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Agenda

Types of Economic Analysis Cash Flow Analysis - Example Sensitivity A l i S iti it Analysis Comparing Alternatives Questions

Economic analysis
Cash Flow Analysis
Typically utilized to determine the financial merits of capital investments

Book Analysis
Conducted for tax purposes, contained in annual report t

Life Cycle Analysis


A Assessment of the environmental impact of a project t f th i t li t f j t from cradle to grave Uses ISO 14,000 standards to determine.

Cash Flow Analysis


Inputs (Cash Flow)
Capital Costs Direct Expenses Indirect Expenses Product Flowstreams Product Price Forecasts Depreciation Product Tax Rates Profit Tax Rates Working and Net Interests Discount Rate Payback Period (PBP) Actual V l Profit A t l Value P fit (AVP)

Outputs (Economic Indicators)

MODEL Excel PEEP Betahat GEMPACK


Present Value Profit ( (PVP) ) Discounted Rate of Return (DCFRR)

Cash Flow Analysis: Inputs


Capital Costs
Di t ib t d over EPC period Distributed i d

Direct Expenses
Power, fuel, catalysts, chemicals, patents, licensing, royalties, machine , overhauls, turnarounds
Escalate cost X percentage per year. 3-4% is a good start

Indirect Expenses
10% of Capital cost, 20-25% of Direct expenses
Account for the project support and operations FTEs admin support loss FTEs, support, control, marketing, R&D, Kleptocratic costs

Product Flowstreams
Methane, NGLs, Sulfur, CO2, Power,
Adjust for reliability turnarounds planned S/Ds reliability, turnarounds,

Product Price Forecasts


Good Luck
Best if originates from the operating company, www.eia.doe.gov for domestic projects. d i j

Product Price Forecasts


Energy Information Administration Yearly Average Crude Oil Price - WTI @ Cushing

70 60 50 40 30 20 10 0 1985

USD/bb bl

?
1990 1995 2000 2005 2010

Cash Flow Analysis: Inputs


Depreciation
Straight Line Declining Balance Unit of Production is a cost of operation that Line, Balance, is implicitly accounted for
Straight Line: Estimate the salvage value, facility life. Depreciate by fixed value each year. Plants Declining Balance: Accelerated, MACRS (tables available from IRS). Compressor stations, sometimes Plants. t ti ti Pl t Unit of Production: Based on units handled by asset, normally field equipment

Product Tax Rates


Ad Valorem Production Taxes
Taxes based on production rate or sales price

Profit Tax Rates


% of net income (32-37% in most developed countries)

Working and Net Interests


% of Direct E f Di t Expenses/Capital, % of P d ti Fl /C it l f Production Flowstream t
Important in joint ventures, DBOs, OBOs.

Discount Rate
Rate at which future cash flows are discounted
Also known as MARR: Minimum Allowable Rate of Return

Cash Flow Analysis: Outputs


Payback Period
The amount of time it takes to recoup the original Capital Expenditure
Simplest of indicators, very important in high risk areas

Actual Value Profit (AVP)


Non discounted after tax profit
Commonly used as a preliminary analysis of profitability, can be misleading in long-life projects g g p j

Present Value Profit (PVP)


Discounted after tax profit
Discount rate is industry and company specific: 5-15%

Discounted Cash Flow Rate of Return (DCFRR)


% return on all capital investments after sufficient profit has been made to recover capital invested
Al IRR or R t of R t Also IRR, Rate f Return

Annual Cash Flows


All annual costs are denoted by A A.
As Sales, Product Rates * Product Flow ATE Total Expenses, All direct and indirect expenses, capital costs and depreciation ACI = As- ATE, Cash Income AIT Income Tax, Annual Cash Income * Tax Rate, Plus Ad Valorem Taxes ANCI = ACI - AIT, Net Cash Income, Also Annual Cash Flow ACF When the cumulative ANCI from each year is equal to zero, that is the Payback Period

Annual Cash Flows Continued Flows,


When the cumulative ANCI from each year is equal to zero, that is the Payback Period Start with the Cash Flow Inputs

Capital Cost $k 2008 2009 2010 2011 2012 2013 2014 ($2,500) ($2,500)

Direct Expense $k

Indirect Expense $k ($250) ($250)

Depreciation $k

Flowstream bbl/year

Price $/bbl

($75) ($77) ($80) ($82) ($84)

($19) ($19) ($20) ($20) ($21)

($1,000) ($1,000) ($1,000) ($1,000) ($1,000)

80000 80000 80000 80000 80000

$80 $84 $88 $93 $97

Annual Cash Flows Continued Flows,


Calculate the Sales, Total Expenses, Cash Income, Income Tax and the Net Cash Income (Cash Fl ) I (C h Flow) The year to year cumulative cash flow is calculated. The payback period becomes apparent ~3.1 years n Calculate the Actual Value Profit: ( ANCI ) n = $15,351 ,

AS
$k 2008 2009 2010 2011 2012 2013 2014 $6,400 $6,720 $7,056 $7,409 $7,779

ATE
$k ($2,750) ($2,750) ($1,094) ($1,097) ( ($1,099) ) ($1,102) ($1,106)

ACI
$k ($2,750) ($2,750) $5,306 $5,623 $5,957 $6,306 $6,674

AIT
$k ($1,018) ($1,018) $1,963 $2,081 $2,204 $2,333 $2,469

ANCI ACF
$k ($1,733) ($1,733) $3,343 $3,543 $3,753 $3,973 $4,204

Cum ANCI ACF


$k ($1,733) ($3,465) ($122) $3,421 $7,173 $11,146 $15,351

Annual Cash Flows Continued Flows,


To consider the Time Value of the project, we look at the Net Present Value (NPV), the l th value of th project i t d d ll f the j t in todays dollars. Calculate a discount factor ( fd ), to decrease the contribution of future cash flows to the project value. Multiply this by the cash flows to determine the Discounted Cash Flows.

1 d (1 i ) n
2008 2009 2010 2011 2012 2013 2014

ANCI ACF
$k ($1,733) ($1,733) $3,343 $3 343 $3,543 $3,753 $3,973 $3 973 $4,204

fd
1.00 0.89 0.80 0 80 0.71 0.64 0.57 0 57 0.51

ADCF
($1,733) ($1,547) $2,665 $2 665 $2,522 $2,385 $2,254 $2 254 $2,130

Where i is the discount rate (12% in this case) and n is the years after project implementation (year2008)
DCF n NPV $8, 677

(A
0

Annual Cash Flows Continued Flows,


The final and most often reffered to indicator is the Discounted Cash Flow Rate of Return (DCFRR) R t DCFRR = i when

(A
0

DCF n 0

ANCI ACF
$k 2008 2009 2010 2011 2012 2013 2014 ($1,733) ($1,733) $3,343 $3,543 $3,753 $3,973 $4,204

fd
1.00 0.89 0.80 0.71 0.64 0.57 0.51

ADCF
($1,733) ($1,547) $2,665 $2,522 $2,385 $2,254 $2,130

Either set the value of I as a variable or use the IRR function in Excel. In this example, the DCFRR is ~52% Consider what that is based on: My less than expert estimate of oil prices!

Sensitivity Analysis
How robust is the project to changes in the primary variables? Capital Cost
Typical Screening Capital Cost estimates have an uncertainty of + 2040% or more

Project Schedule
The largest cash flows typically take place in the EPC phase. Project schedules can

Product Price
Clearly there are are opportunities for the price to change the economic indicators.

It is imperative that the stability of the economics be challenged.


For our project, we chose Capital Cost and Product Price and test the effect on DCFRR

Sensitivity Analysis
Project DCFRR Vs. Capital Cost Vs
80 60 40 Base 20 0 3500

DCFRR (%) (

4000

4500

5000

5500

6000

6500

Capital Cost (M$)

Sensitivity Analysis
Project DCFRR Vs. Capital Cost Vs
80 60 40 20 0 3500

DCFRR (%) (

Base Lower

4000

4500

5000

5500

6000

6500

Capital Cost (M$)

Sensitivity Analysis
Project DCFRR Vs. Capital Cost Vs
80 60 40 20 0 3500 Base Lower Upper

DCFRR (%) (

4000

4500

5000

5500

6000

6500

Capital Cost (M$)

Sensitivity Analysis
Project DCFRR Vs. Capital Cost Vs
80 60 40 20 0 3500 Base Lower Upper

DCFRR (%) (

4000

4500

5000

5500

6000

6500

Capital Cost (M$)

Comparing Alternatives
Ranking Method
Rank based on economic indicators of the projects
Useful for generating a project priority seriatim

Aggregate Method
Assumes the delta between the current alternative and the next best alternative is invested in a reserve at the minimum allowable rate of return
Useful for comparing very different p j p g y projects with large capital cost g p deltas

Incremental Method
Determine economics based on cash flow deltas between projects
Start with lowest price alternative and develop indicators, compare with next higher capital cost alternatives, keeping the current best choice until all alternatives are exhausted

Questions?