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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
6/14/2011 Comments: spm_pdpu_emba10@googlegroups.com 2

1 bn.com 3 .9 bn. both merged in 1998 to form BP Amoco to create financial synergies required to fund capital intensive projects.000 employees • CEO Sir John Browne • Assets $ 54. • Profits $ 2.3 bn. • Profits $ 4.7 bn. • Revenues $ 71.5 bn. (1997) In spite corporate rivalry. (1997) Amoco Corporation • US based – world’s 6rd largest Oil & Gas giant • Operations in 25 countries • 43. 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.Organization Structure British Petroleum • UK based – world’s 3rd largest Oil & Gas giant • Operations in 70 countries • 56.000 employees • CEO H Lawrence Fuller • Assets $ 32.6 bn. • Revenues $ 31.

6/14/2011 Comments: spm_pdpu_emba10@googlegroups.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.com 4 .

6/14/2011 Comments: spm_pdpu_emba10@googlegroups. Process: • Watson & Bill sought opinion of finance executives of both the firms regarding their take on project finance vis-a-vis corporate finance.The Assignment Goal: • To work out new financing policy for the merged entity. • BP sparingly used project finance • Amoco too. believed in corporate finance more.com 5 . But they sometimes used project finance.

com 6 Assets Cash Flows Life 6/14/2011 .Project Finance Lenders •Non recourse debt •Project assets as collateral •Project future cash flows •Finite life Comments: spm_pdpu_emba10@googlegroups.

com 7 .Prerequisites of Project Finance Discrete – non core assets Known risk-return profile Lenders familiarity with business model 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.

com 8 .Advantages of Project Finance Risk management tool Government concessions Financial Leverage – Tax Shield Hedge against losses by sacrificing some profit Increases borrowing capacity 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.

com 9 .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 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.

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 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.com 10 .

Structure of Project Finance Sponsors Contractor Equity Lenders Project Finance Debt Finance SPV Concessions Supplier Off Comments: takers Support Agreement 6/14/2011 spm_pdpu_emba10@googlegroups.com Government 11 .

com 12 .Sources of Long Term Fund Lease Financing Secured Debt Unsecured debt Convertible debt Preferred Equity Common Equity 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.

Sources of Short Term Fund Construction Financing Bridge Financing Line of Credit 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.com 13 .

Institutions Promoters Sponsors Equity Funds Banks / Non Bank Financial Institutions Government Suppliers / Off takers 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.com 14 .

com 15 6/14/2011 .Corporate Finance Funds •Internal funds •Company assets as collateral Assets Cash Flows •Company balance sheet Comments: spm_pdpu_emba10@googlegroups.

com 16 .Process of Corporate Finance Use internal funds Pledge assets and cash flows No liability on sponsors 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.

com 17 .Benefits of Corporate Finance Easy mobilization of funds Low cost of capital Flexibility in decision making 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.

3. BP Amoco Treasury Company Finance Structure: Debt 30% Equity 70% Subsidiary 40% share Partner 1 25% Share Cash from source 6/14/2011 Project Comments: spm_pdpu_emba10@googlegroups.com Partner 2 35% Share Liabilities 18 Cash Back to source . 4. 2.Corporate Finance Model Funds 1. Operating Cash – Bus Long term finance Short term finance Money Market Inst.

com Partner 2 35% Share Liabilities 19 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 6/14/2011 Project Comments: spm_pdpu_emba10@googlegroups.

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 6/14/2011 Project Comments: spm_pdpu_emba10@googlegroups.com Partner 2 35% Share Liabilities 20 Cash Back to source .

Corporate Finance: Pay Off’s $ Sponsor’s Equity Project Finance Pay-off’s 0 Project Value Corporate Finance Pay-off’s Put Premium Debt Debt Level Comments: spm_pdpu_emba10@googlegroups.com Walk away Put Option 6/14/2011 21 .Project Finance vs.

Financial Comparison (1998) Texaco Chevron Mobil BP Amoco Exxon Shell 0% 20% Debt/Capital Revenues Net Income Market Cap Capex 40% 60% 80% 100% 22 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.com .

BP Amoco (1997-1998) 30 25 20 15 10 5 0 Assets Revenues Net Income Debt to Capital ratio Capex Market Cap 1998 1997 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.com 23 .

Income Statement (1997-1998) Avg revenue/barrels Capex Dividend 1997 Profit Income Tax Interest Expense 0 6/14/2011 1998 5 10 15 20 25 30 35 24 Comments: spm_pdpu_emba10@googlegroups.com .

Thank You… 6/14/2011 Comments: spm_pdpu_emba10@googlegroups.com 25 .