| 6008LBSBSC: Strategic Corporate and Project Finance |
The assessment for this module is in [2] parts
This assessment will assess learning outcomes 1 – 5 (as listed below and detailed in the Module Proforma)
It is an individual assessment
Details of the Assessment & the Assessment Criteria are attached
This part of the assessment will be by means of a Verbal Report during the Week Commencing 7th April 2025.
Feedback / Guidance for the Report will be provided throughout the Report
This assessment will assess learning outcomes 1 – 5 (as listed below and detailed in the Module Proforma)
It is an individual assessment
Details of the Assessment & the Assessment Criteria are attached
Submit electronically through Canvas before 1.00 p.m. on Monday 28th April 2025 for the attention of Karl Harper
Feedback will be available through Canvas on 19th May 2025
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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’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
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
Similar Projects have previously made a Return of 15%.
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 of Material | G | 1 | 2 | 3 |
| I: Delivery & Construction of the Oil Platform | E & G | 2 | 4 | 6 |
| J: Pre Sale Drilling & Production | H & I | 1 | 3 | 8 |
| K: Sales & On-going Drilling & Production | J | On-going | ||
Geological studies lasting 12 months have just been completed at a cost of £20 million.
These studies have cast doubt on the amount and quality of oil available for extraction, i.e. it may not provide 7,000,000 barrels per annum for 25 years as initially thought.
In summary, (without going into technical detail), the company could:
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.
Should we proceed with the Project immediately, after Further Test or simply abandon the Project and Sell the Drilling Rights to another party?
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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 7,000,000 barrels per annum for 25 years.
The Board will consider both the Technical & Financial Evaluations before making their decision whether or not to proceed with the project. IF the Board decide to proceed they will place the order for the Oil Platform with their chosen supplier (British Oil Machinery or Munchen Machinery Germany Activity H)
Should the Board decide to proceed the Project will move on to Activities E through to K as detailed below
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.
Associated costs of Activities F & G are included in “Other Costs” detailed below
In order to operate the site, emulsifiers to aid the separation of oil and water and corrosion inhibitors to protect the pipelines will be required.
100,000 tons of material would be required each year of the project, with prices increasing in line with the national inflation rate, throughout the life of the project
These materials are currently purchased from USA on the following terms $435 per ton C & F UK, D/A Payable1 month after shipment.
Collection charges 0.25% payable by the buyer
Shipping Costs are estimated to be $3,000,000 and Insurance Costs are charged at 1% of 110% of the C & F value
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%.
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 |
The additional crude oil (7,000,000 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 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.
The Method of Finance has yet to be agreed and the Board seek your advice on whether to form an SPE and whether to finance the investment by means of
• 100% Equity, or
• 100% Debt, or
• A Combination of Equity & Debt
In this respect:
If we decide to Issue Shares to finance part or all of the project, we
would need to make a Rights Issue of Ordinary Shares. 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.
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The bank have provisionally agreed to finance the project.
Sterling Loans will be provided at the following Interest Rates:
• Base + 2.5% p.a. or
• Fixed 8% 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
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+
Statement of Financial Position/Balance Sheet of Euro Refinery as at 31.12.2021
| €’000 | €’000 | |
| Non Current Assets – 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 2021:
Sales € 80,000,000
Gross Profit € 20,000,000
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. It is believed that a Rights Issue would attract support provided the value of the right is over £1.00.
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 through better Project/Production Management.
The M & A could secure the following additional annual sales/costs, (i.e. additional to existing sales):
o UK Oil Plc: 1,000,000 barrels of Crude Oil to Euro Refinery Plc.
o Euro Refinery Plc: Sales of Gasoline and Heating Oil using a 3-2-1 Crack Spread
o Variable Costs:
UK Oil – as per previous production costs
Euro Refinery Plc – $5pb
o Fixed Costs p.a.
UK Oil – £5 million
Euro Refinery Plc – €5 million
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:
• 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 subsidiaries rather than Norway. These suppliers based in Russia & USA have quoted the following at arm’s length prices:
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
You need to Defend your Preliminary Recommendation regarding Option 1 & Option 2 during a 15 minute meeting.
You are advised to prepare PowerPoint slides to clearly outline and justify your recommendation.
With reference to on-going market and economic conditions submit a 3,000 word Report via Canvas providing an evidenced based recommendation of which strategy to adopt:
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
Your Report should focus on Strategic, Corporate Finance & Project Management:
• Strategic
o With reference to on-going market and economic conditions provide an evidence- based recommendation of which strategy to adopt:
• Corporate Finance including
o A financial evaluation of each alternative using Capital Investment Appraisal techniques
o A justified recommendation of the Method of Finance
• Project Management
o Assessment of the Risks associated with completing the project on-time
o Recommendations to Improve Improve Efficiency & Reduce Existing Operational Costs of the potential M & A
The Coursework is based in real time.
As a result you will need to use Real Time Exchange Rates, Interest Rates, Oil Prices etc.
In addition, throughout the semester you will be presented with new/additional quotations or issues that might arise
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OVERALL
Verbal Report/Defence of Recommendation Option A or B 20%
Written Report
80%
Option 1: Development & Operation of the new Oil Platform 30%
Option 2: The Merger or Acquisition of an Oil Refinery
30%
Evaluation of New/Additional Information presented as issues arise in real time
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 80%
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
Evaluation of New/Additional Information
10%
Accuracy of Calculation
Evaluation & Analysis of the Information
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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