A BOARD REPORT ON THE KEY ISSUES FACING YJCIMA GBC2015
Team members:Tshegofatso Makhene (Team leader)Justice TshabalalaTshenolo RamawelaRaymond Miiro
CharterQuest Financial Training Institutea division of:
CharterCapital Advisory
CharterCapital Advisory: YJ Board Report
Table of Contents
PAGE
1. INTRODUCTION 2
2. TERMS OF REFERENCE 2
3. IDENTIFICATION AND PRIORITISATION OF ISSUES 2
4. EVALUATION OF THE MAIN ISSUES FACING YJ 4
5. ETHICAL CONSIDERATIONS 13
6. RECOMMENDATIONS 16
7. APPENDICES 20
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1. Introduction The global E&P industry is particularly risky and capital intensive but with good return
prospects. It relies on a finite resource: fossil fuel, thus placing it as the focal point of
global consensus on sustainable development. A minor Health, Safety and Environmental
(HSE) incident can quickly translate into a disaster of catastrophic proportions costing
billions of USD for shareholders. For instance in 2010 the BP Deepwater horizon incident
cost them an estimated $42.2 billion and wiped off 55% of their market capitalisation.
Furthermore, the industry remains an attractive target for militant/terrorist groups seeking
to make demands on governments or the international community. Industry consensus
is that HSE, technical and financial capacities are the Critical Success Factors (CSFs).
Unless YJ's strategy continues to deliver a relatively superior track record in these CSFs
and broadens its current CSR stance to embrace sustainability development, it will see
its long-term prospects erode rapidly.
2. Terms of Reference This report identifies, prioritises and evaluates the issues facing YJ and offers appropriate
recommendations. It also includes a briefing paper as requested by Ullan Shah.
3. Identification and Prioritisation of Issues The issues below have been prioritised based on the impact each has combined with
the urgency. A full SWOT analysis is presented in Appendix 1.
License application results
Winning 3 of 4 licenses has had a significant impact on YJ’s market capitalisation, which
has increased by 31%. The licenses are to be accepted in 2 weeks and if YJ cannot, they
could experience a reversal of this 31% gain. This issue is therefore prioritised first.
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Outsourcer - DrilllT Awareness and superior track record in environmental issues is a critical success factor
for obtaining licenses in this industry. A vital safety check was compromised that may
have had serious consequences, the underlying cause being ongoing militant attacks. YJ
must deal with this issue to prevent any further escalation before considering long term
plans as below.
YJ’s long–term future Sustainability is a business challenge in this industry. YJ has at least seven years’ worth
of reserves and needs to evaluate its strategic position and address its going concern.
The impact of this is high but cannot be addressed unless current operations are secure.
This issue is therefore dealt with third.
Farm out offer The Farm Out proposal is dealt with last because even though it’s an opportunity for YJ
to raise funds for the more urgent test drilling, it’s not in line with the current strategy of
bringing fields into production.
Other issues Other issues are considered less significant and are not dealt with further whereas ethical
issues have been addressed in section 5.
Recommendations to issues are all in section 6.
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4. Evaluation of the main issues facing YJ License application results
YJ needs to have the funds to test drill and for production. This is a critical success
factor in obtaining any licenses. In 2005, Gazprom was able to secure financing of
$12bn to fund expansion. Shareholders are currently happy due to the 31%
increase in market capitalisation ($35/share from $26.80/share). It is of utmost
importance that this increase be maintained and not let a reversal happen.
Johnson, Scholes and Whittington’s SAF model is used to appraise this opportunity.
Suitability
The 3 licenses will make the company grow two-fold if all three come into
production. This achievement is within the strategy of YJ which is not only to
explore new fields but to bring them into production as well.
Acceptability
Bringing the 3 oil fields into production will not only increase returns in the form of
dividends but will also improve the image of the company.
YJ’s strength is to produce in shallow waters - which the oil fields are. This
minimises the risk on production and makes it acceptable to key stakeholders
(Appendix 2). However, accepting all the licenses then raises shareholders
expectation in terms of the return (and dividends to be paid consistently).
Nevertheless, now would be a good time to start paying dividends to re-assure
shareholders of their investment.
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Feasibility
YJ needs to meet all expected costs ($63m) to test drill. 2015 cash forecast reveals
$69.84m (Appendix 4) after taking into account the suggested $10m dividend. This
can be used to cover the entire $63m. However, this cash balance is best left for
operations to finance working capital (Appendix 5.2). It is only the surplus cash
($56.44m) that can be used to partly finance the test drilling costs. This in effect,
would show strong cash control which would assist in obtaining debt finance for
production after the threshold as stipulated by the Bank of England has been
crossed. However, other costs such as security increase and managerial
improvement costs are to be taken into account as well.
Option 1: Debt
$31m can be raised from debt (Appendix 5.3) in accordance with the central bank’s
requirements.
Benefits
Cheaper form of finance in relation to equity; less risky for it is secured against
assets and interest is well known before any payments. Moreover, the interest is
tax-deductible and since YJ’s tax losses have now been used up, it will reduce the
total tax liability. Debt also reduces YJ’s Weighted Average Cost of Capital,
WACC1 as stated by the Modigliani & Miller theory with tax.
Drawbacks At a given level, WACC would increase due to the expectation of shareholders
being exposed to risk thus expecting a higher return (as stated by the traditional
view). YJ’s current debt results in gearing of 69.4% (Appendix 5.6) making it risky
which could possibly deter potential investors. If the $31m is raised, it would result
1 WACC, the rate (percentage) a company is expected to pay on average to all its security holders to finance its assets
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in a gearing of 73.4% (140+31/[140+31+61.7]). The remaining amount of $32m
($63m-$31m) can be raised through cash (Appendix 5.5)
Option 2: Rights issue
A rights issue would raise $74,4m (Appendix 5.4) covering the test drilling.
However, it’s the most expensive form of finance (pecking order theory).
Drawbacks: The calculations on the rights issue are views of the market but could easily not be
the views of YJ’s shareholders.
Benefits Apart from the shares issued during the IPO, no other shares have been issued
thereafter. New share issues would be in high demand. The increase in market
capitalisation influences this demand as well. A rights issue would also reduce the
current gearing which would be far more favourable. However, YJ also needs to
raise finance for production and given the benefits, a rights issue would be more
in line given that reserves would have been found and proven. An alternative would
be to take YJ from AIM to main board listing to raise even more finance.
Addressing the managerial capacity
Training and Development
Develop managers from within. Supervisors can be sent for training and
development and a succession plan put in place to replace any manager who may
leave in the future. However, there are 7 months before test drilling commences
and training a sufficient number of people may be a challenge.
Headhunting
Headhunt the required management staff. Given the focused approach of
headhunting, the packages are usually offered at above competitive rates in order
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to attract desired individuals away from their current occupation. This will be a
challenge given the current financial constraints.
Outsourcing
A last resort would be to outsource the requisite managerial capacity. However,
exploring this option alludes to YJ outsourcing one of its core competencies;
managers who are of major importance to YJ’s operations.
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Outsourcer - DrilllT
Impact of the considerable unrest
Attacks by militant groups in the Niger River Delta cut Nigeria’s oil production by
more than 28% from 2006 to 2009. YJ has to manage political risk in order to
prevent it from experiencing a similar incident as Chevron in 2003 at AAA. It could
escalate and result in militants taking over AAA automatically impacting YJ’s
revenue (AAA contributed 40% of 2014 revenue), causing a significant fall in the
share price and impacting the acquisition of further finance.
Impact of the control failures
A vital safety check concerning the flow of oil was compromised and even though
nothing major happened, a minor accident could be catastrophic. Gas leakage
could cause an explosion and the loss of assets. Severe injuries and death would
negatively impact SHE, one of YJ’s critical success factors pertaining to obtaining
future licences. This all could bring YJ’s entire operation to a close.
The following options seek to address this threat. (All ethical issues have been
dealt with in Section 5)
Addressing security concerns
A security risk management strategy for the entire AAA operation using the “Four
Ts” of the risk management process is to be immediately implemented:
Transfer
The risk of asset-loss can be transferred to an insurance company. However,
ongoing militant attacks could make it difficult for YJ to receive insurance cover.
Should insurance companies accept greater risk, it may result in higher premiums.
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Tolerate
Continuously monitor the situation but should militants attack, emergency safety
procedures should be implemented. YJ would accept all consequences arising
from such an incident.
Treat
YJ could re-deploy security from each of the other fields to assist with the
safeguarding of assets and transporting of all employees to and from AAA. This
would fortify the security already at AAA without increasing the costs significantly.
The government would be enlisted to assist, since they have a vested interest in
the oil and gas fields.
Terminate
This would see YJ shut down AAA and exit the country. Termination of the field
will however, strain the financial capacity that YJ already lacks.
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YJ’s Long – Term Future
Fossil fuels are finite which affects the longevity of companies in this industry.
Sustainability remains a business challenge and whilst YJ may discover more
reserves in the new fields, the issue will remain.
Three key criteria are identified in the option to exit, and the 9Ms model applied in
the option to broaden energy sources. A briefing paper was prepared (Appendix
6) to assist in making this decision. Both options would be evolutionary in terms of
Hopely and Balogun’s Type of Change Model, and would constitute a change in
YJ's strategic direction.
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Farm out Offer
Issue
An opportunity has been offered to farm-out GGG by Liquid Gold (LG). The option
payment will partly help YJ financially in financing the test drilling. YJ has never
had a farm out before making it lack the experience to handle one.
This will be evaluated using ‘modified’ Enterprise Risk Management framework.
Strategic YJ has successfully brought its current three fields into production without having
to farm-out. This is a key strength (Appendix 1). Accepting the farm out will result
in a different view by the market; what was once a strength is no more.
Financial & Risk
As calculated in Appendix 4.4, YJ’s 2015 cash flow would improve by $2m. This is
a very negligible difference unlike if the $10m was to be available at once after
signing the agreement. Penalties of $1m if drilling is not completed within the
deadline are attached. YJ would be making such payments monthly till an
unforeseeable time which is highly risky for a company that already lacks cash.
The offer is also short by $8m to meet GGG cost ($18m- $10m=$8m). If the field
does prove to hold more oil than is predicted, then it will surely be valued higher
leading to more bids by different companies. Accepting the farm out would give
rise to the risk of loss of future profits. On the other hand, GGG could prove to not
have oil resulting in the total cost ($18m) of the test drilling being written off. The
$10million farm out offer in this case would then help in reducing this loss down to
$8million. However, such losses should be anticipated for they are a business risk
for companies in such an industry.
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Operational
The farm out can improve the managerial problem faced by YJ. As GGG would not
come into production, the current constraint would be relaxed, giving YJ leeway to
focus on the other two fields.
Compliance
The government would need to approve the farm out which can lead to different
terms altogether such as those of a share agreement of profits to be given to the
government. Not much can be said about LG for little is known about it.
Review of deal terms and suggestions to amend:
• The $10m should be made in cash as a whole amount for YJ to consider
and for it to contribute to the costs of test drilling.
• LG having place on the board should be reviewed. Debriefing of all
information relating to GGG would be a better option through a status report
with meetings to clear any misunderstandings. LG being given a place on
the board is a risky step as it could lead to information leak and LG out-
playing YJ.
• The $1m fine imposed if time given to test drill does run out before the task
is completed is a high amount to pay which enables LG recover its given
amount and more within a period of 12months. The penalty should be
restructured in a more reasonable manner say: pay = work unfinished as a
% of the $10m that was given or a lower fixed amount.
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5. Ethical considerations 5.1 Fraud Committed by DrilllT Underlying ethical issue
The Forgery puts into question DrilllT’s Integrity. DrilllT has a duty to act with due
care and transparency in carrying out its work. However, DrilllT acted unethically
in forging Mr. Brown’s signature and concealing it. Instead a replacement engineer
was found and YJ was given an apology but no formal disciplinary plan was
communicated. DrilllT put profit ahead of employees’ HSE by protecting those
involved in the forgery.
Lee Wang wants to conceal the irregularities. This shows a lack of honesty and
objectivity. His suggestion if carried out, would have serious repercussions on the
company should the government discover safety measures were compromised
and YJ concealed this. Lee Wang upheld his duty of care by suggesting that
“everything be done to ensure things are now safe” and he should be credited for
this. His contradicting actions show an attempt at avoiding consequences and thus
puts his level of ethical maturity at the pre-conventional level of Kohlberg’s stages
of moral development.
Advice
DrilllT’s management should compile a written report fully disclosing the incident to
the government officials within the week and signed off by Jason Oldman. Lee
Wang should be removed from the process completely. Should the government
impose any penalties, DrilllT should be held liable depending on the terms of
DrilllT’s contract with YJ.
YJ should instruct DrilllT to take disciplinary action (e.g. Dismissal) against the
perpetrators involved in the fraud. This is to restore YJ’s confidence in DrilllT.
Should DrilllT not take these measures, Jason Oldman is to initiate contract
termination procedures.
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Lee Wang should be reprimanded for proposing this unethical act. A mentor should
be assigned to help him progress to post-conventional level of ethical maturity as
he lacks practical understanding and application of ethical principles.
5.2 Ullan Shah Statement during Greenbies Protest
Underlying ethical issue
Ullan Shah’s statement and outburst during the Greenbies protest shows that he
does not care about the development of sustainable energy sources and does not
consider the wellbeing of future generations. He lacks due care and professional
behaviour. His ignorance shows inappropriate leadership which points to lack of
Professional Competence. On the other hand, his actions of being angry that he
couldn’t park his BMW 650i on its usual parking spot highlights that he is egoistic
and has self-interest only.
Advice
Given the relatively new integration of sustainability into the corporate space, Ullan
Shah may not fully understand and recognise the resulting responsibilities. He
must first offer a full apology for his actions/outburst. It is then advised that an
assessment be done on his competence in this area by external sustainability
experts. Should the assessment reveal he has been adequately trained, Jeremy
Lion is to initiate a disciplinary process resulting in a written warning stating that
Ullan needs to lead by example and be cognisant of his duty to future generations.
Should the assessment reveal that he has not received adequate training, the
experts are to draw up a comprehensive sustainability plan which he should
internalise.
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5.3 Facilitation payments
Underlying ethical issue
It is rumoured that the HHH license was awarded to another E&P company that
‘bribed’ government officials. The underlying ethical issue is the unfair competitive
advantage gained by the bidders.
Advice
The YJ board and all employees throughout YJ should understand the unethical
conduct of bribery. Jason Oldman should draft an anti-corruption policy that is
strongly against bribery in all its forms.
YJ should seek legal advice and report any suspicion of corruption to relevant
regulatory bodies in order for investigations to be conducted.
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6. Recommendations 6.1 License application results
Recommendation
Finance the test drilling with $32m cash and $31m debt.
To address the managerial capacity, Training and Development should be undertaken
in combination with head hunting.
Justification
This is in line with the pecking order theory but also then lets YJ use the rights issue to
finance production. $29m cash ($5m overdraft facility included) can then be used for
working capital requirements as well as fund the other issues.
Training and Development will be a cost effective way of addressing the managerial
issue in light of current financial constraints and as the employees already know the job
and industry, will save time and offer more motivation. Capacity not addressed by
promotion, head hunting will suffice.
Actions
• Jason Oldman should draft the acceptance letters of all licenses to the
governments.
• Once Orit Mynde returns to work, he should immediately begin the process of
issuing new bonds or negotiate directly with the bank to raise finance from debt.
• Orit Mynde should take steps to ensure a strong cash control regime is
maintained so that the projected cash flows are realised.
• Orit Mynde should also begin the process of taking YJ from AIM to full mainboard
listing in time for production.
• The HR manager should be instructed to put in motion a managerial internal
succession plan that will facilitate Training and Development. Further, a
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headhunting strategy to address the shortfall is to be implemented within the next
3 months. Funds are also to be set aside for this process by Orit Mynde.
6.2 Outsourcer - DrilllT Recommendation Re-deploy more security personnel to AAA from the Asian fields and continuously monitor
the militant threat, assessing its escalation. If this is not adequate, the security company
should provide more personnel and the government petitioned to improve security
controls.
Justification This ensures that the entire AAA operation is safe and allays the fears of employees,
improving retention. Government has a vested interest, thus petitioning them for
protection would be justified. The Asian fields under no militant threat would still have
adequate security.
Action
• Lee Wang should arrange to re-deploy security from the other Asian fields to AAA
within the month. The security personnel should be armed and on high alert. Orit
Mynde in consultation with Lee Wang should estimate how much from the $24m
(excluding $5m overdraft facility) to set aside to cater for any extra costs.
• Jason Oldman should immediately draft a petition letter to the government
requesting assistance with security.
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6.3 YJ’s long term future Recommendation Begin implementing the steps necessary to diversify energy sources. A number of large
energy companies such as Exxon Mobile and Chevron have taken similar steps with great
results.
Justification Exiting the whole industry would unsettle investors and cause share price to drop
significantly. By diversifying, YJ would retain the technical capability it has already built
and even raise finance from more ethical investors.
Action
• The Board should set up a high level Sustainability Committee to oversee the
transformation within the next month.
• The committee should commission a detailed study for each resource area in the
briefing paper, by appointing external consultants. They should report back within
3 months with detailed actions/project plans.
• The above action plans should be compiled into Sustainability/Change
Management Plan document and secure board approval.
• The committee should then appoint a change agent and begin implementing the
plan. Special care should be taken to communicate the rollout widely, to help
reposition the company’s image in relation to the Greenbies Party protest.
• The HR Manager should develop and implement a plan to ensure all employees
are educated on sustainability and are aware of the coming changes (Kotter and
Schlesinger).
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6.4 Farm out Offer
Recommendation
YJ should not accept the farm out offer.
Justification
The impact the farm out has on the cash flow is minor. If it’s accepted, YJ’s strength of
bringing oil fields into production is no more. Waiting could lead to better offers being
made if the fields do hold oil.
Actions:
• Jason Oldman should draft a decline of the offer and send to LG but with
indications that a future option can be reviewed.
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7. Appendices
Appendix 1: SWOT Analysis SWOT
1. Strengths
• No accidents
• Technical capability
• Relationship with DrillT
• Ability to find oil reserves, test drill and bring fields to production
2. Weaknesses
• Lack of financial and managerial capacity to test drill
• Lack of financial and managerial capacity to go into production
3. Opportunities
• Three licenses obtained and eight survey and explorations
• Farm out offer from LG
• Alternative energy sources
• Increasing rate at which licenses can be obtained for test drilling
4. Threats
• Bank regulator may not allow YJ to loan money
• Protest action, bad publicity for industry – could affect sustainability of business once alternatives are present in market, and could cause governments to enforce legislature more or change legislature unfavourably for industry.
• Militant action currently affecting staff retention – may escalate
• Government check subsequent to DrillT incident may lead to action from
government
Items in bold are the key issues
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Appendix 2: Mendelow Analysis Stakeholders
1. Mendelow’s Power Interest Matrix
INTEREST
Low High
POW
ER
Low
Minimal Action
2.5 DrillT Employees
3.2 Community
3.4 News Agencies
4. Future generations
Keep Informed
1.2 YJ Supervisors
3.1 Greenbies
3.3 LG
Hig
h
Keep Satisfied
2.3 African Government
2.4 Lenders of finance
2.6 DrillT
3.5 Bank Regulator
3.6 License Issuing
Governments
Keep Players Involved in Everything
1.1 YJ Board of Directors
2.1 Shareholders
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Appendix 3: PEST Analysis Political
• YJ being awarded three licenses means it was awarded by three governments from
three different countries and it needs to understand different environments of these
different countries.
• Militant attacks in the African country were AAA field is located exposes YJ to
political risk.
• Government spot checks mean that there are different safety policies in place for
different countries that YJ has licenses in.
• If Governments from some countries are willing to accept bribes from license bidders
hinders YJ’s possibility of attaining new licenses.
Economical
• Shareholders/investors that invested in E&P companies are requesting to buy
shares on a 15% discount.
• Share price rose to a record high of $35 due to attaining three new licenses.
• Banks are finding it risky to loan E&P companies funds.
Social
• Risk is posed by public protests by environmental groups that E&P companies
should consider developing sustainable resources.
• Drill T employees fearing to come to work due to the fear of being attacked by
militants affects YJ’s business.
• The challenge that YJ has been facing for a while now of the threat of terrorist
attacks.
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Technological
• Lack of capabilities to develop sustainable sources of energy
• YJ lacking drilling capabilities by outsourcing companies to drill for them poses as a
weakness.
• At the moment YJ strategy is not based on exploring ways of becoming a renewable
energy company which poses a threat because may need to do so in the future.
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Appendix 4: YJ’s Financial Forecasts for Year Ending 31 March 2015 4.1. YJ’s Oil and Gas Production
5% Oil & Gas Price Increase AAA BBB CCC Total Oil bopd 1500 1200 1040 3740 mmbbl 0.55 0.44 0.38 1.37
Total Oil & Revenues
US$ million $
63.12 $
50.50 $
43.76 157.38 Gas bopd 1500 2000 1950 5450.00 mmbble 0.55 0.73 0.71 1.99
Total Oil & Revenues
US$ million $
10.49 $
13.99 $
13.64 38.12 Total Oil & Gas Revenues for year ended 31 March 2015
$ 73.61
$ 64.49
$ 57.40 195.50
4.2. Profit or Loss Statement
Profit and loss statement Year ended 31 March
2015
US $
million Revenue 195.50 Cost of sales 101.66 Gross profit 93.84 Distribution costs 0.5 Administration costs 22.1 Operating profit 71.24 Financial Income 0.1 Finance expense 15.6 Profit before tax 55.74 Tax expense (24%) 13.38 Profit for the period 42.36
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4.3. Statement of Cash Flows
Year ended 31
March 2015
Cash from operating activities US$
million US$
million Profit before taxation 55.74 Adjustments:
Depreciation 28 Financial Cost 15.5 43.5 Decrease in Inventory 10 Increase in Receivables -2 Increase in Deferred tax Increase in Trade payables 5
13 Financial cost (net paid) -15.5 Tax paid -0.5
-16 Cash generated from operating activities: 96.24 Cash flow from investing activities:
Maintenance of non-current assets -30 -30 Cash flow from financial activities :
Dividend paid -10 -10 Net increase in cash and cash equivalents 56.24 Cash and cash equivalent at 31 March 2014 13.6 Cash and cash equivalent at 31 March 2015 69.84
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4.4. Cash Flow With Farm Out Offer and Test Drilling
Cash generated from operating activities: 96.24 farm out 2 non-current assets -30 tests drills -63 Cash flow from financial activities : dividend paid -10 Cash and cash equivalent at 31 March 2014 13.6 Net decrease in cash and cash equivalent 8.84
4.5. Cash Flow Without Farm Out Offer and Test Drilling
Cash generated from operating activities: 96.24 non-current assets -30 tests drills -63 Cash flow from financial activities : dividend paid -10 Cash and cash equivalent at 31 March 2014 13.6 Net decrease in cash and cash equivalent 6.84
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Appendix 5: Financial Requirements, Options and Indicators 5.1. Test Drilling Costs
US$m EEE 20 FFF 25 GGG 18 Total test drilling cost 63
5.2. Working Capital – Cash Available
US$m Cash and Cash equivalent at 31 March 2015 69.84 Receivables (6,5 + 2) 8.5 Inventory (25 - 10) 15 less Payables (31,9 + 5) (36.9) Cash available 56.44
5.3. Debt Assessment
US$m Existing loan (140) Operating profit 57.00 Total lending 3 x Operating Profits 171.00 Total that can be obtained from the bank 31.00
5.4. Rights Issue Assessment
Rights Issue discount 15% Market price of shares US$ 35 Discounted offer per share 29.75 Number of shares to be offered (million) 2.5 Total that can be obtained from rights issue US$m 74.38
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5.5. Hybrid Assessment
US$m Total drilling cost 63.00 Finance from debt (31.00) Finance to be obtained from cash available US$m 32.00
5.6. Gearing
Gearing = Debt 140 69.41% Current Gearing Equity + Debt 201.7 Gearing = Debt 171 73.49% Gearing with loan Equity + Debt + Bank Loan 232.7 Gearing = Debt 140 50.71% Gearing with rights issue
Equity + Debt + Rights Issue
276.08
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Appendix 6: Briefing Paper on YJ’s Long Term Future Briefing Paper
From: CharterCapital Advisory
To: Ullan Shah, CEO of YJ Oil and Gas
Date: 1 August 2014
Purpose
This briefing paper discusses the main matters to be considered in deciding on the long
term future of YJ in terms of a choice between A) exiting the E&P market or B) diversifying
its energy sources.
A) Exit the E&P Market
1. This would mean a bigger change for YJ than the choice to stay within the energy
market and diversify YJ's energy sources.
2. The viability of this option is looked at under 3 key criteria:
• The market into which it enters, if this is another sector dependent on a finite
resource such as gold or iron, YJ's long-term sustainability would remain in
question.
• The amount that YJ would have to change its strategic capability/core
competences, to fit with the new business model
• The attractiveness of the opportunities it can identify in such market (position
based strategy) as well as the entry barriers.
3. No decision has been made into which market YJ will exit into, or whether it would
go into liquidation so no further assessment is provided.
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B) Diversify YJ's sources of energy to include renewable sources
1. This will be transformative but arguably less so than the exit option.
2. The core competencies required to produce energy from renewable sources are as
varied as the different forms of renewable energy however a preliminary
resource/feasibility audit guided by the modified 9 M’s model is provided as a
starting point:
• Materials: Some renewable energy sources e.g. wind and solar depend on the
availability of certain climate/weather patterns and geographical distribution
and location. It is reported that the production of some renewable sources of
energy requires much larger areas of land to produce the same energy
compared to fossil fuels. YJ needs to consider the resulting cost and scale
implications.
• Methods: The manner in which extracted energy is stored and transported
will be a key strategic point, as current fossil fuel extraction is outsourced.
• Manpower: The technical skill set will have to change from the current survey
and geologist capability YJ has relied upon, depending on the type of energy
resource chosen.
• Management: The lacking managerial capacity will not only have to be
expanded to address the requisite changes, but have the expertise and drive
necessary to carry out such a transformative though evolutionary change.
• Machines: The existing equipment & infrastructure’s suitability to the future
function requirements will have to be assessed and training be provided for the
operation of new machinery.
• Management Information: The role of science and technology in the
production methods and means of collecting data and producing and
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distributing reports to guide decision making may alter significantly. The
systems to track and report on YJ's performance in accordance with the best
integrated reporting practices including setting up KPI's such as % of energy
from renewable sources would be key information instruments required.
• Make-up: YJ may have to change from a single product-geographical
(divisional strategy) to a multiproduct or matrix product-geographical structure
centered on the different extraction, conversion, storage and transport
processes. It may have to operate vastly different value chains within the same
entity. It would need to reconsider its product portfolio (BCG). Oil and gas as a
whole are likely to be classified as cash cows whereas wind energy could
become the star and nuclear possibly the dog. The new CSFs need to be
considered and should be part of the factors informing the new structure.
• Markets: YJ needs to spend resources to broaden its understanding of the
energy market including renewable energy sources, the key role players,
competitors, buyers, suppliers and how prices are set (Porters 5 forces and
Porters Generic Strategies). It currently sells to one type of buyer that is oil
refining companies, but going forward it may have to understand different types
of buyers, such as industrial buyers for construction companies associated with
solar energy products and agriculture companies for wind energy. YJ would
need to consider how it would capitalise on the new brand/reputation for going
green &sustainable. The Greenbies party protest would now offer a good
chance for YJ to break ahead of its rivals by creating what Michael Porter called
sustainable competitive advantage. It would also have to reconsider its overall
strategic missions, vision and objectives.
• Money: Some forms of renewable energy are more capital intensive than fossil
fuel. YJ needs to improve its ability to broaden and attract more long-term
investors who care about sustainability. The operating costs vs. selling prices
also need to be considered along with their impacts on YJ’s balance sheet.
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• Time: YJ needs to consider how much time they have before the existing fossil
fuel reserves become obsolete and align this to plans that need to be
implemented in order to continue operations. YJ’s current oil fields in production
have 7 years worth of oil reserves. This is a relatively small time-frame in the
oil and gas industry and considering the scale of the transformation required.
Alternatives Venturing into other activities, such as midstream would allow YJ to explore other revenue
streams in even less capital intensive investments. A similar strategy was employed by
Statoil from 2008 which saw their business grow by positioning themselves to deal with
the uncertainty of a severe economic downturn. They attacked new realities with a strong
balance sheet, a robust project portfolio and excellent people. YJ would therefore have a
reduction of systematic risk through holding different portfolios as it becomes sustainable.
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Appendix 8: Bibliography 1. Chartered Institute of Management Accounts. Fundamentals of Ethics, Corporate
Governance and Business Law, 2014. Berkshire, Kaplan Publishers.
2. Chartered Institute of Management Accounts. T4-Part B – Case Study, March 2014.
3. Chartered Institute of Management Accounts. T4-Part B – Case Study, May 2014.
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