Start Up Training for Project Engineers

8/10/2019 Start Up Training for Project Engineers

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OMV Exploration & Production

Move & More.

Economic EvaluationStart up Training for

Project Engineers

Start up training for project engineers_07.ppt


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2 |OMV Exploration & Production EC-E, December 30, 2011



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Purpose of the Training

Brief introduction into cash flow based project economics

Understanding major economic decision criteria applied by OMV E&P

Usage of the Easy Evaluation Tool



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Contents

Cash Flow Basics

Economic Decision Criteria

Sensitivities

Easy Evaluation Excel Tool

Project Example

2 E&P Exercises

A.

B.

C.

D.

E.

F.

ConclusionG.



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Cash Flow Basics

A.

Cash Flow Basics

Definitions & Cash-flow Profile

Revenue / Volume / Price

Petroleum E&P Expenditure

-

Capital Expenditure (CAPEX)

-

Operational Expenditure (OPEX)



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Cash Flow Profile of an E&P project

Revenue

CAPEX

OPEX

Cash-Flow of an E&P-Project (entire life cycle view)

A.

Cash Flow Basics

mnEURO

27.5

20.6

13.7

6.9

0.0

-27.5

-20.6

-13.7

-6.9

27.7%

19.8%12.0%

4.2%

-3.6%

-27.1%

-19.3%

-11.4%

2012 2014 2016 2018 2020 2022 2024 2026 20302028



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Revenue / Volume / Price

Differentiation:

Produced Volume

Sold Volume

The income portions of cash flows are known as Revenue

Gross revenue is the product of oil and/or gas volume multiplied by

the unit price received for each volume of that product

PricexVolumesoldRevenue=

A.

Cash Flow Basics



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Petroleum E&P Expenditure

Payment of cash or cash-equivalent for goods or services;

can be classified as:

Capital Expenditure (CAPEX) and

Operating Expenditure (OPEX)

Definition of typical E&P expenditures Finding Cost CAPEX

Development Cost CAPEX

Production Cost OPEX

A.

Cash Flow Basics



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Contents

Cash Flow Basics


Sensitivities


Project Example

2 E&P Exercises

A.

B.

C.

D.

E.

F.

ConclusionG.


B E i D i i C it i


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Fundamental bases of economic decision

-

General introduction

-

Time value of Money

Economic Yardsticks

-

Net Present Value (NPV)

-

Expected Monetary Value (EMV)

-

Internal Rate of Return (IRR)-

Payback Period

-

Profitability Index

B. Economic Decision Criteria


B Economic Decision Criteria


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Financial & Economic Analysis

Everything important to the decision should be included in the analysis

Concerning the decision making process also qualitative factors have to

be taken under consideration (e.g. effects to the society)

Financial analysis of investment alternatives requires that all

opportunities be appraised on the same basis, and the time value of

money be properly taken into account

There is not only one single measure of profitability





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Time Value of Money

Decision-making in investment analysis requires anticipated revenues &

cost of investment alternatives to be placed on equivalent bases

Counterpart of discounting: compounding

Relevant levers discount rate

time

value

Project Economics and Decision Analysis, Volume I, p. 23ff.

* PV

. Present value

** FV

. Future value

*** id

. discount

interest

rate1 2 30 5 64

@10%

10,000

10,000 / (1 + 0,1)

=

9,091

9,091 / (1 + 0,1)

=

8,264

8,264 / (1 + 0,1)

=

7,513

7,513 / (1 + 0,1)

=

6,830

6,830 / (1 + 0,1)

=

6,209

6,209 / (1 + 0,1)

= 5,645

*PV=**FV/(1+***id)

n = 10,000/(1+0.1)6

= 10,000/1.7716= 5,645





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Discount rate

Discount rates at E&P:

Standard rate (WACC)- Percentage rate at which future money is

discounted 10%(WACC):

Weighted-average cost of capital

the marginal cost of

funding the next project; this is calculated as an weighted-average

cost of a mixture of equity and debt.

Hurdle rate the minimum acceptable rate of return on investment 15% for incremental projects / 11% for acquisitions

Economics

of worldwide

PPC, R.D. Seba; page

185





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Net Present Value (NPV) (1/4)

For analyses of project cash flows the most common method is Net

Present Value (NPV)

NPV = Total PV of future CFs + Initial Investment (negative)

General:

NPV uses cash flows

NPV uses the cash flow pattern of the entire project NPV discounts the periodically (yearly) cash flows properly (

discounted cash flows)

Base case model computes nominal NPV





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The formula for NPV calculation is*

where

CF0

= Todays cash flow

CFn

= Projects cash flow of period n

i = discount rate

n = Number of years elapsed

If NPV > 0, the project is accepted(NPV represents present value cash worth in excess of realizing a rate of returnequal to i);

If NPV = 0, the project is marginal, i.e. neither adds or destroyed value.

(the project yields a rate of return equal to i);

If NPV


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Would you rather receive:

Option A: 10,000 as follows: 6,000 after 1 year and 4,000 after 2 years

or

Option B: 12,000 as follows: 2,000 after 1 year followed by another 2,000

annually during over the next 5 years?

In this example, it is preferable to receive 10,000 in 2 years as this has a present value of 8,760 as opposed to the

present value of de 8,711 based on in six payments of 2,000 each.

Cash Flow

Option A Option A Option B Option B

Year Discount rateUndiscounted Discounted Undiscounted Discounted

@ 10%0 1.000 0 0 0 0

1 0.909 6,000 5,455 2,000 1,818

2 0.826 4,000 3,306 2,000 1,653

3 0.751 0 0 2,000 1,503

4 0.683 0 0 2,000 1,366

5 0.621 0 0 2,000 1,242

6 0.564 0 0 2,000 1,129

Total 10,000 8,760 12,000 8,711


Example





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Normally, when the discount rate (i) increases the NPV decreases.

8,711

6,651

5,285

4,336

3,6493,135

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

10% 20% 30% 40% 50% 60%

discount rate (i)

NPV

EUR

Option B


Example





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Expected Monetary Value can be calculated by risk adjusting the NPV

expressed mathematically as the sum of the product of an events

probability of occurrence and the gain and loss that will result

undiscounted discounted @10%

0 -2.50 -2.50

1 2.00 1.82

2 3.50 2.89

3 4.00 3.014 4.50 3.07

5 5.00 3.10

6 4.00 2.26

7 3.00 1.54

8 2.00 0.93

9 1.00 0.42

10 0.30 0.12

Total 26.80 16.66

dry hole costs 2,5

Year

Cash Flow Exploration Well (mn EUR)

chance of success 15%

success

propability gain (NPV)

15% 16.66 2.50

EMV = 0.37 mn EUR

dry hole

propability

85% -2.50 -2.13

loss (drilling costs)

x

x

+

Expected Monetary Value (EMV)

co o c ec s o C te a




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Internal Rate of Return (IRR) is the discount rate for which the Net Present

Value equals 0

Excel formulae:

IRR () English version

IKV() German version

Effective rate of interest of the respectively bounded capital

If

IRR

the hurdle rate, the investment proposal shall be accepted.

If

IRR < the hurdle rate, the investment proposal shall be rejected.

Internal Rate of Return (IRR) (1/2)




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3.80

2.45

1.42

0.63

-0.51

-0.93

-1.28-1.58

0.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

5.00

18% 28% 38% 48% 58% 68% 78% 88% 98%

discount rate

NPV

mnEUR

IRR = 58% --> NPV = 0

Internal Rate of Return (IRR) (2/2)

Example




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Payback Period (1/3)

The focuses on recovering the initial investment

time needed to recover the investment (payback or amortization period)

Break-even point

Signifies time period of exposure to risk

the shorter the payback the better

Problems with payback

ignores benefits occurring after the payback period

does not measure total income

The payback period is based on the discounted accumulated project cash

flow (main OMV discount rate of 10% has to be used)




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New Oil Company is considering to drill an additional development well on its

field. The well will cost

mn EUR 2.5 to drill and will generate

mn EUR 0.33

additional income for 20 years. The company requires that investments are

paid back within 10 years. Should the investment go ahead?

Solution: The payback period is 14,6 years, the investment is rejected

OMV

discounted 10% -

notice

Year

Discount

Factor

Annual Cash

Flow

Accumulative

Cash Flow

Accumulative

discounted Cash

Flow

@ 10% [mn EUR] [mn EUR] [mn EUR]

0 -2.50 -2.50 -2.50

1 0.909 0.33 -2.17 -2.202 0.826 0.33 -1.84 -1.93

..

7 0.513 0.33 -0.19 -0.89

8 0.467 0.33 0.14 -0.74

..

13 0.29 0.33 1.79 -0.16

14 0.263 0.33 2.12 -0.07

15 0.239 0.33 2.45 0.01

..

20 0.149 0.33 4.10 0.31


Example Calculation




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Example Chart

-2.4

0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0

-2.5

-2.2

-1.8

-1.5

-1.2

-0.9

-0.5

-0.2

0.1

0.5

0.8

1.1

1.5

1.8

2.1

2.52.8

3.1

3.4

3.8

4.1

-2.4

-2.1

-1.8

-1.6

-1.4-1.2

-1.0-0.9

-0.7-0.6

-0.5-0.3

-0.2-0.1

-0.1 0.00.1 0.1

0.2 0.20.3

-3

-2

-1

0

1

2

3

4

5

2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031

mn

EURO

Project CF (non-disc.)

Project Cash Flow, non-disc.,acc.

Project Cash Flow, disc., acc.

Payback after 14.6 years

(disc.)




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Profitability Index (1/2)

Also known as Discounted Return of Investment (DROI) PI shows how many EURO cents is earned per 1 EURO of cash out (e.g.

CAPEX)

Typically used within OMV E&P

Also possible (normally not used within OMV E&P)

NPV

PV Cash out

=

Profitability Index

PV Cash in PV Cash out-PV Cash out

((

PI =NPV

=PV of CF

Present Value of CAPEX PV of CAPEX

PI =NPV

=PV of CF

Present Value of (CAPEX + OPEX) PV of (CAPEX + OPEX)




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Profitability Index (2/2)

Example

Example:

Project CAPEX = 100 MM EUR spent over 1 year. Operational CF = 20 MM EUR per year over 10 years.

Discount rate = 10%, CF basis at the end of the year.

NPV = 20,81 MM EUR, Present Value (PV) of CAPEX = 90,9 MM EUR

PI = 0,23 which means this project will generate 23 EURO cents per each 1

EURO invested, both being in terms of Present Value.




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Which yardsticks to use

Decision

KPI What is it What it means Stumbling blocks

NPV

Major assessment criterion for

project economics

Absolute value in monetary

terms of discounted payment

surpluses indicating projectattractiveness

Useful for project rankings

Positive NPV project is profitable

Negative NPV project is not profitable

For rankings: a project is preferred if the

NPV is higher than that of an alternativeinvestment

Uncertainty of cash flows

Reinvestment premise (at discounting rate)

For project comparisons: prerequisite of

identical life time of all alternatives

EMV

Risk-adjusted (probability-

adjusted) NPV (cf. above)

Positive EMV project is profitable (given

its probabilities)

Negative EMV project is not profitable(given its probabilities)

Accuracy of probabilities




IRR

Internal rate of return (in %) of acash flow profile

Indicates the discounting rate at

which the cash flow profile hasan NPV of 0

Is compared to a specific hurdle

rate (%)

Higher than hurdle rate project isprofitable (with some restrictions)

Lower than hurdle rate project is not

profitable

For rankings: a project is preferred if the IRR

is higher than that of an alternative

investment

Reinvestment premise (at IRR)

Cannot always be calculated (certain cases

of inconclusive IRR or no IRR at all)

Not additive

Does not consider (total) investment volume



PayBack

Period

Number of periods (years)

needed to recover the investedcapital

Useful for single investment ofchoice decisions

The shorter the pay back period the better

A shorter payback period indicates a lower

risk exposure


Ignores occurrences after breakeven point

in time

Does not provide information about total

profit of the investment project

PI

Ratio indicating how many

monetary units is earned per 1monetary unit of cash out (e.g.CAPEX)

Useful for project rankings

The higher the PI the more attractive a

project appears

Reinvestment premise (cf. NPV)

There is different ways of calculation(depending on denominator)

Not additive

Does not consider (total) investment volume



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Contents

Cash Flow Basics


Sensitivities


Project Example

2 E&P Exercises

A.

B.

C.

D.

E.

F.

ConclusionG.


C. Sensitivities


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Spider

Sensitivity graph (1/2)

Differentiation between input variables/parameters and output results

Ceteris paribus assumption (all other things held constant)

Spider chart illustrates the differences between

the minimum and maximum values of the output result by drawing a

curve through all variations of the input variable tested (E&P standard

50%, 75%, 125%, 150%)

Curves with steep slopes, positive or negative, indicate that those

variables have a large effect, while curves that are almost horizontal

show little or no effect on the forecast

The slopes of the lines also indicate whether a positive change in the

variable has a positive or negative effect on the output result


C. Sensitivities


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Spider

Sensitivity graph (2/2)

38 1

33 6

2 91

2 45

200

15 4

1 09

63

18

-28

33 8

30 1

2 65

2 28

191

15 41 17

81

44

7

-339

-240

-142

-43

56

15 4

2 53

3 52

450

54 9

-339

-240

-142

-43

56

15 4

2 53

352

450

54 9

-400

-200

0

200

400

600

800

5 0.0% 60.0 % 70 .0% 80 .0% 9 0.0% 1 00.0 % 110.0% 120 .0% 13 0.0% 14 0.0%

% of B ase C ase

mnEURO

C A P E X

O P E X

Price

Quant i ty

B A S E C A S E



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Contents

Cash Flow Basics


Sensitivities


Project Example

2 E&P Exercises

A.

B.

C.

D.

E.

F.

ConclusionG.


D. Easy Evaluation Excel Tool


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General-

Pre tax calculation (no royalties and taxes are considered)-

All volumes have to be inputted in mn

boe

-

All cash values have to be inputted in mn

Purpose of the tool

-

Quick project evaluation-

Creation and comparison of project scenarios

-

Optimization of the cash flow concerning the best economicaloutput

-

Not a tool to create final economic calculations-

Final economics have to be calculated in Palantir

Cash




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Contents

Cash Flow Basics


Sensitivities


Project Example

2 E&P Exercises

A.

B.

C.

D.

E.

F.

ConclusionG.


F. 2 E&P Exercises


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2 E&P exercises

Project input

Making the right decisions

-

Output of calculations and graphics

Change Input variables (scenarios)

-

New output of calculations and graphics

Close loop Learning by doing

Short presentation of findings

Presentation of the results and interpretations

Team Exercises


Start Up Training for Project Engineers

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