VALUATION OF UPSTREAM GAS PROJECT USING DISCOUNTED CASH FLOW, MONTE CARLO SIMULATION, AND SENSITIVITY ANALYSIS (CASE STUDY OF CORAL BLOCK)

• Main Author: V. ANSADHA (NIM 29115495), DAISY
• Format: Theses
• Language: Indonesia
• Online Access: https://digilib.itb.ac.id/gdl/view/26344
• Institution: Institut Teknologi Bandung

This final project in specific case will do analysis project valuation of Coral Block, that currently is in exploration stage, by using methodology quantitative method to calculate project valuation based on cash flow. With the result of financial valuation, it could help management, as decision maker, to determine whether its economically profitable, needs to be executed or not, and to understand what financial factors impacting to Coral Block that need to be maintained to prevent negative financial result and predict success probability of this project. <br /> <br /> Business situation analysis in this final project using: (i) external environment PESTEL, to analyze an important set of external forces; (ii) Oil and Gas Industry: Porter’s 5 Forces Analysis; and (iii) Upstream Oil and Gas Industry in Indonesia which is using Production Sharing Contract (PSC). Upstream oil and gas industry, as investments in general, requires economic indicators of this financial cycle. This final project is using financial valuation calculation for Coral Block through Discounted Cash Flow (DCF), Monte Carlo simulation, and sensitivity analysis. <br /> <br /> For DCF analysis, with discount rate 10%, the Net Present Value (NPV) result is USD 188 million, Internal Rate Return (IRR) is 21.11%, Payback Period in year 2023, or 3 years after production, and Profitability Index is 2.91. It means this project gives positive result more than expected return and feasible to run. <br /> <br /> Monte Carlo simulation was conducted to produce a probability to have positive NPV, in order to facilitate management as decision maker to see the distribution of success rate of the project. Using crystal ball application, using 1000 iteration, and four parameters (production level, commodity price, capital expenditures, and operating expenditures). The result is that Coral Block gas project has certainty 60.63% to get NPV USD 188 million. Minimum NPV result is USD 79 million, while maximum NPV is USD 670 million. <br /> <br /> Sensitivity analysis could look how large NPV project varies if the parameter inputs are changed. With it analysis, it could help to see which parameter that have the most influence of project valuation. Four parameters tested with the assumption change is ±20% from original condition (base case). The sensitivity analysis result for NPV is negative USD 17 million until positive USD 412 million, with IRR from 9% for low case and 35% for the high case. <br /> <br /> Risk mitigation strategy is performed for two most sensitive parameters which are price and production volume. For price, the strategy is oil price hedging, long term gas contract, and fix buyers. While strategy for production volume is implementing updated and affordable technology. <br /> <br /> In summary, the upstream gas project of Coral Block is feasible and expected to be profitable with several predetermined assumptions. This project would be worth for investment since not only give positive return to company, but also it could manage the controllable risk parameters. <br /> <br /> Several implementation plans in the future are mitigating the potential risks,conducting further study to simulate future price volatility, full commitment from management to collaborate with related external parties, forming a special taskforce team from technical and non-technical department in this pre-development stage, preparing sufficient funding to support this project, and project monitoring review every quarter per year to get actual condition of project valuation that will help management to decide the next steps.