed evaluation of the three options in the light of on-going market and economic conditions considering:
Strategic Management
Corporate Financial Management
Risk Management &
Project Management
evidence-based recommendations of the investment strategy detailing:
which Project to undertake (if any) and
how you would Finance the Project
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.
Submission Date: Midnight Friday 7th January 2022
Work submitted after this date will receive a Mark of 0%
Coursework Marking Scheme
OVERALL
Verbal Report/Defence of Recommendation Option A or B during the Week Commencing 13th December 2021
20%
Written Report by Midnight Friday 7th January 2022
Option 1: Development & Operation of the new Oil Platform
30%
Option 2: The Merger or Acquisition of an Oil Refinery (Euro Refinery Plc.)
30%
Option 3: Development of a Solar Power Generating Plant
Details to be provided prior to the submission date
10%
Conclusion:
Evaluation & Recommendation of A or B or C
10%
TOTAL
100%
Failure to Meet the Board’s Deadline, will result in a Mark of 0%
Verbal Report/Defence of Recommendation Option A or B
20%
Detailed understanding
Ability to Defend your Recommendation when Questioned
Report
Option 1: Development & Operation of the new Oil Platform
30%
Accuracy of Forecast Cashflow
Analysis of the Options Available
Evaluation of the Method & Cost of Finance
Investment Appraisal
Evidence based Evaluation based on Risk & Return
Option 2: The Merger or Acquisition of an Oil Refinery (Euro Refinery Plc.)
30%
Calculate & Evaluation of the Value of the Business
Evaluate the Benefits & Problems arising from the Merger or Acquisition including:
Increased Market Share
Cost Savings
Increased Efficiency
Evaluate Goodwill
Evaluate the Finance Options
Recommend whether to Merge or Acquire Euro Refinery and on what basis
Evidence based Evaluation based on Risk & Return
Option 3: Development of a Solar Power Generating Plant
10%
Accuracy of Calculation
Conclusion:
Evaluation & Recommendation of A or B or C
10%
TOTAL
100%
You will be offered a one-to-one Personal Tutorial (Assessment Performance) early in Semester 2 to discuss assessment performance and to advise on future requirements for continued academic success.
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