OT22066 - Interest and Financing

Lending Practice. Cash Flow.

In the oil industry much borrowing is related to expectations of future cash flow. Projections are made to predict cash flow over future years either on a single field basis or on the aggregation of all company interests. Such cash flow models require many assumptions to be made about production profiles, future oil prices, future costs, exchange rates and reservoir behaviour. It is not uncommon to find several parallel models which embrace slightly varying assumptions, particularly as the latter can sometimes be easily changed using computers. Present tax regimes are also built in to obtain the best estimate of future net cash flow. At the simplest level a bank will look to see what margin of cover there is, taking into account all other costs, to meet interest payments and debt repayment. A more sophisticated approach is to discount the future cash flow to get a net present value or a present estimate of the value of future cash flow. This becomes an indication of the value of the project available to support a loan application.

Wood Mackenzie is the most accessible public source of future cash flow models.