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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 ProgramSchool 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 2Comments:
Organization Structure
British Petroleum
• UK based – world’s 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 – world’s 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.
6/14/2011 3Comments:
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.
6/14/2011 4Comments:
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-viscorporate finance.
• BP sparingly used project finance
• Amoco too, believed in corporate finance more. But they sometimes used project finance.
6/14/2011 5Comments:
Project Finance
Lenders•Non recourse debt
Assets•Project assets as collateral
Cash Flows•Project future cash flows
Life•Finite life
6/14/2011 6Comments:
Prerequisites of Project Finance
Discrete – non core assets
Known risk-return profile
Lenders familiarity with business model
6/14/2011 7Comments:
Advantages of Project Finance
Increases borrowing capacity
Government concessions
Risk management tool
Financial Leverage – Tax Shield
Hedge against losses by sacrificing some profit
6/14/2011 8Comments:
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 9Comments:
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 10Comments:
SponsorsLenders
EquityProject
Finance Debt
Off takers Government
Support Agreement
SPV
Concessions
Finance
Supplier
Contractor
Structure of Project Finance
6/14/2011 11Comments:
Sources of Long Term Fund
Lease Financing
Secured Debt
Unsecured debt
Convertible debt
Preferred Equity
Common Equity6/14/2011 12
Comments: [email protected]
Sources of Short Term Fund
Construction Financing
Bridge Financing
Line of Credit6/14/2011 13
Comments: [email protected]
Institutions
Promoters
Sponsors
Equity Funds
Banks / Non Bank Financial Institutions
Government
Suppliers / Off takers
6/14/2011 14Comments:
Corporate Finance
Funds•Internal funds
Assets•Company assets as collateral
Cash Flows•Company balance sheet
6/14/2011 15Comments:
Process of Corporate Finance
Use internal funds
Pledge assets and cash flows
No liability on sponsors
6/14/2011 16Comments:
Benefits of Corporate Finance
Easy mobilization of funds
Low cost of capital
Flexibility in decision making
6/14/2011 17Comments:
Corporate Finance Model
Project Partner 2Partner 125% Share 35% Share
Subsidiary
40% share
Cash Back to source
Cash from source
BP AmocoTreasury
Company Finance Structure:Debt 30%Equity 70%
Funds1. Operating Cash – Bus2. Long term finance3. Short term finance4. Money Market Inst.
Liabilities6/14/2011 18
Comments: [email protected]
Project Finance Model (BP Subsidiary uses PF)
Project Partner 2Partner 125% Share 35% Share
Subsidiary
40% share
Cash Back to source
Cash from source
BP AmocoTreasury
Company Finance Structure:Debt 30%Equity 70%
BP Amoco Business
Units
LendersCollateral
Debt Service
Liabilities6/14/2011 19
Comments: [email protected]
Project Partner 2Partner 125% Share 35% Share
Subsidiary
40% share
Cash Back to source
Cash from source
BP AmocoTreasury
Company Finance Structure:Debt 30%Equity 70%
BP Amoco Business
Units
Lenders
CollateralDebt Service
Project Finance Model (Project uses PF)
Liabilities6/14/2011 20
Comments: [email protected]
Project Finance vs. Corporate Finance: Pay Off’s
Put Premium
Walk away Put Option
Project Value
Project Finance Pay-off’s
Corporate Finance Pay-off’s
Debt Level
Sponsor’s Equity
0
$
Debt
6/14/2011 21Comments:
Financial Comparison (1998)
0%20%
40%60%
80%100%
Shell
Exxon
BP Amoco
Mobil
Chevron
Texaco
Debt/Capital
Revenues
Net Income
Market Cap
Capex
6/14/2011 22Comments:
BP Amoco (1997-1998)
0
5
10
15
20
25
30
Assets Revenues Net Income
Debt to Capital
ratio
Capex Market Cap
1998
1997
6/14/2011 23Comments:
Income Statement (1997-1998)
0 5 10 15 20 25 30 35
Interest Expense
Income Tax
Profit
Dividend
Capex
Avg revenue/barrels
1997
1998
6/14/2011 24Comments:
