UK Oil Plc are involved in upstream, oil exploration and production in the North Sea, United Kingdom.

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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 £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:

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

Current Market Price Per Ordinary Share: £3.50

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

Schedule of activities

WACC

Year1

 

 

 

 

Year2

 

 

 

Year3

 

 

                 

 

 

                 

 

Particulars

value

     

Particulars

value

   

Particulars

value

Total debt

2,625

     

Total debt

2,625

   

Total debt

2,625

Total Equity

1,925

     

Total Equity

1,925

   

Total Equity

1,925

intererest expense

700

     

intererest expense

700

   

intererest expense

700

Tax rate

6.50%

     

Tax rate

6.00%

   

Tax rate

5.00%

Risk free return

1.50%

     

Risk free return

1.50%

   

Risk free return

1.50%

beta

1.20%

     

beta

1.20%

   

beta

1.20%

Market return

6.50%

     

Market return

6.50%

   

Market return

6.50%

 

 

     

 

 

   

 

 

 

 

     

 

 

   

 

 

Total capital

4,550

     

Total capital

4,550

   

Total capital

4,550

Weightage of debt

0.57692308

     

Weightage of debt

0.57692308

   

Weightage of debt

0.57692308

Cost of Debt

0.26666667

     

Cost of Debt

0.26666667

   

Cost of Debt

0.26666667

Weightage of Equity

0.42307692

     

Weightage of Equity

0.42307692

   

Weightage of Equity

0.42307692

Cost of Equity

1.5600%

     

Cost of Equity

1.5600%

   

Cost of Equity

1.5600%

WACC

0.15044615

 

 

 

WACC

0.15121538

 

 

WACC

0.15275385

Activity A: Geological Studies

In this case if the geological studies have been conducted then there is a cost attached to it, £20 million, these studies have spanned for a time period of 12 months (Nawaz, 2020).  These seismic studies might be imposing a doubt for the quality and the amount of the oil that has been extracted. It has been pre-supposed that 8,000,000 barrels per annum will be extracted but after the calculation it has been noted that this supposition might not be true for the time period of 25 years. In this case there can be two particular choices that includes the undertaking of the investment for the amount and quality of the oil which is available(Yasin, 2020). If the completed studies could be looked at, then there is only 0.35 chance that the quality of the oil and amount as indicated can be extracted. If the further tests can be conducted, this would again cost $50M and then gain the board decision will be taken after 1 year which is the mean reason of the $50M cost. Additionally, afterwards it will also be decided if the place can be drilled further or not. Again there is a probability of 30 percent to get the positive results and there would also be a probability of 70 percent for the success of drilling and getting the amount and quality required(Dwiputra, 2019). There is only a chance of 20 percent that the results come out negative. This time period would also provide a significant amount of time to strategic alliance with a partner, this partner can be a financial one or an operation one, so that risks, and costs and knowledge could be shared. In this case a financial both operational and strategic alliance should be setup in order to share the costs and knowledge also(Liang, 2019).

For selling the drilling rights to a third party, there are different choices in this case. If this could be done immediately then it could be done for US$ 45 million, or if further tests could be conducted then for the test results if these results are positive US$140. On the other hand, the US$ 20. In this immediate steps should be taken in order to ensure that no further money is being spent. This project will be assessed for its technical aspects, in this case all the technical evaluations will be conducted

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

Activity D: Board Consideration

The Board is able to analyse the Technical & Financial Evaluations so that it could be understood if the decisions could be taken or not. And in this case the board should decide that the project should move on to the activities from E through J.

Activity E: Safety Report

If there are no engineers available then the it will be a critical factor for the project to start at the given time. Although engineers could be suitably and efficiently managed on different activities.  Additionally, it could also be recognised that it is not certain that this particular action would delay the project.

Activity F: Hire & Training of Labour

Activity G: Site Preparation

Various costs that are related with the Activities F & G are being indicated as the “Other Costs” will be explained below.   

Activity H: Delivery & Construction of the Oil Platform including Drills, Pumps, Pipelines etc

British Oil Machinery and Munchen Machinery Germany are the two suppliers that has been chosen in this case. The quotes of these two suppliers are £315,000,000 and €350,000,000 respectively. Tax allowance eligibility is also being indicated in the aspect of CAPEX, the contract details have to be agreed, but there are risks associated with the UK oil. These risks have to be reduced, that are associated with the tender and performance of the contract. An advanced payment of 10% is also being required in this case.

Activity I: Drilling & Production Costs

The below stated costs are associated with the drilling and production costs, these costs are in-line with the previous details of the project. Additionally, the drilling rates could be influenced by the prices of the oil.

Previous Projects

Output (Barrels) 000

£ Costs £000

Percentage ratio

1

5,000

£100,000

0.05

2

5,500

£104,000

0.052885

3

5,300

£101,000

0.052475

4

5,600

£105,000

0.053333

5

6,000

£115,000

0.052174

6

5,750

£112,000

0.051339

7

5,900

£110,000

0.053636

8

6,100

£108,000

0.056481

9

3,800

£80,000

0.0475

10

4,750

£95,000

0.05

The best ratio is being provided by the project 8, where the output barrels were 6100, and 108,000 costs were associated with it. After that the project 7, where the output barrels were 5900, and the costs were 108,000. The percentage ratio was 0.053636, that was a little less than project 8 that was 0.056481.

Activity J: Sales

Crude oil when used additionally would also cost around 8,000,000 for 25 years. That is about the amount of 2000,000,00, and this will be sold to different oil refineries comprising various customers within Europe.

All Other Costs

All other costs are basically related to the inflation rates within united kingdom.  Various costs like Indirect Labour, Administration, Marketing have been indicated as  £20,000,000 per year, these costs are being increasing throughout since the UK inflation rates have also been increasing so that the costs associated with the project might also increase.

Financing the Project

In this case it has to be chosen by the board if the project has to be finance with the equity or debt financing options, or in a case where a combination of equity and debt could be used. In this case the project can be equally financed with both debt and equity. In this case, the change of terms could be about the right issue, and this would include the part equity finance or the full finance, since the shares have to be issued to the parties that are also becoming the owners. Additionally, the underwriting fee and the issue fee would also be charged by the bank and that would be around £5 million, regardless of the size of the issue that does not matter in this case.  The share price in this region could be around £1 to £1.25 and this might result in a successful issue. In the case of the bank loans are being given then the sterling loans could be having the interest rates of  Base + 6.25% p.a. and in the other case the Fixed 7.5% p.a. for 5 years having the £1 million. Additional security arrangement fee of £3 million, will also be required for security. If the currency loans are taken then the same rates could be charged for security in this case also and that fee would be around 3.25 million. If a bond would be chosen then S & P will be able to charge a security fee of around 3.25 million. If the bonds are being chosen then the rating fee will be around 5 million and a further £5 million, the bond size in this case does not matter and the underwriting will be required in this case, the credit rating would be 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

Net Present Value

£1,000,000,000.00       

£845,888,000.00          

£1,476,710,400.00       

£1,981,368,320.00       

£2,385,094,656.00     

 £2,708,075,724.80      

£2,966,460,579.84       

£3,173,168,463.87       

£3,338,534,771.10     

 £3,470,827,816.88      

£3,576,662,253.50       

£3,661,329,802.80       

£3,729,063,842.24       

£3,783,251,073.79     

 £3,826,600,859.03      

£3,861,280,687.23       

£3,889,024,549.78       

£3,911,219,639.83       

£3,928,975,711.86       

£3,943,180,569.49       

£3,954,544,455.59       

£3,963,635,564.47       

£3,970,908,451.58       

£3,976,726,761.26       

£3,981,381,409.01       

£3,985,105,127.21

NPV = $1,000,000,000.0

A 1 for 1 Share Exchange, could also be the possibility of a merger, an acquisition where there are shares of 80 to 100 percent.  This can be given at the £1.30 per share and this would be financed with the rights issue, again it could be done through the right issue or through the special purpose vehicle(Wan, 2019). Provided the value of right is over £1.50,  then it could be noted that a right issue would also attract support. In this case the potential support for M & A is could be effective, there are benefits to M & A, this deal will enable the company to potentially increase the market share and also to improve the efficiency and also the operational costs will also be reduced (Bae, 2019). The option 2 is also effective in this case as compared to the option 1 since the Npv is effective which means the project will be effective in the future also. Incase of increasing the market share, the M & A is able to provide the additional annual sales, hence the, hence the UK Oil Plc would be around 1,000,000 m/b of Crude Oil as given by the Euro Refinery Plc. Sales of Gasoline and Heating Oil could be a 3-2-1 Crack Spread as given by the Euro Refinery Plc. The variable costs would be of UK Oil as given by the previous production costs and the euro refinery would be around $5pb. The Fixed Costs p.a would be around the UK Oil of £5 million and the Euro Refinery Plc would be around €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)

Production price

Regular

87

$2.20

200,000

200,000

$440,000.00

Super

89

$2.30

200,000

325,000

$747,500.00

Power

91

$2.40

200,000

225,000

$540,000.00

Three materials are being merged in order to produce the gasoline, these materials are then merged with the regular, super or power gasoline as given by the company in order to meet the given restraints. The restraints could be given as the material available,  minimum production in this case could be around 200,000 gallons per day for any kind of gasoline. In this case the minimum level of octane can be any type of gasoline, as given above (Asadujjaman, 2021). If the materials are being bought from Norway, then the following costs might occur. Documentary credit payment 3 months after the shipment would be 0.75 and these include the documentary credit charges that are payable by the buyer(Bogataj, 2019) .

Material

Octane Rating

Cost per Gallon

C.I.F. Ireland

3 months after shipment

Capacity/

Purchases

(Gallons

per day)

Price per production

1

83

$1.10

300,000

$330,000.00

2

90

$1.35

400,000

$540,000.00

3

95

$1.45

150,000

$330,000.00

Additionally for the effective blending of the material for increasing the production, a merger or acquisition of the refinery could also be able to reduce the cost of purchasing material. The existing suppliers are from the Russia and U.S, so by using the united kingdom’s supplier the cost of the purchasing material can be reduced easily. In this case regarding the costs per gallon and the shipping costs, charging the 1 percent of the 110 percent of the C & F value.

 

 

 

 

                        Total price per gallon

Russia

 

Cost per Gallon

 

Terms of Payment

 

FOB Russia

Open Account

2 months after Shipment

$3.75

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

$3.78

Material

1

$1.04

 

2

$1.32

 

3

$1.42

Cash flow

CAPITAL INVESTMENT

 

     

Initial Capital

 

 £           1,000,000,000.00

   
 

 

     

INCOME

 

     

Production/(Barrel)

 

 

                                 8,000,000

                                 8,000,000

Selling Price/Barrel

1.30%

 

                                         83.17

                                         84.25

Total Sales

 

s

 £                   665,360,000.00

 £                   674,009,680.00

 

 

     

EXPENDITURE

 

     

Operating Costs/Barrel

0.90%

 

                                         76.00

                                         76.68

Total OPEX

 

 

 £                   608,000,000.00

 £                   613,472,000.00

 

 

     

Net Cashflow Before Tax

 

 

 £                1,057,360,000.00

 £                1,845,888,000.00

Taxation

20%

 

 £                   211,472,000.00

 £                   369,177,600.00

Net Cashflow After tax

 

 

 £                   845,888,000.00

 £                1,476,710,400.00

 

 

     

Rehabilitation Costs

 

     
 

 

     

Net Cash Flow

 

 £           1,000,000,000.00

 £                   845,888,000.00

 £                1,476,710,400.00

       
       
       
       

                                 8,000,000

                                 8,000,000

                                 8,000,000

                                 8,000,000

                                         85.35

                                         86.46

                                         87.58

                                         88.72

 £                   682,771,805.84

 £                   691,647,839.32

 £                   700,639,261.23

 £                   709,747,571.62

       
       

                                         77.37

                                         78.07

                                         78.77

                                         79.48

 £                   618,993,248.00

 £                   624,564,187.23

 £                   630,185,264.92

 £                   635,856,932.30

       

 £                2,476,710,400.00

 £                2,981,368,320.00

 £                3,385,094,656.00

 £                3,708,075,724.80

 £                   495,342,080.00

 £                   596,273,664.00

 £                   677,018,931.20

 £                   741,615,144.96

 £                1,981,368,320.00

 £                2,385,094,656.00

 £                2,708,075,724.80

 £                2,966,460,579.84

       
       
       

 £                1,981,368,320.00

 £                2,385,094,656.00

 £                2,708,075,724.80

 £                2,966,460,579.84

       
       
       
       

                                 8,000,000

                                 8,000,000

                                 8,000,000

                                 8,000,000

                                         89.87

                                         91.04

                                         92.22

                                         93.42

 £                   718,974,290.05

 £                   728,320,955.82

 £                   737,789,128.25

 £                   747,380,386.92

       
       

                                         80.20

                                         80.92

                                         81.65

                                         82.38

 £                   641,579,644.69

 £                   647,353,861.49

 £                   653,180,046.25

 £                   659,058,666.66

       

 £                3,966,460,579.84

 £                4,173,168,463.87

 £                4,338,534,771.10

 £                4,470,827,816.88

 £                   793,292,115.97

 £                   834,633,692.77

 £                   867,706,954.22

 £                   894,165,563.38

 £                3,173,168,463.87

 £                3,338,534,771.10

 £                3,470,827,816.88

 £                3,576,662,253.50

       
       
       

 £                3,173,168,463.87

 £                3,338,534,771.10

 £                3,470,827,816.88

 £                3,576,662,253.50

 

       
       
       
       

                                 8,000,000

                                 8,000,000

                                 8,000,000

                                 8,000,000

                                         94.64

                                         95.87

                                         97.11

                                         98.38

 £                   757,096,331.95

 £                   766,938,584.26

 £                   776,908,785.86

 £                   787,008,600.07

       
       

                                         83.12

                                         83.87

                                         84.63

                                         85.39

 £                   664,990,194.66

 £                   670,975,106.42

 £                   677,013,882.37

 £                   683,107,007.32

       

 £                4,576,662,253.50

 £                4,661,329,802.80

 £                4,729,063,842.24

 £                4,783,251,073.79

 £                   915,332,450.70

 £                   932,265,960.56

 £                   945,812,768.45

 £                   956,650,214.76

 £                3,661,329,802.80

 £                3,729,063,842.24

 £                3,783,251,073.79

 £                3,826,600,859.03

       
       
       

 £                3,661,329,802.80

 £                3,729,063,842.24

 £                3,783,251,073.79

 £                3,826,600,859.03

 

       
       
       
       

                                 8,000,000

                                 8,000,000

                                 8,000,000

                                 8,000,000

                                         99.65

                                       100.95

                                       102.26

                                       103.59

 £                   797,239,711.88

 £                   807,603,828.13

 £                   818,102,677.90

 £                   828,738,012.71

       
       

                                         86.16

                                         86.93

                                         87.71

                                         88.50

 £                   689,254,970.38

 £                   695,458,265.11

 £                   701,717,389.50

 £                   708,032,846.01

       

 £                4,826,600,859.03

 £                4,861,280,687.23

 £                4,889,024,549.78

 £                4,911,219,639.83

 £                   965,320,171.81

 £                   972,256,137.45

 £                   977,804,909.96

 £                   982,243,927.97

 £                3,861,280,687.23

 £                3,889,024,549.78

 £                3,911,219,639.83

 £                3,928,975,711.86

       
       
       

 £                3,861,280,687.23

 £                3,889,024,549.78

 £                3,911,219,639.83

 £                3,928,975,711.86

 

       
       
       
       

                                 8,000,000

                                 8,000,000

                                 8,000,000

                                 8,000,000

                                       104.94

                                       106.30

                                       107.69

                                       109.09

 £                   839,511,606.87

 £                   850,425,257.76

 £                   861,480,786.11

 £                   872,680,036.33

       
       

                                         89.30

                                         90.10

                                         90.92

                                         91.73

 £                   714,405,141.62

 £                   720,834,787.89

 £                   727,322,300.99

 £                   733,868,201.69

       

 £                4,928,975,711.86

 £                4,943,180,569.49

 £                4,954,544,455.59

 £                4,963,635,564.47

 £                   985,795,142.37

 £                   988,636,113.90

 £                   990,908,891.12

 £                   992,727,112.89

 £                3,943,180,569.49

 £                3,954,544,455.59

 £                3,963,635,564.47

 £                3,970,908,451.58

       
       
       

 £                3,943,180,569.49

 £                3,954,544,455.59

 £                3,963,635,564.47

 £                3,970,908,451.58

     
     
     
     

                                 8,000,000

                                 8,000,000

                                 8,000,000

                                       110.50

                                       111.94

                                       113.39

 £                   884,024,876.81

 £                   895,517,200.20

 £                   907,158,923.81

     
     

                                         92.56

                                         93.39

                                         94.23

 £                   740,473,015.51

 £                   747,137,272.65

 £                   753,861,508.10

     

 £                4,970,908,451.58

 £                4,976,726,761.26

 £                4,981,381,409.01

 £                   994,181,690.32

 £                   995,345,352.25

 £                   996,276,281.80

 £                3,976,726,761.26

 £                3,981,381,409.01

 £                3,985,105,127.21

     
     
     

 £                3,976,726,761.26

 £                3,981,381,409.01

 £                3,985,105,127.21

Analysis of the cash statement

The above cash statement had the initial investment of  £ 1,000,000,000.00, the NPV was also positive in this case and that was evaluated as $1,000,000,000.00. If the net present value is in negative that shows the project is going into loss and the future cash flows would also be negative. Therefore in this particular case the cash flows has to be positive, like the for the last month the cash flow was 3,985,105,127.21, although it is also greater as compared to the last cash flow 3,976,726,761.26 and the cash flow of 23rd month. Therefore, it could be noted that in all the previous years the cash flows were increasing rapidly and even in the last 21st month the cash flows were increasing and hence the effect on the net present value was also positive(Aggarwal, 2019). Therefore, it could be noted that the with the increasing cash flows the project value is being also increased and all of the analysis that was conducted before.

References

Aggarwal, R. and S. Singh (2019). "An integrated NPV-based supply chain configuration with third-party logistics services." Journal of Revenue and Pricing Management 18(5): 367-375.

Asadujjaman, M., et al. (2021). "An Immune Genetic Algorithm for Solving NPV-Based Resource Constrained Project Scheduling Problem." IEEE Access 9: 26177-2619  

Bae, D. S., et al. (2019). "PPP renegotiation framework based on equivalent NPV constraint in the case of BOT project: Incheon Airport highway, South Korea." KSCE Journal of Civil Engineering 23(4): 1473-1483.    

Bogataj, D. and M. Bogataj (2019). "NPV approach to material requirements planning theory–a 50-year review of these research achievements." International Journal of Production Research 57(15-16): 5137-5153.

Dwiputra, D. S., et al. (2019). Nett Present Value (NPV) analysis for projection of feasibility of Coastal Sand Dune Tourism in Parangtritis Village. E3S Web of Conferences, EDP Sciences.

Liang, Y., et al. (2019). "Robust resource-constrained max-NPV project scheduling with stochastic activity duration." Or Spectrum 41(1): 219-254.

Nawaz, A., et al. (2020). "Comparative bio-efficacy of nuclear polyhedrosis virus (NPV) and Spinosad against American bollwormm, Helicoverpa armigera (Hubner)." Revista Brasileira de Entomologia 63: 277-282.

Rosłon, J., et al. (2020). "Schedules Optimization with the Use of Value Engineering and NPV Maximization." Sustainability 12(18): 7454.

Wan, N.-F., et al. (2019). "Prior experiences of endoparasitoids affect their ability to discriminate NPV-infected from non-infested caterpillars." Biological Control 128: 64-75     

Yasin, M., et al. (2020). "Evaluation of Nuclear Polyhedrosis Virus (NPV) and Emamectin Benzoate against Spodoptera litura (F.)(Lepidoptera: Noctuidae)." Egyptian Journal of Biological Pest Control 30(1): 1-6.


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