Project Investment Plan Valuation Using Discounted Cash Flow Analysis (Case Study of LLP Compression Project Investment Plan at Tango Field, Mehacca Block)

Abstract

This article performs a valuation analysis of LLP Compression in project investment plan at Tango Field in Mehacca Block. The LLP Compression investment project plan is currently under consideration for a Final Investment Decision (FID). The analysis is conducted by using quantitative methodology approach to evaluate 2 project scenario based on its cash flow. The outcome of financial valuation could assist decision maker in the company, in determining whether the project is economically profitable, whether it should be executed, what scenario can generate maximum economic profit for the company, and also what financial factor affecting LLP Compression Project cash flow that should be managed to avoid negative financial results and to forecast project likelihood of success. For DCF analysis, with company discount rate at 10.2%, the Net Present Value (NPV) result is 1.12 Million USD for Scenario 1 and 0.91 Million USD for Scenario 2. Internal Rate of Return (IRR) for both scenarios are higher than company’s discount rate. Payback Period for both scenarios are also the same in year 2026, or 2 years after production. Profitability Index (PI) for Scenario 1 is slightly higher than Scenario 1 amounting at 1.07, while PI for scenario 2 is 1.03. All of the parameters from DCF gives positive result more than expected return, with scenario 1 that provide better value than scenario 2. Monte Carlo simulation is also used to provide a likelihood of having a negative NPV. The result is that both scenarios have probability negative NPV amounting 28% for scenario 1 and 30% for scenario 2. Based on Monte Carlo Simulation result, scenario 1 has slightly lower probability of generating negative NPV than Scenario 2. Sensitivity analysis is also being used to look how large NPV project varies if the parameter inputs are changed. Four parameters tested with assumption change at ± 25% from original condition. Based on sensitivity analysis, it is observed that Gas Production, Gas Price are the most sensitive parameter for both scenarios of LLP Compression project. In summary, the LLP Compression Project investment plan is feasible to be executed for both scenarios, with scenario 1 provides higher economic profit than scenario 2, and it also generates slightly lower probability negative NPV than scenario 2. Since LLP Compression Project has probability of gaining negative NPV based on Monte Carlo Simulation Result, hence several strategies to minimize project risk exposure are required to be determined before project execution.