Financial Project Evaluation

Introduction

Large capital-intensive projects in the oil and gas industries require substantial – and mostly risky – investments in the acquisition and subsequent operation and maintenance of new organizational assets.

This requires the development of a sound, realistic, and carefully structured cash-flow projections, reflecting both the initial capital expenditures required for the acquisition of the asset, as well as the operational expenditures required for successful operation and maintenance of the asset over its anticipated productive life.

The highlights of the programme are as follows:

• Perform detailed financial evaluations of potential capital projects to ensure project success
• Understand and apply the principles and methods of modern financial engineering
• Apply discounted cash flow analysis to project evaluations
• Determine the Internal Required Rate of Return of the project as the basis for sensitivity analyses to establish the risk exposure to the organization
• Apply the concept of Expected Monetary Value to develop adequate contingency levels
• Use Decision Trees to compare various risk treatment options

Training Methodology

Delegates will develop advanced financial analysis and cash flow management skills through formal and interactive learning methods. The program includes individual exercises, team projects, applicable case studies, group discussions and video material that will bring to life the skills acquired throughout the course.

Organisational Impact

• The organization’s investments in large capital-intensive projects will be safeguarded from the pitfalls that have caused substantial financial losses to many organizations due to inadequate project appraisal and financial risk mitigation strategies
• Proper cash-flow and sensitivity analyses will enable the organization to forecast and control potential future conditions that might jeopardize the chances of project success, thereby maximizing the organization’s return on the capital invested in projects
• The emphasis given to financial evaluation in this seminar will empower staff to focus on achievement of the organization’s overall strategic objectives rather than viewing projects in isolation

Personal Impact

• Participants will enhance their understanding of the time value of money, as well as learn how to use the basic tools of financial engineering such as Net Present Value, Internal Rate of Return, and Annual Worth calculations
• Participants will learn how to evaluate and compare various alternative solutions over differing time horizons
• Learn how to evaluate and compare various alternative solutions over differing time horizons
• Acquire a detailed understanding of the tools and techniques to determine and continuously monitor project feasibility
• Gain the skills required to select projects with the best capital investment potential
• Participants will learn how to plan, structure and manage cash flows on their projects – the single most important forecasting and control element leading to project success

Who Should Attend?

This seminar is designed for:

• Program and Project professionals
• Project Leaders, Project Engineers, Cost Engineers,
• Senior Project Control and Business Services Professionals who are responsible for or involved in evaluating projects and managing cash flow on projects.

Seminar Outline

Day 1: Fundamentals of Financial Evaluation

Introduction to Financial Evaluation

• Typical Oil Company Objectives
• Planning Capital Expenditures
• Uncertainty and Risk
• Deterministic Models of Cash Flow

Basic Tools for Financial Evaluation

• Simple Project Payback Period
• Time Value of Money
• Simple and Compound Interest
• Appraisal Methods – Discounted Cash Flow Projections
• Net Present Value Analysis (NPV)
• Time Equivalence
• Comparing Projects with Equal Lives
• Comparing Projects with Unequal Lives

Day 2: Project Risk Exposure and the Cost of Capital

Rate of Return Computations (IRR)

• Determining the Internal Rate of Return (IRR)
• IRR for a Single Project
• IRR for a Single Project Using Present Worth
• IRR for a Single Project Using Annual Worth
• Incremental Analysis
• Mutually Exclusive Projects
• Using IRR to Analyse Options with Different Lives

Benefit-Cost Ratio (BCR)

• Costs, Benefits, and Non-benefits
• Estimating the Benefit-Cost Ratio for a Single Project
• Comparing Mutually Exclusive Projects Using Incremental Benefit-Cost Ratios

Cost of Capital Computations

• Estimating the Cost of Capital for a Project
• The Cost of Debt Capital
• The Cost of Equity Capital
• Weighted Average Cost of Capital (WACC)
• Financial Gearing (Structuring)
• Capital Asset Pricing Model (CAPM)

Day 3: Cash-Flow Modelling and Project Evaluation

Financial Modelling and Project Evaluation

• Fiscal Systems used in the oil and gas industries
• Royalty/Tax Contracts
• Production-Sharing Contracts
• Preparing Cash Flow Projections
• Accounting Years and Tax Years
• Capital Expenditures (CAPEX)
• Operating Expenditures (OPEX)
• Incremental Costs and Benefits
• Working Capital Requirements
• Forecasting Cash Flows
• How to Deal with Inflation
• Opportunity Costs and Sunk Costs
• Determining the Economic Life of a Project
• Relevant Cash Flows over Differing Time Horizons
• Depreciation
• Tangible and Intangible Property
• Straight-Line Method
• Declining Balance Method
• Amortization and Depletion
• Interest, Insurance and Tax Costs
• Taxation
• Taxable Profit
• Capital Allowances
• Assessing the Terminal (Salvage) Value of a Project
• Government Share
• Contractor Share
• Company Cash Flow
• Government Cash Flow

Day 4: Decision Analysis: Expected Value Concept

Financial Project Risk Analysis

• Overview of the Risk Management Process
• Detailed Risk Quantification and Prioritisation
• Probabilistic Methods
• Expected Monetary Value Concepts
• Risk Quantification and Expected Monetary Value
• Scenario Planning
• Best case scenario
• Base case scenario
• Worst case scenario
• Decisions Under Conditions of Uncertainty
• Multiple Option Decisions

Basic Probability Concepts

• Fundamental Probability Concepts
• Definition of probability
• Observations on the workings of probability
• Probability “rules”
• Addition rules
• Multiplication rules
• Detailed Risk Quantification and Prioritisation
• Mutually Exclusive, Independent Events
• Non-Mutually Exclusive, Independent Events
• Summary and Formulation of Equations
• Expanding the Data Set
• Probability Applications

Day 5: Decision Analysis: Probabilistic Models

Decision Tree Analysis

• Decision Tree Analysis
• Developing Decision Trees
• Solving Decision Trees
• Software Tools

Sensitivity Analysis and Simulation

• Overview
• Simulation Process
• Defining the Variables
• Calculating EMV
• Detailed Example of Simulation
• Modifying the Cash flow Model

Oxford Management Centre
John Eccles House
Robert Robinson Ave
Oxford Science Park
Oxford
OX4 4GP
United Kingdom

Tel: +44 1865 338088

Fax: +44 1865 338100

email info@oxford-management.com