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BP Amoco: Policy Statement on the Use of Project Finance

Abhik Tushar Das (20104001) Sitanshu Pathak (20104007) 15 Month Executive MBA Program School of Petroleum Management, PDPU

Content Organization Structure Post merger structure Assignment Discussion on PF and CF


Advantage Disadvantage Structure Sources Institutions

BP Amoco PF and CF Model


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Organization Structure
British Petroleum UK based worlds 3rd largest Oil & Gas giant Operations in 70 countries 56,000 employees CEO Sir John Browne Assets $ 54.6 bn. Revenues $ 71.3 bn. Profits $ 4.1 bn. (1997) Amoco Corporation US based worlds 6rd largest Oil & Gas giant Operations in 25 countries 43,000 employees CEO H Lawrence Fuller Assets $ 32.5 bn. Revenues $ 31.9 bn. Profits $ 2.7 bn. (1997)

In spite corporate rivalry, both merged in 1998 to form BP Amoco to create financial synergies required to fund capital intensive projects.
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Post Merger Organization Structure


Global HQ in London with Sir John Browne (BP) as CEO H Lawrence Fuller (Amoco) & Peter Sutherland (BP) as non exe co-chairman Finance Group:
CFO: John Buchanan (BP) Treasurer: David Watson (BP) Head Specialized Finance: Bill Young (Amoco)

Both companies had highly centralized finance functions with preference for corporate financing over project financing.

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The 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.

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Project Finance
Lenders

Non recourse debt Project assets as collateral Project future cash flows Finite life
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Assets

Cash Flows

Life

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Prerequisites of Project Finance

Discrete non core assets

Known risk-return profile Lenders familiarity with business model


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Advantages of Project Finance

Risk management tool Government concessions

Financial Leverage Tax Shield

Hedge against losses by sacrificing some profit

Increases borrowing capacity


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Disadvantages of Project Finance


High costs of capital due to high risk Time consuming process; Many layers of clearances Requires separate work force Low flexibility Leakages of proprietary information to lenders
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Comparative Summary
Project Finance Business diversification Capital intensive projects Project in politically volatile areas Ventures with weak credit rating partners Corporate Finance Business Expansion Small scale projects Politically stable environment Stand alone venture or strong partners

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Structure of Project Finance


Sponsors Contractor Equity Lenders

Project Finance Debt Finance

SPV
Concessions Supplier Off Comments: takers

Support Agreement

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Government 11

Sources of Long Term Fund

Lease Financing Secured Debt

Unsecured debt Convertible debt


Preferred Equity Common Equity
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Sources of Short Term Fund

Construction Financing Bridge Financing


Line of Credit
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Institutions
Promoters

Sponsors

Equity Funds

Banks / Non Bank Financial Institutions

Government

Suppliers / Off takers


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Corporate Finance

Funds

Internal funds Company assets as collateral

Assets

Cash Flows

Company balance sheet


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Process of Corporate Finance

Use internal funds Pledge assets and cash flows No liability on sponsors
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Benefits of Corporate Finance

Easy mobilization of funds

Low cost of capital

Flexibility in decision making


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Corporate Finance Model


Funds
1. 2. 3. 4. Operating Cash Bus Long term finance Short term finance Money Market Inst.

BP Amoco Treasury

Company Finance Structure: Debt 30% Equity 70%

Subsidiary
40% share

Partner 1
25% Share
Cash from source
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Project
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Partner 2
35% Share Liabilities
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Cash Back to source

Project Finance Model (BP Subsidiary uses PF)


BP Amoco Business Units

BP Amoco Treasury

Company Finance Structure: Debt 30% Equity 70%

Debt Service

Subsidiary
Collateral 40% share

Lenders

Partner 1
25% Share
Cash from source
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Project
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Partner 2
35% Share Liabilities
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Cash Back to source

Project Finance Model (Project uses PF)


BP Amoco Business Units

BP Amoco Treasury

Company Finance Structure: Debt 30% Equity 70%

Subsidiary
Debt Service 40% share

Lenders
Collateral

Partner 1
25% Share
Cash from source
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Project
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Partner 2
35% Share Liabilities
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Cash Back to source

Project Finance vs. Corporate Finance: Pay Offs


$ Sponsors Equity Project Finance Pay-offs 0 Project Value Corporate Finance Pay-offs

Put Premium Debt


Debt Level
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Walk away Put Option

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Financial Comparison (1998)


Texaco Chevron Mobil BP Amoco Exxon Shell 0% 20% Debt/Capital Revenues Net Income

Market Cap
Capex

40%

60%

80%

100%
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BP Amoco (1997-1998)
30 25 20 15 10 5 0 Assets Revenues Net Income Debt to Capital ratio Capex Market Cap 1998 1997

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Income Statement (1997-1998)


Avg revenue/barrels Capex Dividend 1997 Profit Income Tax Interest Expense 0
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1998

10

15

20

25

30

35
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Thank You
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