Project financing can be discussed as a relevant approach in order to create the value with the focus on minimizing risks and maximizing returns (Key concept overview, 2015). When financing of large projects in the energy industry is developed and implemented appropriately, it is possible to state that project finance mechanisms work to create the value (Simkins and Simkins, 2013).
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The reason is that project financing is an effective tool to address problems associated with taxation, management of risks, and arrangement or regulation of costs among other issues (Simkins and Simkins, 2013, p. 24). In spite of the fact that these factors are often discussed as affecting energy projects negatively, the analysis of principles of project financing demonstrates that it can be used as a value-creation tool even in the context of the mentioned factors (Simkins and Simkins, 2013). Thus, the project financing system allows for creating additional resources in order to address the risks and problematic areas without focusing on debt (Baker, 2015).
From this point, project financing is regarded as not only the value-creation approach but also as the “solution to a very complex contractual design problem” (Simkins and Simkins, 2013, p. 24). When risks are addressed, transactions costs are regulated, the use of imperfect information is avoided, and the capital structure is improved in the context of project financing, it is possible to speak about creating the real value (Simkins and Simkins, 2013, p. 25). Project financing allows for responding to company leaders’ and investors’ interests in terms of addressing typical threats to the financial success in the energy industry.
The impact of financing related to large-scale energy projects on such an aspect as the share price should also be discussed in detail. It is also important to examine the effect of project financing on the cash flow. When project financing is designed successfully, risks are managed, and investors’ losses are minimal, it is possible to expect positive changes in the share price. The reason is in the creation of a situation for predicting positive returns (Abdel-Khalik, 1993). The share price also changes when projects’ returns can cover expenses for addressing sponsors’ interests and expenses planned for further projects (Simkins and Simkins, 2013). Investors become involved in a series of projects, and this situation results in changes in the share price and significant revenues.
Cash flows that are associated with project financing in the energy industry can be high when investors’ returns are also high. This principle can work for the realities of the energy industry because projects are discussed in terms of their attractiveness to sponsors (Johnston and Johnston, 2006). Projects’ cash flows are predicted and analyzed in terms of possibilities for the further growth. Project financing related to the energy industry can create more conditions for attracting investors, and this situation affects cash flows (Simkins and Simkins, 2013). It is important to state that large-scale projects financing has the highest potential effects on positive changes in cash flows because of the involvement of more investors.
Abdel-Khalik, A. (1993) ‘Discussion of financial ratios and corporate endurance: a case of the oil and gas industry’, Contemporary Accounting Research, 9(2), pp. 695-705.
Baker, L. (2015) ‘The evolving role of finance in South Africa’s renewable energy sector’, Geoforum, 64(1), pp. 146-156.
Johnston, D. and Johnston, D. (2006) Introduction to oil company financial analysis. New York: PennWell Books. Key concept overview: considerations in financing large energy projects (2015) Liverpool: Laureate Education, Inc.
Simkins, B. and Simkins, R. (eds.) (2013) Energy finance and economics: analysis and valuation, risk management, and the future of energy. Hoboken: Wiley.