6106LBSBW INTERNATIONAL CORPORATE FINANCE

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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

Work submitted after this date will receive a Mark of 0%

 

6106LBSBW INTERNATIONAL CORPORATE FINANCE

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 2:  The Merger or Acquisition of an Oil Refinery (Euro Refinery) located in Ireland

Option 3:  Development of a Solar Power Generating Plant

6106LBSBW INTERNATIONAL CORPORATE FINANCE

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

6106LBSBW INTERNATIONAL CORPORATE FINANCE

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 - 6106LBSBW INTERNATIONAL CORPORATE FINANCE

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 – at cost                                          423,000

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

  1. 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 threeoptions 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%

Submission Date: midnight Friday 7th January 2022

Feedback Deadline: midnight Friday 28th January 2022

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.

6106LBSBW INTERNATIONAL CORPORATE FINANCE


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