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:
- The Development & Operation of a New Oil Platform in the North Sea costing approximately £315 million
- 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
- 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
- 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 | |
|
40% |
|
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.
