Finance for International Business

| January 5, 2016

Hatfield Petroleum plc was formed in 1988 when it was floated off by a much larger oil company which was in the process of restructuring. Hatfield specialises in working smaller oil wells using conventional extraction methods, both on-shore and off-shore, in a number of locations throughout the world and has been quite successful to-date. However, the company is now facing declining income and needs to invest in order to secure a sound future income stream. Consequently a number of new investment projects are under consideration.
Hatfield Petroleum plc are particularly interested in a new technology which enables significantly more oil to be extracted from a well than is possible using conventional systems. The business logic is very simple here – there are many old wells which could be revisited at considerable profit. The new technology is called the HUMP System (Hydraulic Uplift with Minimum Pumping) and is very specialised with few operators having the equipment or skills to implement it. One way of gaining access to this ‘new industry’ of ‘residual extraction’ is to acquire a firm which is already using the HUMP System. Such a firm is Boutique Oil Co.
Boutique Oil Co
Boutique Oil Co is owned by Blackthorn Private Equity Partners and exploratory discussions have already taken place relating to the sale of Boutique Oil to Hatfield. Blackthorn PEP have indicated that they may be willing to sell Boutique for a sum of around £20m. The sole asset of Boutique oil is a licence to extract oil granted by the Australian government.
Boutique Oil Co is interested in extracting residual oil from an old well off the west coast of Australia. The Australian government has grant an oil extraction licence to the company for a five-year period for a fee of $A5.0m per annum with the first payment due in 2016. The option to acquire the rights had to taken immediately otherwise another oil company will be granted the
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This Case Study has been prepared for discussion, analysis and comment. It is not intended to describe either good or bad practice. This Case Study may not be reproduced without the prior written permission of the author.
© Borlace Management Ltd – 2015
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licence. However, Boutique Oil Co is not in a position to commence operations immediately and operation of the oilfield will not start until the beginning of 2017.
In order to carry out the exploration work the company will require well head equipment costing $A160m which will be made by a specialist engineering company. Half of the equipment cost will be payable immediately and half will be paid when the equipment has been built and tested to the satisfaction of Boutique Oil. It is estimated that the second instalment will be paid at the end of 2016. The new equipment will be sold at the end of the licence period for an estimated $A20m. The project will also require an investment of $A6.5m working capital in 2016.
The company commissioned a geological survey of the area and the results suggest that the oilfield will produce small but significant amounts of high quality crude oil. The survey cost $A250,000 and is now due for payment.
The assistant project manager has produced a projected operating statement for the year 2017 (see appendix 1) showing initial values for income and expenses for the first full year of operations assuming average weather conditions. Sales are subsequently expected to grow at 8% per annum to 2019 when the licence expires. Similarly, wages and material costs are both expected to grow at 4% per annum. Overhead costs are expected to remain static throughout the project although there is a slight chance that they may increase in line with local inflation.
Hatfield Petroleum plc
Hatfield Petroleum plc is financed by equity and debt and an extract from their last Balance Sheet is shown below. The company’s loan stock is currently trading at £103.65 and the ordinary shares at £5.20.
Hatfield estimate their ? to be 0.98 but, there is no ? available for Boutique as it is not a quoted company . There are only two other quoted companies using technology similar to HUMP and their ?s have been estimated at 1.7 and 1.9.
A recent report by financial consultants reported that medium term UK government bonds are earning 2.90% per annum. In addition, the report noted that the FTSE All-share index increased by an average of 9.5% compound in each of the last three years.
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Extract from the Balance Sheet
of Hatfield Petroleum plc
£(k)
Long-term Liabilities:
8% Loan Stock 2018 100,000
Shares & reserves:
£1 ordinary shares 50,000
Profit & loss 500,000
650,000
Required:
Evaluate the Boutique Oil Co investment project on behalf of Hatfield Petroleum plc. Advise
the firm on whether they should undertake the project and identify the maximum price
Hatfield plc should pay to acquire the Boutique Oil Co. Also, advise the firm on the
potential impact of foreign exchange on the project and evaluate the alternatives for
financing the purchase.
Your answer should be presented in the form of a report of 2500 words total (excluding
the reference list). You must also submit an Excel spreadsheet containing your
calculations.
Submission requirements:
You should use Arial font size 12 and 1.5 line spacing. Exceeding the word count by 10%
or more or deviations from the formatting instructions will attract a penalty of up to 5%.
The hand-in deadline for submission is 23.30 on 8th January 2016.
Submissions up to 24 hours late will attract a 5% penalty whilst those beyond 24 hours
but less than 1 week late will be capped at 50%. Reports submitted more than one
week late will attract a mark of zero.
Submit one electronic copy your report via Studynet as a Word or pdf file. In addition,
submit an Excel spreadsheet containing your calculations. Non submission of the
spreadsheet will incur a penalty of 10%.
This is an individual assignment and the report submitted should be entirely your own
work. This assessment is subject to anonymous marking so do not put your name on any
document you submit. However, you must put your SRN on each document you submit.
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Appendix 1: Boutique Oil
2017
$A000 $A000
Sales 74000
Wages & salaries 5,500
Materials 3,400
Licence fee 4,500
Overheads 1,250
Depreciation 35,000
Finance charges 8,000 57,650
Operating Profit 16,350
Notes
Overheads include A$250k of allocated head office
cost
Finance charges relate to interest payments on
loans taken out to fund the project.
Boutique Oil: Australian Off-shore Project
Projected Profit and Loss Account
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Notes:
When calculation cost of capital assume a corporate tax rate of 22% but ignore taxation for all
other purposes.
Assume an exchange rate of A$2.18/£.
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Guidance for the preparation of your report.
The purpose of this assignment is simply to give you the opportunity to demonstrate that you have acquired the knowledge and skills identified in the Module Handbook and that you can apply them in a typical business situation.
You should approach the task as a business manager dealing with a ‘real’ business and should:
a) Adopt a coherent approach to dealing with the set task with a clearly stated business purpose.
b) Identify an appropriate theoretical dimension and consider the implications for practice.
c) Adopt appropriate analytical methods and a critical perspective.
d) Refer to empirical work where appropriate.
You may wish to include charts, diagrams and/or calculations in the report but these should only be used where they demonstrate a point you are trying to make.
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Guidance for the preparation of your report cont’d.
Do refer to the assessment criteria given in the Module Guide which gives a general outline of how marks will be awarded. Further specific advice about how marks will be awarded for the Referral/Deferral Coursework is given below.
Task Specific Assessment Criteria: Coursework
Communication Skills (Written) – 20 Marks:
Marks will be awarded for a) for the physical presentation and layout of your report, b) adopting logical well supported (ie using appropriate citations) arguments, c) the extent to which the report is accurate, brief, concise and clear, d) the standard of English, and, e) compliance with standard Harvard referencing. Equal account will be taken of each element.
Knowledge & Understanding – 20 Marks:
You should establish a clear business focussed conceptual basis for your report – ie you need to show what you are seeking to achieve and why it is important for managing the Hatfield Petroleum plc business (supported using appropriate citations).
Synthesis – 20 Marks:
From the case data given you should identify the nature of the decision(s) facing Hatfield Petroleum plc and identify appropriate theory to support the approach you adopt and give your reasoning. Ie which analytical tools are consistent with ‘business focussed conceptual basis’ referred to above? (supported using appropriate citations).
Analysis – 20 Marks:
Using the case data given, you should apply the analytical methods identified in the previous section and evaluate the impact on the business in relation to the ‘business focussed conceptual basis’ referred to above.
Evaluation – 20 Marks:
Conclusions should be arrived at on the basis of your analysis of Hatfield Petroleum plc issues; ie what do the results of your analysis tell you? In your conclusions section you should summarise the results of your analysis. Your recommendations will assessed on the extent to which they are linked to the analysis of Hatfield Petroleum plc issues and on the extent to which they are theoretically coherent – ie the extent to which they are consistent with the theoretical/conceptual base you establish.

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