Case 7, group-06

Welcome to Our Presentation

Group-06, Case-07Case Study On:

Saskatchewan Oil and Gas Corporation

Prepared For

M. Sadiqul Islam PhDProfessor

Department of FinanceUniversity of Dhaka

We areGroup- 06

SL.No

NAME ID (BBA) ID (MBA)

01 Mohammad Rabin Islam

16-013 16-623

02 Md. Sanowar Hossain 16-175 16-609

03 Mahabubur Rahman Khan

16-263 16-766

Case Summary: Saskoil was a Crown corporation that was formed in 1973 to

participate in the exploration, development, production and transportation of crude oil and natural gas. Since the company‘s inception, it had been 100 percent owned by the Province of Saskatchewan. As a Crown corporation, Saskoil was regulated by the Saskatchewan Oil and Gas Corporation Act. In terms of oil production, in 1985, Saskoil ranked among the top 20 oil companies in Canada. On the other hand, Government was particularly interested in a program to provide the Saskatchewan people with opportunities to put their considerable savings to work. This huge savings pool provided an opportunity to develop and expand the industrial base in Saskatchewan in an attempt to reduce the significant control from eastern Canada.

SWOT ANALYSIS

Strengthenhanced oil recovery High net earnings and cash flow Integrated operations

Weaknessgovt. objectives must affect the privatization process.priority to the Saskatchewan province people

Opportunitiesless government interventionIncreasing demand of oil alternative sources of energyJoint venture or collaborations

ThreatsEnvironmental issuesHigh volatility in the Industry.Intense competition

SWOT ANALYSIS

Industry Analysis:

Intensity of rivalry among

firm HIGH

Threats of new

entranceHigh

Bargaining power

of suppliers

Low

Threats of substitute

sLow

Bargaining power

of Buyers High

Ratio Analysis:

1980 1981 1982 19830.000.200.400.600.801.001.201.401.60

1.02

0.57

1.431.29

Current Ratio

1980 1981 1982 19830.000.200.400.600.801.001.201.40

0.87

0.45

1.26 1.19

Quick Ratio

Ratio Analysis:

1980 1981 1982 1983

-10%

-5%

0%

5%

10%

15%

20%

25%

6%

-6%

1%

22%

Return on Equity

1980 1981 1982 1983

-5%

0%

5%

10%

15%

20%

3%

-4%

1%

14%

Return of Asset

Ratio Analysis:

1980 1981 1982 1983

-30%-20%-10%

0%10%20%30%40%

Net Profit Margin

Net Profit Margin1980 1981 1982 19830.00

0.050.100.150.200.250.300.350.400.45

Total Asset Turnover

Total Asset Turnover

Ratio Analysis:

1980 1981 1982 19830%5%

10%15%20%25%30%35%40%45%50% 45%

32%25%

18%

Debt to Equity Ratio

1980 1981 1982 19830%5%

10%15%20%25%30%35%40%45%50% 45% 43%

29%34%

Debt to Total Asset

Business Risk:

Variability in EBIT

Particulars 1980 1981 1982 1983Income before income taxes and interest 7469 961 25940 44453 Standard deviation of EBIT 19599.28535Mean EBIT 19705.75Variability in EBIT (CV) 99.46%

Degree Of Operating LeverageYear 1980 1981 1982 1983Degree of Operating leverage -41415% 3549% 231%

Degree Of Financial LeverageYear 1980 1981 1982 1983DFL 1.71 -0.38 1.21 1.08

Interest coverage ratio

Year 1980 1981 1982 1983Interest coverage ratio (TIE) 2.41 0.28 5.70 13.46

Business Risk Cont’d: Business risk refers to uncertainty of operating

income caused by the firm’s industry. Business risk of Saskoil is too high compared to its competitors.

Business Risk High

Bankruptcy Risk Analysis

1980 1981 1982 19830.001.002.003.004.005.006.00

2.18 2.243.52

4.85

Z Score

In 1980 and 1981, the Z score of the Saskoil was 2.18 & 2.24 respectively which was in the “Gray” zone. But in the 1982& 1983, the Z score is higher than 2.99 which is in “Safe” zone

bankruptcy risk of the company

is low

Problem Statement:The main issue is that Govt. wants to privatize the Saskoil and issue IPO and underwriters have to find out the best possible way to issue.

First of all decisions must be made regarding whether to do a primary or secondary share offering? If primary offering is to be done then alternatives are:•Issue 100% common stock.•Issue 100% Treasury bond.•Blended issue of units of preferred share and common share or units of convertible debentures and common shares.

If alternative 3 is taken under consideration then identify:•How many convertible securities and how many shares would constitute a unit?•What would be the price of a unit?

Finally if secondary share offering is done then what portion of ownership the govt. delivers to the public.

Assumptions: Sales growth from 2013 was 12%. Royalties 45% of Sales. Selling, general and administrative

12.32% of sales. Depreciation and amortization 8% Property Plant and Equipment growth

rate 8%. Perpetual growth rate is 2.5% Tax rate is 35%.

WACC-Calculation:Beta 1.14

Excess return on the market 6.40%Cost of equity 17.46%Cost of debt 11%

After tax cost of debt 7.15%

Total equity

141,106

Long term debt

25,000 Debt/Equity 0.18

Weight of equity 84.95%Weight of debt 15.05%

WACC 15.90%Risk premium 2%

Rate taken for forcasting ( WACC) 17.90%

Valuation Of Base Case

Enterprise value 233,690

Cash 16,580

(-) Book value of debt 25,000

Firm equity value 225,270

No of shares outstanding 19611

Per share price 11.49

Terminal growth rate 2.50%WACC 19.41%

Simulation Of Base CaseForecast: Enterprise value

Statistic Forecast values

Trials 10,000

Base Case 266,844

Mean 216,190

Median 214,028

Mode '---

Standard Deviation 52,119

Variance 2,716,364,885

Skewness 0.2064

Kurtosis 3.14

Coeff. of Variation 0.2411

Minimum 37,862

Maximum 454,115

Mean Std. Error 521

Simulation of base caseEnterprise value of Quintiles is most sensitive to royalties and sensitivity ratio is -77%

Most sensiti

ve input

Simulation of base caseForecast: Per share price


Trials 10,000

Base Case 18.31

Mean 14.72

Median 14.57

Mode '---

Standard Deviation 3.69

Variance 13.64

Skewness 0.2064

Kurtosis 3.14


Minimum 2.09

Maximum 31.59

Mean Std. Error 0.04

Simulation of base caseShare Price of Quintiles is most sensitive to Royalties and sensitivity ratio is -70%

Most sensiti

ve input

Simulation Analysis: Alternatives

Here we take 6 different alternatives-1. Alt-1 100% common stock 2. Alt-2 100% Treasury bond 3. Alt-3 70% common stock + 30% convertible

bond

4. Alt-4 40% common stock+ 60% convertible bond

5. Alt-5 40% common stock+ 60% preferred stock 6. Alt-6 80% common stock + 20% preferred stock

ALT-1: 100% common stock

Alternative 1

Fund Required 80000

Floatation Cost 10% 8000

Total Fund 88000No. Of New

Share 5500

WACC for alternative 1

Risk free rate 10.16%Beta 1.22

Excess return on the market 6.40%Cost of equity 17.97%Cost of debt 11%

After tax cost of debt 7.15%Total equity 229,106

Long term debt 25,000 Debt/Equity 0.11


WACC 16.91%

Risk premium 2.50%Rate taken for forecasting ( WACC) 19.41%

ALT-1: 100% common stock Valuation


Cash 16,580





Terminal growth rate 2.50%

WACC 19.41%

ALT-1: 100% common stock Simulation

Forecast: Enterprise value


Trials 10,000

Base Case 233,267

Mean 190,886

Median 189,033

Mode '---


Variance 2,083,029,614

Skewness 0.1936

Kurtosis 3.12


Minimum 33,928

Maximum 396,194

Mean Std. Error 456

ALT-1: 100% common stock Simulatio

nForecast: Per share price


Trials 10,000

Base Case 11.47

Mean 9.3

Median 9.21

Mode '---


Variance 5.42

Skewness 0.1936

Kurtosis 3.12


Minimum 1.3

Maximum 19.77


Alt-2 100% Treasury bond

Alternative 2

Fund Required 90000Floatation Cost

10% 9000

Total Fund 99000Book Value Of

Debt 124000


Risk free rate 10.16%

Beta 1.79

Excess return on the market 6.40%

Cost of equity 21.62%

Cost of debt 11%


Total equity 141,106

Long term debt 124,000

Debt/Equity 0.88

Weight of equity 53.23%

Weight of debt 46.77%

WACC 14.85%

Risk premium 2.5%



Valuation


Cash 16,580






WACC 17.35%


SimulationForecast: Enterprise value


Trials 10,000

Base Case 278,313

Mean 224,704

Median 222,463

Mode '---


Variance 2,913,836,292

Skewness 0.1985

Kurtosis 3.15


Minimum 38,979

Maximum 475,548

Mean Std. Error 540


SimulationForecast: Per share price

StatisticForecast values

Trials 10,000

Base Case 12.11

Mean 8.31

Median 8.15

Mode '---


Variance 14.63

Skewness 0.1985

Kurtosis 3.15


Minimum -4.85

Maximum 26.09


Alt-3 70% common stock + 30% convertible bond

Alternative 3

Fund Required 130000


Total Fund 143000

Share Price 16

No. Of Share In An Unit 50

Debenture Price 100

No. Of Debenture In A Unit 4

1 Unit(50 CS + 4 Convertible Debenture) 1200

No Of Units To Be Issued 119

% Of Share In Total Fund 66.67%

% Of Con. Debenture In Total Fund 33.33%

No. Of New CS 5958.3

Book Value Of Debt 72667



Beta 1.37



Cost of debt 11%




Debt/Equity 0.31



WACC 16.15%

Risk premium 2.5%



Valuation


Cash 16,580



No of shares outstanding 20068.93


no. of units to be issued 119

Per Unit price 1,623


WACC 18.65%




Trials 10,000

Base Case 248,397

Mean 202,279

Median 200,304

Mode '---


Variance 2,345,743,681

Skewness 0.1947

Kurtosis 3.13


Minimum 35,641

Maximum 422,777

Mean Std. Error 484


SimulationForecast: Per Unit price


Trials 10,000

Base Case 1,614

Mean 1,227

Median 1,210

Mode '---

Standard Deviation 406

Variance 165,185

Skewness 0.1947

Kurtosis 3.13


Minimum -172

Maximum 3,077

Mean Std. Error 4

Alt-4 40% common stock+ 60% convertible bond

Alternative 4



Total Fund 143000

Share Price 16


Debenture Price 100

No. Of Debenture In A Unit 7

1 Unit(25 CS + 7 Convertible Debenture) 1100


% Of Share In Total Fund 36.36%

% Of Con. Debenture In Total Fund 63.64%

No. Of New CS 3250

Book Value Of Debt 116000



Beta 1.59



Cost of debt 11%




Debt/Equity 0.60



WACC 15.37%

Risk premium 2.5%



Valuation


Cash 16,580








WACC 17.87%




Trials 10,000

Base Case 265,729

Mean 215,286

Median 213,082

Mode '---


Variance 2,666,864,153

Skewness 0.1966

Kurtosis 3.14


Minimum 37,583

Maximum 453,317

Mean Std. Error 516


SimulationForecast: Per Unit price


Trials 10,000

Base Case 1,279

Mean 891

Median 874

Mode '---


Variance 157,803

Skewness 0.1966

Kurtosis 3.14


Minimum -476

Maximum 2,722

Mean Std. Error 4

Alt-5 40% common stock+ 60% preferred stock

Alternative 5



Total Fund 143000

Common Stock Price 16


Preferred Stock Price 18

No. Of Share In A Unit 50

1 Unit(25 CS + 50 PS) 1300


% Of CS In Total Fund 30.77%

% Of PS In Total Fund 69.23%

No. Of New CS 2750

No. Of New PS 5500

No. Of New Share 8250

WACC for alternative 5Cost of equity 10.18%

Cost of debt 11%




Debt/Equity 0.09



WACC 9.94%

Risk premium 4.00%Rate taken for forcasting ( WACC) 13.94%


Valuation


Cash 16,580








WACC 16.00%



StatisticForecast values

Trials 10,000Base Case 530,814

Mean 411,177Median 405,863Mode '---


Variance10,815,582,7

56Skewness 0.2833Kurtosis 3.22

Coeff. of Variation 0.2529Minimum 68,097Maximum 907,800

Mean Std. Error 1,040


Simulation

Forecast: Per Unit price


Trials 10,000

Base Case 4,749

Mean 3,661

Median 3,613

Mode '---


Variance 893,850

Skewness 0.2833

Kurtosis 3.22


Minimum 543

Maximum 8,176

Mean Std. Error 9

Alt-6 80% common stock + 20% preferred stock

Alternative 6

Fund Required 130000Floatation Cost 10% 13000

Total Fund 143000Common Stock Price 16

No. Of Share In An Unit 60Preferred Stock Price 18No. Of Share In A Unit 201 Unit(60 CS + 20 PS) 1320

No Of Units To Be Issued 108% Of CS In Total Fund 72.73%% Of PS In Total Fund 27.27%

No. Of New CS 6500No. Of New PS 2167


WACC for alternative 6Cost of equity 6.21%Cost of debt 11%

After tax cost of debt 7.15%Total equity 284,106

Long term debt 25,000 Debt/Equity 0.09


WACC 6.28%

Risk premium 4.00%Rate taken for forcasting ( WACC) 10.28%


Valuation


Cash 16,580



No of shares outstanding 22777.67





WACC 15.00%




Trials 10,000

Base Case 266,844

Mean 216,190

Median 214,028

Mode '---


Variance 2,716,364,885

Skewness 0.2064

Kurtosis 3.14


Minimum 37,862

Maximum 454,115

Mean Std. Error 521




Trials 10,000

Base Case 248,397

Mean 202,279

Median 200,304

Mode '---


Variance 2,345,743,681

Skewness 0.1947

Kurtosis 3.13Coeff. of Variation 0.2394

Minimum 35,641

Maximum 422,777

Mean Std. Error 484

Comparison among alternatives

Particulars Enterprise value

Per share price

Unit price WACC CV

100% common stock 233690 11.49 19.41% 0.2508

100% Treasury bond 281046 12.30 17.35% 0.2501

70% common stock + 30% convertible bond 249525

9.64

1,623 18.65% 0.3313

40% common stock+ 60% convertible bond 267754

9.70

1,295 17.87% 0.4457

40% common stock+ 60% preferred stock 321886

14.02

2,850 16.00% 0.2582

80% common stock + 20% preferred stock 358873

15.39

3,235 15.00% 0.2508

Comparison among alternatives

Alt 1 Alt 2 Alt 3 Alt 4 Alt 5 Alt 6

11.49 12.30 9.64 9.70

14.02 15.39

Per share pricePer share price

RECOMMENDATIONAlternative 6

80% common stock + 20% preferred stock


Floatation Cost 10% 13000Total Fund 143000

Common Stock Price 16No. Of Share In An Unit 60Preferred Stock Price 18No. Of Share In A Unit 201 Unit(60 CS + 20 PS) 1320

No Of Units To Be Issued 108% Of CS In Total Fund 72.73%% Of PS In Total Fund 27.27%

No. Of New CS 6500No. Of New PS 2167


Offer priceCommon Stock 16Preferred Stock 18

1 UNIT(Blend of instruments) 1000

Wood Gundy as the lead manager of this privatization should select Alternative 6 which is combination of 80% common stock + 20% preferred stock issue for privatization of Saskoil.

Any Query

Thanks For The Patience

Case 7, group-06

Business

Transcript of Case 7, group-06