Bp Amoco (case study)

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Bp Amoco (case study)

  1. 1. BP Amoco:Policy Statement on the Use of Project Finance Abhik Tushar Das (20104001) Sitanshu Pathak (20104007) 15 Month Executive MBA Program School of Petroleum Management, PDPU
  2. 2. Content• Organization Structure• Post merger structure• Assignment• Discussion on PF and CF – Advantage – Disadvantage – Structure – Sources – Institutions• BP Amoco PF and CF Model Comments:6/14/2011 2 spm_pdpu_emba10@googlegroups.com
  3. 3. Organization Structure British Petroleum Amoco Corporation • UK based – world’s 3rd • US based – world’s 6rd largest Oil & Gas giant largest Oil & Gas giant • Operations in 70 countries • Operations in 25 countries • 56,000 employees • 43,000 employees • CEO Sir John Browne • CEO H Lawrence Fuller • Assets $ 54.6 bn. • Assets $ 32.5 bn. • Revenues $ 71.3 bn. • Revenues $ 31.9 bn. • Profits $ 4.1 bn. (1997) • Profits $ 2.7 bn. (1997)In spite corporate rivalry, both merged in 1998 to form BP Amoco tocreate financial synergies required to fund capital intensive projects. Comments: 6/14/2011 3 spm_pdpu_emba10@googlegroups.com
  4. 4. Post Merger Organization Structure• Global HQ in London with Sir John Browne (BP) as CEO• H Lawrence Fuller (Amoco) & Peter Sutherland (BP) as non exe co-chairman• Finance Group: – CFO: John Buchanan (BP) – Treasurer: David Watson (BP) – Head Specialized Finance: Bill Young (Amoco) Both companies had highly centralized finance functions with preference for corporate financing over project financing. Comments:6/14/2011 4 spm_pdpu_emba10@googlegroups.com
  5. 5. The AssignmentGoal:• To work out new financing policy for the merged entity.Process:• Watson & Bill sought opinion of finance executives of both the firms regarding their take on project finance vis-a-vis corporate finance.• BP sparingly used project finance• Amoco too, believed in corporate finance more. But they sometimes used project finance. Comments:6/14/2011 5 spm_pdpu_emba10@googlegroups.com
  6. 6. Project Finance Lenders •Non recourse debt Assets •Project assets as collateralCash Flows •Project future cash flows Life •Finite life Comments:6/14/2011 6 spm_pdpu_emba10@googlegroups.com
  7. 7. Prerequisites of Project Finance Discrete – non core assets Known risk-return profile Lenders familiarity with business model Comments:6/14/2011 7 spm_pdpu_emba10@googlegroups.com
  8. 8. Advantages of Project Finance Hedge Financial against Leverage – Tax losses by Risk Shield sacrificing management some profit tool Government concessions Increases borrowing capacity Comments:6/14/2011 8 spm_pdpu_emba10@googlegroups.com
  9. 9. Disadvantages of Project FinanceHigh costs of capital – due to high risk Time consuming process; Many layers of clearances Requires separate work force Low flexibility Leakages of proprietary information to lenders Comments:6/14/2011 9 spm_pdpu_emba10@googlegroups.com
  10. 10. Comparative SummaryProject Finance Corporate Finance• Business diversification • Business Expansion• Capital intensive projects • Small scale projects• Project in politically volatile • Politically stable areas environment• Ventures with weak credit • Stand alone venture or rating partners strong partners Comments:6/14/2011 10 spm_pdpu_emba10@googlegroups.com
  11. 11. Structure of Project Finance Lenders Sponsors Project Contractor Equity Finance Debt Finance SPV Support Agreement Concessions Supplier Off Comments: takers Government 6/14/2011 11 spm_pdpu_emba10@googlegroups.com
  12. 12. Sources of Long Term Fund Lease Financing Secured Debt Unsecured debt Convertible debt Preferred Equity Common Equity Comments:6/14/2011 12 spm_pdpu_emba10@googlegroups.com
  13. 13. Sources of Short Term Fund Construction Financing Bridge Financing Line of Credit Comments:6/14/2011 13 spm_pdpu_emba10@googlegroups.com
  14. 14. Institutions Promoters Sponsors Equity Funds Banks / Non Bank Financial Institutions Government Suppliers / Off takers Comments:6/14/2011 14 spm_pdpu_emba10@googlegroups.com
  15. 15. Corporate Finance Funds •Internal funds Assets •Company assets as collateralCash Flows •Company balance sheet Comments:6/14/2011 15 spm_pdpu_emba10@googlegroups.com
  16. 16. Process of Corporate Finance Use internal funds Pledge assets and cash flows No liability on sponsors Comments:6/14/2011 16 spm_pdpu_emba10@googlegroups.com
  17. 17. Benefits of Corporate Finance Easy mobilization of funds Low cost of capital Flexibility in decision making Comments:6/14/2011 17 spm_pdpu_emba10@googlegroups.com
  18. 18. Corporate Finance Model Company Finance Structure: Funds BP Amoco Debt 30%1. Operating Cash – Bus Treasury Equity 70%2. Long term finance3. Short term finance4. Money Market Inst. Subsidiary 40% share Partner 1 Project Partner 2 25% Share 35% Share Cash from source Liabilities Comments:6/14/2011 18 spm_pdpu_emba10@googlegroups.com Cash Back to source
  19. 19. Project Finance Model (BP Subsidiary uses PF)BP Amoco BP Amoco Company Finance Structure: Debt 30% Business Treasury Equity 70% Units Debt Service Subsidiary Lenders Collateral 40% share Partner 1 Project Partner 2 25% Share 35% Share Cash from source6/14/2011 Comments: Liabilities 19 spm_pdpu_emba10@googlegroups.com Cash Back to source
  20. 20. Project Finance Model (Project uses PF)BP Amoco BP Amoco Company Finance Structure: Debt 30% Business Treasury Equity 70% Units Subsidiary Lenders Debt Service Collateral 40% share Partner 1 Project Partner 2 25% Share 35% Share Cash from source Liabilities Comments:6/14/2011 20 spm_pdpu_emba10@googlegroups.com Cash Back to source
  21. 21. Project Finance vs. Corporate Finance: Pay Off’s Corporate Finance $ Pay-off’sSponsor’s Equity Project Finance Pay-off’s Project Value 0 Put PremiumDebt Walk away Put Option Debt Level Comments: 6/14/2011 21 spm_pdpu_emba10@googlegroups.com
  22. 22. Financial Comparison (1998) Texaco Chevron Mobil Debt/Capital RevenuesBP Amoco Net Income Exxon Market Cap Capex Shell 0% 20% 40% 60% 80% 100% Comments:6/14/2011 22 spm_pdpu_emba10@googlegroups.com
  23. 23. BP Amoco (1997-1998) 30 25 20 15 1998 10 1997 5 0 Assets Revenues Net Debt to Capex Market Income Capital Cap ratio Comments:6/14/2011 23 spm_pdpu_emba10@googlegroups.com
  24. 24. Income Statement (1997-1998) Avg revenue/barrels Capex Dividend 1997 Profit 1998 Income Tax Interest Expense 0 5 10 15 20 25 30 35 Comments:6/14/2011 24 spm_pdpu_emba10@googlegroups.com
  25. 25. Thank You… Comments:6/14/2011 25 spm_pdpu_emba10@googlegroups.com

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