BP Amoco (Case Study)

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

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Organization Structure
British Petroleum UK based worlds 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 worlds 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.
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.
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Comments: spm_pdpu_emba10@googlegroups.com
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-vis corporate finance. BP sparingly used project finance Amoco too, believed in corporate finance more. But they sometimes used project finance.
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Project Finance
Lenders
Non recourse debt Project assets as collateral Project future cash flows Finite life
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Assets
Cash Flows
Life
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Prerequisites of Project Finance
Discrete non core assets
Known risk-return profile Lenders familiarity with business model

Advantages of Project Finance
Risk management tool Government concessions
Financial Leverage Tax Shield
Hedge against losses by sacrificing some profit
Increases borrowing capacity

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
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
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Structure of Project Finance

Sponsors Contractor Equity Lenders
Project Finance Debt Finance
SPV
Concessions Supplier Off Comments: takers
Support Agreement
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Government 11
Sources of Long Term Fund
Lease Financing Secured Debt
Unsecured debt Convertible debt

Preferred Equity Common Equity
Sources of Short Term Fund
Construction Financing Bridge Financing

Line of Credit
Institutions
Promoters
Sponsors
Equity Funds
Banks / Non Bank Financial Institutions
Government
Suppliers / Off takers

Corporate Finance
Funds
Internal funds Company assets as collateral
Assets
Cash Flows
Company balance sheet

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6/14/2011
Process of Corporate Finance
Use internal funds Pledge assets and cash flows No liability on sponsors
Benefits of Corporate Finance
Easy mobilization of funds
Low cost of capital
Flexibility in decision making

Corporate Finance Model

Funds
1. 2. 3. 4. Operating Cash Bus Long term finance Short term finance Money Market Inst.
BP Amoco Treasury
Company Finance Structure: Debt 30% Equity 70%
Subsidiary
40% share
Partner 1
25% Share
Cash from source
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Project
Partner 2
35% Share Liabilities
18
Cash Back to source
Project Finance Model (BP Subsidiary uses PF)

BP Amoco Business Units
BP Amoco Treasury
Debt Service
Subsidiary
Collateral 40% share
Lenders
Partner 1
25% Share
Cash from source
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Project
Partner 2
19
Cash Back to source
Project Finance Model (Project uses PF)

BP Amoco Business Units
BP Amoco Treasury
Subsidiary
Debt Service 40% share
Lenders
Collateral
Partner 1
25% Share
Cash from source
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Project
Partner 2
20
Cash Back to source
Project Finance vs. Corporate Finance: Pay Offs

$ Sponsors Equity Project Finance Pay-offs 0 Project Value Corporate Finance Pay-offs
Put Premium Debt

Debt Level
Walk away Put Option
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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
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BP Amoco (1997-1998)
30 25 20 15 10 5 0 Assets Revenues Net Income Debt to Capital ratio Capex Market Cap 1998 1997
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23
Income Statement (1997-1998)

Avg revenue/barrels Capex Dividend 1997 Profit Income Tax Interest Expense 0
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1998
10
15
20
25
30
35
24
Thank You

BP Amoco (Case Study)

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BP Amoco: Policy Statement on the Use of Project Finance

Content Organization Structure Post merger structure Assignment Discussion on PF and CF

BP Amoco PF and CF Model

Post Merger Organization Structure

Prerequisites of Project Finance

Discrete non core assets

Known risk-return profile Lenders familiarity with business model

Advantages of Project Finance

Risk management tool Government concessions

Financial Leverage Tax Shield

Hedge against losses by sacrificing some profit

Increases borrowing capacity

Disadvantages of Project Finance

Structure of Project Finance

Project Finance Debt Finance

Sources of Long Term Fund

Lease Financing Secured Debt

Unsecured debt Convertible debt

Sources of Short Term Fund

Construction Financing Bridge Financing

Banks / Non Bank Financial Institutions

Suppliers / Off takers

Internal funds Company assets as collateral

Company balance sheet

Process of Corporate Finance

Benefits of Corporate Finance

Easy mobilization of funds

Low cost of capital

Flexibility in decision making

Corporate Finance Model

Company Finance Structure: Debt 30% Equity 70%

Cash Back to source

Project Finance Model (BP Subsidiary uses PF)

Company Finance Structure: Debt 30% Equity 70%

Cash Back to source

Project Finance Model (Project uses PF)

Company Finance Structure: Debt 30% Equity 70%

Cash Back to source

Project Finance vs. Corporate Finance: Pay Offs

Put Premium Debt

Walk away Put Option

Financial Comparison (1998)

Income Statement (1997-1998)

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