In the name of Allah, the Beneficent, the Merciful

ACKNOWLEDGMENT
Every praise be to Allah alone, The Merciful, The Kind, who give us the understanding
and courage to complete our project report and The Grace of Allah be on Prophet
Muhammad (Peace Be Upon Him), who is eternal source of guidance and knowledge
for humanity.
We are deeply indebted to our supervisor Prof. Dr.Ch.Mazhar Hussain whose help,
suggestions and encouragement helped us a lot during the research and writing of this
report.

Dedications:
Dedicated to Our Respected Parents and Teachers and Friends as well.

DECLARATION
3

It is declared that this is an original piece of our own work, except where
otherwise acknowledged in text and references. This work has not been submitted in
any form for another degree or diploma at any university or other institution for tertiary
education and shall not be submitted by me in future for obtaining any degree from this
or any other University or Institution.

Pervaiz Iqbal
Reg. No.5835-FMS/MBA/F12
Tahir Hussain
Reg. No.5825-FMS/MBA/F12
Sharjeel ur Rehman
Reg. No.5846-FMS/MBA/F12
Mazhar Ali
Reg. No.5838-FMS/MBA/F12

Exective Summary
We visit the Company and take the appointment from the Concern officers .At the
appointment date we meet with the Finance Manager, and told him about our visit, the
main objective, & purpose of our project, and then we ask many relevant Questions
from the Concern Officers which is required for our project. We have done Qualitative &
Quantitative analysis of Cash flow estimation, capital budgeting technique, cost of
Capital and Leverage by keeping in view the main Concept which we have learn in
class as well as from the discussion with the concern officers.
Due to their prohibition the company did not provided the data but cooperated
and discussed all the processes and working of the projects verbally. We have taken the
estimated data just to complete the projects as there was no company ready to provide
its financial data.
Then we collect the data from the different sources that are required for our project.

Contents
ACKNOWLEDGMENT................................................................................................... 2
Dedications:............................................................................................................... 3
Exective Summary...................................................................................................... 5
Contents..................................................................................................................... 6
1.0.

Chapter No: 1.................................................................................................... 8

PURPOSE OF PROJECT............................................................................................. 8
2.0.

INTRODUCTION & HISTORY:...............................................................................8

2.1.

Pakistan's E & P Sector................................................................................10

2.2.

Community Services.................................................................................... 10

2.3.

Salsabil Social Welfare Projects....................................................................11

Dewan Drilling Limited..................................................................................... 11

3.0.

VISION............................................................................................................. 12

4.0.

CORPORATE MISSION...................................................................................... 12

5.0.

BOARD OF DIRECTORS:..................................................................................... 13

5.1.

Quality Assurance........................................................................................ 13

HEAD OFFICE......................................................................................................... 13
6.0.

Chapter No: 2.................................................................................................. 14

7.0.

CAPITAL BUDGETING CASH FLOW ESTIMATION...............................................14

7.1.

Initial Investment......................................................................................... 15

7.2.

Incremental operating cash inflows.............................................................16

Existing Unit................................................................................................................ 16
7.2.1.
7.3.

Calculation of Incremental Cash In Flows..............................................17

Terminal Cash Flow...................................................................................... 17

8.0.

CHAPTER NO: 3............................................................................................... 20

9.0.

Capital Budgeting Techniques.........................................................................20

9.1.

Net Present Value......................................................................................... 20

Net Present Value........................................................................................................... 20

10.0.

ChapterNo: 4................................................................................................ 22

11.0.

Cost of Capital............................................................................................. 22

Cost of Capital.............................................................................................................. 22
11.1.

Cost of Debt.............................................................................................. 22

11.2.

Cost of Preferred Stock:............................................................................ 22

11.3.

Cost of Common Stock:............................................................................ 23

11.4.

WACC Calculation:.................................................................................... 23

12.0.

chapter no: 5............................................................................................... 24

13.0.

Leverage and Capital Structure...................................................................24

13.1.

Leverage Calculation:............................................................................... 25

13.2.

Degree of Operating Leverage:.................................................................25

13.3.

Degree of Financial Leverage:...................................................................25

13.4.

4Degree of Total Leverage:.......................................................................26

14.0.

chapter no: 6............................................................................................... 27

cONCLUSION, recommendation, REFFERENCES............................................27

15.0.

Conclusion and Recommendation................................................................27

16.0.

References................................................................................................... 28

1.0. Chapter No: 1

7

PURPOSE OF PROJECT
To Estimate Cash Flows for Dewan Petroleum that a proposed unit will generate. It
represents the cash flow benefits that are likely to accumulate as a result of executing
the investment. To calculate Net Present Value of project so that company can decide
that proposed investment will be fruitful or not. To calculate the expected average future
cost of capital for Dewan Petroleum. To discuss the leverage, capital structure, to
explain EBIT-EPS approach to capital structure.

2.0.

INTRODUCTION & HISTORY:

Dewan Petroleum (Pvt.) Limited (DPL) is a Pakistani exploration and production

company operating in six exploration licenses and is developing and producing gas and
associated condensate from its Salsabil gas field in Pakistan. In a short span of time
since starting operations in 2005, DPL has maintained a fast-track growth by making
significant gas discoveries in Safedkoh Block and has managed the development of
Salsabil Gas Field in record time. Today DPL is a full cycle E & P company with active
involvement in the exploration, development and production of petroleum to meet the
growingenergyneeds.
International Finance Corporation (IFC) acquired a 10% equity stake in DPL in 2006 as
part of an overall financing package for exploration and development activities in the
Safed Koh Block. DPL intends to broaden its portfolio by utilizing its resources and
expertise to expand its operations in the international E &P arena.

Exploration Licences

2.1.

PAKISTAN'S E & P SECTOR

The Pakistan E & P sector offers an attractive investment opportunity given the
countrys growing energy demand deficit, developed gas infrastructure and established
hydrocarbon potential.
Pakistan imports around 33% of its overall energy requirements in the form of crude oil,
petroleum products, coal and LPG. The Pakistan economy is heavily reliant on natural
gas which meets around 49% of its overall needs. Pakistans energy consumption
growth rate was comparable to the fastest growing global economies during 2001 to
2007 even though Pakistans energy consumption per capita remains amongst the
lowest in comparison to the 10 most populace countries.
While domestic energy demand has continued to grow, during recent years gas supply
growth in Pakistan has stagnated at around 4 bcf per day from indigenous resources.
As a result demand has outgrown supply and the consumers have been forced to shift
to imported fuels where possible. This factor along with increase in international oil
prices has resulted in the countrys annual petroleum import bill increasing exponentially
to US$ 10 to 12 bln levels in recent years.
2.2.

COMMUNITY SERVICES

DPL has initiated several social welfare schemes in and around its blocks. The schemes
are carried out in consultation with the local administration and are purely based on the
needs of the inhabitants, thus to improve their livelihood. As a responsible corporate
citizen, DPL remains actively engaged in several social welfare activities namely
education, supply of drinking water and health care. DPL has also carried out large
scale social welfare activities including disaster relief operations during the Kashmir
earthquake in the year 2005, Swat IDP crisis in the year 2009 and floods in Pakistan in
the year 2011.
2.3.
10

SALSABIL SOCIAL WELFARE PROJECTS

Primary School Rodho: DPL built a school at Rodho village to provide the community
with basic primary education. To further improve this facility, DPL added additional
classrooms backed by recreational facilities. Furthermore, to enhance the safety and
security of the school going children, a compound wall was erected.
Medical Dispensary: In 2004 DPL built a medical dispensary to provide free outdoor
medical care, along with free medicine. The Project was successfully completed in
2007.
Water Supply Scheme: DPL started a program which provides the local people with
fresh and clean drinking water. This gesture by DPL was also offered to adjacent
villages.
Mobile Medical Clinic: Within DPL's area of operation, apart from the terrain being
difficult, the villages are scattered far and wide, thus to provide medical services is a
herculean task. Therefore, DPL operates a Mobile Clinic that reaches people in need at
their very door steps.
Other Activities: During the holy month of Ramzan, DPL offers special food packages
and gifts for the local community.

DEWAN DRILLING LIMITED

As a subsidiary of DPL, Dewan Drilling Ltd. (DDL) was formed in 2007 as a service
company to provide drilling activities and allied services to the Pakistani E & P sector.
Investment in DDL ensured availability of rigs and allied services to DPL at the Salsabil,
Zindapir & Afiband fields and enabled it to meet activity timelines despite low rig
availability, remote location and restrictions on foreign staff. DDL owns & operates two
rigs ZJ-30 and ZJ-40 of Chinese make, capable of drilling down to 3,000m & 4,000m
respectively. ZJ -30 has drilled 9 wells & 4 workover where as ZJ-40 has drilled 4 deep
wells & 2 work overs. DDL has retained a highly experienced crew maintaining and
operating as per international drilling and HSE standards. DDL is committed to provide
best services to E & P sector of Pakistan.

11

3.0.

VISION

To Produce High Quality At The Lowest Cost

4.0.

CORPORATE MISSION

Dewan Petroleum will consistently produce High Quality.

Dewan Petroleum will endeavor to be the lowest cost producer.
It is companys aim to achieve 20% of the market share of North Zone in the short term
and ultimately 30% in the longer term.
Dewan Petroleum will continue to provide a high standard of customer service.
In order to meet future expansion needs, Dewan Petroleum will continue its policies of
staff training and development, promoting from within whenever possible.

12

5.0.

BOARD OF DIRECTORS:

Dewan Muhammad Yousuf Farooqui , President

Dewan Asim Mushfiq Farooqui, Managing Director
Dewan Abdullah Ahmad, Director
Dewan Abdul Baqi Farooqui, Director Administration and Marketing
Mr.Haroon Iqbal, Director Finance and CFO
Mr.Faruq Ali & Co. Auditors
Mr. Feroze Tariq & Co .Auditors

5.1.

QUALITY ASSURANCE

Dewan Petroleum is a Company driven by quality consciousness and efficiency. Quality

is assured through systematic and effective adoption, implementation, monitoring and
continuous enhancement of quality control systems using latest methods of analyses.
All stages of the production process right from the selection of raw materials, processing
of materials and the finished product are subjected to rigorous testing to ensure the
highest quality.
All staff is highly qualified and well trained with highest level of technical competence in
their respective fields in order to achieve an efficient and smooth production process
which is necessary for ensuring quality.
HEAD OFFICE
13

Dewan Petroleum
Dewan House No
46, Nazimudin Road
F-7/4 Islamabad
Islamabad 44000
Pakistan
Tele: + 92-51-111-313-786
Fax: + 92-51-265-5482
Email: info@dewanpetroleum.com

6.0. Chapter No: 2

7.0.

CAPITAL BUDGETING CASH FLOW ESTIMATION

Data about Dewan Petroleum

Dewan Petroleum is considering to purchasing a new unit by replacing it with existing
unit. The existing unit is 2 years old, cost 25,00,000 and is being depreciated under
MACRS using a five year recovery period. The existing unit is expected to have useful
life of 5 more years. The new unit can be purchased at 4,000,000 and requires 400,000
installation cost, it has a 5-year usable life and would be depreciated by using a five
year recovery period. It can currently sell the exiting unit for Rs. 2,200,000 without
incurring any removal or cleanup cost. At the end of 5 years, the existing unit has zero
market value; the new unit would be sold out to net 1,500,000. The Firm is subject to a
40% tax rate. The estimated earnings before depreciation, interest, and taxes over the 5
years for both and existing units are given below
14

Buying of new units following items increased:

Current assets

Current liabilities
Accounts payable=1,200,000

Accounts receivable=1,200,000
Inventory

= 1,600,000

Earnings before depreciation, interest and taxes

Year
1
2
3
4
5

New unit
2,200,000
2,200,000
2,200,000
2,200,000
2,200,000

Existing unit
900,000
700,000
650,000
500,000
450,000

7.1.

INITIAL INVESTMENT

Installed cost of new Asset

Cost of new Asset

4,000,000

+Installation Cost

400000

Total Cost of New Asset

4,400,000

-After-tax Sale proceeds from old asset

Proceeds from sale of old Asset
Tax on sale of old Asset

(2,200,000)
360,000

Total proceeds from sale of Asset

(1,840,000)

+Change in Working Capital

1,600,000

Initial investment

4,160,000

Tax Calculations:
Book Value of old Asset
Accumulated Depreciation= 2,500,000*(.20+.32) = 1,300,000
15

Book Value= 2,500,000-1,300,000

=1,200,000

Recapturing Depreciation=2,200,000-1,300,000
Tax=900,000*40%

=900,000
=360,000

7.2.

INCREMENTAL OPERATING CASH INFLOWS

New unit
Profit
Year

before
Dep. and

N.P
Depriciation

before

N.P after

Taxes

Taxes

Tax

Tax

Operation
Cash Flows.
Inflows

1
2
3
4
5

2,200,000

880,000

1,320,000 528,000

792,000

1,672,000

2,200,000

1,408,000

792,000

475,200

1,883,200

2,200,000

836,000

1,364,000 545,600

818,400

1,654,400

2,200,000

528,000

1,672,000 668,800

1,003,200

1,531,200

2,200,000

528,000

1,672,000 668,800

1,003,200

1,531,200

220000

(220000)

(132000)

88000

316,800

88000

Existing Unit
Profit before
Year

depreciation

1
2
3
4

and tax
900,000
700,000
650,000
500,000

16

Net profit
Depreciation before
500,000
800,000
475,000
300,000

Taxes
400,000
(100,000)
175,000
200,000

Taxes
160,000
40000
70,000
8,0000

Net Profit
after Taxes
240,000
(60000)
105,000
120,000

Operatiing
Cash flow
Inflows
740,000
740,000
580,000
420,000

5
6

450,000
0

300,000
125,000

7.2.1.

150,000
150,000
(125,000) 50,000

60,000
(75000)

Calculation of Incremental Cash In Flows

Incremental
Year

New Unit

Existing Unit

Operating Cash
Flow

1,672,000

740,000

932,000

1,883,200

740,000

1,143,200

1,654,400

580,000

1,074,400

1,531,200

420,000

1,111,200

1,531,200

360,000

1,171,200

88,000

50000

38,000

7.3.

TERMINAL CASH FLOW

After Tax Sale proceeds from sale of new Asset

Proceeds from sale of new Asset

1,500,000

Tax on sale of new Asset

512,000

Total proceeds from sale of new Asset

988,000

After Tax proceeds from sale of old asset

Proceeds from sale of old asset

+Tax on sale of old Asset

Total proceeds from sale of old Asset

17

360,000
50,000

+Change in networking capital

1,600,000

Terminal Cash Flow

2,588,000

Tax Calculations:
Book Value of asset at the end of year 5= 220,000
1,500,000-220,000=1,280,000 Recaptured depreciation
Tax

18

1,280,000*.40=512,000

8.0.

CHAPTER NO: 3

9.0.

Capital Budgeting Techniques

9.1.

NET PRESENT VALUE

Net Present Value

It is a budgeting technique found by subtracting a projects initial investment from the
present value of its cash inflows discounted at a rate equal to the firms cost of capital.

Data:
Initial investment= 4160000
Years

Cash Inflows

932000

1143200

1074400

1111200

1171200

38000

We will discount our Future cash inflow at the rate of 16%.

NPV= PV of Future cash inflows initial Investment
=FVn / (1+r)n initial investment
=932000/(1.16)1 + 1143200/(1.16)2 + 1074400/(1.16)3 + 1111200/(1.16)4 +1171200/
(1.16)5 +

38000/(1.16)6 - 4,160,000

NPV = 903,448+ 994,584+ 888,323+ 813,706+ 658,624+ 15,597 4,160,000

19

NPV= 4,274,282 4,160,000 = 114,282

Our Net Present Value is positive its mean it fulfill our project requirement and it will increase
our Shareholder wealth.

20

10.0.
11.0.

ChapterNo: 4

Cost of Capital

Cost of Capital
The rate of return that a firm must earn on a projects in which it invests to maintain its
market value and attract funds. It is an extremely important rate of return used by firm in
the long-term decision process, particularly in capital budgeting.
11.1.

COST OF DEBT

Dewan Petroleum can sells 10 year, 1200 par value bonds paying annual interest of
9%. And the bond can be sold at 1500 each; floatation cost of 400.
Net Proceeds= Sales-Flotation Cost
=1500-400
=1100
Approximation before cost of debt
Kd=I+ par value Nd/n /Nd+Par Value/2
=108+ 1200-1100/10 /1100+1200/2
Beforetax cost of debt=10.26%
After-tax cost of debt= 10.26*(1-T)
=10.26*(1-.40)
=6.16%
11.2.
Par value =1200
21

COST OF PREFERRED STOCK:

Coupon Rate=9
Sales Price = 1500
Flotation Cost = 400
Calculation of Preference Stock = Dp/Np
Np=1500-400
=1100
Kp= Dp/Np
=108/1100

=9.82%
11.3.

COST OF COMMON STOCK:

Ks= D1/Po +g
Po=1200, g=5%, D1=80
Ks= 80/1200 +0.05
=11.67%
11.4.
Source of Capital

WACC CALCULATION:
Book Value

Cost

Debt

700,000

6.16%

0.5

P/S

50,000

9.82%

0.035

C/S

650,000

11.67%

0.465

=(Wd *Kd) + (Wp *Kp) + (Ws *Ks)

=(0.5 *0.0616)+(0.035 *0.0982)+(0.465 *0.1167)
=0.0308+0.00344+0.0543
WACC

22

Weight

=8.85%

12.0.

chapter no: 5

13.0.

Leverage and Capital Structure

Leverage:
Leverage results from the use of fixed-cost assets or funds to magnify returns to
the firms owners. Generally, increases in leverage result in increased return and risk,
whereas decreases in leverage result in decreased return and risk.
Operating leverage is concerned with the relationship between the firms
sales revenue and its earnings before interest and taxes, or EBIT. (EBIT is a descriptive
label for operating profits.)
Financial leverage is concerned with the relationship between the firms EBIT and its
common stock earnings per share (EPS).
Total leverage is concerned with the relationship between the firms sales revenue and
EPS.
Data:
Total No of Share= 10,000
2011

2012

Sales

4,000,000

4,500,000

F.C

1,000,000

1,200,000

V.C

2,000,000

2,500,000

Interest

150,000

100,000

P/S Div

100,000

100,000

Tax

40%

40%

23

13.1.

LEVERAGE CALCULATION:

2011

2012

Sales Revenue

4,000,000

4,500,000

F.C

(1,000,000)

(1,000,000)

V.C

(2,000,000)

(2,300,000)

EBIT

1,000,000

1,200,000

Interest

(150,000)

(200,000)

EBT

850,000

1,000,000

Tax

(340,000)

(400,000)

Net Income

510,000

600,000

P.S.Div

(200,000)

(220,000)

Earning for C.S

310,000

380,000

EPS

31

38

13.2.

DEGREE OF OPERATING LEVERAGE:

DOL=%change in EBIT/%change in Sales

%change in EBIT=1,000,000-1,200,000/1,200,000
= -0.17

%change in Sales =4,000,000-4,500,000/4,500,000

= -0.11

DOL= -0.17/-0.11

=1.55 Ans

If DOL is greater than 1 it means that leverage is exist.

13.3.

DEGREE OF FINANCIAL LEVERAGE:

DFL=%change in EPS/%change in EBIT

%change in EPS =

31 38/38

-0.184

%change in EBIT=

-0.17

DFL= -0.184/-0.17
24

1.08 Ans

13.4.

4DEGREE OF TOTAL LEVERAGE:

DTL= DOL*DFL
DOL= 1.55
DFL= 1.08
DTL= (1.55)(1.08) = 1.674 Ans

25

14.0.

Chapter no: 6

CONCLUSION, RECOMMENDATION, REFFERENCES

15.0.

Conclusion and Recommendation

After analyzing the entire landscape of company, we recommend to enhance their

capital structure with some amount of debt to minimize risk. Risk management tool
should be applied, the net present Value of this project shows right choice of
management. But it also shows that company willingness to work on low profit margin.
As the amount of NPV is not large enough. It is the responsibility of the management to
look forward for the significant profit margin project only. Low profit margins resulted in
lack of quality. It is not in the favor of company in the longer terms. Company doesnt
have significant contact with the market. So some effort in this regard also needed to be
done.

26

16.0.

References

Persons:

Interview from M.Ikram-ul-Haque, Financial Analyst DPL Pakistan Limited

(ikramhaq@dewanpetroleum.com) Cell No.0342-6720001)

Interview from Bilal Mustafa,Assistant Manager Accounts DPL Pakistan Limited

(bmustafa@dewanpetroleum.com )(Cell No. 0345-5078770)

Interview from Habib Husain, Petroleum Engineer, DPL Pakistan Limited.

Websites:

http://www.dewanpetroleum.com

http://www.obizpakistan.com

http://www.linkedin.com

http://finance.google.com

http://finance.yahoo.com

27