London School of Commerce

MBA For Executives

CORPORATE FINANCE
Investment Decision
Case: Vitol Holding

Yousef Hamad
L0009SBSB0913

Lecturer: Pro. Steve Lumby 1 October 2014

 CONTENTS
INTRODUCTION.................................................................................................................................. 2

1. INTRODUCTION TO VITOL ............................................................................................. 3

2. ARTICLE SUMMARY ....................................................................................................... 5

3. INVESTMENT-DECISION ANALYSIS ................................................................................ 6

DISCOUNT-RATE ....................................................................................................................................... 6
INTERNAL RATE OF RETURN ........................................................................................................................ 7
NET PRESENT VALUE ................................................................................................................................. 7
DATA ...................................................................................................................................................... 8
CALCULATIONS ......................................................................................................................................... 8
ANALYSIS............................................................................................................................................... 11
SUMMARY ............................................................................................................................................. 12

4. DECISION CRITIQUE ..................................................................................................... 13

NPV..................................................................................................................................................... 13
IRR ...................................................................................................................................................... 14
UNCERTAINTY/RISK ................................................................................................................................. 14
ASSET-VALUATION .................................................................................................................................. 14
RISK-ASSESSMENT................................................................................................................................... 15
PAYBACK-PERIOD .................................................................................................................................... 15
CVP-ANALYSIS ....................................................................................................................................... 17

5. SHAREHOLDERS VALUE ............................................................................................... 17

VALUE DRIVERS ...................................................................................................................................... 18

VALUE MEASURE .................................................................................................................................... 20
DECISION IMPACT ................................................................................................................................... 24

6. RECOMMENDATIONS .................................................................................................. 25

INFORMATION ........................................................................................................................................ 25
ARBITRAGE ............................................................................................................................................ 25
RISK ..................................................................................................................................................... 25
INFLATION ............................................................................................................................................. 25
TAXATION.............................................................................................................................................. 26
MISCELLANEOUS ..................................................................................................................................... 26
POST-PROJECT APPRAISAL ........................................................................................................................ 26

7. APPENDIXES ................................................................................................................ 27

APPENDIX 1 CASHFLOWS ........................................................................................................................ 27

APPENDIX-2 PAYBACK PERIOD ................................................................................................................. 35
APPENDIX-3........................................................................................................................................... 35
APPENDIX-4........................................................................................................................................... 36

8. REFERENCES ................................................................................................................ 39

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 INTRODUCTION
This piece of work touches one of the biggest capital investment decisions made
worldwide in this year by Vitol Group to acquire SHELL asset in Australia. As Vitol
is an unquoted private equity, data and information are almost hard to obtain.
However, some real-available data and are used with few assumptions for the purpose
of assignment after discussed with the module lecturer Prof. Steve Lumby- the
approach which generated results perhaps differ from the reality.

The report consists of six main sections apart from the introduction, appendixes and
references.

The author committed to the word limit in all sections reaching 3783 words in total
excluding this introduction, tables, graphs, appendixes and bibliography.

2
 1 INTRODUCTION TO VITOL
1.
Vitol Holding BV is a group of privately-owned
privately owned energy and commodities’ companies,
established in Rotterdam in 1966, having headquarters based in Switzerland, and
currently owned by about 330 employees. It is the biggest energy trader worldwide;
having about 40 premises and owning several facilities/capabilities of Oil&Gas
exploration/production, shipping, refining, power-generation,
power generation, retailing, and mining
those complement its core business:
business trading and distribution/logisticc services. Vitol’s
largest operations take place in Geneva-Switzerland, Houston-USA,
USA, London-UK,
London and
Singapore. It has 5000+ employees.

Apart from 2009 turnover drop, Vitol made incremental annual revenue (see graph-1)
graph
with US$307 billion turnover in 2013,
2013 achieving 47 years continual-profitable
continual
operations.

Last year Vitol paid $23.37m income-tax,

income tax, had $500m personnel expenses and paid
$110m dividends (Hume, 2014).

It delivers different products and services to the market (see Table-1).

Table

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Accoridng to its CEO Ian Taylor (2014), Vitol in 2006 established a JV with MISC
(Malaysian shipping firm), forming VTTI the international giant company of
terminals and storage. It has also made several remarkable acquisitions such as the
British Immingham Combined-Cycle Electric-Power Station in 2013 and the recent
US$2.6 deal in February/2014 with SHELL of buying the Australian Geelong refinery
along with 870 retail-sites. Viva-Energy has been launched to operate such facilities.

Vitol also acquired in 2012 a stake in Grindrod (South-African shipping company)

which allows accessing to the Mozambican coal terminal. Fujairah refinery in UAE is
a major strategic asset in Arabic-Gulf region in which Vitol plan to invest in
revamping the refinery and expanding the tankfarm. It has other refineries in Belgium
and Switzerlan, and 49% shares in Ventspils (Latvian terminal), and many other
stakes and operations over the globe.

(Bloomberg, 2014; Reuters, 2014; Taylor, 2014; D’Alessandro, 2013; vitol.com,

2013)

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 2. ARTICLE SUMMARY
Vitol has completed its largest deal of outlaying A$2.9bn (US$2.6bn) to acquire the
Australian-based ‘Geelong oil refinery’ (was vulnerable to closure) from Royal-Dutch
Shell. Abu Dhabi sovereign-wealth-fund (ADIA) took part of such asset including
870 fuel stations and its associated chemicals, bulk fuels, and portion of lubricants
business.

Shell targets disposing its downstream business to recover US$15bn in 2014/2015 and
focusing on Oil&Gas profitable investments, predominately exploration and
production. This strategy grew the traders’ appetite -in Australia- such as Vitol for
above acquisition and Trafigura who bought two import-terminals and petrol-stations
against $800m in 2013.

Due to shutting its high-cost and old refineries and increasing demand from its mining
industry, Indonesia- the largest Asia-Pacific importer of oil-refined products in a
highly-growing zone could be overtaken by Australia which has high-potential in oil
products industry as Ian Taylor, Vitol CEO said.

Vitol transaction is the most-recent move by commodities’ merchants approaching a

vertically-integrated business-model. Vitol and its competitors Mercuria, Trafigura
and Gunvor are expanding beyond their broking role and investing in high-
volume/low-margin businesses, byword production and processing.

This is the Vitol’s third acquisition deal in the past two year in the refining-field that
to be settled this year after regulatory-approval. Vitol, in 2012, bought 68,000 b/d
Cressier-refinery from the Swiss bankrupt: Petrolus. Last December, it joined Carlyle-
Group, buying from OMV-Group 45% share in Germany’s 260,000 bpd Bayernoil
refinery. Vitol runs other two refineries in UAE and Belgium. Taylor said to FT’s
Global Commodities Summit-2013 “We, like others, are looking to invest in the whole
supply chain”.

In order to enhance cashflows and after Shell had disclosed its first earning’s warning
in 10 years, Ben ven-Beurden, Shell CEO started an austerity strategy of cutting costs
by selling assets, more divestments with less chances of new projects. Shell has sold
several downstream facilities in Europe and Egypt and receded from the resumption
of Arctic drilling activities. It, moreover, intends to sell upstream facilities in Nigeria.

5
The high-value investment waves push employee-owned commodity-trading sector to
open on foreign investors, with trading houses seek tapping the bond market or
floating portion of their businesses, whereas others look for investment from
sovereign-wealth-funds and private-equities.

(Smyth and Terazono, 2014)

3. INVESTMENT-DECISION ANALYSIS
Vitol-Shell deal is somehow mysterious (West, 2014). Companies do not like to be
disclosed how they made investment-decision fearing from exposing commercially
valuable information to competitors.

Several of Vitol’s rivals have adventured -few years ago- into bond markets where
further financial information is disclosed that gradually has exposed number of little-
known but most powerful firms worldwide Kent (2014b).

Taylor (Vitol-CEO) declined to Reuters to comment on Vitol’s financial statement

(Zhdannikov and Farge, 2013).

That is why the appraising process Vitol used for this acquisition were not publicly
available as well as most of Vitol’s data/details. Therefore, Vitol might have used
different ways in making the investment-decision considering money future value,
discount-rate, and other factors.

In such complex project, Vitol needs to consider discount-rate to determine the

present-value of future-cashflow using the discounted-cashflow (DCF) valuation
(Ross, et al., 2006).

Discount-Rate

Vitol should have undertaken simultaneously Oil&Gas sales-analysis, market-survey

and weighted-average-cost-of-capital (WACC) developing a set of discount-rates.
Evaluating Oil&Gas assets demonstrates the significance of seeing the discount-rate
in the overall appraisal context comprising cost-parameters, prices and production-
decline. Four components Vitol should have considered defining the discount-rate: (a)

6
risk-free; (b) inflation-rate; (c) general risk premium those quantified by public data
and (d) property specific risk premium which should be estimated by the appraiser
(Combs, 2012).

However, 10% discount-rate is commonly used in Oil&Gas field (Deliotte, 2014; and
Higgins, 2013) where DCF methods are widely used for property appraising (Combs,
2012).

Vitol could have used IRR as one of the most commonly-used tools for investment
efficiency though its limitations. Oil&Gas asset cashflows are fundamentally different
from putting money in banks to gain little interest which is then reinvested over time
(Meehan, 2011).

Internal Rate of Return

Vitol should have set a minimum IRR which is similar to the return-on-investment
ROI (Course-Manual, 2014; Lumby, 2011), and greater than the opportunity-cost of
the capital-investment to accept the project (Arnold, 2008). Net present value is zero
at such IRR that requires performing two sets of computation for the investment’s
cashflow to have positive and negative NPVs. To compute these NPVs, first discount-
factors are applied to future cashflows to identify their PVs which then added-up for
each year (Steven, 2010).

Although the cashflows (assumption-based sales) are standard in Appendix-1, the

reality might have non-standard cashflows with which IRR appraisal is misleading.

Net Present Value

To reach the estimated NPVs based on the available perceived options, Shell and
Vitol should have conducted DCF modeling of post-tax cashflow. They should have
utilized the modeling of such options while negotiating the final transaction structure
(West, 2014). For instance, BP derives 11% discount-rate from its after-tax WACC;
consequently the future cashflow is adjusted for the investment associated-risks and
discounted using 11% (Pwc, 2008). The analysis of defining the appropriate rate
encloses judgment and should depend on Vitol’s circumstances and certain facts
(Deliotte, 2014).

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It is difficult to define proper/appropriate discount-rate (Lumby, 2011). However,
Vitol should have strived to perform firm appraising fulfilling its objectives and
increasing the shareholders value.

Due to the information scarcity, NPV and IRR will be calculated using the available
data and some realistic assumptions.

Data

Now-a-days commodity-traders do average returns (IOR) 20-30% which is deemed

high compared to other businesses’ standards (Blas, 2013).

Vitol launched Viva-Energy to operate Geelong-Refinery with other facilities. Scott

Wyatt (Viva-CEO) stated that Viva intends to invest $1bn over first 5 years in
revamping the facilities for better outcomes and $150m for maintenance for the next 2
years (Chambers, 2014b). Seeking accuracy, matching-principle (Carlberg, 2010) is
applied for $1bn investment.

According to West (2014), Woodside paid 32% tax on profit, while Caltex paid 28%
to Australia Taxation Office (ATO). Shell Australia ltd (SAL), ex-operator had
$21.7bn revenues in 2013, loss 108m and tax benefit 38m.

Calculations

From above, capital-investment is $2.6bn, average ROI is 25%, average tax is 30%
and discount-rate is 10%. Average investment-life is 15 years (Remsha, 2009) and
average diminishing-value is 13% (Depreciationrates.manager.io, 2014; ATO, 2014).

8
9
10
Analysis

Vitol realized losses in year-1, as the project started with $18440m revenue (same as
previous figure by the ex-operator SAL).

11
Taylor said to Herald that Vitol buys business to create business. Due to the on-going
developments of new mining and LNG projects and resources, Vitol wants to secure
the fuel supply required. This needs investing extra money in maintaining/revamping
the old refinery from which profits can be generated as well as from hedging on
currencies and logistics improvement. (UPI, 2014)

The project annual revenue grows by 2% which started attaining profits with year-2
due to plant optimization. Vitol confirmed to keep Shell-SAL staff (Chambers,
2014a).

The project makes 3.8-3.9% net profit margin, however, in reality the margin is ~1%
in commodities industry (Zhdannikov and Farge, 2013).

Summary

The appraisal and calculations show positive NPV and about 5 years payback-period
judging acceptable project.

As to Lumby (2011), minimum IRR to be set is same as the discount-rate applied in

NPV analysis which is 10%. Because the project IRR is 22% bigger than min. IRR
(10%), the investment is acceptable.

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 4. DECISION CRITIQUE

Organisations use investment appraisal techniques either by their accountants and

economists or external consultants. There is no absolute-optimal evaluation method
and each has limitations. To improve appraising outcomes, Vitol should have engaged
also its technically-qualified staff like engineers especially those are well-experienced
in engineering economy.

NPV

It is the net cashflow’s PV in future, discounted at the capital’s cost, and applied to
assort/appraise investment alternatives and anticipate the shareowners’ wealth a
potential investment can fulfill. NPV is a powerful tool differentiates between market
value and project cost, considering the asset riskiness via DCF. However, it is not
appropriate for projects of different effective lives. (Birgham and Ehrhardt, 2013;
Ross, et al., 2006)

Accordingly, Vitol should have estimated the asset value. Even if positive NPV
(acceptable proposal), it could mislead the results, as Vitol acquisition comprises
different type of assets having different effective lives.

Galli et al. (1999) as cited by Macmillan (2000) posited that input parameters are
assumed known in NPV. For instance in Oil&Gas, the assumption is that the
analyst/appraiser knows oil-price, decline-rate, tax-structure, discount-rate, etc.
Nevertheless, the input variables are associated with uncertainty.

Further, West (2014) in his article in The-Sydney-Morning-Herald touched

transferring-prices and tax-structure related to Vitol-Shell deal. For example, he
expressed that Shell evaded answering many analysts’ and journalists’ questions
about tax issues and how ATO is not aware of many tricks in Shell tax-structure
thereof Vitol acquisition. He said: “As the sale of Shell’s downstream business will be
a share sale, it is reasonable to expect the transfer and exchange of agreements may
all occur offshore, in which case the ATO may not have an opportunity to understand
the full construct of the deal” (see appendix-3).

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So, was Vitol aware of the full story of tax issues before the acquisition? If ‘yes’ did
Vitol analyst consider this story and its risk/impact on the appraising process and
future operations?

IRR

As anticipated in part-3, Vitol should have set a minimum IRR considering ROI,
discount-rate and opportunity-cost. Vitol acquisition is acceptable if IRR higher than
its cost-of-capital by an amount that can run to the shareholders; whereas the
opposite-case decreases the share-price hence requires shareholders’ intervention to
offset the shortage. With non-standard cashflows, IRR misleads Vitol decision which
is highly expected, especially, with minimum 15-year life. (Brigham and Houston,
2007)

Uncertainty/Risk

According to Macmillan (2000), riskiness and uncertainty are crucial in complex

industry like Oil&Gas. Several helpful researches offered broad insights into
decision-making notion, but few who explored the techniques that used in such sector.
Therefore, a significant capital-outlay is required for each investment-decision
without expecting revenues for many years, however, the cashflows showed
relatively-short (5.45 years) payback-period that based on assumptions. Since PV is
function in discount-rate, finding convenient rates is a matter of preferences and
judgment; nevertheless, some researchers try to make discount-rate selection more
objective. Vitol should have considered inflation/risks when making-up nominal
discount-rate.

Asset-Valuation

Geelong-refinery including its tank-farm and offsite-facilities is obviously the biggest

and most sophisticated asset in Vitol’s acquisition.

Vitol should have well-investigated the market, utilizing experience, judgment, and
common sense to estimate the asset-value. Based on Reshma (2009), Vitol appraiser
should have used three valuation approaches apart from the appraisal techniques:

14
1. Sales-Comparison Approach: very powerful technique in appraising refineries
where the actual transaction is analyzed in the marketplace, deriving value for the
asset upon Vitol and Shell actions. This needs to consider refinery’s size,
complexity, performance, location and age, and time difference between appraisal
date and sale date. Removing any intangible and marketing assets and inventories
from the transaction price is a must so that dealing only with tangible
assets/facilities under review.

In contrast, Vitol acquisition includes intangible assets such as goodwill/brand and

human-capital and several inventories.

2. Income-Approach: frequently used by buyer/seller in the marketplace where

future income realization is developed which is difficult due to the necessity of
future forecasting. Vitol and Shell should have used income-approaches matrix to
examine their forecasts possibly in many various ways. Forecasted items are
refinery productivity, production, profitability, produced products’ prices, raw-
material and operating-costs, future CAPEX, requirements of sustaining capital
and discount-rate. Thus each part can understand low/high ends of its negotiation
domain.
3. Cost-Approach: requires a certain degree of knowhow about the industry,
utilized technology and economics to compute the plant cost of the appraising
date. Vitol appraiser must have done this valuation to estimate asset-price
($2.6bn) that should not exceed the price of building new asset.

Risk-Assessment

As the investment-appraisal tools are purely financial, Vitol should have conducted a
qualitative and quantitative risk-assessment which gives an initial view to whether or
not buy the asset before starting the appraising process.

Payback-Period

Based on Arnold (2008), Vitol might have used payback or discounted-payback,

despite their drawbacks, as a secondary technique to supplement the more
complicated techniques (NPV/IRR) at the beginning. Payback considers the

15
discounted future cashflow, but neglects cashflow beyond the cut-off date. It screens-
out risky and unprofitable assets, as Vitol transaction comprised several assets
eventually to improve the appraising efficiency. Vitol is liable for paying $2.05bn
loan to eighteen lenders financed the investment (Kumar, 2014). Payback easily
provides the investment payback-period which Vitol needs as an indicator to set a
payment schedule when debts become due (Arnold, 2008).

According to Reshma (2009), supply, demand and competition are keys in refineries’
economics determining the product-value and raw-materials. Prices rise with
increasing demand and constant supply of products. High profit grows competition
thereof supply increases. When supply meets or exceeds demand, prices fall-down
thus competition declines. This is the basic scenario of prices and product-value of
any oil-refinery.

Vitol must then monitor regularly products’ prices and the processed crude-oil
prices/types. Traders can delve into the increasing gap between supply and demand in
Australia’s extremely-attractive market (Xie and Paul, 2014). Here is where Vitol
makes money by storing the surplus products and selling it later when demand
increases, and by feeding Geelong-refinery with appropriate Vitol-stored-elsewhere
crude. Vitol confirmed to identify supply/demand imbalances and act rapidly/safely to
recover the equilibrium, and move commodity from the sourcing location and
stored/delivered to the demand location (Vitol, 2013).

This process might need using Cost-Volume-Profit Analysis.

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CVP-Analysis

CVP can be used for long-term investment decisions, but needs the knowhow of
analyzing and evaluating investment proposals (Dauber et al., 2012).

As a trader, Vitol needs to use CVP analysis to determine the required volumes to
breakeven in terms of costs, sales-volume, and selling-prices and earnings. CVP also
assists in analyzing the profit-sensitivity to variations in costs, prices, volume/sales
mix (Eldenburg and Wolcott, 2011) which is normal in the Oil&Gas commodities’
business where crude-oil prices fluctuate.

5. SHAREHOLDERS VALUE
Vitol as a commodity-trader transforms commodities in-space utilizing logistics, in-
time via storage and in-form with processing. Vitol optimizes oil-commodities’
transformation which reconcile the supply-demand mismatches to add/enhance value
(Pirrong, 2014).

Vitol-diversified acquisition that consists of refinery, storage and distribution-

channels/retail-stations realizes a high-model of value-chain.

17
Taylor deems the investment-decision is right, as it leads to an exciting deal of
acquiring facilities that have value of SHELL-brand (Mills, 2014), and due to the on-
going developments of new mining and LNG projects, Vitol wants to secure the fuel
supply required (UPI, 2014).

On the other hand, Pirrong (2014) sees that Vitol perhaps wanted to adopt the asset-
intensive strategy whereby the acquisition broken-down in parts and sold to third-
parties, thereby summing such parts will eventually be greater than the initial price
paid for the entire acquisition.

Commodity-merchants harvest more earnings during turmoil periods and

supply/demand shocks where storage becomes more valuable, as a result creating
opportunities of inter-temporal arbitrage (Pirrong, 2014).

Value Drivers

Managers should shed-light on decisions affecting the value drivers those greatly
manipulate shareholder-value: (1) sales-growth and margin; (2) working-capital and
fixed-capital investment; (3) cost of capital; (4) taxation. (Pike and Neale, 2006)

1. As Taylor said, Vitol intended, through this purchase, to build the business and
increase its footprint to shore-up its position, in other words “hoping for good
return” (Saunders, 2014), and to be more competitive (Hume, 2014b). Gunvor
(Vitol’s competitor) stated that commodities-industry returns on equity which
substantially has decreased. Responding to this trend and to protect margins,
traders embarked on grapping more control over the value-chain by increasing
downstream/midstream acquisitions (Blas, 2013). Cashflow has 2% constant
growth-rate realizing incremental sales and profits.

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2. Vitol’s working-capital is important to keep-running the operations. WC size
reflects the difference between firm’s business success and failure. Vitol has
allocated $150m for facilities’ maintenance to improve the operations efficiency.
As profit increases with more sales and less costs, Vitol targets minimizing the
transformation costs of processing/refining, storing, transporting and financing
inventory. That is why Vitol invested $1bn in optimizing/revamping the system to
support growth-plan. Vitol strives to make money out of this acquisition
(Chambers, 2014b). Due to a growing economy in Australia with some growing
imports, Vitol needs to buy more assets in the long-term (Saunders, 2014).
3. Hedging decreases cost-of-capital and risks and stabilizes earning, ultimately to
raise the shareholder-wealth (Gibby, 2009). Investors are risk-averse thus share-
value is inversely proportional to risk. Vitol will hedge on currencies to generate
profits from the refinery (UPI, 2014), and to run the plant very safe/efficient
(Mills, 2014).
4. Taxation: where huge money is made. Shell-SAL pays 12% taxes. Will ATO treat
Vitol like SAL or Vitol should pay 28-32% taxes like others. Several tax issues
are still unclear about this transaction and Shell declined to answer many
questions, see Appendix-3 (West, 2014).

However, even with 30% tax, NPV is high/positive as per Appendix-1A.

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Value Measure

20
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22
Vitol is unlisted in stock-market (Reuters, 2013). Different valuation models enable to
evaluate the probable influence of altering main parameters like introducing more
effective/efficient management or dividend-policy. Applying them is a sufferance
with scarcity of efficient information. They are applicable for unquoted-firms, as long
as appropriate surrogates and/or reliable sector averages are available, otherwise it is
subjective valuation. The key valuation problem of Vitol is the necessity of keeping
the key managers for longer time to guarantee the investment recovery. (Pike and
Neale, 2006)

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Decision Impact

Accordingly, Vitol share-values can be compared within the industry to its

competitors’ values traded on an exchange-market.
If Vitol share-value is greater than that of its rivals, it is deemed undervalued where
the investment-decision has positive impact on the shareholder-wealth. If less, it is
considered overvalued thus the decision has negative impact that could deteriorate
Vitol’s financial-strength.
Taylor stated that the high-quality refinery, though small, with a good retail-network
can achieve high-returns in Australia which –in-long-term- needs more storage-
terminals (Kaye and Tan, 2014). This acquisition fosters Vitol trading position in a
promising market of high-volume/low-profit business (Kent, 2014a). Credit-Suisse
analyst cited that Vitol as highly-competent trader can produce more
efficiently/effectively than the others in Austria’s market (McAleavey, 2014). See
Appendix-4

Accordingly, the strategy is to buy more downstream-facilities. Vitol has high-model

value-chain: crude trading, transportation, storing, processing, distribution and
retailing almost everywhere. Quality and price affects commodities’ sales. Thus, Vitol
can provide the suitable crude for its refinery, realizing lower-cost operations and
higher-quality product. Terminals are vital in storing crude and products which are
managed depending on supply/demand. Having large distribution network and
numerous fuel/service stations enhances value-chain.

This acquisition delivers several elements those contribute to increasing the return and
augmenting the corporate-value, thereby maximizing shareholder-wealth:

However, and as unquoted, Vitol has less value to investors and difficult to sell
shares. Minority stockowners have little power of voting (Garrett, 2012).

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 6. RECOMMENDATIONS

Information

As it is a risky-irreversible action, investment-decision is a commitment of fund to

extraordinary projects, therefore requires careful investigations of all
concerned/available information. Board should be aware of what is going on around,
market trend/behavior, economic status, inflation, rates, prices, etc. and make sure
that information is relevant, accurate, reliable, up-to-date and cost-efficient. (Pike and
Neale, 2006)

Arbitrage

As commodity-trading is fundamentally based on transforming commodity in form

(processing), in space (logistics) and in time (storage), performing physical arbitrages
is necessary to augment value via such-different transformations (Pirrong, 2014),
especially Vitol owns different assets/facilities around Australia in African-Southern-
part, Pacific-Asian and Gulf among which price-transferring is feasible/viable.

Risk

Board needs to oversight and apply policies/procedures to manage/control riskiness.

With involving in aforesaid transformations, Vitol will confront several risks, part of
which may be managed by diversification, insurance and hedging, while the rest must
be transferred to the stockholders (Pirrong, 2014).

Inflation

Inflation should be considered, as it substantially influences the investment-decision

through the estimated cashflows and discount-rate. The value and purchasing-power
of money decrease with increasing inflation. Even with low current-rates inflation, it
persists increasing crucially the user cost-of-capital (Pike and Neale, 2006; Cohen et
al., 1999). Australian automotive fuel prices has recently fallen (-2.7%) which could
affect Vitol investment (Tradingeconomics.com, 2014).

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Taxation

Taxation must be incorporated in the appraisal. It is significant element of cashflows.

Whatever tax rate ATO applies, Vitol should disclose to ATO any taxation issues
related to Vitol-Shell deal those -if kept hidden- may jeopardize the investment.

Miscellaneous

Decision analysis is dependent on incremental-cashflow occurring as a result of such

decision. WC should also be incorporated in the appraisal. Before taking decision,
board needs to know the most valuable options (opportunity-cost) that can be
undertaken if a specific investment is withdrawn. And assuring decision-making is
independent on sunk-costs Vitol incurs before such decision like feasibility-
study/consultations’ costs, as well as any financing-cost like interest-paid or dividends
(Ross et al., 2006). Vitol might convert Geelong-refinery into terminal which is
costly/risky. Shutting-down the refinery will increase the unemployment after the
looming collapse of car and aluminum industries those scrutinized by Australian
regulators (International Business Times, 2014).

Post-Project Appraisal

PPA is used to assess projects after completion and examine what went right and what
went wrong. Vitol could use PPA results as lesson-learned that are beneficial in
similar future projects to avoid repeating same mistakes (Gulliver, 1987).

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 7. APPENDIXES

Appendix 1 Cashflows

Appendix-1A

27
Appendix-1B

28
Appendix-1C

29
Appendix-1D Internal Rate of Return (IRR)

30
Appendix-1E

31
Appendix-1F

32
Appendix-1G

33
Appendix-1H

34
Appendix-2 Payback Period

Appendix-3

Vitol-Shell deal is about buying assets operated by Shell Australia ltd (SAL). As a part of Shell tax integration group with (SEHAL)
Shell Energy Holding-Australia being the taxpayer, SAL pays 12% taxes; unlike other majors those pay 28-32%. Shell declined to
answer the following questions; thereby removing ambiguity requires waiting to see what SAL (now is Viva under Vitol) will claim in
2013/2014 tax returns. It is still ambiguous how Vitol dealt with this issue. (West, 2014)

No. Question
1. Which offshore Shell’s firm represents the seller against Vitol?
2. Has a firm of Shell group assumed this asset ownership with paying nothing to SAL for its
fair value?
3. Will Vitol get Shell’s compensation, and in which country?
4. Did both parties agree on part-payment based on delivery to mitigate Vitol risks?

35
Appendix-4

Why Australia?

Trafigura (Puma’s owner) stated that Australia has the world’s second-greatest rate/capita of car ownership and third-largest fuel
consumption- the country of more about million km of roads and more than 300 airports where Puma realizes what it takes to deliver fuel
to far-rural areas. It is vital to expand the import terminals in Australia during the increase of refining capacity in India and China due to
the decelerating growth in products demand in Asia. India and China plan to increase capacity by 2.5m p/d in 2014/2015 which can
create products repletion thus more imports into Australia. Notwithstanding high demand, oil majors are reluctant to invest in and quit
from the refining business because of strong Australian currency that causes high financing/labor costs. Merchants expect lack of oil-
products shortly in Australia where trading prospers. This growth surplus could unavoidably increase the pressure on Australia’s key
refining players while offering more opportunities to major fuel importers. (Xie and Paul, 2014)

Consecutive closures of small-sized and old-conventional refineries caused them uncompetitive versus regional modern refineries
(Hamawand et al., 2013). This leads to raise oil product imports in Australia, especially jet–fuel, gasoline, and diesel (Eia.gov, 2014).
This acquisition fosters Vitol trading position in a promising market of high-volume/low-profit business. JBC Energy-Consultancy
expected that Australian oil-imports would increase about 65% from 2013 to 2020, accordingly Trafigura (Vitol’s rival) has acquired
$800m+ storage and retailing facilities extending its footprint. (Kent, 2014a)

Credit-Suisse analyst cited that Vitol as highly-competent trader can produce more efficiently/effectively than the others in Austria’s
market (McAleavey, 2014).

36
Why Downstream?

Since market and trading have become more transparent and competitive respectively, giant commodity merchants reacted by sinking
$billions into downstream facilities including refineries (Hume, 2014b).

Gunvor’s CEO stated that commodities industry returns on equity which substantially has decreased. Responding to this trend and to
protect margins, traders embarked on grapping more control over the value chain by increasing downstream/midstream assets’
acquisitions (Blas, 2013).

Van Poecke (Petroplus founder) said that oil majors are selling more assets worldwide which improve returns, particularly when focusing
outside of America, numerous private capitals were pursuing opportunities in the US/Canada. In contrast, less capital is available outside
of the US; meaning it is buyers’ market. J.M. Mulder (ABN Amro) mentioned that sovereign wealth funds take vigorous paces to join
commodity merchants to finance energy asset deals. (Hume, 2014a)

Traders were shipping Africa’s oil –in the past- onto the international markets, but also they now perceive Africa as fuels’ destination
where Vitol owns 1300 petrol-stations. This encourages traders to acquire retail networks and tank-farms for better growth-rates
(Erpecnews, 2013).

According to Vitol CEO, major oil producers are now-a-days capital-constrained and under their stockholders’ pressure to invest more in
upstream- their core business that brings them high returns, while Vitol is married-off downstream which is its return source. Vitol’s
invasion started few months ago after Puma (subsidiary of competitor Trafigura) had remarkable acquisition of storage and retail stations
in Australia. (Xie and Paul, 2014)

On the other hand, Pirrong (2014) sees that Vitol perhaps wanted to adopt the asset-intensive strategy whereby the acquisition broken-
down in parts and sold to third parties, so that the summation of such parts will eventually be greater than the initial price paid for the
entire acquisition.

37
Why Geelong-Refinery?

Ian Taylor (Vitol CEO) stated that the high-quality refinery, though small, with a good retail network can achieve high returns in
Australia which –in-long-term- needs more storage-terminals. He said, "Longer term, yes, we are making a bet that refining will actually
be a cyclically good business. And that's what we've found so far, by the way", furthermore Australia is attractive as its market is free
compared to other Asian markets where fuel prices are strictly controlled. Analysts posited that the asset is meaningful for Vitol despite
Shell could not attain profits to retain it. Prof. Pirrong (University of Houston) says: "These two companies have different return
expectations and targets they're willing to accept". (Kaye and Tan, 2014)

Taylor said: “Geelong-Refinery is one of only three refineries in the southern hemisphere that produces aviation gasoline, which could be
re-exported, he said” (Xie and Paul, 2014).

38
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