Hello,

I've attached two documents; a Word document with the questions and an Excel template for the answers. I have started and completed a little bit of the project.

Thanks!

MINI-CASE CONOCOPHILLIPS GAS ACQUISITION PROJECT ConocoPhillips's (COP) Natural Gas and Gas Products Department (NG&GP) manages all of the company's activities relating to the gathering, purchasing, processing, and sale of natural gas and gas liquids. Chris Simpkins, a recent graduate, was recently hired as a financial analyst to support the NG&GP department. One of Chris's first assignments was to review the projections for a proposed gas purchase project that were made by one of the firm's field engineers. The cash flow projections for the ten-year project are found in Exhibit P3-12.1 (Excel Template) and are based on the following assumptions and projections: The investment required for the project consists of two components: First, there is the cost to lay the natural gas pipeline of $1,200,000. The project is expected to have a ten-year life and is depreciated over seven years using a seven-year modified accelerated cost recovery system (MACRS). Second, the project will require a $145,000 increase in net working capital that is assumed to be recovered at the termination of the project. The well is expected to produce 900,000 cubic feet (900 MCF) per day of natural gas during year 1 and then decline over the remaining nine-year period (365 operating days per year). The natural gas production is expected to decline at a rate of 20% per year after year 1. In addition to the initial expenditures for the pipeline and additional working capital, two more sets of expenses will be incurred. First, a fee consisting of 50% of the wellhead natural gas market price must be paid to the producer. In other words, if the wellhead market price is $6.00 per MCF, 50% (or $3.00 per MCF) is paid to the producer. Second, gas processing and compression costs of $0.65 per MCF will be incurred. There is no salvage value for the equipment at the end of the natural gas lease. The natural gas price at the wellhead is currently $6.00 per MCF. The cost of capital for this project is 15%. ANSWER THE FOLLOWING QUESTIONS: A. What are the NPV and IRR for the proposed project, based on the forecasts made above? Should Chris recommend that the project be undertaken? Explain your answer. What reservations, if any, should Chris have about recommending the project to his boss? B. Perform a sensitivity analysis of the proposed project to determine the impact on NPV and IRR for each of the following scenarios: 1. Best case: a natural gas price of $8.00 and a year 1 production rate of 1,200 MCF per day that declines by 20% per year after that. 2. Most likely case: a natural gas price of $6.00 and a year 1 production rate of 900 MCF per day that declines by 20% per year after that. 3. Worst case: a natural gas price of $3.00 and a year 1 production rate of 700 MCF per day that declines by 20% per year after that. C. Do breakeven sensitivity analysis to find each of the following: 1. Breakeven natural gas price for an NPV = 0 2. Breakeven natural gas volume in year 1 for an NPV = 0 3. Breakeven investment for an NPV = 0 D. Given the results of your risk analysis in parts B and C, would you recommend this project? Explain your answer. PROBLEM 3-12: ConocoPhillips Natural Gas Wellhead Project Given ConocoPhillips's Cost of Capital for project Project life 15.00% 10 years Solution Solution Legend 1. Years Investment Increase in NWC MACRS Depr Rate (7 year) Natural Gas Wellhead Price (per MCF) Volume (MCF/day) Days per year Fee to Producer of Natural Gas Compression & processing costs (per MCF) $ 0 1,200,000 145,000 1 2 3 4 5 6 7 8 9 10 0.1429 6.00 900 365 $3.00 0.65 Cash Flow Calculations Natural Gas Wellhead Price Revenue Lease fee expense Compression & processing costs Depreciation expense Net operating Profit Less: Taxes (40%) Net operating profit after tax (NOPAT) Plus: Depreciation expense Return of net working capital Project Free Cash Flow $ $ $ $ NPV IRR (1,345,000) $ 0.1749 6.00 576 0.1249 6.00 461 0.0893 6.00 369 0.0893 6.00 295 0.0893 6.00 236 0.0445 6.00 189 6.00 151 6.00 121 $3.00 0.65 $3.00 0.65 $3.00 0.65 $3.00 0.65 $3.00 0.65 $3.00 0.65 $3.00 0.65 $3.00 0.65 $3.00 0.65 1,971,000 $ 985,500 213,525 171,480 600,495 $ (240,198) 360,297 $ 171,480 $ 0.2449 6.00 720 1,576,800 $ 788,400 170,820 293,880 323,700 $ (129,480) 194,220 $ 293,880 807,322 $ 403,661 87,460 107,160 209,041 $ (83,616) 125,425 $ 107,160 645,857 $ 322,929 69,968 107,160 145,801 $ (58,320) 87,480 $ 107,160 516,686 $ 258,343 55,974 107,160 95,209 $ (38,083) 57,125 $ 107,160 413,349 $ 206,674 44,779 53,400 108,495 $ (43,398) 65,097 $ 53,400 330,679 $ 165,339 35,824 129,516 $ (51,806) 77,710 $ - 232,585 194,640 164,285 118,497 531,777 $ 488,100 $ 1,261,440 $ 1,009,152 $ 630,720 504,576 136,656 109,325 209,880 149,880 284,184 $ 245,371 $ (113,674) (98,148) 170,510 $ 147,223 $ 209,880 149,880 380,390 280,051 22.43% 2a-c. Scenario Summary Current Values Best Case Most Likely Case Worst Case Changing Cells NG Price Production Rate Result Cells NPV IRR Notes: Current Values column represents values of changing cells at time Scenario Summary Report was created. 3. Breakeven Sensitivity Analsyis Students should use Goal Seek in Excel to answer this question. a. Breakeven nautral gas price for an NPV = 0 b. Breakeven natural gas volume in Year 1 for an NPV = 0 c. Breakeven investment for an NPV = 0 4. Analysis $ 297,103 $ $ $ $ $ 77,710 $ 264,543 132,272 28,659 103,613 (41,445) 62,168 145,000 207,168 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output PROBLEM 3-9: ConocoPhillips Natural Gas Wellhead Project Given Price ConocoPhillips's Cost of Capital for project Project life Solution Solution Legend 1. 0 Investment Increase in NWC MACRS Depr Rate (7 year) Natural Gas Wellhead Price (per MCF) Volume (MCF/day) Days per year Fee to Producer of Natural Gas Compression & processing costs (per MCF) Cash Flow Calculations Natural Gas Wellhead Price Revenue Lease fee expense Compression & processing costs Depreciation expense Net operating Profit Less: Taxes (40%) Net operating profit after tax (NOPAT) Plus: Depreciation expense Return of net working capital Project Free Cash Flow NPV IRR 1 2 0.1429 3 0.2449 0.1749 4 0.1249 Years 5 0.0893 6 0.0893 7 0.0893 8 0.0445 9 10 = Value given in problem = Formula/Calculation/Analysis required = Qualitative analysis or Short answer required = Goal Seek or Solver cell = Crystal Ball Input = Crystal Ball Output Variable Investment WACC Compression and Processing Costs Price 1 Price 2 Volume 1 NWC Volume 2 Volume 3 Price 9 Price 10 Volume 9 Volume 10 Downside $ (419,446) $ (471,471) $ (473,719) $ (536,089) $ (527,951) $ (524,948) $ (498,436) $ (520,201) $ (516,899) $ (510,818) $ (510,372) $ (510,207) $ (509,947) NPV Upside $ (599,257) $ (544,311) $ (544,984) $ (482,614) $ (490,752) $ (493,755) $ (520,267) $ (498,502) $ (501,804) $ (507,885) $ (508,331) $ (508,496) $ (508,756) Range $ 179,810 $ 72,839 $ 71,266 $ 53,474 $ 37,199 $ 31,193 $ 21,832 $ 21,700 $ 15,095 $ 2,933 $ 2,040 $ 1,711 $ 1,190 Downside $ 1,080,000 13.50% 0.59 $2.81 $2.81 810 130,500 648 518 $2.81 $2.81 136 109 Input Upside Base Case $ 1,320,000 $ 1,200,000 16.50% 15.00% 0.72 0.65 $3.43 $3.12 $3.43 $3.12 990 900 159,500 145,000 792 720 634 576 $3.43 $3.12 $3.43 $3.12 166 151 133 121