OFFSHORE

DRILLING
INCORPORATED CASE ANALYSIS
DMOP Group Assignment

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EXECUTIVE SUMMARY:
As per the case Offshore Drilling Incorporate (ODI), who was in a fixed rate contract with PEPCO, was
looking for the viable options out of the 6 proposed, to minimize their risk of High Negative Cash Flow
(which could lead to bankruptcy) and making loss due to changing global Crude Oil Prices. The proposed
6 options were simulated using Monte Carlo Simulation in Crystal Ball and recommendations have been
made for the best option for ODI. (Appendix 8)
The recommendations were made taking following criterias under consideration:
1.
2.
3.
4.
5.

Probability of Expected Minimum Cash Flow to be Positive. Higher the better

Probability of Expected Present Value of the contract to be positive Higher the better
Magnitude of Expected Minimum Cash Flow Higher the better
Magnitude of Expected Present Value of the contract Higher the Better
Low Variability i.e. Low Standard Error of Mean for values Lower the better.

For final recommendation all the possible options were ranked as per Rank 1 being best option for ODI
and Rank 7 being the worst. (Appendix 8)

TECHNICAL ANALYSIS:
CONTRACT WITHOUT INSURANCE vs WITH INSURANCE
Based on Appendix 1 and 2 which reports the result of the 2 cases
1. PEPCOs floating day rate contract: (Without Insurance) (Appendix 1)
2. Contracts offered by International Insurance: (With Insurance) (Appendix 2)
Without any doubt ODI should go for the second option i.e. with insurance because of the following reasons:
1. Expected Value of the Contract Payment:
The probability of the Expected value of the contract payment with insurance to be greater than
0 is 100% where as in case of without insurance it is 73.07%
Even the Expected Value for Case 2 is high with less variability (Small Standard Error) than Case
1.
2. Expected value of the Minimum Cash Flow:
The probability of the Expected value of the minimum cash flow with insurance to be greater
than 0 is 100% where as in case of without insurance it is 69.97%
The expected value in Case 2 is positive and has low variability as compared to Case 1 for which
expected value if negative.

Negative value of contract payment implies losses and Negative minimum cash flow denotes the ODIs
ability to pay for its loan from bank. Thus the insurance contract reduces the risk of the ODI going bankrupt.

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SELECTING BEST OPTION AMONG 6 CASES WITH INSURANCE

To get into an insurance plan with the International Insurance, ODI can choose one of the plan among
following 6 possible plans, simulation results of each of them are listed in Appendix 2 to 7.
1. ODI taking claim quarterly with fixed target Price of Oil and using only WTI crude for calculations.
(Appendix 2)
2. ODI taking claim yearly with fixed target Price of Oil and using only WTI crude for calculations.
(Appendix 4)
3. ODI taking claim quarterly with quarterly changing target Price of Oil and using only WTI crude
for calculations. (Appendix 3)
4. ODI taking claim quarterly with fixed target Price of Oil and using WTI crude for PEPCO side
calculation and Brent Crude for Insurance side calculations. (Appendix 6)
5. ODI taking claim Yearly with fixed target Price of Oil and using WTI crude for PEPCO side
calculation and Brent Crude for Insurance side calculations. (Appendix 5)
6. ODI taking claim quarterly with quarterly changing target Price of Oil and using WTI crude for
PEPCO side calculation and Brent Crude for Insurance side calculations. (Appendix 7)

Simulation of each case has been listed down in Appendix 2 7. On the basis of above listed criterias of
analysis the ranking to all the options have been allotted (Appendix 8) with Rank 1 being the best option
and Rank 6 being the worst option. On the basis of analysis following are the two best possible options
for ODI.

1. ODI taking claim quarterly with fixed target Price of Oil and using only WTI crude for calculations.
(Appendix 2)
2. ODI taking claim quarterly with fixed target Price of Oil and using WTI crude for PEPCO side
calculation and Brent Crude for Insurance side calculations. (Appendix 6)

SENSITIVITY ANALYSIS
As the key assumptions concerning the price of oil are variable:
1. mean annual percentage change in price: 10% to +10%
2. standard deviation of the annual percentage change in price: 20% to 60%;
3. For scenarios in which two grades were used, the team would use the same mean and standard
deviation for the spot price of both WTI and Arab Light and vary the correlation between the
returns of WTI and Arab Light between 0.70 and 0.99.
We should carry out a sensitivity analysis to ascertain how much the key results depend on each
assumption and what is the approximate optimum value for the assumed values. Based on the result of
this analysis ODI may negotiate on terms and condition with International Insurance for premium
calculation.
In this we are considering only 2 best cases one of which is using only WTI Crude for calculation and
other which is using WTI crude price for calculating PEPCO side of contract and Brent Crude for
Insurance side calculation.


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As per following analysis for higher value of Mu and Sigma corresponds to better returns for ODI.

As per the following analysis keeping all other variables constant, higher correlated value of the 2 crude
oils gives better return for ODI.

RECOMMENDATIONS:
Thus based on the analysis it is recommended for ODI to pitch for striking contract with International
Insurance keeping following in consideration:
1. Quarterly Claim contract is better than the other two.
2. Among quarterly claim, using WTI crude for all the calculations is better than using both (WTI for
PEPCO side calculation and Brent Crude for Insurance Side Calculation).
3. For Quarterly Claim using only WTI crude prices, a higher value of Mu and Sigma is better thus
contract terms should have some conditions pertaining to this.
4. For Quarterly Claim using both the crude oil prices a high level of correlation is beneficial from
ODIs perspective. Thus, some terms and condition could be included in the contract to minimize
the risk.

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APPENDIX1:PEPCOsfloatingdayratecontract:(WithoutInsurance)

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APPENDIX2:ContractsofferedbyInternationalInsurance,QuarterlyPayment(WTIOnly)

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APPENDIX3:InternationalInsurance,QuarterlyPayment,ChangingTargetRate(WTIOnly)

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APPENDIX4:InternationalInsurance,YearlyPayment,FixedTargetRate(WTIOnly)

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APPENDIX5:InternationalInsurance,YearlyPayment,FixedTargetRate(WTIandBrent)

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APPENDIX6:ContractsofferedbyInternationalInsurance,QuarterlyPayment(WTIandBrent)

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APPENDIX7:InternationalInsurance,QuarterlyPayment,ChangingTargetRate(WTIandBrent)

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APPENDIX8:Analysisofavailableoptions

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APPENDIX9:Case2,Mu=15%,Sigma=25%

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APPENDIX9:Case2,Mu=15%,Sigma=55%

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APPENDIX10:Case6_Mu=15%,Sigma=55%,Correlation=0.75

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APPENDIX11:Case6_Mu=15%,Sigma=55%,Correlation=0.85

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APPENDIX12:Case6_Mu=15%,Sigma=55%,Correlation=0.95

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