Petrolera Zuata, Petrozuata C.A.

Group #14
Anupama Prakash (PGP/17/009)
Anuradha Dhote (PGP/17/010)
Sarika Chauhan (PGP/17/044)
Corporate Finance Option
Total Investment = $ 2,424 Mn
If only CF is used, investment by PDVSA(49.9%) = $ 1,209 Mn

PDVSA had given several guarantees to Petrozuata for payment of project expenses, including unexpected cost overruns, prior to completion
This was the first in a series of future deals to be taken up with foreign Oil & Gas companies, for development of Orinoco basin, hence, it was important
to preserve parents debt capacity and financial flexibility
Under PF, it was decided that 60% of investment would be sourced from debt, hence
Total Equity Investmnt = $ 975 Mn
PDVSAs share(49.9%) = $ 487 Mn

As we can see, with PF, PDVSAs investment is significantly lesser, as compared to its investment obligation with CF this helps to preserve its debt
capacity
Sufficient lender protection was ensured under the PF deal structure by putting a time limit (Dec 2001) on project completion extendable by a finite
time. If this was not met, all debt would become due and payable.
Under PF, PDVSA had the option of getting a higher investment rating for issued bonds, as compared to current country and parent company ratings (B)

There are issues of political risk insurance (PRI) due to which leverage could be costlier, and chances of negative carry due to inflow of large
amounts of funds via bonds at the start. However, as PF maintains financial flexibility of parent company, thus putting it in a better position to
handle future uncertainties, hence, it can be concluded that project financing is a better funding option.
Project Finance Option
CF and PF as alternative financing models
Operating Risks Involved
Pre-completion risk
Chances of cost overrun & ensuring funds for project
expenses
Sponsors- Conoco & Maraven obliged to pay for
project expenses including cost overruns, If any.
Obligations guaranteed by parent companies- DuPont
& PDVSA
Severe penalties if sponsors fail to meet these
obligations
Incentives to make up for the other partys shortfall
Construction All Risk Insurance Policy
Insurance policies to cover physical loss or damage up
to $1.5 Billion
Provision for Contingency in construction budget for
upstream, downstream facilities & payment of
insurance policies
Force Majeure
if the project could not be completed with a specified
period, all debt will become due and payable with
immediate effect
Post-completion risk
Conoco was not liable to purchase the syncrude in
the case of force majeure
High debt service coverage ratio of 1.35X as the
bare minimum requirement
Break even price was kept quite low so that
operating & financing costs can be recovered even if
prices fall to a very low value
Payment through cash waterfall system-
1
st
priority- 90 day operating expense account
2
nd
priority- Projects debt obligations
3
rd
priority: Debt Service reserve account for 6
months
4
th
priority: Equity holders
Political & Economic Risk
Initial Planning to raise debt from commercial banks
and getting loan guarantees & Country Risk
Insurance from agencies like EDC, OPIC & IFC
Tax Rate 34%
Asset Beta 0.6
Leverage 60%
Cost of Debt 10%
Risk free rate (Rf) 5.60%
Market Risk Premium (MRP) 7.00%
Country Risk Premium (CRP) 6.67%
Start-up Premium (SP) 2.10%
Return on assets (rA)
= Rf+A*(MRP)+CRP+SP
18.57%
Expected Return (Equity) =rA+(1-Tc)*(rA-rD)*(D/E)
27.05%
IRR 25.58% ROA 18.57%
Year Equity Cash Flows Equity Value Debt Value D/E Cost of Equity
1996 ($79,035) $79,035 $0 0.00 18.57%
1997 ($1,986) $81,021 1,000,000 $ 12.34 88.38%
1998 ($550,148) $631,169 1,024,299 $ 1.62 27.75%
1999 $1,576 $631,169 1,267,280 $ 2.01 29.93%
2000 $185,047 $631,169 1,450,000 $ 2.30 31.56%
2001 $225,457 $631,169 1,411,111 $ 2.24 31.22%
2002 $233,074 $631,169 1,372,222 $ 2.17 30.87%
2003 $200,600 $631,169 1,333,333 $ 2.11 30.52%
2004 $218,903 $631,169 1,268,856 $ 2.01 29.94%
2005 $203,857 $631,169 1,187,614 $ 1.88 29.21%
2006 $232,620 $631,169 1,086,961 $ 1.72 28.31%
2007 $229,393 $631,169 977,484 $ 1.55 27.33%
2008 $238,588 $631,169 849,556 $ 1.35 26.18%
2009 $226,629 $631,169 755,137 $ 1.20 25.34%
2010 $216,878 $631,169 669,137 $ 1.06 24.57%
2011 $216,655 $631,169 567,137 $ 0.90 23.65%
2012 $262,881 $631,169 449,137 $ 0.71 22.59%
2013 $242,378 $631,169 401,689 $ 0.64 22.17%
2014 $251,988 $631,169 348,241 $ 0.55 21.69%
2015 $260,474 $631,169 252,034 $ 0.40 20.83%
2016 $250,893 $631,169 134,448 $ 0.21 19.77%
2017 $376,215 $631,169 75,000 $ 0.12 19.24%
2018 $320,878 $631,169 75,000 $ 0.12 19.24%
2019 $301,370 $631,169 75,000 $ 0.12 19.24%
2020 $276,398 $631,169 75,000 $ 0.12 19.24%
2021 $292,810 $631,169 75,000 $ 0.12 19.24%
2022 $217,227 $631,169 - $ 0.00 18.57%
2023 $294,578 $631,169 - $ 0.00 18.57%
2024 $289,656 $631,169 - $ 0.00 18.57%
2025 $289,705 $631,169 - $ 0.00 18.57%
2026 $278,074 $631,169 - $ 0.00 18.57%
2027 $276,806 $631,169 - $ 0.00 18.57%
2028 $274,449 $631,169 - $ 0.00 18.57%
2029 $263,604 $631,169 - $ 0.00 18.57%
2030 $247,540 $631,169 - $ 0.00 18.57%
2031 $250,329 $631,169 - $ 0.00 18.57%
2032 $242,937 $631,169 - $ 0.00 18.57%
2033 $240,644 $631,169 - $ 0.00 18.57%
2034 $226,196 $631,169 - $ 0.00 18.57%
Average 24.31%
Project has IRR of 25.58% for 60% leverage but since debt is
being repaid Debt-equity ratio will keep changing.
Cost of equity has been shown for differnent debt-equity
ratios which is very high initially. Average cost of equity
comes to be 24.31% which is below IRR
For Fixed Debt-Equity ratio
60%
Expected Returns
Change in Leverage
At 60% leverage, the equity cash flows are such that

IRR = 26% and Minimum DSCR ratio = 2.08x, against prescribed requirement of 1.35x

For 50% leverage, the advantage of tax shield and lower cost of debt financing reduces. However, the minimum
DSCR increases to 2.68x, while IRR suffers and comes down to 23%

For 70% leverage, greater debt impacts minimum DSCR which comes down to 1.91x, however, IRR increases to
29%, giving the project equity investors substantial returns
Advantages
Flexibility to withdraw as
per requirement, matching
of cash inflows & outflows
Disadvantages
Short Maturities,
restrictive covenants,
small size
Longer Processing Time
Expensive if PRI is required
Advantages
Long Maturities, Fixed
Interest rates, Flexible
covenants, Available in
larger amount
Disadvantages
Can only be raised in lump
sum amount
Results in loss, as funds
can not earn higher return
than cost of borrowing
(Negative Carry)
Advantages
Advantages similar to
Public Bonds
Can be underwritten
within 6 months
Disadvantages
Less liquid as these
can sold back to only
QIBs (Qualified
Institutional Buyers)
Rule 144A market Public Bond Market Bank Debt
Petrolera Zuata should use combination of Bank Debt & Rule 144A market. Since Rule 144A market offers advantages of Public
Bonds, funds can be raised in two or three phases according to funds requirement. At the same time, to ensure liquidity, band
debt can also be taken to make up for the deficit.
Going for all the three option will increase the cost of raising fund with no incremental benefit and it is not possible to raise the
entire amount through one instrument only.
Hence bank debt and Rule 144A bond market will give Petrolera Zuata ease of raising funds for a longer maturity in large
amount & flexibility to withdraw as per fund deficit.
Sources of Debt
Sensitivity Analysis
Crude Oil Prices
Revenue of the project driven by
market price of Maya crude
Historical data shows that price of
Maya crude has been heavily
fluctuating lowest of $8.14 per
barrel recorded around 1986
During the course of project
financing meetings, price of Maya
crude was expected to fall from
$18.62 to $16 per barrel
With DSCR of 1.0 (highest
forecasted debt service), break even
price estimated at $8.63 per barrel
Exchange Rate
Projects topline would be
affected by exchange rate
fluctuations
Revenues are to be earned in
US dollars as against operating
expenses that are to be met
with local currency of bolivar
Appreciation of bolivar to
increase operating expenses,
tax liability, as well as increase
pressure on revenues
Sensitivity analysis can be
done by assuming bolivar to
become overvalued by 20% to
return to PPP
Reserves
Current reserve estimate of
Orinoco belt stands at 21.5
billion barrels
Planned production level is
set at 120000 BPCD
Sensitivity analysis with lower
estimates of reserves will lead
to lower production and
hence lower realized revenues
It will also lead to increased
capital expenditure for
drilling, completion and
related oil-well servicing costs
Impact on projects topline as
well as costs
Sensitivity analysis can also be carried out on other parameters like increased operating costs and substandard upgrader performance.
Lower or pessimistic estimates will tend to increase the minimum DSCR requirement based on which the project would be analysed.
Is Investment Grade Rating Possible?
There are good chances for the project bonds to be rated as investment grade despite PDVSA and Venezuela having sub-
investment grade ratings
Possible reasons for an investment grade rating are
Mitigation of risks through well-planned deal structure that entails high debt coverage ratio requirement, strict break-even
price threshold and waterfall model payment priority
Positive outlook owing to low operating costs of the project as aginst industry standard projects cash operating cost was
$3.19 per barrel as against industry median of $8.55
Involvement of sponsor like Conoco which has huge experience in completing large-scale projects of the same nature and
whose parent, DuPont, has Aa3 and AA- as credit ratings for its long-term senior unsecured debt

Decision to Invest in the Project:
With the given cash flows and leverage of 60%, the project maintains a minimum DSCR of 2.08x, which is greater than
prescribed 1.35x DSR
Conoco, with a guarantee from DuPont had agreed to purchase the first 104,000 BPCD of Petrozuatas syncrude for the
35-yr life of the project, based on market price of Maya crude, while, both the parent companies had agreed to severally
provide funds to Petrozuata to pay project expenses, including cost overruns -> thus with stable revenues and costs,
there are chances of project bonds getting an investment grade rating
Hence, investing Petrozuata bonds seems like a feasible option
Investment in Project Bonds