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Haas Energy TeamRepublic Petroleum Refinery Decision
10/25/2015
Team Haas
Andrey Gutkovsky
Stephanie Moon
Yuriy Pryadko
Avanti Tamhane
Key goal• Advise Republic Petroleum on
whether to invest in 500,000 barrel/day refinery in PADD 3
Introduction
Treat refinery as long term investment
IntroductionFramework
Introduction Summary and recommendation
Lack of crude supply advantage in the long term
Lot of existing capacity in PADD 3 Uncertain policy outcomes Poor demand projections in the US
Given our investment analysis, we do not recommend building a 500,000 bpd refinery in the PADD3 Region
Overview of Current MarketUSGC Competitive Environment
Gulf coast has a lot of coking capacity
Overview of Current MarketSupply of crude oil stocks
Oversupply in the US starting in 2012 due to the tight oil revolution.It drives both domestic and worldwide prices down.
• PADD-3 and US in general will face a non-growing consumption market
• Non-OECD growth is predicted to be robust
• Focus on growing markets makes strategic sense
Overview of Current MarketDemand Challenges in US
Stagnant demand in US & OECD; rest of the world continues growth
Overview of Current MarketGlobal Supply vs Demand
Investment AnalysisCrude Oil Reference Forecast
2009
2011
2013
2015
2017
2019
2021
2023
2025
2027
2029
2031
2033
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
Brent WTI WCS
Based on EIA Reference case
Price rise steadily after 2015 due to demand growth in non-OECD countries
Continued growth in U.S crude oil production contributes to downward pressure on prices
Heavy crudes trade a 25-30% differential from Brent/Crude Historically
Investment AnalysisFramework
Largely depending on key assumptions: Overall WTI-Brent differential
Will the Export Ban be repealed? Will the Keystone Pipeline be built? Feedstock price forecasting – WCS or WTI? WTI – Brent differential anticipated to move towards parity in the
long run due to minimal US demand Coker versus Cracker Decision
Different Investment Costs Coking Margins versus 3-2-1 Cracking Calculation
Modeled forecasted returns for 4 regulation scenarios
Investment Analysis: Scenario Modeling
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033$0.00
$5.00
$10.00
$15.00
$20.00
$25.00
$30.00
$35.00
$40.00
Forecasted Margin/bbl by Scenario
IRR NPV Keystone Pipeline is Built & Export Ban Remains Coker 11.5%$6.6BKeystone Pipeline is Built & Export Ban Lifted Coker 9.4%$5.2BExport Ban Remains Cracker 5.6%$1.7BExport Ban Lifted Cracker 4.9%$1.5B
Keystone Pipeline Decision
Impact of Keystone Pipeline is positive for PADD-3 U.S Refineries
WCS crude at 20-35% discount to lighter crudes
Will decrease WTI in relation to Brent, thus creating advantages for U.S refineries
Due to broad support of the keystone pipeline by democrats and republicans, it is likely to be built ~75%
If Keystone pipeline is built, it is likely that the WTI-Brent differential will become greater than $10 and Export ban will be repealed
Export Ban DecisionWTI-Brent Differential
Export Ban in Place
Sources: U.S. Energy Information Administration, Reference, Low Oil Price, High Oil and Gas Resource, and High Oil and Gas Resource/Low Oil Price cases, with current crude oil export restrictions.
Export Ban Lifted
WTI-Brent spread will be closer to the Low Oil Price Scenario forecasted by the EIA
Keystone Pipeline Built in 2020 75%
Keystone Pipeline not Built 25%
Export Ban Repealed 80%
Export Ban Remains 20%
USGC Conclusion
NOT A SOUND LONG TERM STRATEGIC MOVE
IF NOT USGC, THEN WHAT?
Demand Around the World
20102040
2010
2040
NigeriaDemand:• 2nd Largest Net
Importer of Refined Products in Africa
180MBPD in 2012• GDP Growth of 5-6%
Supply:6th Largest Crude Producer in the World
Regulatory Environment:President Muhammadu
Buhari
• Anti-Corruption Policies• Supports Private
Investment • Vows to crush militant
groups
THANK YOU!
#haasome
Best Case Scenario: Keystone Pipeline is Built & Export Ban Restrictions
NPV 6,598,915 IRR 11.5%Type of Refinery Coker
Yr Contsruction 2018 2021 2024 2027 2030 2033Proccessing BBLS (000's) 164,250 164,250 164,250 164,250 164,250 164,250
Margin Per Barrel 25.62 28.93 29.43 29.84 30.11 30.31
Sales Revenues 4,207,317 4,751,409 4,834,156 4,901,001 4,945,206 4,977,968
Depreciation Expense (1,717,050) (879,130) (450,114) (230,459) (117,995) (60,413)
Transportation Costs - Inbound (985,500) (985,500) (985,500) (985,500) (985,500) (985,500) Tranportation Costs - Outbound (160,965) (160,965) (160,965) (160,965) (160,965) (160,965)
Operating Costs (152,511) (159,478) (166,762) (174,380) (182,345) (190,674)
NIBT - 1,191,291 2,566,337 3,070,815 3,349,698 3,498,401 3,580,415 Taxes - (416,952) (898,218) (1,074,785) (1,172,394) (1,224,440) (1,253,145) Tax Shield 500,000 Net Income After Taxes 500,000 774,339 1,668,119 1,996,030 2,177,304 2,273,960 2,327,270
Addback Depreciation - 1,717,050 879,130 450,114 230,459 117,995 60,413 Capital Expenditures (8,585,250) Change in NWC - 252,439 2,615 1,614 979 849 638
Free Cash Flow (8,085,250) 2,743,828 2,549,864 2,447,758 2,408,742 2,392,804 2,388,321 PVFCF (8,085,250) 1,874,071 1,308,483 943,717 697,727 520,744 390,510
2nd Best ScenarioKeystone is Built & Export Ban is Lifted
NPV 5,154,492 IRR 9.4%Type of Refinery Coker
Yr Contsruction 2018 2021 2024 2027 2030 2033Proccessing BBLS (000's) 164,250 164,250 164,250 164,250 164,250 164,250
Margin Per Barrel 24.28 27.02 27.05 26.99 26.81 26.59
Sales Revenues 3,987,500 4,438,112 4,442,163 4,433,203 4,404,319 4,367,778
Depreciation Expense (1,717,050) (879,130) (450,114) (230,459) (117,995) (60,413)
Transportation Costs - Inbound (985,500) (985,500) (985,500) (985,500) (985,500) (985,500) Tranportation Costs - Outbound (160,965) (160,965) (160,965) (160,965) (160,965) (160,965)
Operating Costs (152,511) (159,478) (166,762) (174,380) (182,345) (190,674)
NIBT - 971,474 2,253,040 2,678,821 2,881,899 2,957,514 2,970,226 Taxes - (340,016) (788,564) (937,588) (1,008,665) (1,035,130) (1,039,579) Tax Shield 500,000 Net Income After Taxes 500,000 631,458 1,464,476 1,741,234 1,873,235 1,922,384 1,930,647
Addback Depreciation - 1,717,050 879,130 450,114 230,459 117,995 60,413 Capital Expenditures (8,585,250) Change in NWC - 239,250 1,093 65 (538) (584) (720)
Free Cash Flow (8,085,250) 2,587,758 2,344,698 2,191,413 2,103,155 2,039,794 1,990,340 PVFCF (8,085,250) 1,767,474 1,203,201 844,885 609,209 443,919 325,437
3rd Best ScenarioExport Ban Restrictions & Keystone Pipeline Not Built
NPV 1,689,543 IRR 5.7%Typer of Refinery: Cracker
Yr Contsruction 2018 2021 2024 2027 2030 2033Proccessing BBLS (000's) 164,250 164,250 164,250 164,250 164,250 164,250
Margin Per Barrel 16.48 17.93 17.77 17.39 16.73 15.88
Sales Revenues 2,706,445 2,945,648 2,918,050 2,855,723 2,747,734 2,608,481
Depreciation Expense (1,063,750) (544,640) (278,856) (142,774) (73,100) (37,427)
Transportation Costs - Inbound (985,500) (985,500) (985,500) (985,500) (985,500) (985,500) Tranportation Costs - Outbound (160,965) (160,965) (160,965) (160,965) (160,965) (160,965)
Operating Costs (244,812) (255,994) (267,688) (279,915) (292,701) (306,071)
NIBT - 251,419 998,549 1,225,041 1,286,569 1,235,468 1,118,517 Taxes - (87,997) (349,492) (428,764) (450,299) (432,414) (391,481) Tax Shield 500,000 Net Income After Taxes 500,000 163,422 649,057 796,277 836,270 803,054 727,036
Addback Depreciation - 1,063,750 544,640 278,856 142,774 73,100 37,427 Capital Expenditures (5,318,750) Change in NWC - 162,387 930 (688) (1,836) (2,306) (2,915)
Free Cash Flow (4,818,750) 1,389,559 1,194,627 1,074,444 977,208 873,848 761,549 PVFCF (4,818,750) 949,087 613,033 414,245 283,062 190,175 124,519
4th Best ScenarioExport Ban is Lifted & Keystone Pipeline Not Built
NPV 1,468,058 IRR 5.0%Type of Refinery Cracker
Yr Contsruction 2018 2021 2024 2027 2030 2033Proccessing BBLS (000's) 164,250 164,250 164,250 164,250 164,250 164,250
Margin Per Barrel 16.12 17.58 17.42 17.04 16.38 15.54
Sales Revenues 2,647,526 2,888,319 2,861,022 2,798,929 2,691,096 2,551,999
Depreciation Expense (1,063,750) (544,640) (278,856) (142,774) (73,100) (37,427)
Transportation Costs - Inbound (985,500) (985,500) (985,500) (985,500) (985,500) (985,500) Tranportation Costs - Outbound (160,965) (160,965) (160,965) (160,965) (160,965) (160,965)
Operating Costs (244,812) (255,994) (267,688) (279,915) (292,701) (306,071)
NIBT - 192,499 941,220 1,168,014 1,229,775 1,178,830 1,062,035 Taxes - (67,375) (329,427) (408,805) (430,421) (412,590) (371,712) Tax Shield 500,000 Net Income After Taxes 500,000 125,125 611,793 759,209 799,354 766,239 690,323
Addback Depreciation - 1,063,750 544,640 278,856 142,774 73,100 37,427 Capital Expenditures (5,318,750) Change in NWC - 158,852 942 (682) (1,833) (2,303) (2,911)
Free Cash Flow (4,818,750) 1,347,726 1,157,376 1,037,383 940,295 837,036 724,839 PVFCF (4,818,750) 920,515 593,917 399,956 272,370 182,164 118,517