expected growth rate in dividends (speculative assessment

=> main weakness in the method): PV Stock = Cash Flows/(1

+ discount rate)t
PV(present value)Stock = D0(1+g)/(1+k) + D0(1+g)
2
/(1+k)
2
------
-D0(1+g)

/(1+k)

k= appropriate discount rate on the investment,g= growth
rate in annual dividend,D0= current dividend paid; The sum of
the series is given by: PV Stock = D1/(kg),D1 - dividend for
the next period.
Components of debt:
Short term debt: Overdrafts meet short term needs and the
interest rate is usually set at a fixed amount above the
prevailing national bank rate. Commercial paper is a short-
term money market security issued by the company to cover
short term financial needs such as purchasing stock, not
capital assets. It is usually paid back by the company within 9
months. As it is unsecured, a company cannot issue
commercial paper unless it has a very good credit rating.
Long term debt: Corporate bonds are issued by companies
for a fixed term and at a fixed rate of interest. The loan
amount is returned in full to the investor on the redemption
date. Although unsecured, corporate bonds rank higher than
equity if a company goes into liquidation. Long term loans
are for a predetermined term of more than one year and at a
fixed rate of interest. Long term loans require a good credit
rating and may be secured on the assets of the company.
Mortgages are secured loans against company owned
property.
Cost of debt (CD) = *(Di/Dt)*ri+, Di= individual loan amounts,
including corporate bonds,Dt= the total of the loans taken
out by the company,ri= after tax interest rates on the loan
amounts
Cost of Equity (CE)= (D/P)*(1+g)+g, D= latest dividend per
share,P= average stock price in the year the latest dividend
was paid,g= expected dividend growth year on year.
Total debt = corporate bonds+fixed term loans+Short term
debt.
ATCD (after tax cost of debt)=[corporate bonds/total
debt*(interest rate)+fixed term loans/total debt*( interest
rate)+short term debt/total debt( interest rate)*[company
corporate tax rate]=..%
Cost of equity (CE)=(price per share/average stock
price)*(1+increase the dividend)+ increase the dividend=..%
Weighted Average Cost of Capital (WACC)=ATCD* Total
debt/(total debt + equity(equity=stock price per share*share
issued) + cost of equity*equity/(total debt + equity)=..%
WACC-represents the minimum return standard that can be
adopted by a company when investing in new ventures of
projects. In practice, an oil company will only accept
investment projects that are forecast to make returns in
excess of the WACC.
Annual reports must include: Directors' report signed by a
director or the secretary of the company, Operating and
financial review signed by a director or the secretary of the
company,
Balance sheet signed by a director, Profit and loss account,
Notes to the accounts, Auditors' report signed by the auditor
Net profit=gross profit-interest paid on loans-taxes
Gross profit=revenue-operational expenses (rental+salary-
interst paid on loans)
ROR (rate of return)- ARR- accounting rate of return
Assets (what it owns) and the liabilities (what it owes)
Current Ratio=Current Assets/Current Liabilities (A current
ratio greater than 1.00 is a good sign.A ratio less <1 indicate
insufficient cash reserves to meet near term obligations. This
increase the risk that company could become insolvent in the
event of a serious reduction in turnover or other adverse
event.
Quick Ratio (or acid test)=(Current Assets-current Stocks or
inventories)/current Liabilities.
Easy to convert into cash;
Debt Ratio=non-current liabilities finance Debt+current
liabilities finance debt (Total Finance debt)/Total Assets
(current assets+non-current assets)
Debt to Equity Ratio = Total Finance Debt/Shareholders
Equity (or total equity)
The profit margin shows how efficiently, in financial terms,
the company is performing.
Profit before interest payments and taxation (PBIT)
Profit Margin =PBIT / Turnover (sales & other revenues)=..%
Return on Total Assets (ROA It is a measure of how
efficiently the assets of a company are made to
work)=PBIT/Total Assets
Earnings Per Share (EPS) =Net Earnings (or profit for total
year)/Shares Outstanding (or average number of shares)=$
Dividend Cover=EPS / Annual Dividend (indicated in the
text+ , 44 =0.44
) Dividend - a sum of money paid regularly (typically
quarterly) by a company to its shareholders out of its profits
(or reserves)
Proven oil reserves are reserves that are reasonably certain to
exists based on a variety of criteria. Proven oil reserves are
listed as an asset in the balance sheet under Property, plant
and equipment.
Current assets and liabilities are monetary amounts expected
to be off the books of the company in one year or less.
Non-current assets or liabilities expected to remain on the
books of the company for more than one year.
Accounting ratios are applied to a balance sheet to estimate
some elements of the companys financial health regardless
of size.
The current ratio-measure of how well a company can meet
its current liabilities if the business climate suddenly
deteriorates.
Current liabilities-include loans repayable by the Co in less
than one year, interest payable on loans, trade creditiors and
tax payments due within one year.
Equity (Book-value)= total assets(non-current+current
assets)-total liabilities(non-current liab+current liab)
No-current liabilities-long term loans due to for repayment
after one year, deferred tax liabilities, retirement benefit
obligations & provisions against possibility of bad debts.
Non-current assets & liabilities-monetary amounts that are
expected to remain in the Co for more than 1 year.
Current assets & liabilities-monetary amounts expected to
leave the Co within one year.
Non-current or long-term assets-property? Plant &
equipment, goodwill & invests.
Current assets-stock inventories, trade & associated Co
receivable & cash at bank.
Net cash flow (NCF)NCF for a year is the difference between
revenueand all operating costs, overheads, taxes and capital
expendituresincurred during the year.
Annual RevenueFor an oilfield developments, it is the oil or
gas price multiplied by annual production. Figures for annual
production are obtained from the predicted production
profile of the field.
Operating costsConsist of variable costs tied to production
levels and fixed operating costs independent of production.
OverheadsCosts not directly attributable to a specific
operating functionor project. Typically general management
costs, office rents, utilities and accounting and materials
functions etc.
Capital expenditures (CAPEX)Investment costs to put
project infrastructure in place. Can be tangible or intangible.
TaxesMany and varied and time consuming to calculate. In
cash flows, taxes are included when paid, not when liability is
incurred.
CASH FLOW-estimate the funds absorbed & the funds
generated during the investment life cycle.
real cash flow (RCF) - Base Year Cost or value
base year costs (BYC)
REVENUE (BYR)=MMBL*oil price
REVENUE (MOD)= inflation factor* BYR REVENUE
CAPEX base year costs (BYC) -
CAPEX money of the day (MOD)= inflation factor* BYC CAPEX
(namely the amounts of money actually spent if future years,
it is necessary to take account of inflation and any predictable
market influences;monetary value allowing for inflation at the
time it is spent)
Cap Allow= MOD CAPEX+ ../- cap
allow
OPEX BYC-
OPEX MOD= BYC OPEX*Inflation factor
Taxable income=MOD REVENUE-Cap Allow-MOD OPEX
Tax=taxable income*effective tax rate/100
CASH FLOW MOD=REVENUE MOD-(CAPEX MOD+OPEX
MOD)-TAX
CASH FLOW REAL= CASH FLOW MOD/inflation factor
Discount rate of nth%= CASH FLOW REAL/(1+n)
year
( )
e.g.=13%=0.13
NPV= MOD CASH FLOW,
REAL CASH FLOW,
discount rate.
Inflation factor = (1 + ri)
n
, ri is the assumed future inflation
rateand n is the nth year of the proj
Vt= Vort (Simple Interest)
Vt= Vo(1 + r)
t
(Compound Interest)
Vt= value after t years, Vo= amount invested, r= annual
rate of interest
DF (Discount factor)=1/(1+r)
t
NPVr= (RCFt*DFt), where t is the time period (year). (NPV
provides a common measure of value that may be applied to
projects having different life cycles and cash flow patterns)
Profitability Index (PI)= ((RCFtDFt+ (Cit*DFt))/ (Cit*DFt),
Where Cit= capital invested in year t
IRR (Internal Rate of Return)-defined as the rate of return
resulting in an NPV of zero
If a project has an NPV = 0, the IRR is the same as the
discount rate used in the evaluation
0 = RCFt/ (1 + r*)
t
, where r* is the IRR
Risk -possibility of exposure to incurring misfortune or loss.
Risk Management Process- process by which the likelihood of
risk occurring and its impact on the business objectives is
reduced. Identifysources of riskDetermine likelihoodof risk
occurringAssess significanceof risk and uncertainty
Implement controltechniques eliminate or minimise risk
Develop plans and proceduresto manage exceptional events.
Risk arises when uncertainty will potentially impact on
business objectives.Uncertainty occurs when there is doubt
about the validity of qualitative or quantitative data.
Uncertainty is an inability to predict future outcomes or
events.Uncertainty can be reduced, e.g. in petroleum
exploration.Businesses will always try to reduce uncertainty
so long as the expected benefits of doing this outweigh the
cost involved. arise from:Technical issuesCommercial
constraintsManagement ssuesExternal dependencies
Risk Assessment Techniques:HazopIdentification of hazards
by HAZard and OPerability studies. (Process
parameters)HazidHazidIdentification (Equipment failures
and safety)HazanQuantification of hazards by HAZard
ANalysis.
Quantitative Risk AnalysisThe main advantage of
quantitative risk analysis is that it puts numbers to the likely
outcomes from an investment. The approaches are:
Probability treesDecision treesMonte Carlo simulations
Strategic Planning:A strategic plan is designed to guide and
shape an organisation as it develops its business over time.It
is the strategic direction in which the company is heading.In
formulating a strategic plan, an organisation is forced to
examine the crucial issues and challenges that lie ahead and
develop strategies to deal with them. Strategic plans are not
cast in stone they have to be mobile and flexible in order to
adapt to sudden change.Strategic plans may be knocked off
course by sudden, unforeseen events.
Permit to work: define the work, specify the precautions to
be taken, specify the ppe required, detail all monitoring
requirements, notify all other personnel whose activities my
be affected by the work, be cross referenced to all other work
permits that could impact on the work, be signed by all
responsible managers & workers involved w. the work.
Initiation
Initiation stage dictates the need for project and conception is
made with initial idea and capital proposal.
Sound business case established, driven by needs and provides
client with solutions/recommendations to move forward.
Client objectives clearly defined.
Importance
Identification of an opportunity with respect to the
requirements and defining the solutions.
Establishing of clear objectives.
Shape of initiation will analyse and decide the subsequent
phases of project life cycle.
Feasibility-Feasibility phase emphases on outlining the
possibility and appraisal
Importance
Feasibility study draw an outline to engage and brief the
various specialists for the feasibility study, co-ordinate the
information, assess the various options and report the
conclusions and risk assessments for each option.
Crucial stages in a project were the life cycle cost and time
will be determined so, changes made during the execution will
affect the project.
StrategyStrategy planning combines various elements
including project brief, organisation, control system and
procurement by the designated project team.
Importance
It is at this stage that the Client formally appoints the project
manager to exercise the co-ordinating, monitoring and
controlling role for the project.
This ensures satisfactory completion of project in compliance
with the brief.
Cost control will be implemented so as to complete the project
within the approved budget.
Contractual procurement route and a draft master programme
will be determined.
project failures: poor Project definition,Unclear
objectives,Unrealistic targets,Inadequate risk
evaluation,Client inexperience,Poor forecasting on
demand,Lack of effective sponsor and strong leadership,Poor
communication and lack of openness,Inadequate stakeholder
management,Management focus wrongly targeted at the
back end rather than at the front end of the project
objectives of project planning: To define work required so
that it is readily identifiable to project participants,To
eliminate or reduce uncertainty,To improve the efficiency of
the operation,To obtain a better understanding of
objectives,To provide a basis for monitoring and controlling
work.
Components for project planning:
policy,schedule,budget,procedure,standart,organization,forec
ast, programme. Tools of Project Planning: Work breakdown
structure and work packages used to define the project
work and break it down into specific tasks.Responsibility
matrix used to define project organisation, and key
individuals and their responsibilities.FEvents and milestones
used to identify critical points and major occurrences on the
project schedule. Gantt charts, networks, critical path
analysis, PERT/CPM, cost estimating, budgeting, and
forecasting used to display the project master schedule and
detailed task schedules.
Stocks and SharesPublic companies raise finance to fund
investment in two ways:From their owners, who buy shares
in the company,From borrowing.Borrowing is usually
cheaper but loans have to be paid back some day and too
much borrowing is risky. If a company issues 100 shares and
you buy 1, you effectively own 1% of that company.The
companyuses the money you use to buy the share (on first
issue) to invest in the business. In return for buying stock,
shareholdersappoint the companys board of directors and
the auditors. Shareholders also expect:A proportion of the
companys profits to be paid to them as dividends,That the
value of their shares will appreciate with time.Neither
outcome is guaranteed.
Shareholder RisksIf a public company becomes insolvent:All
creditors, bondholders and preference shareholders are paid
off first.Any remaining money is distributed to the
shareholders. This is why shareholders expect a better
return from shares than they would from government bonds
or a bank. In other words, a risk premiumis expected over
and above the return on safe investments,The value of
shares, and the dividends paid on them, go up or go down
depending on company performance. Shares in a company
making healthy profits will be in demand whereas shares in a
persistently poor performing company will remain out of
favour.


Main phases of offshore project:appraisal,
feasibility,conceptual,front end engeneering design
(feed),detailed design & procurement,fabrication,
installation, hook up & commissioning.
Tools for Planning and Control:Work Breakdown
StructureNetwork DiagramsCalendars Gantt
chartsCritical Path AnalysisCTRs
The CTRCostTimeResourceA way of breaking down
individual activities into their elementsUsually prepared by
project engineers and lead discipline engineersUsed as an
input into the project planGenerally engineers prepare CTR
Sheets which are usually one page documents.CTR Sheet:1
Identifies activity with a name and (usually) an identifying
code.2Describes in a few sentences what the activity entails
and where it fits into the picture. 3 Identifies inputs and
dependencies.4 Identifies specific manpower. 5.Gives
estimate of cost of activity.6.Estimate of man-hours needed.
7 Estimate of duration. 8 Identifies milestones involved and
percentage completions to be set against milestones, where
appropriate. 9 Identifies deliverables for activity.