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A detailed evaluation of the two alternatives together with your evidence based recommendation

Assessment

Assessment

Deadline Date: Midnight…

Feedback date

Coursework: UK Oil Plc

3,000 Report 

Weight 100%

Friday 18th December 2020

Friday 15th January 2021

Here is a more detailed look at the Coursework, however please note that the following assessments are 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 – it is your responsibility to ensure that you attempt the correct assessment.

INTERNATIONAL CORPORATE FINANCE: 6310BUSBS & 6106LBSBW

COURSEWORK

UK Oil Plc

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:

          Equity                                                                                       £M

          £1 Ordinary Shares                                                               1,000

          £1 6% Preference Shares                                                      225

          Retained Profits                                                                       700

                                                                                                          1,925

          Debt

          Unsecured 6% Bond 2025                                         500

          Secured Loan (Floating Rate 7%)                                       200      700

                                                                                                     2,625        

Last year, Profit Before Tax was £500 M.

Ordinary shareholders have previously received the following dividends:

  • 3 years ago – 5%
  • 2 years ago – 6%
  • 1 year ago – 6.5%

Future Strategy

The Board of UK Oil are considering their future strategy.

Despite the challenges facing the sector, (declining 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 sustain and grow the business.

The Board are willing to invest up to a maximum of £350 million and require your financial evaluation of two alternative strategies, together with your recommendation:

  1. The Development & Operation of a New Oil Platform in the North Sea costing approximately £315 million
  2. The Merger or Acquisition of an Oil Refinery (Euro Refinery) located in Ireland costing approximately £320 million

One potential problem is the possible Liquidation of a Major Customer, Mersey Airways. They are currently experiencing financial difficulty and owe us $5,000,000 following the purchase of jet kerosene under a Fixed Contract at a price of $100 per/barrel.

Required

With reference to on-going market and economic conditions submit a 3,000 word Report via Canvas providing:

  • a detailed evaluation of the two alternatives together with your evidence based recommendation
  • an evaluation and recommendation concerning the potential liquidation of Mersey Airways

Submission Date: midnight Friday 18th December 2020

  1. The Development & Operation of a New Oil Platform in the North Sea costing approximately £315 million

Schedule of Activities, Immediate Predecessor & Duration (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

3

10

C: Financial Evaluation

A

3

D: Board Consideration

B & C

1

3

4

E: Safety Report

D

1

4

11

F: Hire & Training of Labour

D

1

3

4

G: Site Preparation

E & F

3

5

6

H: Delivery & Construction of the Oil Platform

E & G

2

6

8

I: Delivery of Material

G

1

3

5

J: Pre Sale Drilling & Production

H & I

1

2

3

K: 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 £10 million and the project is now entering the Technical & Financial Evaluation stage.

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.

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.

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 are include 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.

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 the contractor may require an advanced payment of 10%

Activity I: Material

In order to operate the site, emulsifiers to aid the separation of oil and water and corrosion inhibitors to protect the pipelines would be required. In total 100,000 tons of material would be required each year of the project

Three quotations have been received from potential suppliers and prices are expected to increase in line with the national inflation rate, throughout the life of the project

Supplier    Price          (ton) Payment Terms

Russia       Rub 29000 CFR Ust Luga  

                             Open Account - settlement 2 months after

                             shipment

 

U.S.A                   US$ 425    CFR Dover        

D/A – Bill of Exchange payable 1 month after

shipment

Collection charges of 0.25% are payable by the buyer.

Netherlands € 370       CIF Dover

Confirmed Irrevocable Documentary Credit – payment 3 months after shipment.

Documentary credit charges of 0.75% are payable

by the buyer.

 

Activity J: Drilling & Production Costs

 

Annual Drilling & Production Costs for this project are expected to be in line with previous ten projects detailed below, though drilling rates could be affected by oil prices:

 

          Previous Project        Output (Barrels)                   Costs

                1                               2,000,000                     £50,000,000

                2                               2,500,000                     £65,000,000      

                3                               2,300,000                     £54,000,000

                4                               2,600,000                     £62,800,000

                5                               3,000,000                     £70,000,000

                6                               2,750,000                     £66,100,000

                7                               2,900,000                     £67,000.000

                8                               3,100,000                     £69,000,000

                9                               1,800,000                     £42,500,000

              10                              1,750,000                     £40,200,000                         

 

Activity K: Sales

The project is expected to increase productivity in the North Sea enabling the company to secure an additional 6,500,000 barrels per year, for the next 25 years. 

The additional crude oil 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 £10,000,000 per year, increasing throughout the project in line with UK inflation rates.

Finance

The Method of Finance has yet to be agreed and the Board seek your advice

  1. The Merger or Acquisition of an Oil Refinery (Euro Refinery Plc.) located in Ireland approximately £320 million

A merger may be possible via a 1 for 1 Share Exchange.

An Acquisition(s) may be financed by:

  • a Rights Issue, or
  • Issuing Debt

The latest financial statement shows:

Statement of Financial Position/Balance Sheet of Euro Refinery Plc as at 31.12.2019

                                                             €’000             €’000

Non Current – at cost                                          217,000

Accumulated depreciation                                    (26,000)

                                                                                191,000

Current Assets

Inventory/Stock                                78,000

Accounts Receivable/Debtors        46,000

Prepayments                                      5,000

                                                         129,000

Current Liabilities

Accounts Payable/Creditors           27,000

Dividends                                            8,000

Overdraft                                           12,000

                                                      47,000           82,000

                                                                                273,000

Equity                                                          

Share Capital – $1 Ordinary Shares                   250,000

Retained Profits                                                      23,000

                                                                                273,000

 

Annual Earnings for the year ending 31st December 2019: € 23,000,000

Current Market Price per share     €1.50

In addition to the normal benefits and risks of mergers and acquisitions, this deal will hopefully 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

The Irish Government, (where the company is registered) may also be willing allow a 5 year tax break, resulting in 0% Corporation Tax.

In order to manage the Group finances the Board may wish to establish a Group Treasury Department in either the UK or Ireland, to operate as either a cost centre or a profit centre. Management Fees of £1,500,000 or € equivalent would then be paid to/received by the Treasury Department.

Liquidation of a Major Customer, Mersey Airways.

A major customer, Mersey Airways are experiencing financial difficulty. The company entered into fixed contracts with us in relation to the purchase of jet kerosene at a price of $100 per/barrel and currently owe us $5,000,000 with payment due over the next 6 months.

This high cost together with declining sales and a loss of market share has forced the company to negotiate a capital restructure or face liquidation.

Mersey Airway’s latest Statement of Financial Position is shown below.

Consolidated Statement of Financial Position/Group Balance Sheet of Mersey Airways as at 31.06.20

                                                                                       £’000                   £’000

          Intangible Assets

Goodwill                                                                                   10,000

Non Current Assets                                                            202,500 

          Current Assets                                                 30,000

          Less Current Liabilities                                   10,000         20,000

                             232,500

          Debt

          Unsecured 6% Bond 2020                               50,000

          Secured Loan (Floating Rate 7%)                             90,000

          Loans (Secured by a Floating Charge)           10,000       150,000

                                                                                                            82,500

 

          Equity                                                                                       £’000

          £1 Ordinary Shares                                                                 50,000

          £1 7% Cumulative Preference Shares                                 20,000

          Retained Profits                                                                      12,500    

                                                                                                            82,500

Latest estimates suggest that:

  • Non Current Assets will only realize £100,000,000
  • Current Assets include:
    • Stock with a Reservation of Title £5,000,000
    • Bad Debts of £10,000,000
    • Liquidation Fees are estimated at £500,000.

Provided Shareholders will write off unpaid dividends and inject a further £30,000,000, an Investment Bank have provisionally agreed to advance an additional £10,000,000 and take over their existing secured loan, amending the terms of the loan from a 10 year loan to a 15 year loan at 8% fixed. As security the bank would require a fixed charge over all the Non Current Assets.

As major creditors, the existing floating charge holder, bond holder and ourselves would need to agree to this.

As part of the restructure, in order to ease the current cashflow problems we are also being asked to write off £3,000,000 of the debt due in the next 3 months, in exchange for 5,000,000 £1, 5% Preference Shares.

The company believe these arrangements will allow them to continue to operate saving over 2000 jobs.

Evaluate the position and recommend an appropriate strategy. Do we accept the proposed restructure or petition for their liquidation?

Please note

The assessments are 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 – it is your responsibility to ensure that you attempt the correct assessment.

Coursework Marking Scheme

There is NOT one correct answer. There are MANY. Just as there are many incorrect answers. Your decisions will be based on your evaluation of the economy, the market and the financial aspects as well as your assessment of Risk.

As a result marks will be awarded for:

  • Evaluation
  • Accuracy of Evaluation
  • Evidence based Justification of your Recommendation
  • Risk Assessment
  • Professional Presentation

OVERALL

 

  1. Development & Operation of the new Oil Platform

40%

  1. The Merger or Acquisition of an Oil Refinery (Euro Refinery Plc.)

40%

Evaluation & Recommendation of A or B

5%

Liquidation of a Major Customer, Mersey Airways.

15%

TOTAL

100%

 


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.

Development & Operation of the new Oil Platform

40%

Accuracy of Forecast Cashflow

 

Evaluation of the Method & Cost of Finance

 

Choice of Material Supplier

 

Investment Appraisal

 

Justified evidence based Recommendations

 

The Merger or Acquisition of an Oil Refinery (Euro Refinery Plc.)

40%

Calculate the Value of the Business & Goodwill

 

Evaluate the Benefits & Problems arising from the merger or Acquisition

 

Evaluate Goodwill

 

Make Recommendations concerning the location and operation of the Treasury Department

 

Evaluate the Finance Options

 

Recommend whether to Merge or Acquire  Euro Refinery

 

Evaluate the Impact on the Shareholders of UK Oil Plc

 

Evaluation & Recommendation of A or B

5%

Liquidation

15%

Evaluate the Impact of Liquidation

 

Evaluate the Proposed Financial Restructure

 

Recommend whether to accept the proposed restructure or petition for their liquidation

 

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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