Case Studies

Case Study 3 - Oil and Gas strategic review and valuations exercise

Industry: Oil and Gas trading and logistics company

Client: Well established publicly listed company in the Middle East.

Objective:

• To value the company and its investments to confirm the long term holding
.. value for investors
• To assist the company in raising capital on the stock exchange
.. and from private investors for further development in a new logistics venture.
• To identify strategic opportunities to improve synergies and leverage
.. on physical asset investments globally.

Results:

The company was established some 30 years ago based on the trading skills of the executive directors of the company, all oil and gas veterans. The company had previously raised finances some years ago, and was focussed on further down stream acquisitions and a new direction to complement the already substantial asset portfolio it held in physical storage, pipelines and shipping. In addition, the long term shareholders needed to see a confirmation of their long term holding of shares, as many of the investments had not paid dividends over the course of the investments, as the company had reinvested the revenues in expansion of existing capacity.

The client engaged us as independent consultants to address their concerns in a major independent valuation exercise as well as a strategic review of their operations, both at holding company level as well as at the level of individual strategic investments.

Based on structured strategic interviews with senior executives, review of strategic documents and site visits, we developed an understanding of key drivers, both supply and demand driven, as well as operational parameters, resulting in a comprehensive SWOT analysis. In addition, we developed a view, based on analytical comparisons between expected and targeted Key Performance Indicators on the one hand and actual results on the other, on whether the synergies expected to result from interaction between trading activities and other services (storage, shipping) were actually achieved and were in fact measurable.

We were able to identify real value in the long term investments although it was clear that such returns were variable and not always achieving benchmarks. Valuations were based on a DCF basis, using company business plans and inputs from investee company management, as well as detailed discount factor calculations based on our knowledge of the business and industry sector. This resulted in a value per share substantially higher than the listed share price on the national stock exchange.

Other matters we identified during the writing of the strategic review and the development of valuation reports were as follows:

Need to differentiate risk factors according to geographic location. The client used a common standard benchmark of 15% regardless of the geographic location and respective country risks. We were able to demonstrate, using international risk ratings as well as our own algorithms, that many country risk ratings were considerably higher than the 15% benchmark set by the company.

Need to monitor performance based on realistic KPI. A number of investments were trading driven, to increase volumes, without clear feasibility studies having been completed and approved by the Board. In addition, subsequently, there was no active and effective monitoring of the performance of assets and investments, to take account of the expected synergies between trading and marketing activities related to operating the storage locations, pipelines and other assets.

The client accepted the strategic recommendations, which included, inter alia, the need to implement a comprehensive risk management framework, a detailed strategic plan for the next 3 - 5 years, and the requirement to strengthen internal controls to ensure benchmarks and KPIs were set in formal feasibility studies and regularly monitored subsequently.

Lesson learnt:

The interaction between valuations and strategic consulting, which leads to a much deeper insight into client operations and the identification of hidden values, for the benefit of shareholders, by improving performance.

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