A presentation on the topic "American Energy Inc: Oil Project in Argentina "

1. Welcome To
Investment Opportunity Analysis
on
American Energy Inc.: Oil Project in
Argentina

2. Name ID
Dababrata Mondal 40014
Fahim Muntasir 40004
Ami Bhattacharjee 34056

3. 1
The Composite
political, financial &
economic risk ratings
for Argentina are 75 in
the year 2006 which
fall in “Low risk”
category .
2
All the variables & sub
components are
ranked based on
assumption as those
data were unavailable.
3
The details of the
country risk
assessment
methodology are
shown in excel sheets
which are enclosed
with this report as an
appendix.
Country Risk
Assessment:

4. Country Risk Assessment:
33
1
2
Economic Risk
Political
Risk
Financial Risk
Power Point Teach

5. PESTEL Analysis
33
1
2
45
E
Environment
al
T
Technological
S
Social
P
Political E
Economic
6
L
Legal

6. Pestel Analysis:
POLITICAL
UNEVEN POLITICAL SITUATION WITH CHEAP LABOR AND
IMPROVED INFRASTRUCTURE
FDI INFLOWS IN ARGENTINA HAVE BEEN UNSTABLE
ECONOMIC
 ARGENTINA IS THE 3RD LARGEST ECONOMY IN THE LATIN
AMERICA WITH HIGHEST GDP
 THE STANDARD CORPORATE INCOME TAX RATE IS 30%

7. SOCIAL
GOOD RELATION AMONG THE FAMILY MEMBER.
ONE OF THE MOST POPULOUS COUNTRY IN LATIN AMERICA
WITH A TOTAL POPULATION OF APPROXIMATELY 45.47
MILLION
TECHNOLOGICAL
 ARGENTINA'S MAJOR URBAN AREAS TEND TO SHARE WITH
NORTHERN EUROPE, CANADA, AND THE UNITED STATES A
VIEW OF TECHNOLOGY AS A CONTROLLING MECHANISM
Pestel Analysis:

8. Pestel Analysis:
ENVIRONMENTAL
UNEVEN ECONOMIC DEVELOPMENT HAS IMPACTED ON ITS
NATURAL ENVIRONMENT SEVERELY.
THE GOVERNMENT HAS TAKEN A NUMBER OF INITIATIVES TO
ADDRESS THE ENVIRONMENTAL CONCERNS
LEGAL
• THERE ARE A NUMBER OF LAWS THAT REGULATE BUSINESS
AND EMPLOYMENT PRACTICES IN ARGENTINA. FOR EXAMPLE,
LABOR STANDARDS, EMPLOYEE REMUNERATION AND
BENEFITS, LABOR DISPUTES

9. Economic Indicators 2001 2002 2003 2004 2005 2006
GDP (Billion Dollars) 268.697 97.724 127.587 164.658 198.737 232.557
Growth Rate (%) -4.4 -14.7 8.7 8.3 9.2 8.5
Inflation Rate (%) 4 41 13.4 6.1 9.6 9.8
GDP Per Capita
(Dollars)
7208.37
2
2593.404 3349.806 4277.72
1
4109.85
1
5919.01
2
ECONOMY ANALYSIS OF ARGENTINA

10. PROBLEM STATEMENT
Whether to invest or not in the project
Which Method can be used to evaluate?
Which Tool can be used to Measure Discount
Rate?

11. Economic Risk Rating
Sequence Component Points Out of
A GDP per Head 4 5
B Real GDP Growth 8 10
C Annual Inflation rate 8 10
D Budget balance as a % of GDP 7 10
E Current Account as a % of GDP 13 15
Total 40 50
Economic Risk
Analysis

12. Political Risk
Analysis
Political Risk Rating
Sequence Component Points Out of
*A Govt. stability 9 12
*B Socioeconomic Conditions 8 12
*C Investment Profile 7 12
*D Internal Conflict 8 12
*E External Conflict 9 12
F Corruption 3 6
G Military in Politics 5 6
H Religious tensions 6 6
I Law and Order 4 6
J Ethnic tensions 4 6
K Democratic Accountability 4 6
L Bureaucracy Quality 3 4
Total 70 100

13. Financial Risk Analysis
Sequence: Components Score Out of
1 Foreign debt as % of GDP 7 10
2 Foreign Debt service as % paid 8 10
3 Current account as % of export 15 15
4 Net International liquidity 3 5
5 Exchange Rate stability 7 10
6 Total points 40 50
CPFER (Argentina) = 0.5 (PR + FR + ER) = 0.5(70+40+40) = 75
which lies in the range of 70 to 79.5 indicating LOW RISK.

14. Monte Carlo Simulation:
Forecast: NPV

15. Statistics: Forecast values
Trials 100,000
Base Case 51.56
Mean 47.84
Median 47.67
Mode --
Standard
Deviation 7.99
Variance 63.80
Skewness 0.1385
Kurtosis 3.03
Coeff. of
Variation 0.1670
Minimum 14.95
Maximum 86.05
Mean Std. Error 0.03

17. Statistics Forecast values
Trials 100,000
Base Case 0.22
Mean 0.21
Median 0.21
Mode --
Standard
Deviation
0.02
Variance 0.00
Skewness -0.0168
Kurtosis 3.00
Coeff. of
Variation
0.0730
Minimum 0.14
Maximum 0.28
Mean Std. Error 0.00

19. Statistics: Forecast values
Trials 100,000
Base Case 0.12
Mean 0.12
Median 0.12
Mode --
Standard
Deviation 0.01
Variance 0.00
Skewness 0.0220
Kurtosis 3.00
Coeff. of
Variation 0.0803
Minimum 0.07
Maximum 0.16
Mean Std. Error 0.00

20. Oil in Argentina
Estimated Project
Cost
USD
Million
Initial Investment
including Working
capital 3.9) 130
Depreciation
Calculation Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Depreciation (6/6) 10 10 10 10 10 10
CASH FLOW ANALYSIS

21. YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
YEAR
6
Production
Quantity(million)
1.00 1.05 1.10 1.16 1.22 1.28
Revenues ($58*1) 58.00 60.90 63.65 67.14 70.50 74.02
Operating costs
($7*1)
7.00 7.00 7.00 7.00 7.00 7.00
Less: Depreciation
(6/6)
10.00 10.00 10.00 10.00 10.00 10.00
Pre-tax profit 41.00 43.90 46.95 50.14 53.50 57.02
Taxes 35% 14.35 15.37 16.43 17.55 18.72 19.96
After-tax profit 26.65 28.54 30.51 32.59 34.77 37.07
Depreciation add-
back
10.00 10.00 10.00 10.00 10.00 10.00
Free cash flow 36.65 38.54 40.51 42.59 44.77 47.07
Recovery of Working
Capital
6.50
Operating Cash Flow -130 36.65 38.54 40.51 42.59 44.77 53.57
CASHFLOW STATEMENT:

22. DECISION
Cash Flow
Component Result Decision
NPV Positive Accepted
IRR Higher than the
discount rate
Accepted
MIRR
Higher than the
discount rate
Accepted
NPV 51.66
IRR 22%
MIRR 12%

23. Investment Probability CF PV Return Pi*Ri
(Ri-
Exp.R)^2*Pi
$130 0.1 $5.00 $5.00 $5.00 -0.1 -0.1 0.4
$130 0.2 $6.00 $6.00 $6.00 -0.1 -0.2 0.7
$130 0.4 $7.00 $7.00 $7.00 0.9 0.4 5.7
$130 0.2 $8.00 $8.00 $8.00 -0.9 -0.2 0.7
$130 0.1 $9.00 $9.00 $9.00 -0.9 -0.1 0.4
Exp.
Return
-2.8 7.9 Variance
2.8 SD
REAL OPTION ANALYSIS

24. X= Exercise Price $130
S= Current market
Price
$23.5
t= time 3
r 0.04
VR= variance 7.88
SD= Standard deviation 2.81
e 2.72
d1 0.75 N(d1) 0.77
d2 -4.1 N(d2) 0.00
C [Value of Real
Option]
18.12
Traditional NPV 51.66
True NPV 69.78
Therefore, taking project of
extracting gas along with oil
be profitable for the
company and the
shareholders.

25. RECOMMENDATIONS:
 The NPV results in Positive that’s why they should take
the project as it will add value to the firm.
 The company should consider the real option. Because the
real option value is positive. So, it will increase the firm’s
value
 Competitors are available but the company can use there
existing distribution channel as a competitive advantage.
 Argentina is fulfilled with natural resources so they should
look for new scope of investment.

26. Thank you