cima report.docx

cima report.docx

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cimareport

1.Introduction

YJLtd（YJ）isaUKcompanywhichwaslistedonAIMinJanuary2007withaninitialpublicoffering（IPO）ofUS$60million，whosemainshareholdersare12largeinstitutionalshareholders.ThemainoperationalactivitiesofYJaretheexplorationof,andproductionfromoilandgasfields.Thecompany’scompetitiveanddevelopmentstrategyistoexplore,appraiseanddevelopintoproductionitslicensedoilandgasfieldsabidingly.

HoweverasYJisplanningtoexplore,appraiseanddevelopintoproductionitslicensedoilandgasfields,thereispotentialriskandproblemsofYJcompany’splanofnewproduction.SeveralproblemsandincidentsofYJneedanalysisinordertoachieveitssustainabledevelopmentandprofit.

2.TermsofReference

Thereportisdesignedtoprioritize,analyzeandevaluatetheissuesfacingtheYJcompany.Detailedrecommendationismadetowardtheseproblems..

3.Identificationandprioritizationofissues

Priority

Issue

Financial

W1

Feasibility

W2

Urgency

W3

Total

Priority

1

5

0.5

5

0.3

5

0.2

5

1

2

2

0.5

5

0.3

3

0.2

3.1

4

3

5

0.5

4

0.3

5

0.2

4.7

2

4

3

0.5

3

0.3

2

0.2

2.8

5

5

4

0.5

3

0.3

3

0.2

3.5

3

Issue

Financial

Feasibility

Urgency

1

5points:

willinfluencetheprofitabilityandtheriskofthecompanystrongly.

5points:

thesolutionisreasonableandfeasible.

5points:

shouldbedecidedbeforethelicensegoesexpire.

2

2points:

theaccountingmethodwillinfluencethedecisionmadeinthefuturebutnotinfluencemuch.

5points:

theexchangeofaccountingmethodiseasytorealize.

3points:

shouldbedecided,butnotsourgent.

3

5points:

willinfluencetheprofitabilityandtheriskofthecompanystrongly.

4points:

theacceptanceofthefarm-outofferrequiresseveralconditionandrequirecashtocommencetheproject.

5points:

theproposalshouldbedecidedbeforeAugust.

4

3points:

willinfluencetheprofitabilityinthefuture

3points:

thisproposalrequiresnewmethodtoexploitnewresources,whichishardtorealize.

2points:

theoilfieldcanstillmakeprofitforaround7years.

5

4points:

willinfluencetheprofitabilityandtheriskofthecompany.

3points:

requiresalotofcash,whichneedstoberaised.

3points:

thedecisionneedn’tbemadewithin1year.

Priority1

Issue1Financialdecisionofthecompany

Giventhatthecompanyhaswonthetestlicenseofthreeoilfieldandthecashflowcannotsupportthecompanytotestallthreeofthem,thecompanyshoulddecidewhethertoraisemoneytotestallthreeoilfield.Ifyes,whichmethodshouldbetaken,debtorequityshouldbeusedtoraisemoney.

Priority2

Issue3Farm-outofferofGGGprovidedbyLG

ThecompanyhasreceivedanofferprovidedbyLG.Giventhecompanyhasn’tanenoughcashflowtobringGGGintoproduction,whetherthecompanyshouldreceivetheofferprovidedbyGGG.

Priority3

Issue5Acceleratingoperationofnewoilandgasfields

ThenewCEOUilanShahwantsYJtoidentifyandbringnewoilandgasfieldsintooperationatafasterratethancurrentlyachieved,However,OritMynde（CFO）thinksthatmostofcurrentcashwasspentoncurrentoperationaloilandgasfieldsaswellasonsurveyingpotentialnewoilandgasfields,sothereisnotenoughfundingfortestingandproductionnewfieldsuntilYJgrantfurtherlicenses.Whetherweshouldacceleratingoperationofnewoilandgasfieldsremainsabigquestion.

Priority4

Issue2Accountingmethodforoilandgasexplorationcosts

TheGAAPaccountingconceptisthattheoilandgasexplorationcostsareassetsthataretobechargedagainstrevenuesintheProfitorLossStatementastheassets.However,theaccountingmethodusedbyYJtoaccountforoilandgasexplorationcostsistocapitalizeallcostsofexplorationthatleadtothesuccessfulgenerationofoilandgasfields,thedrillingandexplorationcostsassociatedwithoilandgasfieldsthatareunsuccessfulandwillnotgointoproductionarewrittenoffintheirentirety.WhetherweshouldtransfertoGAAPshouldbediscussed.

Priority5

Issue4Thesustainabilityofenergysources

YJ’sexistingreservesfromoilfieldsalreadyinoperationwilllastaroundsevenmoreyears.Withspecificregardtotheinherentlackofsustainabilityoffossilfuels,forYJ’slong-termfuture,itcouldsimplyexittheE&Pmarketonceitsfieldsrundryorbecomeanenergycompanywhereitsourcesenergyinabroadersensefromwhereverisviable.

4.Analysesandevaluation

SWOTanalysis（Appendix1）,PESTanalysis（Appendix2）,Porter’sfiveforcesanalysis（Appendix3）,andotheranalysesareperformedtolayafoundationfortheanalysesandgetabetterunderstandingofYJcompanyandtheoilandgasindustry.

4.1Financialdecisionofthecompany

Judgingfromappendix6,wecanassumeatMarch,31st2015,thecompanyhas70milliondollaravailable.Asthere’s36.9milliontradepayableand13.4milliontaxpayableonthattimepoint,letalonethesecuredemandforthecompanytoholdacertainamountofmoneytokeepcompanyturnover,themaximumcashforthecompanytoinvestonthetestdrillisnomorethan20millionwithoutmoneyraising.

Asismentionedinscenario,thecompanyhaswontherighttotestdrillonthreedifferentfields（EEE,FFFandGGG）,andthecostofthethreedrillsare20,25,18million,itisimpossibleforthecompanytostarttotestallthreeoilfield,wecanonlyleavetherighttotestgoexpire.

RaiseMoney

NotRaisemoney

Return

Ifthecompanydecidetoraisemoneytotestallthreeoilfield,thecompanycanearnahigherprofitiftheoilfieldprovedtobeeconomictotakeintoproduction.

Ifthecompanydecidenottoraisemoney,thecompanycanonlytestoneoilfield,themaximumprofitthecompanycanearnislowerthanraisemoneytotestoilfield.

Risk

Ifitisproventhatitisuneconomictobringthesethreeoilfieldsintoproduction,thecompanywillburdenahugeinterestcostorequitydilution,whichmeansadisastertotheshareholders.

Asthecompanyusesinternalcashflowtotestoilfield,evenifthesethreeoilfieldscannotbringeconomicprofit,thelostofshareholdersisnotthathigh（comparetothelosebyraisingmoney）.

Thetechniquecompanyusedtomeasureanoilfieldisquiteaccurate,thatmeansitishighlypossiblethatthere’seconomicchancebehindthesea.What’smore,accordingtoscenario,theearningtosellaprovenoilfieldtoothercompanyisquitehigh（$11million/mmbbl*8~10mmbbl=around$100m）.

Thus,comparetopotentialprofit,therisktoburdenalossisacceptable.Werecommendthecompanytoraisemoneytotestallthreeoilfield.

Herecomesthesecondquestion,shouldthecompanyusedebtfinancingorequity

financing?

Thecomparisonbetweenthesemethodareasfollows.

Debtfinancing

Equityfinancing

Comparison

amount

74.2million

（$71.4m*3-$140m）#

87.5million

（10m*$35/4）##

Thesetwomethodareallenoughforthecompanytotestallthreeoilfield.

Taxshield

Yes.

Accordingtoaveragediscountrateatoilandgascompany（15%）*,andcorporatetaxrate（24%）,interestrate（11%）,thevalueoftaxshieldis$54.4M**

NoTaxshield.

AccordingtoMMII（withcorporatetax）,thevalueofthecompanyrisesbecauseofthedebtfinancing.

Risk

High,comparetoequityfinancing,higherreturnwhilegoodsituation,viceversa.

Low,comparetodebtfinancing,lowerreturnwhilegoodsituation,viceversa.

AccordingtoMMI,companywithleveragesuffersahigherrisk.

Bankruptrisk

High

Low

Whentheassetcannotcoverliability,thecompanygoesbankrupt.Higherdebtmeanshigherrisk.

StockPrice

Stockpricemaygoesup

Stockpricemaygoesdown

Accordingtoanempiricalanalysis$,thestockpricemaybeinfluencedbyfinancingmethod.Anseasonedissuedequitymeansa2%decreaseinstockprice.

Notes:

#:

Accordingtothescenario,companyisallowedtolendamaximumofthreetimesofoperatingprofit.

##:

Accordingtothescenario,oneinfourisgenerallyworkswellinthisindustry.

*:

Sources:

2014PropertyValueStudyDiscountRateRangeforOilandGasProperties

**:

$:

sources,ShahK.Thenatureofinformationconveyedbypurecapitalstructurechanges[J].JournalofFinancialEconomics,1994,36

（1）:

89-126.

Suitability:

Equitymethodismoreappropriateforthemarketastheleverageratioatthattimepointishigherthanthemarketaverage,adebtfinancingmaycauseahigherleverageratio.

Acceptability:

Asthecompanystillhavethreeoilfields（AAA,BBB,andCCC）,andthecashflowwilllastabout7years.EvenifthecompanycannotmakeittomakeprofitfromEEE,FFF,GGG,theoperatingcashflowmayremainabout7yearsatalevelof$71.4Mperyear.Givenadiscountrateof15%（muchhigherthantheinterestratebankcharge）,thepresentvalueofthatcashflowis$297M,faroverweighthanthedebt.Thus,thebankruptriskofthecompanyislimited.Comparetothetaxshieldeffect（$54.4M）andstockpriceeffect（about2%*10m*$35=$7M）,werecommendadebtfinancingmethod.

Feasibility:

Asgiveninthechart,bothmethodsarefeasible.Judgingfromfactorsabove,althoughtheleverageratioishigherthantheaverage,thebankruptriskisnothigherenoughtoneutralizethevalueeffectprovidedbythedebtfinancing.

4.2:

Accountingmethodforoilandgasexplorationcosts

GAAPisthestandardframeworkofguidelinesforfinancialaccountingusedinanygivenjurisdiction;generallyknownasaccountingstandardsorstandardaccountingpractice.ManycountriesuseorareconvergingontheInternationalFinancialReportingStandards（IFRS）thatwasestablishedandismaintainedbytheInternationalAccountin