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Petrolera Zuata

Petrozuata C.A.
Team 4: Esa Meng, Mike Titkov, Rina Li, Joseph Smith
Project Background
Venezuela and Petrozuata
Country Outlook Project Map

 Economic growth dependent on the petroleum industry


Growth
 Government nationalized oil industry in 1976

 Two failed military coups


Political  Impeachment of President Pérez
Instability  Government has a history of invasive administration &
B rating
nationalization of industries
 Financial sector crisis of 1993
Finance
 Government control of the banking system in the early 1990s

Petrozuata Rationale

First Step into Orinoco Basin Development


2 Sponsors Maraven & Conoco Orinoco
 The project is the first in a series of future deals to be taken up with foreign oil & gas
companies for the development of Orinoco basin
$2.4bn Investments needed
Support from the Government
 Lowered royalty and tax rates 21.5bn Barrels of extra heavy crude oil
Other Guarantees
 PDVSA had given several guarantees to Petrozuata for payment of project 3 key Inland production wells
expenses, including unexpected cost overruns, prior to completion component Pipeline to the coast
s Upgrader facility
02
Financing Alternatives
Petrozuata and Project
Finance
Project Finance
Under MM, financing method is irrelevant
$1.0bn equity investment, $0.5bn from PDVSA (49.9%)
Positives
Assumptions of Modigliani Miller
+ Ability to take on higher leverage (and benefit from co-
•+ Financial distress sponsor’s creditworthiness)
•– Transaction costs + No recourse to the sponsor balance sheet
+ Limits financial risks of a project to the equity amount invested
by a sponsor
Conclusion
+ Economies of scale
Joint venture between Conoco and PDVSA provides the project + Leveraging of synergies
with: Negatives
• Enhanced creditworthiness (DuPont) – Increased complexity due to multi-party agreements
• Refining expertise (Conoco) – Complexity associated with trust fund account and
prioritization of cash flows
• Heavy crude resources (Maraven)
– Requires extensive and costly risk analysis & evaluation
• Increased debt capacity – High financing and transaction costs

03
Petrozuata
Risks and Risk Management
Risks Mitigants

Sponsor Creditworthiness
• Creditworthiness of parent companies • Severe penalties for failing to meet obligations of the several
• Risk associated with several guarantee for successful project guarantee, as well as incentives to cover the other party’s
completion shortfalls

Project Economics
• Contingencies on upstream and downstream facilities; and for
• Use of early project cash flows to finance remaining project premiums on a construction all risk insurance policy, and
construction costs • Construction, budgeting, schedules, and forecasts all verified by
• Sensitivity to volatility in price of syncrude independent consultants

Sovereign Risks
• Political risk from unexpected actions of the Venezuelan • Partnership with state-owned PDVSA reduces risk of
government detrimental political action
• Exchange rate risk between earnings in USD and operating • Cash payment priority schedule (cash waterfall)
expenses in Bolivar

04
Debt Financing
Options
Rule 144A Bonds Bank Debt Public Bonds
Pros Pros Pros
• Low interest rate of 8.0-9.0% • Credit line can be drawn as needed • Longer maturity than bank debt
• Can be issued within six months Cons • Fixed interest rate
Cons • Short maturity • Fewer and more flexible covenants
• Contingent on Petrozuata receiving an • Restrictive covenants Cons
investment grade rating • Variable interest rates • Funds need to be raised in a lump sum,
• Contingent on market demand • Political risk insurance (PRI) adding 300 which could create a negative carry
basis points to the cost of borrowing • Difficult for emerging market projects to
• Requires 12 or 16 months to arrange tap into the public bond market
• Difficulty in restructuring

Financing Options Summary

Worst Case Base Case (9.5%) Best Case (8.9%) 60% Leverage Min 1.80x DSCR Stability to Risks

$200mm $200mm • The project is set to be run with 60% leverage


Bank Debt, no PRI Bank Debt, no PRI • Ability to obtain investment grade rating is key

No Deal
$600mm $250mm • Market conditions affect the demand from creditors significantly
Bank Debt, PRI Bank Debt, PRI
$650mm $1,000mm Ras Laffan (Qatar) issued $1.2bn of 144A bonds in mid-December
144A Bonds 144A Bonds 1996. However, Qatar has an investment grade credit rating.

05
Sensitivity Analysis
60% Leverage (Base Case)
Base Case $175bn NPV 26.4% IRR DSCR Sensitivity

• Non-fixed equity cashflows in 1996-2000 DSCR Interest Rates

 
2.02 7.53% 8.53% 9.53% 10.53% 11.53% 12.53% 13.53% 14.53%
• Interest rate is based on weighted sources of 45% 2.86 2.75 2.65 2.55 2.44 2.32 2.20 2.09
debt funds 50% 2.59 2.49 2.40 2.31 2.22 2.12 2.01 1.91

Leverage
• Risk-free rate is based on 30Y Treasuries 55% 2.36 2.27 2.20 2.12 2.03 1.95 1.85 1.76
60% 2.17 2.10 2.02 1.96 1.88 1.81 1.72 1.64
• ERP equal to 7% 65% 2.02 1.94 1.88 1.82 1.75 1.69 1.61 1.54
• Start-up risk wasn’t implemented 70% 1.88 1.81 1.75 1.70 1.64 1.58 1.51 1.45

Leverage IRR Min. DSCR DSCR Growth in Oil Prices

 
50% 22.7% 2.40 2.02 3.50% 3.00% 2.50% 1.50% 1.00% 0.50% -0.50% -1.00%
55% 24.3% 2.20 45% 2.94 2.80 2.65 2.35 2.20 1.96 1.44 0.98
60% 26.4% 2.02 50% 2.66 2.54 2.40 2.12 1.99 1.78 1.29 0.88

Leverage
65% 29.3% 1.88 55% 2.44 2.32 2.20 1.94 1.82 1.62 1.18 0.80
70% 34.2% 1.75 60% 2.25 2.14 2.02 1.79 1.67 1.49 1.08 0.74
65% 2.09 1.99 1.88 1.67 1.55 1.39 0.99 0.68
Δ Oil Price IRR Min. DSCR 70% 1.95 1.86 1.75 1.56 1.45 1.29 0.92 0.63
3.50% 30.1% 2.25 60% leverage, 2.5% growth in oil prices, 9.5% interest rate
3.00% 28.3% 2.14
2.50% 26.4% 2.02 Project generates IRR of 26.4% (higher than COE by 6.2%); high industry risk
1.50% 22.4% 1.79 50% leverage, 2.5% growth in oil prices, 9.5% interest rate
1.00% 20.4% 1.67 Project generates IRR of 22.7% (higher than COE by 2.6%); not sufficient return
0.50% 18.2% 1.49
-0.50% 13.5% 1.08 70% leverage, 2.5% growth in oil prices, 9.5% interest rate; not sufficient DSCR

06
Project Bond Rating
Investment Grade
Criteria for Investment Grade Monte Carlo Simulation (Oil Prices)
Minimum DSCR > 1.80x; Recommended minimum DSCR > 2.00x 281

Weakest Link: Sovereign Risk Count of Observations


Precedents Analysis

S&P Rating S&P Rating EBITDA/


Project Debt to Value
(Project) (Country) Interest (X) 96
Athabasca Oil 57 63 57 57 57 56 57
BBB AA+ 27% 11x 41
50
41
50
Sands 37

Canadian Oil Sands BBB+ AA+ 23% 13x


YPF Sociedad <1 1-1.1 1.1- 1.2- 1.3- 1.4- 1.5- 1.6- 1.7- 1.8- 1.9-2 2-2.1 2.1- >2.2
BBB BBB- 35% 8x
Anomima 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.2
Ras Laffan (2001) BBB+ BBB 63% n.a. Minimum DSCR Range

Average BBB A 37% 11x Simulation Assumptions


• Oil price returns follows geometric Brownian motion
Petrozuata (2001) n.a. B 60% 4x • Drift: 2.5%; Volatility: 33.7% (based on 1982-1996 data)

Precedents Analysis Summary Simulation Results


• Projects usually get credit rating worse than one of its country • Minimum DSCR > 1.80x: 50% of the time
• None of the precedents are in non-investment grade countries • Minimum DSCR > 2.00x: 39% of the time

07
Appendix
Petrozuata – Project
Overview
Petrozuata – Contracts &
Commitments
Appendix – Monte Carlo
Simulations Year of Minimum DSCR
140
120
100
80
60
40
20
0
01 03 05 07 09 11 13 16 20 18
20 20 20 20 20 20 20 20 20 20

NPV Average DSCR


120
250
100
80 200
60
150
40
20 100
0
50
00 00 00 00 00 00 00 00 00 00
8 00 800 200 200 200 200 200 2 00 200 200
3 -1 - 2 4 6 8 0 2 3
<- 0- 000 00- 00- 00- 00- 0-1 0-1 >1 0
0
0 -8
0 00 00 00 00 00
0 00 2 3 8 3 8 3 8 3 8 3 8 3 8 3 8
80 12 32 52 72 20 <- -2- 3- 8-1 3-1 8-2 3-2 8-3 3-3 8-4 3-4 8-5 3-5 8-6 3-6
-2 92 11 1 1 2 2 3 3 4 4 5 5 6
Appendix – Sensitivities
of IRR

IRR Sensitivity Cost of Equity


IRR Interest Rates Item Source Value
 

26.4% 7.53% 8.53% 9.53% 10.53% 11.53% 12.53% 13.53% 14.53% Risk-free Rate Treasury 30Y 6.81%
45% 23.4% 22.4% 21.5% 20.6% 19.7% 18.9% 18.1% 17.4% ERP Case 7.00%
50% 25.2% 23.9% 22.7% 21.6% 20.5% 19.5% 18.5% 17.7%
Leverage

CRP Case 6.68%


55% 27.6% 25.9% 24.3% 22.8% 21.4% 20.2% 19.0% 17.9% Levered Beta Case 0.95
60% 31.0% 28.6% 26.4% 24.4% 22.6% 21.0% 19.6% 18.3% COE Case 20.14%
65% 36.4% 32.6% 29.3% 26.6% 24.2% 22.1% 20.2% 18.6%
70% 47.4% 39.8% 34.2% 29.9% 26.4% 23.5% 21.1% 19.1%

IRR Growth in Oil Prices


 

26.4% 3.50% 3.00% 2.50% 1.50% 1.00% 0.50% -0.50% -1.00%


45% 24.2% 22.9% 21.5% 18.6% 17.1% 15.5% 12.0% 9.9%
50% 25.7% 24.2% 22.7% 19.6% 17.9% 16.2% 12.3% 10.0%
Leverage

55% 27.6% 25.9% 24.3% 20.8% 19.0% 17.1% 12.8% 10.2%


60% 30.1% 28.3% 26.4% 22.4% 20.4% 18.2% 13.5% 10.5%
65% 33.9% 31.6% 29.3% 24.7% 22.3% 19.9% 14.3% 10.9%
70% 40.1% 37.2% 34.2% 28.4% 25.4% 22.3% 15.6% 11.5%
Appendix – Sensitivities
of NPV

NPV Sensitivity
NPV Interest Rates
 

175 7.53% 8.53% 9.53% 10.53% 11.53% 12.53% 13.53% 14.53%


45% 188 159 129 99 69 39 9 -21
50% 208 176 144 112 80 47 14 -20
Leverage

55% 227 194 160 125 90 55 19 -17


60% 246 211 175 138 101 64 26 -13
65% 263 227 190 152 113 73 33 -8
70% 280 244 206 166 126 84 42 -2

NPV Growth in Oil Prices


 

175 3.50% 3.00% 2.50% 1.50% 1.00% 0.50% -0.50% -1.00%


45% 257 192 129 13 -41 -93 -190 -235
50% 269 205 144 31 -21 -72 -166 -210
Leverage

55% 280 219 160 50 -1 -50 -141 -184


60% 291 232 175 69 20 -27 -116 -157
65% 302 245 190 89 41 -4 -89 -128
70% 312 258 206 109 64 21 -60 -98