1 for purd2

Hey mate

I didnt end up getting in, just to snowed under with uni and mate just became a dad a couple of months back, so didnt have the time to research it but nice to see you currently riding a winner.
Anyways mate in relation to your question on valuation here is a cut and paste I posted on the oil&gas thread a few months back.
I hope this finds you and your family safe and well and if you get stuck, drop me a mail and I will do my up most to help you out.

PSC unplugged

I have been reading on different threads where companies are drilling in countries that use the PSC system. There seems to be little understanding on exactly how a PSC works, so thought I would go about explaining it.
I will use the Indonesian system in this post and although they change from country to country the changes are not great and generally they all model about the same.

Firstly the main thing to understand is that companies operating in countries that use the PSC system, if that company discovers a commercial oil reserve that oil goes straight back to state and the company in effect becomes a contractor to the state. In other words the company does NOT own the oil the state does.

Because of this, that is the company is at the whim of whatever regime is in at the time, this does put downward pressure on the discount rates when risking.


below is a flow chart that demonstrates how the system works based on a $100 cash flow.

The first thing that gets paid is FTP (First Tranche Petroleum). This kind of sort of works like a royalty in the fact it is paid before any costs can be recovered. The thing that is different though is that it is split between the state and the company.
In the above gross revenue in a particular year is assumed to be $100. FTP is 20 percent of this (that is $20). Under conventional Indonesian PSCs, the contractors' share of FTP is 28.8462 (being the before-tax equivalent of an after tax share of 15 percent when the tax rate is 48 percent). This is equal to $5.77 in this example. This means that the State receives the remainder (that is 71.1538 percent) of FTP. This is equal to $14.23 in the above example.
Derivation of before-tax FTP share
Pre-tax percentage x (1–Tax Rate) = Post-tax percentage
Therefore:- Pre-tax percentage = Post-tax percentage / (1–tax rate)
For example, for a required 15% post-tax contractor share and 48% tax rate, the pre-tax
share would be:-
Pre-tax share = 15% / (1–48%)
= 28.8462%

Cost Recovery

Since we allocated $20 to FTP, the remainder of gross revenue $80 is available for cost recovery. We assume that costs are $10. Because this is less than $80, the costs can be fully recovered in the year (otherwise the costs which could be recovered would be limited to $80 which is effectively the cost recovery ceiling for the year). Therefore $10 is revenue allocated to the contractors to enable it to recover costs.

Profit Oil

The revenue remaining after FTP and cost recovery is $100 less $20 less $10 equals $70. This is so-called Profit Oil. Under conventional Indonesian PSCs, Profit Oil is shared between the State and the contractors such that the contractors receives 28.8462 percent (the same as its share of FTP as described above). This is equal to $20.19 in this example.

Income Tax

In this example, income tax is calculated on the assumption that deductions for tax are equal to costs. Therefore, income tax is calculated as indicated below.
Income tax = 48 percent of ($5.77 for the contractors' share of FTP
plus $10 for cost recovery income
plus $20.19 for the contractors’ share of Profit Oil less $10 for costs)
equals $12.46
The income tax rate might be different under different contracts. For instance, in the most recent contracts, the rate is 44%.

As a simplification, we assume that no bonuses are applicable in this analysis. However, if bonuses were paid, they would be tax deductible.
Note that the income tax referred to in these notes is a composite of company tax (at 35%) and dividend tax (at 20%). The 48% composite tax rate is derived as follows :-
Company tax rate = 35%
Income remaining after company tax = 65%
Dividend tax rate = 20%
Therefore, effective dividend tax = 65% * 20% = 13%
(All profits are deemed to be distributed as dividends)
Therefore, effective total income tax = 35% + 13% = 48%
The total effective income tax rate might be different under different contracts. For instance, in the most recent contracts, the rate is 44%. This is composed of a company tax of 30% and a dividend tax of 20%.

Effect of DMO

Under the DMO provisions, the contractors are obliged to sell to Indonesia a portion of their oil at less than market price. The DMO applies after 5 years from the start of production.

Maximum DMO
In each year after the fifth year of production, the contractors are obliged to sell an amount
of the oil to which they are entitled from FTP and Profit oil. The amount is calculated firstly by calculating the lower of
(a) the total domestic consumption of crude oil in Indonesia divided by the total domestic production of crude oil in Indonesia.
(b) 25%
Currently, the fraction (a) is significantly more than 25%. Therefore, currently the 25% figure applies.
The portion (a) or (b) is multiplied by the contractors’ “entitlement” percentage. The latter is the contractors’ before tax percentage share of profit oil and FTP (28.8462% in this example).
The result is the maximum DMO.

Actual DMO
The actual DMO is the maximum described above or the contractors’ FTP plus Profit Oil whichever is the smaller. If the contractors’ FTP and Profit Oil is less than the maximum, the shortfall cannot be carried forward to the next year.

DMO example calculation
In the example above we assume
(a) that more than five years have passed since the start of production,
(b) the contractors' “entitlement” is 28.8462% and
(c) the DMO price is 15% of market price
Maximum DMO calculation
Gross revenue from oil sales = $100 (assumption)
Oil price = $20.00 per bbl (assumption)
Gross production = 5 MMbbl ($100 / $20 per bbl)
Contractors’ entitlement = 28.8462% (assumption)
Maximum DMO = 25% of “entitlement” (see above)
Maximum DMO = 25% * 28.8462% * 5 MMbbl = 0.3606 MMbbl

So thats a pretty good overview of a PSC. I do have some spreadsheet already to go so those who are keen. If you would like some more info on this subject let me know on which area and I will do my best to get it to you.

Hope you enjoyed

cheers

ciggs