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RESEARCH REPORT " MUHAMMAD FASIH KHAN
Pakistan Petroleum LimitedRESEARCH AND ANALYSIS PROJECT NAME: MUHAMMAD FASIH KHANACCA REGISTRATION#: 2096261WORD COUNT: 7849MENTOR: TAHIR SARTAJ
Pakistan Petroleum Limited
RESEARCH AND ANALYSIS PROJECT
NAME: MUHAMMAD FASIH KHAN
ACCA REGISTRATION#: 2096261
WORD COUNT: 7849
MENTOR: TAHIR SARTAJ
INTRODUCTION
I have selected Topic 8: "The business and financial performance of an organization over a three year period", for my Oxford Brookes university research and analysis project, and have chosen Pakistan Petroleum Limited as an organization for this research.
Reasons For Choosing The Topic:
Learning and researching the business and financial aspects of organizations had always been my area of interest since I entered into the accountancy profession, and hopefully it would be a step ahead towards my career. So by selecting this topic I expect to enhance my skills and knowledge in this area which could ultimately help me to achieve my objective.
Furthermore studying with ACCA had allowed me to learn a lot of business models and analyze several financial performance indicators, so by choosing this topic I had an opportunity to practically apply what I have learned.
Reasons For Choosing Pakistan Petroleum Limited (P.P.L.):
Pakistan Petroleum limited is a very large company with several large scale operations spread throughout the country, so researching on such a huge and well managed company would help me to learn a lot and make me able to manage complex situations.
PPL's annual report of 2009 has been awarded the "Best corporate Report" title (PPL Annual Report, 2011). So this indicates that the information provided in its financial statements are very reliable and helpful, thus resolving the issue of reliable information to some extent.
Oil and Gas sector had been a very critical sector for Pakistan and PPL has been a major contributor to this sector, so by choosing PPL I would be able to grasp knowledge and understanding of this critical sector, which is also my area of Interest.
About Pakistan Petroleum Limited:
Pakistan Petroleum limited was formed in June 1950 as a public limited company. Its major shareholder at that time was Burmah Oil Company (B.O.C) a UK based organization. B.O.C withdrew its investment from PPL in September 1997 by selling its holding in PPL to the Government of Pakistan.
(Pakistan Petroleum Limited, 2012)
Currently the pattern of holding of PPL's shares is as under:
(Pakistan Petroleum Limited, 2012)
PPL main activity includes production of Natural Gas, Crude oil, Natural gas liquid and Liquefied petroleum gas.
PPL has been one of the largest natural gas supplier of Pakistan. It contributes around 24 percent of the country's natural gas supplies.
(PPL Annual Report, 2012)
PPL Sales summary (location wise):
A concise summary of the revenue generated from different locations by PPL is as under:
(PPL Annual Report, 2011)
INDUSTRY ANALYSIS:
Oil and gas industry is the core focus of this research project. Oil and gas is a very critical sector for any country's economy. It is one of the major sources of energy which is desperately needed in every area of economic activity. Recently Pakistan has been facing a major energy crisis and to overcome this it has been introducing several economic policies in the oil and gas sector to make it perform efficiently and effectively.
The Major companies involved in the oil and gas exploration sector in Pakistan includes Oil and gas development company (O.G.D.C), Pakistan Petroleum limited (P.P.L), MOL etc.
It has been a highly regulated sector in Pakistan and separate regulator named O.G.R.A. (Oil and Gas regulatory Authority) is in place to regulate this sector and protect the interest of all the stakeholders which includes consumers, investors and the government.
Oil and gas has been a very high revenue generating sector for the Government of Pakistan, which is evident from the recent expectations of the Government to collect around Rs. 590 billion revenue from this sector in the next fiscal year.
(Khaleeq Kiani, 2012)
OBJECTIVES OF R.A.P:
Following are the objectives of this research and analysis project:
To perform a financial analysis of Pakistan Petroleum limited for three years by using different financial techniques.
To perform business analysis of Pakistan Petroleum limited by using different models like PEST and SWOT.
To analyze and review the policies and practices of Pakistan Petroleum limited in response to its corporate social responsibilities.
To analyze the performance of Oil and gas development company(O.G.D.C) to provide it as a comparison against PPL
R.A.P FRAMEWORK:
This research and analysis project has been cover folded in many different steps. First of all a comprehensive introduction and analysis of the whole Oil and gas industry in Pakistan has been performed and provided for to gain an understanding of the environment in which PPL operates.
Moving forward in the project a need to identify the Objectives of this project has been spotted and has been provided for.
Furthermore a critical portion of this project is being defined which is of information gathering and its limitations. A lot of efforts have been placed to make sure that each and every media used in information gathering for this project has been identified and the relevant limitations are properly disclosed.
A huge emphasize has been placed to make sure that all the work done in this project is purely ethical and no such actions exist which could threaten this. A concise summary of the ethical framework is being provided in this project to highlight the ethical stances taken in this research and to make sure that the standards are up to the mark.
Then one of the main areas named financial analysis has been executed in this project. It involved using several different accounting and financial techniques to evaluate the financial data of Pakistan petroleum limited and its competitor Oil and Gas development company.
After completing the financial analysis another major portion of Business analysis has been covered which involved using business models like PEST and SWOT.
After covering the business analysis portion of this project a plausible and thorough contrast has been made between the financial and business analysis which involved a great involvement of technical and analytical skills. And after the contrast has been completed a conclusion has been drawn based on the facts and analysis performed.
INFORMATION GATHERING:
Information refers to a processed form of data. Data are raw facts and figures and when these facts and figures are arranged and compiled in such a manner which adds some meaning and/or message to it than it is referred to as information.
Importance of information gathering for this R.A.P:
Information gathering has been one of the major portions of this research and analysis project. Without this activity execution of this R.A.P would not have been possible as the main focus of this R.A.P is based on selecting and disclosing appropriate information.
Types of information:
There are two types of information:
Primary information
Secondary Information
Primary Information :
Primary information can be defined as first hand information, gathered directly from the subject or the concerned party which has not been modified. Examples include information gathered through interviews, annual reports, autobiographies etc.
Secondary Information:
Secondary information is a modified form of primary information. Usually the information is modified to make it relevant for a specific purpose or audience. Examples of such information include commentaries, textbooks, news papers etc.
Sources of information used:
A number of different sources have been approached to gather information relevant for this Research and analysis project. Following are the sources approached:
Annual report:
Pakistan Petroleum limited and Oil and gas development company's annual reports of 2010, 2011 and 2012 have been widely used throughout this project. It has been one of the major sources of evidence, as it is the company's base document and to some extent the most reliable source of information. For performing the financial analysis this source is widely used as it contained most of the information needed
Company's Website:
The website of PPL has also contributed a lot to prepare this project. It helped in providing current updates about the company and also provided a lot of information regarding the company's norms and practices, its origin, mission, activities etc.
Other websites:
A lot of other websites had also played a key role in providing necessary information required. Examples of such websites includes Google, Investopedia, Bloomberg etc
Books:
A number of different books have also been consulted for finding relevant information. Such books include ACCA F7 study text, ACCA P2 study text, ACCA F9 study text, ACCA P3 study text, Economics by Brian Titley etc.
News and Media:
Furthermore different pieces of information and understanding have also been obtained from several different T.V. channels and magazines, Examples of such includes CNBC Pakistan, Business plus, Time magazine, Dawn newspaper etc.
Limitations of the above mentioned sources:
It is very important to make it clear that the information gathered from different source have their inherent limitations which could have an impact on the quality of information gathered from them. Such limitations have been identified below source by source:
Annual Reports:
Company's annual reports mostly contained information that are historical and sometimes not disclose the actual current position of the company. Furthermore these reports do not tell us about the company's inside environment and conduct and the policies and procedures that are actually implemented by the organization. And also the existence of accounting limitations over different issues of accounting might indicate that the actual position of the company might not have been presented.
Company's Website:
Company's website as a source of information also has some limitations attached. It is possible that the information disclosed on the website might not be updated which could result in the omission of certain valuable information to be considered. Furthermore it is also possible that the information presented on the company's website could be too optimistic as it is prepared by the organization itself and it needs not to be audited.
Other websites:
Information gathered from other different website also have some limitations attached as internet as a source provides junk of information and it is very difficult to identify which information is correct as there are many contradicting pieces of evidence are provided which makes the decision difficult.
Books:
Books are usually criticized of presenting a lot of academic information with little practical information. Furthermore books are usually published at some particular point of time and are not being updated until a defined time for updates reaches thus skipping some necessary current issues and updates.
News and media:
News and media are often criticized to disclose facts and figures in a negative manner or in a manner which commercially advantageous for them thus making the information biased and less reliable. And further sometimes it is very difficult to identify that whether the information is relevant or not as it is usually presented in a different scenario.
Ethical Framework:
As mentioned earlier that ethics have been specifically focused in each and every aspects of this project so has been with the information gathering and presenting stage. It should be made clear that all the information presented in this project are completely relevant to it and is based on solid facts. These facts have not, in any sense, been altered and are presented as it is. In order to provide an evidence of the facts disclosed relevant referencing has been done in accordance with Harvard referencing system. And it should be crystal clear that no information presented in this report is fake or self generated.
Financial and Business Analysis:
As per the requirement of the topic selected two broad analysis have to be performed Financial and Business.
Financial Analysis:
In order to perform the financial analysis of Pakistan Petroleum limited two broad techniques have been used:
Ratio Analysis
Horizontal Analysis
Ratio Analysis:
Ratio analysis is one of the tool of performing quantitative analysis of a company's financial statements. It can be used to assess the performance of the company and for comparison among specific competitors or with the industry as a whole.
Limitations of Ratio Analysis:
Although ratio analysis is a technique widely used to evaluate the performance of a company it should also be remembered that it carries a lot of limitations to. Such limitations include:
Ratio analysis is only possible with quantitative information. It cannot be used to evaluate the qualitative features
Ratio analysis is mostly used with historical information. Using them for future analysis involves a lot of assumptions and estimates to be made which poses an inherent limitation.
Furthermore ratio analysis can easily be manipulated to portray more attractive or desirable picture(windowdressing). An example of this could be deliberate delay in payments to trade creditors by a company to show a better cash flow and high trade payable days.
Types Of Ratios:
Ratios can be divided among four different categories:
Profitability ratios
Liquidity ratios
Investors ratios
Leverage ratios
The ratios included in these categories are as follows:
INVESTORS RATIOSEARNINGS PER SHAREDIVIDEND COVER LEVERAGE RATIOSNot applicable in PPLPROFITABILITY RATIOSGROSS PROFIT MARGINNET PROFIT MARGIN RETURN ON CAPITAL EMPLOYED(R.O.C.E)
INVESTORS RATIOS
EARNINGS PER SHARE
DIVIDEND COVER
LEVERAGE RATIOS
Not applicable in PPL
PROFITABILITY RATIOS
GROSS PROFIT MARGIN
NET PROFIT MARGIN
RETURN ON CAPITAL EMPLOYED(R.O.C.E)
LIQUIDITY RATIOSCURRENT RATIOQUICK RATIORECEIVABLE DAYS
LIQUIDITY RATIOS
CURRENT RATIO
QUICK RATIO
RECEIVABLE DAYS
HORIZONTAL ANALYSIS:
Horizontal analysis refers to a procedure in fundamental analysis in which an analyst compares ratios or line items in a company's financial statement over a certain period of time.
(). Horizontal Analysis. [ONLINE] Available at: http://www.investopedia.com/terms/h/horizontalanalysis.asp#axzz29s2kNlCV. [Last Accessed 15/9/2012].
Limitations of Horizontal Analysis:
One of the main limitation of horizontal analysis is it's over dependence on the selection of base year and year under analysis. The figures could be fabricated by choosing more intended result oriented figures or years.
Furthermore horizontal analysis does not provide the necessary information or guidance to understand that why the trend had actually occurred.
And at last horizontal analysis fails to overcome the issue of negative numbers.
BUSINESS ANALYSIS:
In order to perform the business analysis of Pakistan Petroleum limited following models have been used:
SWOT analysis
PEST analysis
SWOT ANALYSIS:
SWOT analysis is a strategic planning method used to help organizations identify their strengths and weaknesses and help them to highlight the opportunities and threats they are faced with.
The SWOT Analysis combines the result of the environmental analysis and the internal appraisal into one framework for assessing the firm's current and future
opportunities: External chances to improve performance in the environment.strategic fit, or lack of it, with the environment. It is an analysis of the organization's strengths and weaknesses, and the opportunities and threats offered by the environment. (BPP: P3 Study text)
opportunities:
External chances to improve performance in the environment.
Weakness:Characteristics that place the organization at a disadvantage relative to othersStrengths:Characteristics of a business, or project team that give it an advantage over others. SWOT
Weakness:
Characteristics that place the organization at a disadvantage relative to others
Strengths:
Characteristics of a business, or project team that give it an advantage over others.
SWOT
Threats:External elements in the environment that could cause trouble for the business.
Threats:
External elements in the environment that could cause trouble for the business.
PEST Analysis:
PEST analysis describes a framework of macro-economic environmental factors used in the environmental scanning component of strategic management.
(). PEST analysis. [ONLINE] Available at: http://en.wikipedia.org/wiki/PEST_analysis. [Last Accessed 15/9/2012].
PEST is a useful checklist for general environmental factors- in the real world they are all interlinked of course. Any single environmental development can have implications for all four PEST aspects. In particular, political, social and economic affairs tend to be closely intertwined.
( ACCA P3: Study text)
Limitations Of PEST Analysis:
One of the major limitations of PEST analysis is its over dependence on a bunch of assumptions.
Another limitation of PEST analysis is its core focus on the external environment without considering any of the internal environment factors. So such a one –off review cannot be used all alone to make strategic decisions.
PEST analysis usually requires a huge amount of information which can lead to heavy confusions among the users while screening out the more critical and intended pieces of information.
(26/12/2012). Limitations of a PEST analysis. [ONLINE] Available at: http://www.brighthubpm.com/project-planning/100700-limitations-of-a-pest-analysis/. [Last Accessed 15/9/2012].
FINANCIAL ANALYSIS:
In order to perform the financial analysis of PPL and OGDC following two techniques have been used:
Horizontal analysis
Ratio analysis
HORIZONTAL ANALYSIS
SALES REVENUE GROWTH:
PPL and OGDC's sales revenue over these three years had increased sharply. From 2010 to 2011 PPL's sales revenue had grown by Rs. 18.29 billion (31%). The major contribution to this increase is made by crude oil by Rs. 5 billion, condensate sales by Rs.5 billion, and natural gas sales by Rs. 8 billion approximately. Then from 2011 to 2012 the sales revenue had increased by Rs. 17.969 billion which was again majorly contributed by sales of natural gas by Rs. 9.55 billion and crude oil sales by 7.46 billion. But looking on the overall basis the sales of all the PPL's products have increased by some amount over these three years.
An analysis of PPL's product wise sales is shown in the following graphs:
The product wise break up of sales shown above clearly identifies that natural gas have always been PPL's core revenue generating product. This is because of huge demand of natural gas in the country as now most of the industries and individuals prefer this as a source of energy due it low cost. Furthermore the increasing industrialization and commercial activities, and growing population in the country had also resulted in an increase in demand for natural gas.
Furthermore, crude oil had also increased its share in the sales revenue of PPL as in 2010 it was 8.47% of total sales than in 2011 this figure jumped to 13% and in 2012 it again increased to 18.4%. This increase in the share is mainly attributable to increased demand of crude oil in the country due to increase in industrialization and population. Furthermore significant increase in the prices of crude over these years had also contributed this growth.
GROSS PROFIT:
The above graph clearly identifies that OGDC had always been ahead from PPL in terms of gross profit, but both the companies have suffered an increase in their gross profit over these three years.
PPL's gross profit from 2010 to 2011 had increased by 38% while OGDC's gross profit had only increased by 2.1%. Huge percentage increase in PPL's gross profit margin is mainly due to significant increase in the sales volume of the company and massive increase in the prices of international oil
(PPL Annual report 2011, page# 39).
OGDC's gross profit had increased in line with PPL which is due less percentage increase in the sales volume of the company as OGDC is still having a very huge revenue stream so it is very difficult to further increase its sources of revenue in such a competitive market.
From 2011 to 2012 PPL's gross profit had increased by 17.41% while OGDC's gross had increased by 35%. This time OGDC had shown massive improvement in its gross profit growth while PPL had shown a decline in its gross profit growth. Although PPL's sales over this period had increased rapidly but huge costs during the year including field expenditure which had increased by 27% and amortization charges which had increased due to capitalization of appraisal and development wells, had led the gross profit not to grow in line with its previous year's figure
(PPL Annual report 2012 page# 47).
TOTAL OPERATING EXPENSES:
The above trend clearly identifies that PPL and OGDC both had their operating expenses increasing during these three years which is obvious as both of them had increased their production and other activities. OGDC's operating expenses had always been ahead from PPL in terms of operating expenses. PPL's operating expenses had increased by Rs. 4.1 billion which is mainly attributable to exploration expenditure which had increased by Rs. 1 billion(PPL annual report 2011 page# 127) and ammortisation and exploration charges due to further capitalization in the year.(PPL annual report 2011 page# 39). From 2011 to 2011 PPL's total operating expenses had increased by Rs. 6 billion which is mainly due to significant increase of Rs. 3 billion in development and drilling (PPL annual report 2012 page# 139) and Rs. 1 billion attributable to provision for doubtful debts recognized against byco(PPL annual report 2012 page#128). Further increase is due to depreciation and ammortisation charges which had increased due to capitalization appraisal and development wells during the year(PPL Annual report 2012 page# 46).
PROFITABILITY RATIOS:
The ratios used to assess the profitability of PPL and OGDC are:
Gross profit margin
Net profit margin
Return on capital employed (R.O.C.E)
GROSS PROFIT MARGIN:
Gross profit margin is a financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.
An analysis of PPL and OGDC's gross profit margin is shown below:
The above statistics clearly identifies that OGDC have always been ahead from PPL in terms of gross profit margin. But PPL in these three years never suffered a substantial decline in its Gross profit margin while OGDC had suffered one from 2010 to 2011 by 5%. PPL's gross profit margin over these years has shown a sufficiently stable picture. From 2010 to 2011 it had increased by 3%. One of the major reasons for this increase is the impact of higher international oil prices (PPL annual report 2011) which had made the sales price to increase thus resulting in a higher gross profit margin. Another reason for an increase in PPL's gross profit margin from 2010 to 2011 is a decline in the field expenditure as a percentage of sales from 30% in 2010 to 27% in 2011(PPL Annual report 2011 page 73). The major components of field expenditure that resulted in its decline as a percentage of sales are a decline in the development and drilling expenditure by 10%, and proportionally less increase in other expenditures such as Exploration by 14%and Amortization of prospecting and development expenditure by 26% which is less than the increase in sales revenue of 30%.From 2011 to 2012 only 1% decrease in the G.P. margin of PPL has been observed. One major reason for this decline is an increase in the field expenditure as a percentage of sales from 27%in 2011 to 28% in 2012, major contributing factors to such an increase are the acquisitions of 2D and 3D seismic data at various locations like Sui, Kandkot, Adhi, D.I. Khan, Kharan, Tal, Baska etc, and increased depreciation and amortization charges due to capitalization of appraisal and development wells and other items during the year.(PPL Annual report 2012).
OGDC have also from Gross profit's view-point been in a very interesting frame. From 2010 to 2011 its gross profit margin had decline by 5% that is in 2010 it was 71% and in 2011 it was 66%. The major contributing factors for such a decline include substantial increase in the amortization of production and development assets by 5.625 billion (87%) due to capitalization of new wells and reclassification of different reserves evaluation studies. (2011 annual report). Other reasons for such a decline includes higher crude transportation charges at different remote locations and idle costs of rigs and engineering field parties due to floods. From 2011 to 2012 a 4% increase in the G.P. margin has been observed, the main reasons include higher realized prices of crude oil, gas and LPG and a decrease in the exploration and prospecting expenditures as no well was declares dry and abandoned in the 2012 as compared to seven wells declared dry and abandoned in the year 2011.
NET PROFIT MARGIN:
Net profit margin is a ratio of profitability calculated as net income divided by revenues or net profit divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings.
(www.investopedia.com)
An analysis of PPL and OGDC's Net profit margin is shown below:
Both the companies PPL and OGDC have shown an increase in their net profit margin over these three years. PPL's net profit margin from 2010 to 2011 had increased by 1%. One reason for this increase is embedded in the discussion for an increase in the gross profit margin during these years which will ultimately result in an increase in the net profit margin. Yet another reason for this increase is an increase in the other operating income of PPL which had resulted due to increased investments in financial assets and higher interest rates (PPL annual report 2011)(director report). From 2011 to 2012 the net profit margin had increased by 3%. This increase is mainly attributable to an overwhelming increase in the other operating income by approximately Rs. 7 billion. In these Rs. 7 billion approximately 2 billion is being contributed by income from financial assets which had increase due more investments made in this category, (Annual report 2012 page 145 note 30),and approximately 4.5 billion is being contributed by the reversal of provision for workers welfare fund (PPL annual report 2012 page 145 note 30) which is due to the supreme court of Pakistan's decision in favor of Pakistan petroleum limited that no WWF is applicable on this entity as it is owned by the government of Pakistan.(PPL's Annual report 2012 page 135 note 25.3).
OGDC's net profit margin from 2010 to 2011 had shown a decline of 1%. One major reason justifying this decline is a decline in the gross profit margin over these years whose reasons have been identified in the discussion of gross profit margin before this ratio. But the interesting fact to focus here is the relative difference between the decline of gross profit margin and net profit margin as gross profit margin had decline over these years by 5% while net profit margin had decline by only 1%. The major reasons justifying this fact are significant reduction in the tax expense of the company by approximately Rs. 2 billion which is due to reduced tax rate from 52.07%in 2010 to 48.78% in 2011(OGDC annual report 2011 page 95 note 30.1), further contribution to these Rs. 2 billion is being made by the royalties paid by the company which had increased from Rs. 7.5 billion(2010) to Rs. 15.5 billion (2011) as royalties are allowed as expense for tax purposes.(Annual report 2011, page# 95, note 30.1). From 2011 to 2012 OGDC'S net profit margin had shown a significant increase of 8%. One obvious reason for this increase is the increase in the gross profit margin of the company over these years by 4% whose reasons have been comprehensively discussed in the gross profit margin section. The other major reasons for this increase include significant increase in the other income of the company by approximately Rs. 6 billion. These Rs. 6 billion had mainly arrived through increased income from investments and bank deposits by around Rs 4 billion and realized exchange gains by around Rs. 2 billion.
RETURN ON CAPITAL EMPLOYED: (R.O.C.E.):
The return on capital employed ratio measures profit before interest and tax with the total capital employed in the business. It is therefore a measure of the success of the company in making use of its invested capital.
(Emile Woolf P2 study text INT 2011)
An analysis of PPL and OGDC's R.O.C.E is shown below: PPL's R.O.C.E had shown an increase of 7% from 2010 to 2011. The major reason attributable to this increase is significant increase in the profit before interest and tax of PPL from 2010 to 2011 by 40%, which is greater than the increase in the capital employed of 19%. As R.O.C.E is calculated by dividing PBIT with capital employed, so proportionally less increase in capital employed as compared to PBIT will result in the resultant answer to increase which had happened in the case above. The major reason for significant increase in the PBIT is enormous in increase in the other income of PPL over these years by approximately 72.5% or Rs. 2 billion. Then from 2011 to 2012 the ROCE has suffered a decline of 3%. During this span the PBIT had increased by 33% and the capital employed had increased by 43% which had ultimately resulted in a decline in the R.O.C.E. Such huge increase is mainly attributable to significant increase in the non-current liabilities of the company as one of its components includes provision for decommissioning obligation which had increased by approximately Rs. 8.6 billion as there has been significant price fluctuations of material and services and constant devaluation of Pak rupee against US dollar. Furthermore the abandonment of wells project initiated by PPL as a result of high security cost and deteriorating formations had increased the man days which had again contributed significantly to provision for decommissioning obligation. (PPL annual report 2012 page #133 note # 21.1).
As compared to this OGDC's ROCE had also been suffering from various fluctuations, from 46% in 2010 to 39% in 2011 and then to 43% in 2012. The reason for a decline in the ROCE from 2010 to 2011 by 7% includes significant increase in capital employed by 24% while the PBIT has only increased by 3%. One major reason for significant increase in capital employed is massive reduction in the dividends being paid by the company from Rs. 28 billion in 2010 to Rs. 19 billion in 2011 which constitutes a 32% decline which had resulted in significant increase in unappropriated profits, thus increasing the capital employed of the company. (OGDC annual report 2011 page# 63). Then from 2011 to 2012 the PBIT of the company had increased by 46% while the Capital employed of the company had only increased by 31% which had caused the ROCE to increase by 4%. The comparative low increase in the Capital employed of the company is mainly attributable to massive dividends being declared during the year of around Rs 30 billion which is approximately 56% higher than the previous year's declaration.
2. LIQUIDITY RATIOS
The ratios used to assess the liquidity of PPL and OGDC are as follows:
Current Ratio
Quick Ratio
Receivable days
CURRENT RATIO:
The current ratio is simply a ratio that compares short term sources of cash (current assets) with short term needs for cash (current liabilities). In the normal course of the cash cycle, current assets such as trade receivables should produce cash in the near future. The need for liquidity comes from the end to settle current liabilities.
An analysis of PPL and OGDC's current ratio is performed below:
The above trend clearly identifies that OGDC have always been ahead of PPL in respect of current ratio. In 2011 and 2012 PPL's current ratio have almost been half of OGDC's current ratio. In 2010 both the companies have maintained almost the same current ratio.
PPL's current ratio from 2010 to 2011 had shown a slight decline by 0.07. One major reason for this decline is the reduction in the short term investments from 2010 to 2011 by approximately Rs. 6.4 billion. Such decline in short term investments is heavily contributed to the factor that management has reclassified their investments in foreign currency as a non current asset as it intends and has the ability to reinvest the amount for longer term.(PPL annual report 2011 page # 113 note# 7.6). Furthermore significant reduction in the investment in treasury bills by approximately Rs. 9 billion have also contributed towards the reduction in the current ratio, as these have a maximum maturity period of 6 months(ppl annual report 2011 page # 117 note # 17.2) which indicates that the investments held by the management at the start of the year have become matured and no further investments have been made in category as the company's cash flow statement shows no outflow in the purchases of short term investment's category (PPL annual report 2011 page# 93). Then from 2011 to 2012 PPL's current ratio have shown some improvement as it has increased by 1.3. The major reasons attributed to this increase are significant increase in the trade debts by around Rs. 18 billion and short term investments of the company by around Rs. 14 billion. The significant increase in trade debts is attributable to massive increment in the receivables from SSGCL by Rs. 6 billion and from GENCO II by Rs. 16 billion which is due to transfer of WAPDA's liability to GENCO II and further credit to sales to it. Comparing these statistics with OGDC's performance it is fair enough to say that OGDC have maintained a very high ratio of current assets over its current liabilities. Its current ratio from 2010 to 2011 had increased massively by around 3.41 and from 2011 to 2012 by 1.87. This increase is mainly attributable to massive increase in the trade debts of the entity over these years and significant investments being made by the entity in the financial assets.
QUICK RATIO:
The quick ratio or acid test ratio is similar to current ratio, but it excludes inventory from current assets.
An analysis of PPL and OGDC's quick ratio is performed below:
PPL over these years have maintained a sufficiently stable quick ratio while OGDC have shown heavy fluctuations. From 2010 to 2011 PPL's quick ratio had declined by 0.08. This decline is obviously justifiable by a decline in the current ratio of the company as approximately a very small change has been observed in the stores and spares held by the company. From 2011 to 2012 PPL had shown an increase in its quick ratio by 1.19. Although the amount of stores and spares held by the company had increased by around Rs. 1 billion over these years but the increase in the other liquid assets of the company such as trade debts by around Rs. 18 billion had caused the quick ratio to increase.(PPL annual report 2012 page# 102)
Putting some light on OGDC's performance as compared to PPL massive fluctuations have been observed. From 2010 to 2011 OGDC's quick ratio had increased by 3.18 which is due to significant reduction in the current liabilities of the company by around Rs. 13 billion and increase in the other financial assets of the company by Rs. 27 billion(OGDC's annual report 2011 page# 58 & 59). From 2011 to 2012 the quick ratio of the company had again increased by 2 which is due to significant increase in the trade debts of the company by around Rs.60 billion, during this period the current liabilities of the company had also increased by Rs.2 million but the percentage increase of current assets is more than of current liabilities which had caused the quick ratio to increase.
RECEIVABLE DAYS:
Receivable days is a measure of the average time that it takes an entity to collect amounts due from customers.
(P2 INT study text 2011 Emile woolf).
It is one of the critical indicator of an entity's liquidity position as it indicates that how much able an entity is to recover its debts.
An analysis of PPL and OGDC's receivable days has been performed below:
Over these three years PPL had shown a fluctuating result in the receivable days and OGDC had shown an increasing trend in the receivable days. From 2010 to 2011 receivable days of PPL had declined by 31 days. This had happened due to an imbalance between the increasing percentages of sales and average receivables as the sales had increased by 30% while the average receivable had only increased by 7.36%. One major reason for a decline in the receivable days of the company is a reduction in the amount of company funds tied up in the inter-corporate circular debt by Rs. 7 billion {21( Annual report 2010page# 39)-14(annual report 2011 page# 39)}. Then from 2011 to 2012 the receivable days had increased by 9. The major reason for this increase is significant shoot back in the company's funds being tied up in the inter-corporate circular debt by Rs.17.8 billion; this had caused overdue balances in the company accounts thus resulting in an increase in the receivable days.
PPL has been far better off from OGDC in this area as OGDC's receivable days kept on increasing with significant margins over these years. From 2010 to 2011 it had increased by 11 days and from 2011 to 2012 this had further increased by 10 days. This indicates that OGDC exercise poor control over its receivables and is heavily impacted by inter-corporate circular debt issue as being heavily focused in each of the three annual reports.(Annual report 2010 page# 28, Annual report 2011 page# 44, Annual report 2012 page# 39).
INVESTORS RATIOS
The ratios used to assess the investors perspective of PPL and OGDC are as follows:
Earnings per share
Dividend cover
EARNINGS PER SHARE (EPS):
Earnings per share is a key ratio used by investors to assess the performance of a company. It provides a measure of the profit attributable to each ordinary shareholder during the year
(Emile Woolf ACCA P2 INT 2011 page# 339)
An analysis of PPL and OGDC's EPS has been performed below:
The above statistics clearly identifies that both the companies have shown an increase in their EPS over these three years but PPL had shown a much impressive performance then OGDC. PPL's EPS had increased by 2.89 from 2010 to 2011 which is mainly attributable to the fact that its increase in profit had outweighed the increase in the number of ordinary shares issued by the company as its number of ordinary shares had only increased by 20% while its profit after taxation had significantly increased by 35%, which is an extraordinary achievement as its competitor OGDC had only managed to gain an increase by 7.4% over these years. From 2011 to 2012 PPL had again shown a drastic increase in its EPS by 4.82, which is again significantly contributed by a 30% increase in profit after taxation while only 10% increase in the ordinary shares. This time the pace of growth in OGDC's EPS is higher as it has increased by 52.5% which is due to huge increase in the profit after taxation of the company by 52.5% while no change in the number of ordinary shares in issue.
DIVIDEND COVER:
The dividend cover ratio measures the earnings of a company to the size of its dividend payment. Dividends are paid out of earnings; dividends are therefore more secure when the dividend cover is high.
(P2 INT study text 2011 Emile woolf page# 488)
An analysis of PPL and OGDC's dividend cover has been performed below:PPL has been presenting fluctuating results over these three years in its dividend cover while OGDC has shown an increase in each of the three years. From 2010 to 2011 the dividend cover of PPL had declined by 0.41.This is due to significant increase in the dividends declared by the company by around Rs.54 billion which is a 60% increase while the increase in the profit after taxation of the company is 35%.As compared to this OGDC had maintained a better position as its dividend had remained constant as Rs. 23.655 billion while its profit after taxation had increased by Rs.4.35 billion.
From 2011 to 2012 PPL had shown an improvement in its dividend cover as it has increased by 0.52. This is due to a massive increase of Rs. 9.48 billion (30%) in the profit after taxation of the company while only a 5.41% increase in the dividends declared by the company has been observed. Over this period OGDC had also shown an increase in the dividend cover by 0.42. This is due to lower increase of 24% in the dividends declared by the company while the company had achieved a 34.44% increase in its profit after taxation.
LONG TERM SOLVENCY RATIOS:
Both PPL and OGDC are not having any long term debts over the three years period thus they both are solvent in the long term.
BUSINESS ANALYSIS
In order to perform the business analysis of PPL the following models are used:
SWOT analysis
PEST Analysis
SWOT Analysis
In SWOT analysis four factors are being highlighted strengths, Weaknesses, Opportunities and Threats.
STRENGTHS:
Pakistan Petroleum limited has been enriched with various strengths which had led it to grow rapidly and sustainably in this competitive oil and gas sector.
One of its major strengths include a heavy number of exploration licenses which it had achieved throughout Pakistan and in some areas of Iraq and Saudi Arabia(PPL annual report 2012 page#157) which allows it to operate smoothly and capture numerous markets at various locations and maintain its presence at key competitive and potentially profitable locations.
Quality is also one the strengths of PPL as it has maintained its ISO certification which indicates that it has been successful in providing quality services to its customers and achieving their precious satisfaction.(PPL Annual report 2012 page# 78)
PPL has been the pioneer of exploration and production in the oil and gas sector of Pakistan. It has been the discoverer of Pakistan's oldest and largest gas field at Sui which contributes around 25% of Pakistan's gas production. (Pakistan Petroleum Limited. [Online]Available at http://www.privatisation.gov.pk/oilgas/ppl.htm. [Last accessed 29/10/2012]). This indicates PPL's strong establishment in the industry and extensive knowledge of its norms and practices.
WEAKNESSES:
PPL has been focused in the production of oil and gas which poses it to the risk of over reliance on a particular segment which could be harmful if the whole segment faces its decline stage.
Yet another weakness of PPL is its longer receivable days from 178 to 199 as calculated before. This indicates that PPL has been facing major crisis in its recovery of dues from customers which could lead to severe liquidity problems.
PPL had around 71% of shareholding in the hands of Government of Pakistan(). Equity structure. [ONLINE] Available at: http://ppl.com.pk/content/investor-center-capital-structure. [Last Accessed 29/10/2012].This often leads to delay in the decision making process of PPL as it had to be approved by the government and a number of formalities are being imposed.
OPPORTUINITES:
A number of opportunities are available to PPL; one of such includes diversification of its product base in order to mitigate the risk of over reliance on a particular segment to some extent.
Furthermore, a number of opportunities in the form of foreign markets are available to PPL as it could supply its products to the neighboring countries. One of such countries named Afghanistan is in a state of war so a huge amount of fuel is required over there so it would be an opportunity for PPL to supply its oil and gas over there.
PPL has been holding a very huge amount of cash at the end of June 2012 at around Rs. 37 billion.{ , (2012). 'Cash flow statement' In: PPL (ed), PPL Annual report 2012. 1st ed. 2012: Pakistan pp.105}.This indicates an opportunity to invest some portion of this excessive cash into profitable activities such as money markets or different stock exchanges which could earn heavy profit for it.
THREATS:
PPL has been facing various threats over these years. One of such threats is of security conditions at various operating locations which causes disruption in operations and exploration efforts.(PPL annual report 2012 page#69). This has been particularly common in the Baluchistan fields where law and order situation is disturbed and various tribunal issues contravene with the piece of the area.
Another major threat faced by PPL is the adverse conditions of Pakistan in terms of economic and political instability (PPL annual report 2012 page# 69), this widely affects PPL's operations and has the potential to become massively unfavorable for the organization.
And another most dangerous threat to PPL is the threat of new entrants into the market(PPL annual report 2012 page# 69). This can dilute the market share of PPL which could have devastating effects on the company.
PEST ANALYSIS
In PEST analysis the external environment of an organization is analyzed by looking at four key areas Political, Economic, Social, and Technological.
POLITICAL:
Political climate prevailing in Pakistan had crucial impacts on PPL's performance. PPL's shareholding of 71% is under the hands of Government of Pakistan thus it is worth mentioning that political activities must have influence in PPL's operations.
PPL had its main fields situated in areas where law and order situation is at its worst conditions which includes Sui field situated in the Baluchistan province. This field is mostly affected due to lack of presence of law enforcing agencies and weak rid of Government in this area. Thus this affects PPL negatively and disrupts its operations.
ECONOMIC:
The economic climate of Pakistan is very unstable, which obviously had major impacts on the performance of Pakistan Petroleum limited.
The risk free interest rate provided by the Government of Pakistan is high which increases expectation on PPL's behalf to deliver more return to the investors as the investor can switch to make less or no risky investments with high rate of return.
Furthermore heavy taxation policies on the oil and gas sector by the Government of Pakistan also forces PPL to increase its prices which resulted in slow increase the sales of the company.
The rate of Inflation is also high in Pakistan which results in increasing cost of inputs in the form labor, material etc for PPL
SOCIAL:
PPL has been socially a very active player. It has spent millions of Rupees on its corporate social responsibility program. PPL has been awarded as the largest corporate giver at the corporate philanthropy awards due to its high volume of donations in 2010. (PPL Annual report 2012, page#78).
PPL had actively donated for the flood victims of 2011 in Pakistan. The delivered necessary items such as food boxes, potable water and other goods to the victims and also contributed Rs. 20 million to the prime minister flood relief fund. (PPL annual report 2012 page# 82).
PPL also considers rural development as an important function of execute for which it provides necessary infrastructure, and also imparts necessary skills and trainings to locals. (PPL annual report 2012, Page# 83)
TECHNOLOGICAL:
PPL has been successful in completing its exploration and production data management(EPDM) project in 2012 which enabled access to digital information to the authorized core functions such as geoscientists etc which helped them carrying out their seismic interpretation and modeling activities. (PPL annual report 2012, page# 76)
Furthermore a technology management centre with information technology and experienced professionals from different disciplines to manage operational, support and planning activities. (PPL annual report 2012, page# 76).
CONCLUSION
After the performing the financial and business analysis of PPL it is easy to say that PPL has shown an excellent performance over these three years. It has been one of the biggest organizations of Pakistan involved in very critically sensitive industry. It can be said that 2011 was a golden year for PPL due to highest level of profitablilty achieved by it in this year as the net profit margin, gross profit margin and return on capital employed had all increased during this period but in 2012 a slight decline has been observed in the gross profit margin and return on capital employed has been observed.
PPL has been cash rich over these three years as its bank balances have always shown a huge amount which indicates that this company does not have severe liquidity issues.
Futhermore the investors of PPL seemed to be quite happy with this organization as it has been delivering continuous increase in its EPS and dividend cover which is a relaxing point for shareholders as they see their investments as highly profitable and low risk geared as the company is all free from any type of gearing thus preventing itself from substantial financial risk.
Besides the financial aspects, PPL has also shown pleasing performance in the non financial aspects. Its had actively pursued its corporate social responsibility and have taken parts in various social activities such as donations for flood victims as well as rural developments etc. PPL had employed state of the art technology in its operations and had managed to secure public commitment, customer care and investors confidence throughout these years.
RECOMMENDATIONS
Besides its excellent performance over these three years some crucial steps are still needed to be taken if the organization wants to flourish more in the future. Such recommendations include:
Gaining the tax advantage by sourcing its finance from interest bearing loans as interest is a interest is a tax allowable expense.
Diversifying its product sector as this would reduce the market risk and add to further profitability.
Using excess cash in profitable activities such as financial assets(shares etc) rather than keeping it idle.
Capturing further local and international markets as this would increase the revenue and widen the customer base.
Pakistan Petroleum Limited " Research and Analysis Report
Can u indicate % of shareholding?
This industry analysis is not enough
First plz tell the regulatory body of PPL it is Govt
Then tell about the major competitor
Competitor's market share (graph) with a brief intro
Competitor's sales (graph)with a brief discussion
Competitors profit (graph) with a brief discussion
Plz serach on google
Use decent color combination
Strictly professional!
Use decent format graph
Use decent colors and round off the figure, which is ez to read
Use decent color cobination
Reference? Add news paper reference like brecorder or tribune
Add reference?
Add figure like (xmillion to xmillion)
Add amount?
Add amount
Expressed in %
Plz add figures!
Add figures\
Add the figure of profit in discussion and make it brief u r exceeding the word limit
Plz plz use decent colors
Express them in %
Add fig
Refer?
Reference>
Add % of increase
Add amount of share issue
Add amount of profit (xmillion to xmillion)
Add figure of dividend
Reference the 71% share
Refer the rate of inflation ?
