INTERNATIONAL CORPORATE

FINANCE:

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 2020 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:

o 3 years ago – 5%
o 2 years ago – 6%
o 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:

A. The Development & Operation of a New Oil Platform in the

North Sea costing approximately £315 million

B. 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 $10,000,000 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 3000 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
A. The Development & Operation of a New Oil Platform in the North
Sea costing approximately £315 million

Schedule of Activities, Expected Duration & Additional Workforce

Activity Immediate Duration (months) Additional

Predecessors Workers
Required
O M P

A: Geological Study Completed 12 5

B: Technical A 2 3 10 5
Evaluation

C: Financial A 3 3
Evaluation

D: Board B&C 1 2 3 4
Consideration

E: Safety Report D 1 3 11 3

F: Delivery & D 1 3 5 3
Construction of the
Oil Platform &
Material

G: Hire & Training of D 1 2 3 3

Labour

H: Site Preparation E&F&G 3 4 5 5

I: Drilling & H 1 4 7 20
Production

J: Sales & On-going I On-going

Drilling & Production

O = Optimistic; M = Most Likely; P = Pessimistic

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 Activity F to Activity E, though it is uncertain whether
this action would then delay the project.

Activity F: 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 F: Material

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.
Three quotations have been received from potential suppliers:

Supplier Price (ton) Payment Terms

Russia Rub 27000 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 € 400 CIF Dover

Confirmed Irrevocable Documentary Credit –
payment 3 months after shipment.
Documentary credit charges of 0.75% are payable
by the
buyer.

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

Activity J: 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.
Activity I & J: Production Costs

Annual Production Costs for this project are expected to be in line with
previous projects detailed below:

Project Output (Barrels) Costs

A 2,000,000 £50,000,000
B 2,500,000 £65,000,000
C 2,300,000 £54,000,000
D 2,600,000 £62,800,000
E 3,000,000 £70,000,000
F 2,750,000 £66,100,000
G 2,900,000 £67,000.000
H 3,100,000 £69,000,000
I 1,800,000 £42,500,000
J 1,750,000 £40,200,000

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
B. 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 31.12.2018

€’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 2018: € 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:
o UK Oil – as per previous production costs
o Euro Refinery Plc - $5pb
 Fixed Costs p.a.
o UK Oil – £5 million
o 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 31.06.19
£’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:
o Stock with a Reservation of Title £5,000,000
o 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.

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?
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

A. Development & Operation of the new Oil Platform 40%

B. The Merger or Acquisition of an Oil Refinery (Euro 40%

Refinery Plc.)

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 40%

Refinery Plc.)
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%