What are some factors that should be included in the Qualitative Analysis on the Pipeline transport?

Finance - Practice Case 8 Case (120 minutes) OG Energy Transport Inc. (OG) is a publicly traded oil field service company located in Hardisty, Alberta. OG operates in the oil trucking and oil storage business. David Jackson is the founder and CEO of OG. David feels strongly that aggressive expansion will provide future success for OG. The oil and gas industry is undergoing a long-term shift to pipeline transport, due to lower costs and less exposure to weather events. David has identified a company that is selling its partially constructed pipeline, and his notes regarding the pipeline transportation opportunity are in Appendix I. Dividends have been suspended since 2020 to provide cash to build a new oil storage facility; this has upset some shareholders and led to a decline in share price. Historically, OG paid a consistent dividend, providing shareholders with steady cash flow. It is now February 28, 2023; OG's share price has recovered given the significant improvement in earnings now that its storage facility is operating, and OG is finally in a position to pay a dividend again with the excess cash on hand. The board of directors (the board) has engaged a financial advisory firm, Janzen and Co., to provide advice. You, CPA, are a financial analyst at Janzen and Co. First, you will need to calculate how much excess cash OG has on hand at December 31, 2022, considering the loan covenant requirements. The board has two options for using the excess cash: purchasing the pipeline or paying a dividend. The board would like you to calculate the internal rate of return (IRR) on the pipeline transport opportunity and to discuss any related qualitative considerations. The board would also like you to calculate the dividend yields for each class of shares, assuming all cash is distributed as a dividend (Appendix II). The board would like you to compare the IRR of the pipeline to the dividend yield, discuss other important decision factors between the two options, and recommend which option to pursue. OG's financial statements are provided in Appendix III. In addition, the board would like a separate memo, which will not be shared with David. The board would like you to discuss whether David is acting and advising in line with OG's mission, vision, and values as noted in Appendix IV. It would like you to consider whether David's compensation structure is appropriate and recommend changes as necessary.Appendixl Notes on the EnerLlnk Inc. {EL} pipeline opportunity Background In 2020, EL began construction on a 100-kilometre underground pipeline to link the oilsands in the Viking Basin to Hardisty, Alberta, to provide reliable oil transportation during Alberta's harsh winters. EL was able to construct almost 85% of the pipeline before encountering signicant delays. Due to public opposition by environmental groups. the government ordered a halt to construction until an additional environmental study could be completed. The study was successfully completed in late 2022, but there have been additional delays while EL waits for nal regulatory approval to continue construction. EL has been in breach of its lending covenants for some time and has run out of cash. Therefore. EL's bank is forcing the sale of the pipeline and is accepting bids. While the board is hesitant to pursue another expansion so soon, it will consider submitting a bid for the maximum amount of excess cash available, less any costs to complete construction, if the IRR on the investment is above its hurdle rate of 20%. The oil and gas industry is notoriously cyclical, and the board does not wish to increase OG's leverage. David has heard a rumour that another company is planning to submit a bid for $35 million. Cash ow considerations - Estimated cost to nish the pipeline in 2023, to be paid by the purchaser. is $10 million. . Pipeline will be operational beginning in 2024. a After revenues have stabilized in 2023, the nished pipeline could be sold for eight times the after-tax operating cash flow. Projected revenues . Estimated output is 13,000 barrels per day in 2024. 365 days per year. a 1 barrel of oil is equal to 0.1589?3 cubic metres of oil. . Volume will increase 10% per year until 2023. . 90% of the volume is from long-term contract customers, starting at $12l'cubic metre in 2024. increasing by $1lcubic metre per year to stabilize at $1Blcubic metre in 2028. - Remaining 10% is volume from other customers at $18lcubic metre. . Maximum capacity is 20,000 barrelslday. Appendix I (Continued) Notes on the EnerLlnk Inc. {EL} pipeline opportunity Projected costs Gross margin 95% of revenues Other costs: Labour 6% of revenues Repairs and maintenance 3% of revenues Insurance $500,000 annually Depreciation 5% of total cost of the asset The annual capital cost allowance (CCA) and taxes owing upon sale of the pipeline are as follows: 2024 2025 2026 202? 2028 CCAdeduction $5,94?,272 $3,489,066 $3,209,941 $2,953,146 $2,?'16,894 Tax owing on sale $10,004,009 To be conservative, the board would like you to assume that operating cash ows will be received at the end of each year. Finance Practice Case 8 Case Appendix III 06 Energy Transport Inc. Statement of financial position As at December 31 ('0003) (Audited, prepared in accordance with IFRS} 2022 2021 Assets Current assets Cash and cash equivalents $ 55,103 $ 15,855 Trade and other receivables 107,125 118,203 Inventories (repair parts and fuel) 10,501 13,580 Prepaid expenses 18,335 12,075 Income taxes receivable - 2,857 301,055 153,501 Non-current assets Property, plant, and equipment 1,333,100 1,449,022 Total assets 5 1,634,165 5 1,512,613 Liabilities and equity Current liabilities Accounts payable and accmed liabilities $ 102,874 $ 53,380 Income taxes payable 15,713 - Current portion of long-term debt 00,000 70,000 200,587 133,830 Non-current liabilities Long-term debt (Note 1) 570,000 750,000 Decommissioning obligations 14,790 1,050 Deferred taxes 10, 570 12,850 505,350 773,010 Equity Share capital 143,570 143,570 Contributed surplus 575 575 Retained earnings 584,954 550,528 720 200 704 873 Total liabilities and equity $1,634,165 5 1,512,613 Note 1: Loan covenants: Borrower shall maintain a minimum: 1. current ratio of at least 12 to 1, measured on an annual basis 2. cash balance of $15,000,000 Appendix III (cont) 06 Energy Transport Inc. Statement of profit or loss For the years ended December 31 races) (Audited, prepared in accordance with IFRS} 2022 2021 Revenue $ 959,348 $ 815,345 Direct operating expenses 750,983 51 T138 Selling and administrative expenses 16,4 95 11,218 Operating income before depreciation 191,878 8139? Depreciation of property, plant, and equipment 115,922 86,288 Finance costs 43,?58 4?,258 Other {income} expense i258} i269} Prot (loss) before income taxes 32,448 (45,8?21 Income tax expense (recovery) {Note 1) 8,112 {11,468} Net prot (or loss} S 24,336 5 34.404 Note 1: The corporate income tax rate is 25%