Professional Documents
Culture Documents
of Project Finance
Manish ( 014epgp2014 )
Bhupinder Singh ( 007epgp2014)
Content
Organization structure
Post Merger Structure
Assignments
Project Finance vis--vis Corporate finance
Advantages
Disadvantages
Structure
Sources
Institutions
BP Amocos PF vs CF Model
Organization Structure
British Petroleum
Amoco Corporation
Operations in 70 countries
Operations in 25 countries
56,000 employees
43,000 employees
spite
Profits
Profitsof
$ 4.1
bn. (1997)
$ 2.7 Corp.,
bn. (1997)
In
corporate
rivalry between BP
& Amoco
both merged in
1998 to form BP Amoco to create financial synergies required to fund
capital intensive projects.
Why Merge ?
What prompted the merger of the two arc rivals?
Belief that success in capital intensive Oil and Gas Industry was
becoming increasingly dependent on scale.
Scale and Synergies
See Case page 3.
The best investment opportunities, in terms of rates of return on capital
employed, will be ones that, because of location and complexity, will be
available only to companies with greatest financial resources.
The risks are high and capital cost enormous as are the potential
riches if a huge oil field is discovered. Only well capitalized firms big
enough to afford the time, money and risk required to play poker game
can hope to thrive.
Assignment
Goal:
To work out new financing policy for the merged entity.
Process:
Watson & Bill sought opinion of finance executives of both the firms
regarding their take on project finance vis-a-vis corporate finance.
BP sparingly used project finance
Amoco too, believed in corporate finance more. But they sometimes
used project finance.
Issues
Finance Organization Structure
Project Finance Concepts
Cost and benefits of PF
Decision on Corporate Finance/Project Finance
Oil Industry economics
Type of Projects Basics (Development, Exploration,
Refining, Marketing, Power Plants)
Control &
Monitoring
Risk Allocation
Corporate structure
-Large businesses
Project Financing
Corporate structure
Cash flows only from
Project assets
Stringent monitoring
Full recourse
Diversified across
assets
Limited/Non- recourse
Contractual arrangements
for risk distribution
Corporate
Financing
Criteria
Financial
Easy/fast
Flexibility
Project Financing
[Off Balance Sheet]
Can be freely
used. Commingled
and allocated as per
Debt Contracts
Debt capacity
Corporate Policy
Lenders seek
project assets
Typically unsecured
Secured
Seen in entirety
Corporate
Financing
Criteria
Bankruptcy
Transaction
Costs
Agency Cost
Lower
Project Financing
[Off Balance Sheet]
Higher
MARKET
IMPERFECTIONS
PROJECT FINANCE
Distress Cost
Unclear advantage
CORPORATE FINANCE
Taxes
Project Finance has higher
taxes
Information Cost
Agency cost
Unclear advantage
investment
Sponsors
Contractor
Project
Finance
Debt
Equity
Finan
ce
Support
Agreement
SPV
Concessions
Supplie
r
Off
takers
Government
Operating Cash
Bus
Long term
finance
Short term
finance
Money Market
Inst.
BP
Amoco
Treasur
y
Subsidi
ary
share
25% Share
Partner
1
Company Finance
Structure:
Debt 30%
Equity 70%
Project
Cash from
Cash Back to source
source
35% Share
Partner
2
Liabilities
BP
Amoco
Treasury
Company Finance
Structure:
Debt 30%
Equity 70%
Debt Service
Subsidiar
y
25% Share
Partner
1
40% share
Project
Collate
ral
Lenders
35% Share
Partner
2
BP Amoco
Treasury
Company Finance
Structure:
Debt 30%
Equity 70%
35% Share
Subsidiar
y
25% Share
Debt
Lenders
Collateral
35% Share
Partner
1
40% share
Partner
Sponsors Equity
Project Finance
Pay-offs
Project Value
Put Premium
Debt
Debt Level
Walk away
Put
Option
Texac
o
Chevro
n
Mobil
BP
Amoco
Net Income
Revenues
Market Cap
Capex
Exxo
n Shell
Debt/Capital
20
%
40
%
60
%
80
%
100%
Risk Sharing
Transfer of risk to other parties that can bear and risk more
cheaply and effectively
Large investment for several years requires partners
Benefits
Sharing of Risk
Risk Management
Put Option (if walk away)
Expand Firms debt capacity
Interest Tax shield
Tax Holidays (if separate entity
required)
Better risk allocation with various
parties
Suitable for high risk, first time
investments, new industries etc.
Partners bring the needed know how