Answer the following questions with the aid of excel spreadsheets. You also need to answer the below questions in your word file and refer to your excel spreadsheets as supporting documents. Assume all figures are in USD.
Imagine that in 2016 Shell is evaluating whether to undertake a gas project in a country which is highly risky. The annual total incremental revenues for the gas project is $3,633,300,000. The total incremental costs project are 30% of the incremental revenues for this project. Assume that the incremental depreciation for the gas project is $889,200,000 per year. Assume that the free cash flows for the project will continue for 20 more years with the first cash flow occurring at the end of next year and that the initial investment in the project being made today. Assume that the initial outlay for this project is $27 billion USD. Incremental revenues will increase by 2% per year and all costs will decrease by 3% per year starting at the end of year 2 for the life of the project. Assume depreciation remains constant over 20 years. All values are in USD. Assume the tax rate is 30% over the 20 years.
a) Based on the above information and sources what are the free cash flows to the Shell’s gas project?
b) Calculate the NPV for project using the below costs of capital and recommend whether at these two rates Shell should invest in the project.
a. A WACC (cost of capital) of 5.94%?
b. A WACC (cost of capital) of 8%?
Overview of Woodside Petroleum Limited
Woodside petroleum limited is an exploration and manufacturing company. This company is operating its business in Australian market. Woodside petroleum has the largest share in the gas and oil exploration industry of Australia. Head office of this company is situated is at Perth in Australia. This company has registered its stock in stock exchange of Australia. The main operations of this company are to exploration and deliver the oil and gas products in the Australian market. Various mines are owned by the company in Australia itself (Home, 2018). This company has most of the natural gas projects in Australia. 13.5% share of oil and gas exploration industry is held by Woodside petroleum limited only. This market share is the highest in the Australian market.
Oil and gas exploration industry of Australia is one of the largest industries in ASX. This industry contributes 2.58% in the total GDP of the country. The current reports and the future trends of oil and gas exploration industry of Australia explains that the company has faced few losses in last year due to natural and environment factor and future trend explains that the firms in oil and gas industry must run the business though concerning about natural aspects (Annual report, 2018).
The main key opportunity of Woodside petroleum limited is high technology of which would assist the organization to grab more market share. Through the help of technology, international project could also be owned by the company and the mission of the company could be accomplished. On the other hand, huge competition at international level is the main threat of the company and the bad relations of the company with its stakeholders would also impact over the performance of the company. Thus the company is required to manage the threats by identifying and taking a better step at fair time.
Cash conversion cycle (CCC) is a financial analysis process which is used by the companies, management and the professionals to evaluate the cash turnover of the company. It directly impacts over the liquidity and working capital management position of the company. Cash conversion cycle calculations express about the total time in which the cash of the company would be get back. Below table express about the cash conversion cycle of last 2 years:
|
Calculation of cash conversion cycle of 2016 |
||||||||||
|
Sales |
£ 4,075 |
|||||||||
|
COGS |
£ 2,234 |
|||||||||
|
Inventories |
£ 5 |
|||||||||
|
AR |
£ 172 |
|||||||||
|
AP |
£ 546 |
|||||||||
|
Days/year |
365 |
|||||||||
|
Cash conversion cycle (CCC) |
= |
Inventory conversion period |
+ |
Receivables collection period |
- |
Payables deferral period |
||||
|
= |
Inventory/Sales per day |
+ |
AR/Sales per day |
- |
AP/COGS per day |
|||||
|
= |
0.45 |
+ |
15.41 |
- |
48.91 |
|||||
|
= |
33.05 days |
|||||||||
|
Calculation of cash conversion cycle of 2015 |
||||||||||
|
Sales |
£ 5,030 |
|||||||||
|
COGS |
£ 3,073 |
|||||||||
|
Inventories |
£ 19 |
|||||||||
|
AR |
£ 93 |
|||||||||
|
AP |
£ 813 |
|||||||||
|
Days/year |
365 |
|||||||||
|
Cash conversion cycle (CCC) |
= |
Inventory conversion period |
+ |
Receivables collection period |
- |
Payables deferral period |
||||
|
= |
Inventory/Sales per day |
+ |
AR/Sales per day |
- |
AP/COGS per day |
|||||
|
= |
1.38 |
+ |
6.75 |
- |
59.00 |
|||||
|
= |
- 50.87 |
|||||||||
(Arnold, 2013)
The above table of cash conversion cycle expresses about the total days which would be required by the company to get back the total investment cash for operations and daily activities. The CCC of 2015 was -50.87 days and in 2016, it was -33.05 days. This explains that the average receivable collection days have been enhanced in 2016. Though, the current CCC position of the company expresses that the current working capital position of the company is in negative. It expresses that the current asset of the company is quite lower than the current liabilities of the company. Though, the cash turnover of the company is quite higher and explains that the good position could be maintained by the company.
Oil and Gas Exploration Industry of Australia
In addition, financing options have been evaluated which had been opted by the company to raise its short term and long term funds. For short term financing, accounting payable is the most used source for the company. The current payables of the company are $ 546. On the other hand, for long term financing, interest bearing liability is the most used source for the company. The current interest bearing liability of the company is $ 4897. At the same time, total short term debt of the company is $ 963 and total long term liabilities of the company are $ 8128 (Brealey, Myers and Marcus, 2007).
It explains that the long term as well as short term, both financing sources have been used by the company to manage its performance and the position in the market. Further, it also explains that the debt financing sources have been used by the company to reduce the level of the cost of the company.
Bond valuation is a process in which the current value of bond is calculated and it is compared with the face value of the bond. This study is comprised to evaluate the position of the bond in the market (Nobes and Parker, 2008). Bond valuation study has been conducted over Woodside petroleum limited to evaluate the current bond position of the company.
|
Position of the company |
|
|
Bond-1 |
|
|
Face value |
$ 100.00 |
|
Coupon |
2.25% |
|
Maturity |
11 |
|
Yield (Half yearly) |
2.62% |
|
Price of bond |
|
|
Bond-1 |
|
|
Face value |
100 |
|
Coupon (half yearly) |
1.13% |
|
Maturity |
11 |
|
Maturity (half yearly) |
22 |
|
Yield (half yearly) |
1.31% |
|
Valuation of bond |
78.44 |
(Besley and Brigham, 2008)
The current value of the bond is $ 98 which is quite higher than the bond value of the company which is $ 78.44.
The study over current bond value explains that this change have occurred due to changes in the market. The YTM has impacted over the bond valuation. The current price of bond is below par due to various market factors and the bond position in the market.
Share valuation is a process in which the intrinsic value of share is calculated and it is compared with the market value of the bond (Marginson, 2009). This study is comprised to evaluate the position of the bond in the market. Share valuation study has been conducted over Woodside petroleum limited to evaluate the current share position of the company.
|
Required rate of return |
||
|
Risk free rate |
1.25% |
|
|
Expected rate of return on market portfolio |
9.00% |
|
|
systematic risk of common stock |
1.12 |
|
|
Required rate of return |
9.93% |
|
|
calculations: |
||
|
r= R(f)+ beta{E(R(m)-R(f)} |
||
|
Dividend Discount Model |
||
|
Required rate of return |
9.93% |
|
|
Dividend amount |
1.41 |
|
|
growth rate |
5.00% |
|
|
Intrinsic Value |
$ 30.03 |
|
|
Intrinsic value in euro |
€ 24.87 |
|
|
Share Price |
€ 28.83 |
|
|
Undervalued |
||
|
|
||
|
(yahoo Finance, 2018) |
||
The above calculations express that the intrinsic value of the share is Euro 24.87 which is lower than the market price of the company, Euro 28.83. For calculating the share price of the company, dividend discount model has been used. As the current share price of the company is undervalued, so it would be the right time for the investors to buy the shares as in lower price the high worth shares could be bought by the investors now, it would offer great return to the investors in near future.
Free cash flows brief about the total cash inflow of a company (Phillips and Stawarski, 2016). Following is the free cash flow of investment opportunity of Shell:
|
Project A |
|||||||||||||||||||||
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Year 6 |
Year 7 |
Year 8 |
Year 9 |
Year 10 |
Year 11 |
Year 12 |
Year 13 |
Year 14 |
Year 15 |
Year 16 |
Year 17 |
Year 18 |
Year 19 |
Year 20 |
||
|
Initial Outlay |
$ 27,00,00,00,000 |
||||||||||||||||||||
|
Revenues |
$ 3,63,33,00,000 |
$ 3,70,59,66,000 |
$ 3,78,00,85,320 |
$ 3,85,56,87,026 |
$ 3,93,28,00,767 |
$ 4,01,14,56,782 |
$4,09,16,85,918 |
$ 4,17,35,19,636 |
$ 4,25,69,90,029 |
$ 4,34,21,29,830 |
$ 4,42,89,72,426 |
$ 4,51,75,51,875 |
$ 4,60,79,02,912 |
$ 4,70,00,60,970 |
$ 4,79,40,62,190 |
$ 4,88,99,43,434 |
$ 4,98,77,42,302 |
$ 5,08,74,97,148 |
$ 5,18,92,47,091 |
$ 5,29,30,32,033 |
|
|
Expenses |
$ 1,08,99,90,000 |
$ 1,11,17,89,800 |
$ 1,10,00,04,828 |
$ 1,12,20,04,925 |
$ 1,14,44,45,023 |
$ 1,16,73,33,924 |
$1,19,06,80,602 |
$ 1,21,44,94,214 |
$ 1,23,87,84,098 |
$ 1,26,35,59,780 |
$ 1,28,88,30,976 |
$ 1,31,46,07,596 |
$ 1,34,08,99,747 |
$ 1,36,77,17,742 |
$ 1,39,50,72,097 |
$ 1,42,29,73,539 |
$ 1,45,14,33,010 |
$ 1,48,04,61,670 |
$ 1,51,00,70,904 |
$ 1,54,02,72,322 |
|
|
EBDT |
$ 2,54,33,10,000 |
$ 2,59,41,76,200 |
$ 2,68,00,80,492 |
$ 2,73,36,82,102 |
$ 2,78,83,55,744 |
$ 2,84,41,22,859 |
$2,90,10,05,316 |
$ 2,95,90,25,422 |
$ 3,01,82,05,931 |
$ 3,07,85,70,049 |
$ 3,14,01,41,450 |
$ 3,20,29,44,279 |
$ 3,26,70,03,165 |
$ 3,33,23,43,228 |
$ 3,39,89,90,093 |
$ 3,46,69,69,894 |
$ 3,53,63,09,292 |
$ 3,60,70,35,478 |
$ 3,67,91,76,188 |
$ 3,75,27,59,711 |
|
|
Less: Depreciation |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
|
|
EBT |
$ 1,65,41,10,000 |
$ 1,70,49,76,200 |
$ 1,79,08,80,492 |
$ 1,84,44,82,102 |
$ 1,89,91,55,744 |
$ 1,95,49,22,859 |
$2,01,18,05,316 |
$ 2,06,98,25,422 |
$ 2,12,90,05,931 |
$ 2,18,93,70,049 |
$ 2,25,09,41,450 |
$ 2,31,37,44,279 |
$ 2,37,78,03,165 |
$ 2,44,31,43,228 |
$ 2,50,97,90,093 |
$ 2,57,77,69,894 |
$ 2,64,71,09,292 |
$ 2,71,78,35,478 |
$ 2,78,99,76,188 |
$ 2,86,35,59,711 |
|
|
Less: Taxes |
$ 49,62,33,000 |
$ 51,14,92,860 |
$ 53,72,64,148 |
$ 55,33,44,631 |
$ 56,97,46,723 |
$ 58,64,76,858 |
$ 60,35,41,595 |
$ 62,09,47,627 |
$ 63,87,01,779 |
$ 65,68,11,015 |
$ 67,52,82,435 |
$ 69,41,23,284 |
$ 71,33,40,949 |
$ 73,29,42,968 |
$ 75,29,37,028 |
$ 77,33,30,968 |
$ 79,41,32,788 |
$ 81,53,50,643 |
$ 83,69,92,856 |
$ 85,90,67,913 |
|
|
EAT |
$ 1,15,78,77,000 |
$ 1,19,34,83,340 |
$ 1,25,36,16,344 |
$ 1,29,11,37,471 |
$ 1,32,94,09,021 |
$ 1,36,84,46,001 |
$1,40,82,63,721 |
$ 1,44,88,77,795 |
$ 1,49,03,04,151 |
$ 1,53,25,59,034 |
$ 1,57,56,59,015 |
$ 1,61,96,20,995 |
$ 1,66,44,62,215 |
$ 1,71,02,00,260 |
$ 1,75,68,53,065 |
$ 1,80,44,38,926 |
$ 1,85,29,76,505 |
$ 1,90,24,84,835 |
$ 1,95,29,83,331 |
$ 2,00,44,91,798 |
|
|
ADD: Depreciation |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
$ 88,92,00,000 |
|
|
cash inflow |
$ 49,10,21,44,825 |
$ 2,04,70,77,000 |
$ 2,08,26,83,340 |
$ 2,14,28,16,344 |
$ 2,18,03,37,471 |
$ 2,21,86,09,021 |
$ 2,25,76,46,001 |
$2,29,74,63,721 |
$ 2,33,80,77,795 |
$ 2,37,95,04,151 |
$ 2,42,17,59,034 |
$ 2,46,48,59,015 |
$ 2,50,88,20,995 |
$ 2,55,36,62,215 |
$ 2,59,94,00,260 |
$ 2,64,60,53,065 |
$ 2,69,36,38,926 |
$ 2,74,21,76,505 |
$ 2,79,16,84,835 |
$ 2,84,21,83,331 |
$ 2,89,36,91,798 |
|
Total cash flow |
22,10,21,44,825 |
||||||||||||||||||||
The above calculations explain that the total free cash inflow of the project would be 22,10,21,44,825. It explains that the investment opportunity of the company is quite good.
Further, for analyzing the investment opportunity in a better way, NPV has been calculated. Following is the calculations of NPV:
|
Calculation of Net Present Value (5.94%) |
|||||
|
Years |
Cash Outflow |
Cash Inflow |
Factors |
P.V. of Cash Inflow |
P.V. of Cash Outflow |
|
0 |
27,00,00,00,000 |
1 |
0 |
27000000000 |
|
|
1 |
1089990000 |
3633300000 |
0.94393053 |
3429582783 |
1028874835 |
|
2 |
1111789800 |
3705966000 |
0.89100484 |
3302033640 |
990610092 |
|
3 |
1100004828 |
3780085320 |
0.84104667 |
3179228160 |
925155394.6 |
|
4 |
1122004925 |
3855687026 |
0.79388962 |
3060989922 |
890748067.3 |
|
5 |
1144445023 |
3932800767 |
0.74937665 |
2947149066 |
857620378.2 |
|
6 |
1167333924 |
4011456782 |
0.7073595 |
2837542050 |
825724736.4 |
|
7 |
1190680602 |
4091685918 |
0.66769822 |
2732011413 |
795015321.1 |
|
8 |
1214494214 |
4173519636 |
0.63026073 |
2630405551 |
765448015.4 |
|
9 |
1238784098 |
4256990029 |
0.59492235 |
2532578499 |
736980343.3 |
|
10 |
1263559780 |
4342129830 |
0.56156536 |
2438389720 |
709571408.5 |
|
11 |
1288830976 |
4428972426 |
0.53007869 |
2347703903 |
683181835.6 |
|
12 |
1314607596 |
4517551875 |
0.50035746 |
2260390769 |
657773713.8 |
|
13 |
1340899747 |
4607902912 |
0.47230268 |
2176324886 |
633310541.8 |
|
14 |
1367717742 |
4700060970 |
0.44582092 |
2095385486 |
609757176.4 |
|
15 |
1395072097 |
4794062190 |
0.42082397 |
2017456292 |
587079780.9 |
|
16 |
1422973539 |
4889943434 |
0.39722859 |
1942425352 |
565245777.4 |
|
17 |
1451433010 |
4987742302 |
0.3749562 |
1870184877 |
544223799.3 |
|
18 |
1480461670 |
5087497148 |
0.3539326 |
1800631088 |
523983646.6 |
|
19 |
1510070904 |
5189247091 |
0.33408778 |
1733664064 |
504496242.7 |
|
20 |
1540272322 |
5293032033 |
0.31535566 |
1669187602 |
485733592.2 |
|
49003265123 |
41320534698 |
||||
|
Net Present value = Present value of cash inflow- present value of cash outflow |
$ 7,68,27,30,424 |
||||
|
Calculation of Net Present Value (8%) |
|||||
|
Years |
Cash Outflow |
Cash Inflow |
Factors |
P.V. of Cash Inflow |
P.V. of Cash Outflow |
|
0 |
27000000000 |
1 |
0 |
27000000000 |
|
|
1 |
1089990000 |
3633300000 |
0.92592593 |
3364166667 |
1009250000 |
|
2 |
1111789800 |
3705966000 |
0.85733882 |
3177268519 |
953180555.6 |
|
3 |
1100004828 |
3780085320 |
0.79383224 |
3000753601 |
873219297.8 |
|
4 |
1122004925 |
3855687026 |
0.73502985 |
2834045067 |
824707114.6 |
|
5 |
1144445023 |
3932800767 |
0.6805832 |
2676598119 |
778890052.7 |
|
6 |
1167333924 |
4011456782 |
0.63016963 |
2527898224 |
735618383.1 |
|
7 |
1190680602 |
4091685918 |
0.5834904 |
2387459434 |
694750695.2 |
|
8 |
1214494214 |
4173519636 |
0.54026888 |
2254822798 |
656153434.3 |
|
9 |
1238784098 |
4256990029 |
0.50024897 |
2129554865 |
619700465.7 |
|
10 |
1263559780 |
4342129830 |
0.46319349 |
2011246261 |
585272662.1 |
|
11 |
1288830976 |
4428972426 |
0.42888286 |
1899510358 |
552757514.2 |
|
12 |
1314607596 |
4517551875 |
0.39711376 |
1793982005 |
522048763.4 |
|
13 |
1340899747 |
4607902912 |
0.36769792 |
1694316338 |
493046054.3 |
|
14 |
1367717742 |
4700060970 |
0.34046104 |
1600187652 |
465654606.9 |
|
15 |
1395072097 |
4794062190 |
0.3152417 |
1511288338 |
439784906.5 |
|
16 |
1422973539 |
4889943434 |
0.29189047 |
1427327875 |
415352411.7 |
|
17 |
1451433010 |
4987742302 |
0.27026895 |
1348031882 |
392277277.7 |
|
18 |
1480461670 |
5087497148 |
0.25024903 |
1273141222 |
370484095.6 |
|
19 |
1510070904 |
5189247091 |
0.23171206 |
1202411154 |
349901645.8 |
|
20 |
1540272322 |
5293032033 |
0.21454821 |
1135610534 |
330462665.5 |
|
41249620914 |
39062512603 |
||||
|
Net Present value = Present value of cash inflow- present value of cash outflow |
$ 2,18,71,08,312 |
||||
The above calculations express that the investment opportunity of shell is way better because it would offer huge profits to the company in 5.49% as well as 8%. It explains that if the company would invest into this opportunity than $7,68,27,30,424 would be the total profit of the company in case of 5.94% and $2,18,71,08,312 would be the total profit in case of 8% (Moles, Parrino and Kidwekk, 2011). It explains that the both opportunities are good for the company. And company is recommended to invest into this company.
References:
Annual Report. Woodside petroleum limited. Available at https://www.woodside.com.au/Investors-Media/announcements/Documents/01.03.2017%20Annual%20Report%202016.pdf [Accessed on 12th Jan 2018].
Arnold, G., 2013. Corporate financial management. Pearson Higher Ed.
Besley, S. and Brigham, E.F., 2008. Essentials of managerial finance. Thomson South-Western.
Brealey, R., Myers, S.C. and Marcus, A.J., 2007. FundamentalsofCorporate Finance. Mc Graw Hill, New York.
Home. 2018. Woodside petroleum limited. Available at https://www.woodside.com.au/Pages/home.aspx [Accessed on 12th Jan 2018].
Marginson, D.E., 2009. Beyond the budgetary control system: towards a two-tiered process of management control. Management Accounting Research, 10(3), pp.203-230.
Moles, P. Parrino, R and Kidwekk, D,.2011. Corporate finance, European edition, John Wiley &sons, United Kingdom
Nobes, C. and Parker, R.H., 2008. Comparative international accounting. Pearson Education.
Phillips, P.P. and Stawarski, C.A. 2016. Data Collection: Planning for and Collecting All Types of Data. John Wiley & Sons.
Yahoo Finance. 2018. Royal Dutch Shell plc. Available at https://au.finance.yahoo.com/quote/RDSA.AS?p=RDSA.AS [Accessed on 12th Jan 2018].
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My Assignment Help (2020) Woodside Petroleum Limited: Exploration And Manufacturing Essay In Australia. [Online]. Available from: https://myassignmenthelp.com/free-samples/fin203-corporate-finance-for-cash-conversion-cycle-financial-analysis-process
[Accessed 09 May 2024].
My Assignment Help. 'Woodside Petroleum Limited: Exploration And Manufacturing Essay In Australia.' (My Assignment Help, 2020) <https://myassignmenthelp.com/free-samples/fin203-corporate-finance-for-cash-conversion-cycle-financial-analysis-process> accessed 09 May 2024.
My Assignment Help. Woodside Petroleum Limited: Exploration And Manufacturing Essay In Australia. [Internet]. My Assignment Help. 2020 [cited 09 May 2024]. Available from: https://myassignmenthelp.com/free-samples/fin203-corporate-finance-for-cash-conversion-cycle-financial-analysis-process.
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