Petrozuata Questions - SPR_2015 (1)

Advanced Corporate Finance Taylor Begley Spring 2015

Case Study Questions Petrolera Zuata, Petrozuata C.A.

Petrolera Zuata, Petrozuata C.A. (Petrozuata) is a proposed $2.4 billion oil field development project in Venezuela. The case is set in January 1997 as the project sponsors, Conoco (a DuPont subsidiary) and Maraven (a PDVSA subsidiary), are planning to meet with various development agencies in Washington D.C. and rating agencies in New York city regarding the proposed financial structure. The key questions facing the sponsors is whether the project will achieve an investment grade rating and, if not, how to finance the deal so that it remains economically and operationally attractive.

1. How should PDVSA finance the development of the Orinoco Basin? What are the costs and benefits of using project finance instead of traditional internal debt finance? Does project finance increase the total debt capacity of PDVSA? Does project finance lower the overall cost of capital to PDVSA? 2. What are Petrozuata’s three or four most important risks? How does the deal structure address these risks? Who would bear these risks if the project were financed internally by PDVSA instead? 3. Look at the “Petrozuata model” spreadsheet in portal. As currently envisioned, debt will comprise 60% of the funds needed for the project. Would you recommend a higher or lower leverage ratio? What happens to the minimum debt service coverage ratio and internal rate of return on equity (IRR) as project leverage increases to 70% of project funds? Decrease to 50%? 4. What is unsatisfactory in the valuation used in the spreadsheet? What do you think of the cost of capital methodology used by Petrozuata planning team? Try to build your own valuation model, searching for assumptions you did not like. 5. What kind of debt (agency debt, bank debt, or Rule 144A bonds) should the sponsors use to fund the deal? What are the advantages and disadvantages of each kind of debt? 6. Will the project bonds receive an investment grade rating? What is the “weakest link” in the project? 7. What kind of sensitivity analysis would you do to verify the projects’ economics?