EXECUTIVE SUMMARY

This report evaluated the operating issues, discussed in the order of urgency, facing YJ,
and recommends appropriate actions. It also provides a broader assessment of other
factors that will significantly affect YJ in maintaining its operations and long-term future
plans.
1. Financing the Three Potential Wells
YJ must address first the financing issue of the three potential wells EEE, FFF, and
GGG given the two-week acceptance period. The issue is rooted in how much cash the
company will generate at the time the drilling commences. With the expected 5% price
increase and 30% volume increase in production in CCC, for both oil and gas, there will
be an increase in revenue of 12.79% for 2015. The projected cash balance for the same
period of $70,208,304.00 seems enough for the total cash needs for the wells.
2. Farm-out Offer
The farm-out offer received from LG will provide funds for the drilling costs of GGG. This
would reduce the cash YJ has to generate from operation, debt and equity. LG will be
given a right, but not the obligation to produce the oil of the said field in exchange for an
option payable to date. If GGG has commercial reserves, then LG can extract them
should they wish. But if the GGG proves to be barren of oil and gas, YJ retains the
option payment.
Recommendations for Issues 1 & 2: Using Black Scholes Option Pricing Model, the
call options value of the entire reserve is $12,283,001.00 which is above the $ 10M
option offer. Hence, the option is underpriced by a substantial19%. We recommend that
YJ should not accept the farm-out offer by LG. However, YJ may modify the terms as
follows:
1. Pegging the option payment to its adjusted fair value of around $ 13M.
2. Increasing the penalty for a delayed completion of field testing and confirmation
of reserves to a range of $ 2M to $ 2.5M for every month or partial month.
3. Changing the amounts of tranche releases held in escrow account as follows:
(a) from $ 2M first tranche to $ 5M; (b) from $ 2M second tranche to $ 4M; and
(c) from $6M third tranche to $ 4M once the test drilling is completed and the
extent of any reserves is established.
A conservative decision is based on the assumption that the modified tranches provided
by YJ will not be accepted by LG and test drilling is to be financed through a
combination of cash generated from operations, debt, and equity. The political unrest in
Africa which might affect the oil production in AAA was given attention considering it
strains the cash flows. However, even in the most conservative assumption in AAA, the
company can still pursue the test drill of the three wells.
Therefore, from $ 63M total estimated testing costs, $ 35M should be financed from the
$70,208,304.00 projected cash flow for 2015 before considering the three licenses. The
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remaining $ 28M should come from debt and equity financing. In order to maintain the
companys capital structure, using the debt-equity ratio of 0.54, $ 9.M should be
financed through loans and the $ 18.2M through a 10 is to 1 rights issue with a 48%
discount rate on the current market price. The remainder is to be retained to maintain
the liquidity ratio near the industry average of 1.15.
3. Risk Encountered in AAA Field in Africa
The political unrest due to the attack by the militants in Africa where the AAA field is
located jeopardizes the ability of outsourcer DrillIT to meet its operational and
manpower requirement. It has started to find it difficult both to retain staff and to recruit a
replacement. If not immediately resolved, this issue would eventually lead to a loss of
production and the closure of the AAA site.
Recommendations: YJ should implement a stronger safety precaution system to
reduce the security risk for both the investors interests and the welfare of those under
YJs operation, particularly DrillITs employees and staff. In preparation for
unforeseeable future unrests, close vigilance may also safeguard against such threat.
4. Impact of Greenbies Protest
The protest by the Greenbies Party has resulted in YJ and the industry facing criticisms
for environmental damages. This protest highlighted the peoples concern about the
environmental and health impacts of extractive activities and industrial production.
Recommendations: To reduce societys negative impression on the industry in
general, and improve its image in particular, YJ must initiate efforts to demonstrate
environmental responsibility. YJ should revisit its vision-mission statements and include
therein its commitment to environmental sustainability, and develop and implement strict
environmental policies for the company and subcontractors.
Ethical Issues and Long-Term Plans
As an E&P company, YJ is challenged to meet the global energy demand and yet
maintain its ethical integrity. It is recommended that:
In the irregularities in the control over AAA, YJ should amend its contract with
DrillIT and provide a temporary qualified substitute that would supervise the
operations in AAA. YJ should effectively communicate such irregularities before
the governments visit.
In YJs ethical stance regarding facilitation payments, YJ should publish policies
and procedures that will identify suspicious relationships between government
officials and YJs constituents in dealing with the license applications.
YJ should establish R&D that would study future trends in the industry. This R&D
shall provide new strategies and capabilities for building sustainability of YJ by
keeping them updated on emerging changes.
YJ should embrace new technologies as early as it can to increase its longevity
in the fossil fuel industry and not be left out of the competition.
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