Performance Analysis of Top Oil and Gas Companies Worldwide with reference to Oil Prices. Indrani Hazarika

Transcription

1 Journal of Energy and Economic Development, 1(1), 62-78, August Performance Analysis of Top Oil and Gas Companies Worldwide with reference to Oil Prices Indrani Hazarika Business Faculty, Higher Colleges of Technology; Dubai Women s Campus, UAE indrani.hazarika@hct.ac.ae Abstract Oil and gas industries is one of the largest industries worldwide and is involved in the exploration, extraction, refining, transport and marketing of oil and gas products. The present study has been undertaken to analyze the profitability, liquidity, financial health and efficiency of top five oil and gas companies worldwide based on revenue, net income and market value as per the values stated in the 2014 Financial Times, Global 500 list and principal operations with reference to crude oil prices from 2007 to Simple linear regression analysis has been employed to determine the statistical significance and degree of dependence between fluctuating crude oil prices and financial performance indicators. The present study revealed that fluctuating oil prices do not significantly impact the profitability, liquidity, efficiency and financial health of top oil and gas companies. Keywords: Market Value, Efficiency, Liquidity, Profitability and Fluctuating Introduction: Oil and gas industries is one of the largest industries worldwide and is involved in the exploration, extraction, refining, transport and marketing of oil and gas products. Many industries are heavily dependent on oil and gas products in the form of energy, fuel or raw materials for chemical products. The present study has been undertaken to analyze the financial performance of top five

2 Journal of Energy and Economic Development, 1(1), 62-78, August oil and gas companies based on revenue, net income and market value as per the values stated in the 2014 Financial Times, Global 500 list and principal operations with reference to crude oil prices from 2007 to (Refer Fig1, 2, 3 and 4). Like prices of other commodities the crude oil price experiences wide fluctuations in times of shortage or oversupply. The history of oil prices (Fig 5) dates back to 152 years of economic and political events that shaped the price, wars, economy, domestic policy, OPEC (Organization of Petroleum Exporting Countries) and price controls. Fig Top 10 Oil and Gas Companies Worldwide based on Revenue Revenue in billions in US Dollars Source: Statista: 2015 Fig Top 10 Oil and Gas Companies Worldwide based on Net Income Net Income in billions in US Dollar Source: Statista: 2015 Fig Top 10 Oil and Gas Companies Worldwide based on Market Value

3 Journal of Energy and Economic Development, 1(1), 62-78, August Market Value in billions in US Dollar Source: Statista: 2015 Fig Principal operations of the major oil companies (1,000 b/d) 1000 billion barrel per day 15,000 13,239 10,000 5,000 6,170 5,413 4,303 4,161 0,USA Royal Dutch, Shell, UK Total SA, France Chevron,USA Petroleum Source: OPEC Annual Statistical Bulletin 2014 Fig Trend of Crude Oil Price from 1970 to 2014 US Crude Oil First Purchase Price (Dollars Per Barrel) Source: US Energy Information Administration

4 Journal of Energy and Economic Development, 1(1), 62-78, August Literature Review Strong (1991) considers the world major oil companies and analyses the ability of oil equities portfolios to hedge oil price risk and constructs portfolios aimed at maximizing sensitivity to oil price changes and at diversifying away other risk. Huang et.al (1996) states that at the micro level, changes in the price of oil, a key factor in the production process, affect financial performance or cash flows of firms, in turn influencing firms' dividend payments, retained earnings, and equity prices. Sadorsky (1999) documents the fact that if the volatility of either demand shocks or supply shocks increases, this will yield higher volatility in both aggregate stock market returns and oil prices. Aleisa et al. (2003) also examines the equity returns of firms operating in oil exploration, refinery and marketing. Giovannini, Grasso, Lanza and Manera (2004) investigates the correlations of volatilities in the stock price returns and their determinants for the most important integrated oil companies, namely Bp (BP), Chevron-Texaco (CVX), Eni (ENI), - (XOM), Royal Dutch (RD) and Total-Fina Elf (TFE). They measure the actual co-risk in stock returns and their determinants within and between the different oil companies. Hammoudeh et al. (2004) use univariate and multivariate GARCH to examine volatility persistence in the crude oil market and its effect on the equity return volatility of the S&P oil sector indices. Lanza et al. (2004) investigates the correlations of volatilities in the stock price returns and their determinants for the most important integrated oil companies. Boyer and Filion (2007) analyze the factors that explain the Canadian oil and gas company stock returns. Kilian and Park (2009) examines the different shocks' impact on the U.S. stock market. Elyasini, Mansur, Odusami (2011) examine the impact of changes in the oil returns and oil return volatility on excess stock returns and return volatilities of thirteen U.S. industries using the GARCH (1,1) technique. They find strong evidence in support of the view that oil price fluctuations constitute a systematic asset price risk at the

5 Journal of Energy and Economic Development, 1(1), 62-78, August industry level as nine of the thirteen sectors analyzed includes oil related industry (Oil Extraction and Petroleum Refinery) which shows statistically significant relationships between oil-futures return distribution and industry excess return. Ready (2013) develops a novel method for classifying oil price changes as supply or demand driven and documents several new facts about the relation between oil prices and stock returns. 2. Research Objective: The present study is undertaken to analyze the financial performance in terms of profitability, efficiency, liquidity and financial health of top five oil and gas companies worldwide based on revenues, net income, market value and principal operations with reference to crude oil prices. 3. Financial Performance Indicators: The following ratios have been analyzed with reference to the top oil and gas companies worldwide from 2007 to (Refer Table I) 3.1 Profitability Ratios- A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time Return on Assets (ROA) - ROA gives an idea as to how efficient management is at using its assets to generate earning (Ref Fig 6 and Appendix I) Return on Equity (ROE) - ROE measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested (Ref Fig 7 and Appendix II) Return on Capital (ROC): ROC measures the return that an investment generates for capital contributors, i.e. bondholders and stockholders. (Ref Appendix III) 3.2 Efficiency Ratio: Efficiency Ratios are used to analyze how well a company uses its assets and liabilities internally.

6 Journal of Energy and Economic Development, 1(1), 62-78, August Asset Turnover Ratio (ATR): The Asset Turnover ratio is an indicator of the efficiency with which a company is deploying its assets and a higher ratio is recommended (Refer Appendix IV) Inventory Turnover Ratios (ITR): The inventory turnover ratio is a common measure of the firm s operational efficiency in the management of its asset. (Refer Appendix V) Receivables Turnover Ratios (RTR): Accounts receivable turnover ratio is an efficiency measurement that helps management analyze its receivable. A low turnover ratio represents an opportunity to collect excessively old accounts receivable that are unnecessarily tying up working capital. (Refer Appendix VI). 3.3 Liquidity Ratio (LR): Liquidity ratios are the ratios that measure the ability of a company to meet its short term debt obligations Current Ratio (CER): The current ratio is a liquidity and efficiency ratio that measures a firm's ability to pay off its short-term liabilities with its current assets. A current ratio between 1 and 1.5 is considered standard. (Refer Appendix VII) Debt Equity Ratio (DER): The debt-to-equity ratio is a financial ratio indicating the relative proportion of shareholders' equity and debt used to finance a company's assets. A ratio of 0.3 or lower is considered healthy by many analysts. (Refer Appendix VIII) 3.5 First purchase price: The price for domestic crude oil reported by the company that owns the crude oil the first time it is removed from the lease boundary

7 Journal of Energy and Economic Development, 1(1), 62-78, August Table 1 Ranking based on Financial Performance Indicators Ranks ROA ROE ROC ATR CER DER I Sinopec Gazprom BP II Chevron Chevron Chevron Chevron Petro III Gazprom RDS RDS RDS BP Gazprom IV Petro Gazprom Gazprom BP RDS RDS V RDS BP Petro Chevron Chevron VI BP Petro BP Petro Petro VII Sinopec Sinopec Sinopec Gazprom Sinopec Sinopec Fig.6 Average Return on Assets of Top Oil and Gas Companies Average ROA in Percentage 15.00% 10.00% 5.00% 0.00% 5.75% Petroleum 10.98% 10.06% 7.30% Chevron Gazprom Royal Dutch 0.81% Sinopec 12.74% 8.18% Petro

8 Journal of Energy and Economic Development, 1(1), 62-78, August Fig.7 Average Return on Equity of Top Oil and Gas Companies 30.00% 20.00% 14.59% 19.70% 15.13% 15.44% 25.88% 13.83% 10.00% 0.00% Petroleum Chevron Gazprom Royal Dutch 2.04% Sinopec Petro 4. Research Methodology: The study is based on the financial performance of top 5 oil and gas companies worldwide based on revenue, net income and market value with reference to profitability, efficiency, financial health and liquidity from 2007 to 2014 considering global crisis and post global crisis period. The present study also analyses the impact of U.S. crude oil First Purchase Price (Dollars per Barrel) on performance indicators. 4.1 Research Questions: The research question addressed in the present study is whether fluctuating oil prices impact the profitability, efficiency, liquidity and financial health of top oil and gas companies worldwide. 4.2 Sample Design: For the present study financial data of the top oil and gas companies worldwide namely Petroleum, Chevron,, Royal Dutch Shell, Gazprom, Sinopec and Petro has been collected from the company websites, annual reports and Morning Star, Inc ( The crude oil price has been collected from the Independent Data Analysis of U.S. Energy Information Administration Data Analysis: The financial data of the oil and gas companies has been analyzed with the help of Data Analysis in Excel using Significance F and R square in simple regression analysis

9 Journal of Energy and Economic Development, 1(1), 62-78, August where the independent variable is the crude oil price and financial performance indicators are dependent variables. The following model is repeatedly used for the study to establish the relation between the dependent variables and single independent variable for five observations in the oil and gas companies. Equation: Y = β0 + β1x1 + µ where β0 is the intercept and independent variable X is the crude oil price and dependent variable Y represents the financial indicators: ATR, ITR, RTR, DER and ROA and µ represent the estimated standard deviation of the error term µ. 5. Findings: The correlation coefficient as shown in Table II between the independent variable crude oil and dependent variables for oil and gas companies worldwide are all less than 0.5 except for the efficiency ratios in Petroleum, Royal Dutch Shell, Gazprom, Petro and Sinopec Regression Output: The regression results in Table III shows that R Squared is less than 0.2 (95% Confidence Level) for all dependent variables except for the efficiency ratios of Petroleum, Royal Dutch Shell, Petro and Sinopec where the value of p is equal or less than 0.05 which is statistically significant. Around 60 % changes in the efficiency ratios of these companies are brought by the independent variable. Existing literature on oil price shocks and returns states that there is no evidence of the oil price risk in the U.S. and Japan, Hamao (1988). Huang et al. (1996) find evidence that oil futures returns positively lead individual oil company and petroleum industry stock returns. Giovannini,, Grasso, Lanza and Manera (2004) found that the correlation of shocks to the volatilities in STOCK equations are the highest for Petroleum, Chevron,, Total Fina and Royal Dutch Shell. Boyer and Fillion (2007) states that stock returns of Canadian oil and gas companies

10 Journal of Energy and Economic Development, 1(1), 62-78, August are sensitive to five market based and fundamental factors and one of the market based factors is the oil prices. Overall they find that Canadian oil and gas company stock returns are positively associated with the appreciation of crude oil and natural gas prices. Conclusion: The present study analyzed the financial data with reference to profitability, liquidity, financial health and efficiency of top oil and gas worldwide companies based on market value, net income and revenue. Existing literature on oil and gas companies find that stock prices are positively associated with the appreciation of crude oil prices. But in the present study it is revealed that fluctuating oil prices do not significantly impact the profitability, liquidity, efficiency and financial health of top oil and gas companies. Table 1I Correlation Coefficient between crude oil price and Financial Performance Indicators Name of ROA ROE ROC ATO ITO ART CR DER Company Petroleum Chevron Gazprom NA Royal Dutch Shell Sinopec Petro

11 Journal of Energy and Economic Development, 1(1), 62-78, August Table III Regression Results between crude oil price and Financial Performance Indicator Oil ATR ITR RTR DER ROA Company R 2 p R 2 p R 2 P R 2 p R 2 p BP Chevron Gazprom NA NA Royal Dutch Shell Sinopec Petro References: Aleisa, E., Dibooglu, S., & Hammoudeh, S. (2003). Relationships among U.S. oil prices and oil industry equity indices. International Review of Economics and Finance, 15, Boyer, M., & Filion, D. (2007). Common and fundamental factors in stock returns of Canadian oil and gas companies. Energy Economics, Giovannini, M., Grasso, M., Lanza, A., & Manera, M. (April 2004). Conditional Correlation in the Returns on Oil Companies Stock Prices and their Determinants. International Energy Markets. Hamao, Y. (1988). An empirical examination of the arbitrage pricing theory using Japanese Data. Japan and the World Economy, 1, Hammoudeh, S., Dibooglu, S., & Aleisa, E. (2004). Relationships among US oil prices and oil industry equity indices. International Review of Economics and Finance, 13, Huang, R., Masulis, R., & Stoll, H. (1996). Energy shocks and financial markets. Journal of Futures Market, 16, Kilian, L., & Park, C. (2009). The impact of oil prices shocks and the US stock market. 50(4), Lanza, A., Manera, M., Grasso, M., & Giovannini, M. (2004). Long run models of oil stock prices. Environmental Modelling and Software, forthcoming.

12 Journal of Energy and Economic Development, 1(1), 62-78, August Sadorsky, P. (1999). Oil prices shocks and the stock market activity. Energy Economics, 21, Sadorsky, P. (2001). Risk factors in stock returns of Canadian oil and gas companies. Energy Economics, 23, Strong, J. (1991). Using oil share portfolios to hedge oil price risk. Quarterly Review of Economics and Business, 31, Appendixes: Appendix 1 Return on Assets of the Top Oil and Gas Companies world wide Year Petroleum Chevron Gazprom Royal Dutch Sinopec Petro % 13.28% 10.30% 12.41% 5.71% 17.61% 15.09% % 15.44% 10.64% 9.52% % 19.24% 10.15% % 6.44% 10.04% 4.36% 5.54% 8.36% 7.82% % 10.89% 11.01% 6.55% 9.48% 11.37% 9.01% % 13.64% 12.98% 9.26% 3.23% 12.96% 7.44% % 11.83% 10.30% 7.54% -4.55% 13.50% 5.64% % 8.88% 8.93% 4.56% 5.62% 9.57% 5.75% % 7.40% 6.29% 4.19% 3.20% 9.34% 4.57% Average 5.75% 10.98% 10.06% 7.30% 0.81% 12.74% 8.18% Appendix II Return on Equity of the Top Oil and Gas Companies world wide YEAR Petroleum Chevron Gazprom Royal Dutch Sinopec Petro % 25.60% 15.39% 27.28% 8.26% 34.47% 22.08% % 29.23% 17.37% 20.92% % 38.53% 15.01% % 11.74% 15.70% 9.49% 11.16% 17.25% 12.62% % 19.31% 16.73% 14.15% 17.02% 23.67% 15.68% % 23.75% 19.06% 19.47% 5.39% 27.26% 13.70% % 20.30% 14.92% 14.86% -9% 28.03% 11.16% % 15% 12.86% 8.88% 12.17% 19.17% 11.18% % 12.65% 9.03% 8.45% 7.84% 18.67% 9.20% Average 14.59% 19.70% 15.13% 15.44% 2.04% 25.88% 13.83% Appendix III

13 Journal of Energy and Economic Development, 1(1), 62-78, August Return on Capital of the Top Oil and Gas Companies world wide YEAR Royal Sinopec Petro Petroleum Chevron Gazprom Dutch % 23.05% 13.22% 24.05% 7.40% 32.24% 20.30% % 26.61% 13.78% 18.53% % 35.99% 13.56% % 10.61% 13% 7.98% 7.92% 16.19% 10.52% % 17.40% 13.76% 11.46% 13.17% 21.72% 12.29% % 21.68% 16.09% 16.01% 4.89% 24.74% 11.07% % 18.68% 12.83% 12.72% -4.86% 25.84% 9.10% % 13.46% 11.16% 7.46% 8.83% 17.42% 9.40% % 10.92% 11.14% 7.36% 5.49% 16.34% 5.99% Average 11.33% 17.88% 13.12% 13.2% 2.39% 23.81% 11.53% YEAR Appendix IV Asset Turnover Ratio of the Top Oil and Gas Companies world wide Petroleum Chevron Gazprom Royal Dutch Sinopec Petro Average

14 Journal of Energy and Economic Development, 1(1), 62-78, August Appendix V Inventory Turnover Ratio of the Top Oil and Gas Companies world wide YEAR Petroleum Chevron Gazprom Royal Dutch Sinopec Petro Average Appendix VI Receivable Turnover Ratio of the Top Oil and Gas Companies world wide YEAR Petroleum Chevron Gazprom Royal Dutch Petro Sinopec Average

15 Journal of Energy and Economic Development, 1(1), 62-78, August YEAR Appendix VII: Current Ratio of the Top Oil and Gas Companies world wide Petroleum Chevron Gazprom Royal Dutch Sinopec Petro Average YEAR Appendix VIII Debt Equity Ratio of the Top Oil and Gas Companies world wide Petroleum Chevron Gazprom Royal Dutch Sinopec Petro Average Biography and Author Information Name: Dr. Indrani Hazarika Educational Background Doctor of Philosophy: Obtained Ph.D in the area of taxation from Gauhati University, Guwahati, India in 2003.

16 Journal of Energy and Economic Development, 1(1), 62-78, August Thesis titled An analytical study on the flexibility of Indian Tax Structure with special reference to Direct Tax Master Degree: Discipline Commerce with specialization in Finance, Accountancy and Taxation from Gauhati University, Guwahati in Major Field of Study:- Accounting and Finance Professional Qualification Qualified as a Chartered Accountant from The Institute of Chartered Accountants of India in 2006 Obtained the IFRS Certification from ICAI in Presently undergoing SAP Certification She is currently working as a BUSINESS FACULTY at Higher Colleges of Technology (HCT), Dubai Women s Campus and she is also the Chair of Accounting Curriculum Committee at HCT. Prior to joining at HCT she was the MANAGER Training and Research in Dubai Gold and Commodities Exchange. Before relocating to Dubai she served as a FACULTY of MBA, BBA & Commerce in JVIMS, Jamnagar, Gujarat, India from 1999 to 2006 and was also a visiting faculty at All India Management Association (AIMA), Jamnagar Centre. Prior to joining Gauhati Commerce College as a LECTURER she was a Research Scholar in Gauhati University, to carry out her research work and received UGC grant for doing research. Few of her publications include [1] Performance Metrics versus Wealth Metrics of Dubai Telecommunication Sector at 23 rd IBIMA Conference-Vision 2020: Sustainable Growth, Economic Development, and Global Competitiveness ISBN , May 2014, [2] Can the Method of Levy, Assessment and Collection of Tax Deter Tax Evasion? Shadow 2009 / The Shadow economy, Tax Evasion and Social Norms International Conference July 23 26, 2009 University of Muenster, Germany Conference Proceedings, [3] Corporate Social Responsibility: - An inevitable tool for business sustainability and growth Business Assam Quarterly Journal of Assam Chambers of Commerce (India) April Her current and previous research interests include Oil Prices causes and effects on Airline Industry and Oil Companies, IFRS, Audit Reengineering, Profitability Analysis of Banks, Revenue Recognition Principles with

17 Journal of Energy and Economic Development, 1(1), 62-78, August reference to Real Estate Companies, Fair Value Accounting, Tax Evasion, Financial Reporting, Earnings Quality, Cost Control and Cost Reduction, EVA and MVA. CA, Dr. Indrani Hazarika is a member of the following [1] Institute of Chartered Accountants of India and Dubai Chapter [2] Member of the review committee of IBIMA (International Business Information Management Association) [3] Member of the review committee of the Asia Pacific Studies Journal Award Distinction and Fellowships Awarded Gold Medal for securing 1 st position in the University in Master Degree in Commerce Awarded Junior Research Fellowship (JRF) by University Grants Commission (Supreme body for management of Indian Universities) on the basis of National Eligibility Test for carrying out Research Work and Lectureship