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OFFSHORE DRILLING INCORPORATED CASE

EXECUTIVE SUMMARY:

According to the case Offshore Drilling Incorporate (ODI), who was in a fixed rate contract
with PEPCO, was looking for the viable options out of the 3 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 3 options were simulated using Monte
Carlo Simulation in Crystal Ball and recommendations have been made for the best option
for ODI.

The recommendations were made taking following criteria under consideration:

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

2. Probability of Expected Present Value of the contract to be positive – Higher the
better
3. Magnitude of Expected Minimum Cash Flow – Higher the better
4. Magnitude of Expected Present Value of the contract – Higher the Better
5. 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)

CONTRACT WITHOUT INSURANCE vs WITH INSURANCE

Based on Appendix 1 and 2 which reports the result of the 2 cases

1. PEPCO’s 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

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denotes the ODI’s ability to pay for its loan from bank. Thus the insurance contract reduces
the risk of the ODI going bankrupt.

APPENDIX-1: PEPCO’s floating day rate contract: (Without Insurance)

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APPENDIX-2: International Insurance quarterly payment (Insurance claim)

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APPENDIX-3: International Insurance quarterly contract with combined cash flows

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CASE-2

APPENDIX-4: International Insurance quarterly contract (Changing target rate)

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CASE-3
APPENDIX-5: International Insurance Yearly contract (Fixed target rate)

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APPENDIX-6: International Insurance quarterly payment (µ: 10% & σ: 55%)

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