ACC4003 STD/IL Accounting and Finance Project 2019-21

Analysis of
performance in
the Oil and Gas
Industry
Financial and Non-financial analysis
Common Academic Framework
Accounting & Finance Front Project Sheet
NB. This sheet must be attached to any submission of Accounting & Finance field
module coursework.
Student Name:
Student ID:
Title of Module: Accounting and Finance Project 2019-20
Module Code: ACC4003 STD/IL
Title of Coursework: Analysis of performance in the Oil and Gas Industry
Module Leader:
Dissertation Supervisor:
Hand-in Date: 22/04/2020
Checklist before submission
1. Have you read, understood and acted in accordance with the referencing
guidelines set out in the appropriate Accounting & Finance Module Guide.
2. Where you have quoted directly from or where you have paraphrased the work
of others, have you acknowledged and appropriately referenced the source of
your quotation in the body of the text?
3. Have you placed all direct quotations in inverted commas?
4. Have you listed and correctly cited all your sources in your reference list and
bibliography?
Declaration by the candidate named above
1. I confirm that this is my own work (or, in the case of a group assignment, the
work of my group) and that, although I may have consulted others in the course
of assembling material for the work, the finished article has been completed
without help or participation of any other person (other than, in group
assignments, other members of the same group).
2. The work contains no material drawn from unattributed sources.
Student Signature (Type in)
Table of Contents
1.1.0 Introduction ………………………………………………………………………………………..3
1.2.0 The rationale for Industry and Company Choice ………………………………..3
1.2.1 Rationale for Industry choice ………………………………………………………………. 3
1.2.2 Rationale for Company choice…………………………………………………………….. 3
1.3.0 Research Question, Aim, and Objective……………………………………………..5
Research Question…………………………………………………………………………………….. 5
Research Aim……………………………………………………………………………………………. 5
Research Objective ……………………………………………………………………………………. 5
1.4.0 Critical External Environmental Analysis……………………………………………6
1.4.1 PESTLE ………………………………………………………………………………………………6
Political and Legal……………………………………………………………………………………… 6
Economic………………………………………………………………………………………………….. 6
Social……………………………………………………………………………………………………….. 7
Technological……………………………………………………………………………………………. 7
Environmental…………………………………………………………………………………………… 8
1.4.2 Critical Success Factors: ……………………………………………………………………9
Reduction in Greenhouse gas emissions……………………………………………………… 9
Employment of skilled technicians…………………………………………………………….. 11
Sustaining lower operating costs………………………………………………………………. 11
Optimising Oil and Gas drawn from wells & Discovering new & effective ways to
draw resources…………………………………………………………………………………………….. 12
1.6.0 Five years of Financial and Non-Financial Ratio analysis………………… 14
1.6.2 Net Profit Margin………………………………………………………………………………. 16
1.6.3 ROCE (%) – Using net income……………………………………………………………. 18
1.6.4 Cash flow/Operating revenue…………………………………………………………….. 20
1.6.5 Quick Ratio ……………………………………………………………………………………… 23
1.6.6 Interest cover…………………………………………………………………………………… 25
1.6.7 Earnings per share (EPS) and Dividends per share (DPS)…………………….. 29
1.6.8 Inventory turnover……………………………………………………………………………. 31
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1.6.9 Asset turnover…………………………………………………………………………………. 33
1.6.10 Net Debt to Equity…………………………………………………………………………… 35
1.6.11 CO2 Emissions Ratio……………………………………………………………………….. 37
1.6.12 % of Females on the board of Directors……………………………………………. 39
1.6.13 Reserves Replacement Ratio …………………………………………………………… 41
1.6.14 H & S Recordable Injury Frequency………………………………………………….. 43
1.6.15 Employee turnover ratio………………………………………………………………….. 45
1.7.0 Overall Ranking Table – …………………………………………………………………… 46
1.7.1 Ranking criteria………………………………………………………………………………… 46
1.7.2 Weighting criteria …………………………………………………………………………….. 46
1.7.3 – Company performance analysed based on total ratio performance per
year……………………………………………………………………………………………………………… 47
1.7.4 Weighted Ranking chart……………………………………………………………………. 47
1.8.0 Worst performing company ……………………………………………………………… 48
1.8.1 Recommendations for improvement…………………………………………………… 48
1.9.0 Personal reflection:………………………………………………………………………….. 50
2.0 Conclusion: ………………………………………………………………………………………… 50
2.1 References………………………………………………………………………………………….. 52
2.2 Appendices:………………………………………………………………………………………… 61
2.2.1 Ratio calculation formulas…………………………………………………………………. 61
2.2.2 Wider economic benefits of the Oil and Gas Industry…………………………… 63
2.2.3 Justification of Financial and Non-financial ratios……………………………….. 64
Justification of Financial Ratios……………………………………………………………….. 64
Profitability Ratios……………………………………………………………………………………. 65
Liquidity Ratios ……………………………………………………………………………………….. 65
Equity Ratios…………………………………………………………………………………………… 65
Asset Management Ratios ………………………………………………………………………… 65
Gearing Ratios…………………………………………………………………………………………. 65
Justification of Non-Financial Ratios ……………………………………………………….. 66
CO2 Emissions…………………………………………………………………………………………. 66
Health and Safety – recordable injury frequency (RFI) …………………………………. 66
Employee turnover…………………………………………………………………………………… 66
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% of Females on the board of Directors……………………………………………………… 67
Reserves Replacement Ratio…………………………………………………………………….. 67
2.3 Project supervisor record sheet: ………………………………………………………… 68
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1.1.0 Introduction
This report seeks to ascertain the relationship between the volatility of the wider
business environment and its effects on the profitability margins of the Oil and Gas Industry.
To successfully conduct this research, a variety of financial and non-financial measures
have been assessed, ranked and analysed according to performance. Conclusions will be
drawn as to the worst-performing company and critical advice given for improvement.
1.2.0 The rationale for Industry and Company Choice
1.2.1 Rationale for Industry choice
Domestic supply of Oil and Gas currently accounts for 1.2% of the UK’s GDP
(Oilandgasuk.co.uk. 2019) and 9.2% of the European Oil and Gas market
(Marketlineadvantage, 2019). Despite environmental pressures, Oil and Gas play a
significant role in energy requirements, with predicted demand increasing by 25% by 2040, a
year on year increase of 1% (IEA, 2018). 11 million barrels are consumed every day
globally (H. Thompson, 2017), and contribution in the form of taxes is significant to the UK
economy (OGUK, 2019).
1.2.2 Rationale for Company choice
BP Plc, Total SA and Shell have been chosen as a representative sample because of their
size, employment and contribution to the UK economy. The industry requires high levels of
capital investment for market entry (SWOT, Orbis, 2019). Chart 1.1 demonstrates the
representative market shares of the three companies, which represents 56.03% of the total
market. Economies of scale are an essential factor demonstrated by the three companies
and a key determinant of firm profitability. The ability of major sized companies to raise
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finance from internal cash flows is a critical structure that protects against market volatility
(International Energy Agency, 2009)
Chart 1.1 Sources: Orbis 2019, Vara 2019, Statista 2019
BP Plc
• 01.04.1909
• 73,000
employees
• Operate in 70
countries
• 18.67% market
share
• 4th largest
globally
• Total operating
revenue:
235,570,966 th
GBP
Total SA
• 01.03.1924
• 104,460
employees
• Operate in 130
countries
• 13.09% market
share
• 6th largest
globally
• Total operating
revenue:
145,446,083 th
GBP
Shell
• 01.02.1907
• 82,000
employees
• Operate in 70
countries
• 24.27% market
share
• 2nd largest
globally
• Total operating
revenue:
306,000,675 th
GBP
5
1.3.0 Research Question, Aim, and Objective
Research Question
Since the 2014 Oil price crash, The Oil and Gas business environment has been volatile at
best (IEA, 2018). Therefore, research is based on, “How has the volatility of the business
environment affected the profitability of the Oil and Gas Industry?
Research Aim
This report aims to select three companies that represent the industry, using appropriate
financial ratios and non-financial measurements. It should try to establish whether volatility
in the business environment has affected the profitability of the industry over the last five
years.
Research Objective
Peform PESTLE Analysis and Identify Critical
Success Factors (CSF) appropriate to the Industry.
Analyse key financial and non-financial ratios and
critically assess their role in the profitability of
firms within the industry.
Identify strengths and weaknesses within firms
analysed in relation to the economic determinants
of profitability.
Rank firms in order of financial and non-financial
performance weighted result, offering strategic
advice to the worst performing company.
Establish a link between the Research Question
and the ratio analysis to ensure the objectives
have been met.
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1.4.0 Critical External Environmental Analysis
1.4.1 PESTLE
Political and Legal
The Petroleum Act 1998/ Energy Act 2016 gave the Oil and Gas Authority (OGA) full
regulator rights regarding enforcing “regulatory regimes, dispute regulation and the collection
of data and samples” amongst other jurisdiction (Thomson and Derrick, 2019). The
government set taxation policies and international treaties and agreements influence
company strategy and available trading routes (Van de Bosch and De Man, 1994) with the
granting of exploration licenses and the legal costs of implementing regulatory measures.
Governments are working with companies to maximise oil and gas drawn from wells
(Oilandgasuk, 2019) which is critical to their success. OPEC (The Organization of the
Petroleum Exporting Countries) currently supply about “43.5% of the world’s crude oil
production.” (Library, 2019) and seek to stabilise the oil markets for economic benefit.
Economic
Supply and demand for oil and gas are affected by cost changes, movements in interest
rates and exchange rates (Tveberg, 2018). The cyclical nature of the industry can have a
significant effect on profitability, as projects require long periods and large amounts of capital
(England, Bean and Mittal, 2015). The financial crisis of 2008 continues to impact the
economic growth of firms within the industry. However, economies of scale highlight a more
substantial impact on smaller firms that those super large firms (Ec.europa.eu, 2009).
Predictions in demand for energy across the globe will continue to rise by 1.2% until 2030
and the world will be “using almost 35% more energy than it used in 2005.” (Raut, Narkhede
and Gardas, 2017). Vertical firm integration is likely to produce an unacceptable level of
market concentration, although many firms within the industry already work on a vertical
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integration system with interests in the production, downstream and upstream activities
(Marchak, 2003)
Oil and Gas prices are an active economic driver of the Industry (PwC, 2019) and
sufficient continued investment is required for economic success. The government continues
to take steps to reduce tax payable by the industry to encourage investment and in response
to lower oil prices (Thomson and Derrick, 2019). The “International Energy Agency (2004)
found that an increase of 10% per barrel in the oil price would affect the world GDP
negatively the following year by at least 0.5% “ (Hou et al., 2015)
Social
Long term population growth rate directly affects the continued need for fuels and affects
CO2 emissions targets (Holtz-Eakin and Selden, 1992). There has been an increase of 3
billion people in the world since 1950, and this figure is expected to increase to a total of 9
billion by 2050. (Raut, Narkhede and Gardas, 2017)
The Infrastructure Act 2015 includes several “conditions or safeguards” before fracking
licenses will be granted (Thomson and Derrick, 2019), in response to local community’s
aversion to the process due to risks of pollution and ground instability (Mohsenin, 2017).
Changes in tastes and preferences of consumers, especially a desire for greener transport
options, directly impact the industry’s profitability and is critical to its success (Ellsmore,
2019).
Technological
Technological advancement has enabled remote monitoring of rigs and the ability to detect
sources of oil and gas (technology Insights, 2018). There has been a reduction in skilled
drilling technicians since 2014 in line with the 40% decrease in total wells drilled during the
same period (Oilandgasuk, 2018). The retention of human resources, especially skilled
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technicians, is required to harness this critical success factor.
(Assets.publishing.service.gov.uk, 2019). Increased adherence to Health and Safety
regulations satisfies both social, economic and technological success (Health and Safety
Report 2018, 2018). However, a decrease in maintenance workers by 17% since 2014 has
not compromised the safety records (Oilandgasuk, 2018).
Environmental
The pressure to comply with regulations set out in the Paris Agreement (2015), decreasing
CO2 emissions, investing in emission-reducing technology and end of life phase of an asset
has impacted the profitability of the industry. (Oilandgasuk.co.uk, 2019). Regulations to
reduce greenhouse gas emissions have caused “artificial acceleration in the natural gas
sector” (Theccc.org.uk, 2018). Ability to reduce greenhouse gas emissions is a CSF of the
Oil and Gas Industry. The environmental effect of dubious drilling techniques such as
fracking have affected communities and had an impact environmentally. This has affected
the direction of the oil and gas industry, especially Shell, whose drilling activities in
Grogeningen caused a series of earthquakes, leading to the Dutch Government forcing the
curtailment of drilling within four years (Boffey, 2018). Provisions for accidents and spills
shape the financial statements of the Oil and Gas companies, and a focus on good
corporate governance will shape future practices (Payne and Srinivasan, 2019).
Simplified PESTLE in Appendix 2.3
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1.4.2 Critical Success Factors:
Critical Success Factors (CSF’s) are those determinants of an Industry that influence its
profitability, sustainability and longevity. To capture a competitive market advantage, each
of the firms within the Oil and Gas Industry needs to improve the CSF’s influencing their
balance sheet. Success is not only measured by the financial returns produced for
shareholders but the broader societal and environmental impacts of business choices and
strategy.
Reduction in Greenhouse gas emissions
Compliance with all regulations regarding carbon emissions is critical to the success of the
industry. Despite an increase in the cost of compliance, firms within the industry can exert a
competitive advantage if they lead the way with reducing emissions and “Selling or closing
‘dirty assets’ can be a powerful demonstration of intent.” (Flowers, 2019). Public image and
corporate governance of the issues are paramount to increased revenues from greener
energy application (Flowers, 2019). Although it is predicted that Oil and Gas will still
dominate domestic supply (IEA.com, 2018), it is important to note a continuing downward
trend of emissions from the Industry (Oilandgasuk.co.uk, 2019).
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Chart 1.2 (Shell.com, 2018)
Chart 1.3 (Shell.com, 2018)
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Employment of skilled technicians
The 2008 financial crisis impacted the retention of skilled technicians within the Industry
(PwC, 2016). With a longer than expected cycle of redundancies, the ability to reemploy staff
has become a significant issue. Retaining skilled staff is paramount to the industries
success as the cost of training new staff is likely to outstrip the value of the skilled
technicians already available; however, there has been a marked decrease in employment
across all areas of the industry. (Chart 1.4)
Chart 1.4: Workforce report, Oilandgasuk, 2018
Sustaining lower operating costs
With the long term Brent Oil price averaged at $64.52 a barrel (Macrotrends.net, 2020) it has
been necessary over the past five years to reduce operating costs. With increasing costs of
compliance with emissions targets, it will be necessary for Oil and Gas companies to reduce
their operating costs further and make operations more streamlined and efficient.
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Optimising Oil and Gas drawn from wells& Discovering new & effective
ways to draw resources
As demonstrated in chart 1.5, there has been a long term decrease in Oil and Gas
discoveries. With an increase in technological development, it is hoped that new extraction
methods will be developed which enable discoveries of new sources of Oil and Gas
(Baraniuk, 2017). As the industry relies on continual extraction it is critical to its success that
discoveries are increased, and techniques for extraction are improved.
Chart 1.5 (Markets.ft, 2020)
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Chart 1.6 Marketline Advantage, 2019
14
1.6.0 Five years of Financial and Non-Financial Ratio analysis
The following financial and non-financial ratios have been analysed over the past five years
for each of the three companies and compared against the industry average. The ranking
criteria for this analysis are highlighted in section 1.7.0. Justification of the ratios is found in
Appendices 2.2.3. Weightings have been attributed to these chart results to define their
significance in the business environment concerning the question “How has the volatility
of the business environment affected the profitability of the Oil and Gas Industry?”
The company, with the most points, is defined as the worst-performing of the three
companies analysed.
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Chart 1
Source: Orbis/Marketline Advantage, 2019
16
1.6.2 Net Profit Margin
BP Plc’s Net profit margin is significantly below the industry average, and in comparison to
Total SA and Shell, its performance is poor. The significant point to note is 2015 where both
BP Plc and Shell saw a sharp drop in their net profit margin. On-Page 6 of the 2016 Annual
Report BP note that the 2015 loss “reflected the provisioning for the Gulf of Mexico
settlements” (BP.com, 2016). Shell attribute their significant decrease to the ceasing of
drilling in Alaska. (Reports.shell.com, 2016)
Total SA, in contrast, has continued to improve its NPM over the past five years and
currently has the highest level of NPM. When compared with the Industry average, Total SA
has consistently seen better returns than the average. With consideration to shareholder
wealth and the business climate, the NPM of all three companies is crucial to long term
profitability. BP Plc does not seem to have coped well with external environmental factors
that have affected its NPM, regarding the Gulf of Mexico oil spill that has affected its balance
sheet significantly since 2014 (BP.com, 2015-present).
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Chart 2
Source: Orbis, 2019
18
1.6.3 ROCE (%) – Using net income
Relating to the efficiency and profitability of the industry and companies, ROCE is a critical
ratio for analysis. It provides users of this report with information on the effectiveness of the
companies to obtain returns from the capital employed. Continually improving ROCE,
comparative to a ROCE which is volatile from one year to the next, indicates firm stability.
The cyclical nature of the industry can have a significant effect on the profitability of projects,
which inherently require long periods and large amounts of capital (England, Bean and
Mittal, 2015). All three companies have maintained a consistent upward trend of improving
ROCE over the five years. However, Total SA and Shell are more attractive to investors
because they maintained a ROCE above the industry average, indicating better use of
capital to generate profits, in comparison to BP, who have recorded below the industry
average in all five years (Uk.finance.yahoo.com, 2020).
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Chart 3
Source: Orbis, 2019
20
1.6.4 Cash flow/Operating revenue
In the Oil and Gas Industry, the capital expenditure required is significant (England, Bean
and Mittal, 2015) and the advantage of analysing the cash flow to operating revenue is that it
omits the capital expenditure from its calculation. Total SA has the best ability to continue
operations without increasing leverage as they have the highest % of those companies
analysed. Significant to the critical success factor of reducing operating expenses and
21
sustaining them, all three companies have been successful in reducing operating costs to
produce an increasingly positive operating cash flow.
Total SA has a consistently higher operating cash flow than either the Industry Average or
the other two companies under analysis which relates to their strong position on the Net
Profit margin and the ROCE charts.
22
Chart 4
Source: Orbis/Marketline Advantage, 2019
23
1.6.5 Quick Ratio
Quick Ratio takes on a more conservative calculation than the Current Ratio, which is why it
has been chosen for analysis. A quick ratio over 1 indicates that a company has enough
current assets less inventories to cover its current liabilities. Interestingly only Total SA
managed a ratio over 1 for the whole 5 year analysis period, although all three companies
were significantly better than the industry average, which fell well below 1. As most of the
current assets are held in inventory (Oil and gas), the industry as a whole has a lack of liquid
funds thus a low Quick Ratio is inherent to the nature of the industry.
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Chart 5
Source: Orbis, 2019
25
1.6.6 Interest cover
The ability to cover all debt interest payments is paramount to the concept of going
concern, and BP had struggled with their coverage, especially in 2015, when they reported a
negative figure. Despite a significant dip in 2015, Total has kept a high-interest coverage,
which indicates to investors the ability of the firm to pay its debt. This can be attributed to
their low levels of debt to equity. As all firms took a significant drop in interest cover in 2015,
it is noted that this is down to volatility in the business environment attributed to the 2014 oil
price crash where the Brent oil price went from $112 per barrel to $62 (Eia.gov, 2014). It
affected the balance sheet of all of the firms although Total was the quickest to rebound from
this, recording a substantial increase in its 2016 figure.
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Chart 6
Source: Marketline Advantage, 2019
27
28
Chart 7
Source: Marketline Advantage, 2019
29
1.6.7 Earnings per share (EPS) and Dividends per share (DPS)
Shell has continued to produce significantly higher than average earnings per share than
the market average across the five years, especially in 2015/16 despite a decrease in their
operating cash flow during this time. They have also operated a smoothed dividend policy
well over the Industry average. In contrast, BP Plc has earnt close to zero throughout the
five-year analysis on earnings per share; however, they have still paid out a minimal
dividend in all years. This policy of offering a smoothed dividend is inviting to investors. BP’s
dividend policy is more sustainable in relation to volatility in the business environment;
however, it is also noted that the dividend offered is attributed to BP’s net profit margin.
Total’s plan to increase its dividend payout rate by 10% between 2018/20 will see an
increase in shareholder returns (Total.com, 2018). Further analysis of Shell and Total SA’s
financial health would be required to confirm the sustainability of their dividend policy.
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Chart 8
Source: Marketline Advantage, 2019
31
1.6.8 Inventory turnover
Efficiency ratios are essential, especially the inventory of oil and gas, because the longer
they are held in inventory instead of being sold, the price of oil or gas can change
significantly affecting profit margins. The volatility of the industry between 2014/15 when the
price of oil crashed had a significant impact on the returns from inventory. It is unlikely that
the inventory will become obsolete; however, the more times a company can turn over its
inventory/assets, the more profitable it is likely to be. Total SA struggled to turn over their
inventory for all five years in contrast to BP and Shell, who saw a significantly higher
turnover of inventory during the same period. This is reflected in Shells NPM, although BP
don’t seem to have managed to turn this in to available cash flows for reinvestment.
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Chart 9
Source: Marketline Advantage, 2019
33
1.6.9 Asset turnover
The use of assets to generate sales is a vital efficiency indicator to investors and the
higher the turnover, the more efficient the company is deemed to be. All three companies
produced a positive asset turnover; however, BP Plc employed a more effective use of their
assets in comparison to Total SA, who saw no improvement for three years straight.
However, during this time, Total SA managed to reduce its net debt to equity and maintained
a better operating cash flow, indicating a longer term strategy to cope with business
volatility.
34
Chart 10
Source: Marketline Advantage, 2019
35
1.6.10 Net Debt to Equity
Highly leveraged firms are likely to bring down their cost of capital although equity is
preferred because it carries no obligation; however, investors expect a higher return, and
thus equity is a more expensive way of financing a firm. Larger firms can self-finance
through internal cash flows and produce their own in house financing activities; therefore,
they are likely to keep their gearing within an optimum range. Both BP Plc and Shell have a
target range of between 0-30% (annual reports) and Total aim to have a gearing level below
20%. Total have managed to decrease their net debt to equity with strategic management
(Total AR, 2018). Despite targets set, all three companies struggled to keep their debt to
equity within the chosen range.
36
Chart 11
Source: Orbis, 2019
37
1.6.11 CO2 Emissions Ratio
With a current political and economic focus on climate change, it is critical to the long term
success of Oil and Gas companies that there is a marked reduction in CO2 emissions.
However, conclusions are drawn that the three companies have not seen a marked drop in
CO2 emissions, with Shell producing more than the Industry average across the five years,
this is despite a robust strategic plan for reducing emissions (Vara, 2019)
BP state on their 2015 Annual report that although they were lower than the industry
average across all five years, the increase in CO2 emissions in 2015-16 was largely down to
the change in government regulations regarding the potential for methane, however without
this update they would have seen a decrease in their emissions due to divestments in
Alaska. (BP AR pg 21, 2015).
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Chart 12
Source: Annual report of each company, 2019
39
1.6.12 % of Females on the board of Directors
Diversity throughout companies structure has been a focus of recent times, especially in the
board room. Hays Diversity & Inclusion report 2019 found that blind recruitment can help
with diversity (Hays.co.uk, 2019). A robust internal diversity and inclusion policy can enable
females to progress through the ranks of a company with confidence. All three companies
have seen an increase in employment of females on the board of directors in line with
guidance to increase females on the board of directors as females are underrepresented in
upper management roles (Middleditch, 2018). This drive for greater diversity is pivotal to
increased efficiency and higher profitability.
40
Chart 13
Source: Annual report of each company, 2019
41
1.6.13 Reserves Replacement Ratio
The reserve replacement of each company varies significantly, with Total SA and BP
consistently achieving high replacement ratios year on year. However, in contrast, Shell had
numerous events over the last five years that have affected their replacement ratio, reporting
a negative figure in 2015. This negative was attributed to low oil prices coupled with
overstatements for several years which required adjustment. Shell also reported that by
reducing operating costs it had impacted its reserves ratio and that it wasn’t a cause for
alarm (Royal Dutch Shell Plc Fourth Quarter 2018 Results, 2019). The Ratio has seen an
increase in the last year to 53% although it was stated that this should have been 98% had
the Dutch government not imposed a withdrawal of drilling from the Groninger area (Meijer,
2019). On page 19 of BP’s 2017 annual report it states that, “the ratio was higher due to
development activity in Abu Dhabi and Rosneft, expansion of the Khazzan development in
Oman and extension of the ACG licence.” The Ratio helps demonstrate success in the
exploring and extraction of resources to add to the companies reserve bases which is a
critical success factor of the industry.
42
Chart 14
Source: Annual reports of each company, 2019
43
1.6.14 H & S Recordable Injury Frequency
The industry has an inherent risk of health and safety-related accidents. This has been
decreased by a focus from all three companies on improving health and safety onboard rigs
and the ability to monitor more dangerous ones remotely without the need for human
involvement. BP achieved the most consistent average decrease in incidents across the 5
years, comparative to Shell, whose record was volatile. BP’s 2016 Annual Report states that
“process safety means designing our facilities to appropriate standards” and “underlines the
importance of capable people” operating the rigs. (BP Annual Report 2016, 2016)
44
Chart 15
Source: Orbis, 2019
45
1.6.15 Employee turnover ratio
A decrease in overall % of staff over time is because of an efficiency drive causing a
25% decrease in the workforce since 2014 (Workforce report 2018, 2018). However, the
cyclical nature of the industry affects the employee turnover ratio depending on which part of
the cycle the industry or company is currently in. It is noted that only Total SA followed the
cyclical pattern and Shell decreased the volatility in their workforce significantly over the five
years. BP decreased employment during 2015/16, leading to an unfavourable % change in
the workforce. BP reported that “A lower oil price has meant ….. a reduction in overall
headcount of 10,000 over the past two years. Our focus is on retaining the skills we require
to maintain safe and reliable operations.” (BP Annual Report 2016, 2016)
46
1.7.0 Overall Ranking Table –
1.7.1 Ranking criteria
1.7.2 Weighting criteria
47
1.7.3 – Company performance analysed based on total ratio
performance per year.
1.7.4 Weighted Ranking chart
48
1.8.0 Worst performing company
BP Plc is the worst-performing company because they performed worst on 6 out of
10 of the financial ratios analysed, especially with regards to Net Profit margin and
Operating cash flow. BP plc, however, noted on their operating cash flow that had the
Gulf of Mexico oil spill not been reported, the operating cash flow of the company would
have been significantly improved. This would not have improved their overall ranking on
the analysis. Despite having a high reserves replacement ratio, which is paramount to
the industries long term success and ability to continue operations, they had a lowinterest cover which puts them at risk of bankruptcy should the business environment
become increasingly volatile.
1.8.1 Recommendations for improvement
49
BP ‘s net profit margin and ROCE were significantly below the industry average. They
should consider the viability of long term projects and aim to reduce costs explicitly incurred
from the operating costs. However, current contracts will determine the length of time taken
to reduce these costs. A reduction in their net debt would see an increase in their interest
cover ratio as interest repayments would be reduced.
In a volatile business environment where the stability of oil prices are unpredictable,
improving global profitability and streamlining processes will enable BP to control their fixed
costs and move to a variable cost structure.
Although the industry as a whole requires improvement on their CO2 emissions, BP can
gain competitive advantage by considering ways in which they can reduce their CO2
emissions further than their competitors. By investing in R & D relative to emissions, BP can
invest in future technology that can help safeguard against government regulations and
restrictions. They can also take advantage of tax relief on R & D relative to technological
advancements that benefit the industry as a whole.
As a cyclical industry, influenced heavily by the external business environment, it is
somewhat challenging to reduce capital expenditure however it may be a consideration for
BP, as it is likely to increase their profitability as focus shifts to already profitable drilling and
extraction.
50
1.9.0 Personal reflection:
During the interim and final project, I have gained an insight into my working practises
and improved significantly in certain areas. Below is a list of subject-specific skills I have
improved on and transferrable skills which I can use in future work projects and the wider
business environment.
2.0 Conclusion:
In conclusion, reference must be made to the reports initial objective in answering
the question, “How has the volatility of the business environment affected the
profitability of the Oil and Gas Industry?” and how well the ratio analysis has
answered this.
It is concluded that the companies that performed the best within the industry were
those that operated a higher than average net profit margin and operating cash flow.
51
Total SA and Shell consistently out-performed BP’s dividend offerings; thus, investors
would be happier to invest in these firms. The volatility of the business environment,
especially the vast decrease in Brent Oil Price in 2014, has affected the profitability of all
firms analysed, directly impacting their net profit margins and operating cash flows
(firms annual reports, 2018)
Long term viability of the industry is dependent on the broader economic stability
and regulating bodies. Firms within the industry are currently facing another sharp
decrease in Oil price due to COVID-19, limiting air travel and economic stability, which
will, in turn, affect the net profit margin of even the most robust firm.
52
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53
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54
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55
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Transition Economics. Masters. EERC MA program in Economics.
Markets.ft.com. (2020). Henry Hub Natural Gas Front Month Futures price information –
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https://markets.ft.com/data/commodities/tearsheet/summary?c=Natural+Gas [Accessed 20
Feb. 2020].
Markets.ft.com. (2020). ICE Brent Crude Oil Front Month price information – FT.com.
[online] Available at:
https://markets.ft.com/data/commodities/tearsheet/summary?c=Brent+Crude+Oil [Accessed
20 Feb. 2020].
Meijer, B. (2019). Netherlands to halt Groningen gas production by 2022. [online] U.S.
Available at: https://www.reuters.com/article/us-netherlands-gas/netherlands-to-haltgroningen-gas-production-by-2022-idUSKCN1VV1KE [Accessed 20 Feb. 2020].
56
Middleditch, V. (2018). Is it time for mandatory quotas on women in the boardroom?.
[online] People Management. Available at:
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[Accessed 20 Feb. 2020].
Mohsenin, A. (2017). The Environmental and Social Impacts of Natural Gas Fracking.
[online] Forbes.com. Available at: https://www.forbes.com/sites/quora/2017/04/17/theenvironmental-and-social-impacts-of-natural-gas-fracking/#9ce265d1a76b [Accessed 5 Nov.
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Oilandgasuk.co.uk. (2018). Workforce Report UK. [online] Available at:
https://oilandgasuk.co.uk/wp-content/uploads/2019/03/OGUK-Workforce-Report-2018.pdf
[Accessed 4 Mar. 2020].
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OGUK, 2019, Economic report, page 4 & 5. [online], Oil and gas UK, available at
https://oilandgasuk.co.uk/product/economic-report/. [Accessed 21 Oct 2019].
Oilandgasuk.co.uk. (2019).As supply increases and oil prices rise, volatility will continue
to shape strategy. [online] Available at: https://oilandgasuk.co.uk/wpcontent/uploads/2019/03/OGUK-Business-Outlook-Report-2019.pdf [Accessed 12 Oct.
2019].
57
Oilandgasuk.co.uk. (2018).Economic report 2018. [online] Available at:
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[Accessed 4 Nov. 2019].
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58
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Raut, R., Narkhede, B. and Gardas, B. (2017). To identify the critical success factors of
sustainable supply chain management practices in the context of oil and gas industries: ISM
approach. Renewable and Sustainable Energy Reviews, 68(1), pp.33-47.
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59
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60
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61
2.2 Appendices:
2.2.1 Ratio calculation formulas
Ratio The formula used for Ratio calculation
Asset turnover Ratio (Absolute) COGS/Av. Assets
Net Profit Margin (%) (Net Income/Revenue) * 100 (%)
Earnings per share (USD) Net income – preferred shares
Weighted Av. Shares outstanding
ROCE (%) EBIT
Total Assets – Current Liabilities
Cash flow/Operating revenue (%) Cash flow/Operating revenue (turnover)
*100
Quick Ratio (Absolute) Current Assets-Inventories
62
Current Liabilities
Gearing Ratio (%) Current debt to Equity * 100
Net Debt to Equity (Absolute) (Short term debt + long term debt +
capital leases)/Equity
Interest Cover (%) EBIT/Interest Expenses
Dividend per share (USD) Total Dividend
Weighted Av. Shares outstanding
Inventory turnover Ratio (Absolute) COGS/Av Inventory
CO2 Emissions Ratio (%) Total GHG as a CO2 equivalent
H & S Recordable Injury Frequency (per
200,000 hrs worked (BP Plc) and per 1
million hrs worked (Shell and Total))–
Total number of recordable injuries per
hrs worked
Employee turnover percentage change
(%)
Employee No at start + Employee No at
the end of period / Average No of employees
* 100
No of females on board of directors The number of females on the board of
directors as a total of the number of people
on the board of directors. (%)
Reserves replacement ratio (%) Proved reserves + reserve base from the
yr
Annual Production
* 100
63
2.2.2 Wider economic benefits of the Oil and Gas Industry
64
Oil and Gas report 2018 Pg 6
2.2.3 Justification of Financial and Non-financial ratios
Justification of Financial Ratios
65
Profitability Ratios
Essential Ratios that demonstrate the company’s ability to generate profit for growth and
investment. Investors and analysts rely on information from these ratios to judge whether
sufficient liquid funds are available to keep the business running.
Liquidity Ratios
Indicative of the firm’s abilities to pay their financial commitments on time and when they
fall due. Used by prospective business owners to ascertain the company’s ability to pay its
debt obligations without raising external capital.
Equity Ratios
Useful Ratios because Dividends are a signal/insight for investors to the health of the
company. Investors look for a return on investment and riskiness of investments. DPS can
only be paid out if there have been excess EPS (Bulaki Borad, 2019).
Asset Management Ratios
Used to highlight the efficiency and management of resources for profit-making activities.
The more times inventory is turned over in a period, the more efficient its processes are
(Sakevych, 2019). Gives insight for creditors and investors as to the internal management
of the company.
Gearing Ratios
Gearing is indicative of the financial risk of the company defaulting on its debt repayment
schedule. A fundamental weakness of the industry with high proportions of debt to Equity, it
indicates that a company is using debt to pay for its continuing operations. However, there
is an optimum debt to equity ratio, and this helps to bring down the cost of capital.
66
Justification of Non-Financial Ratios
Chosen because the industry has corporate social responsibilities (CSR) and Ethical
responsibilities not captured by the financial ratios.
CO2 Emissions
Decreasing CO2 emissions is governed by regulatory requirements and an increased
need to reduce global temperatures. As the biggest producer of CO2, the industry has a
moral obligation to reduce this ratio.
Health and Safety – recordable injury frequency (RFI)
Chosen because it demonstrates a link between improved H & S compliance and
continued improvements in H & S regulations. Investors are interested in
Employee turnover
A decrease in % of staff over time is because of an efficiency drive causing a 25%
decrease in the workforce since 2014 (Workforce report 2018, 2018). The cyclical nature of
the industry affects the employee turnover ratio depending on which part of the cycle the
industry or company is currently in. It is essential to see the cyclical pattern because, since
2008, the pattern changed to long term unemployment because of the financial crisis.
67
Oil and Gas UK Economic outlook report 2018 pg 55
% of Females on the board of Directors
Targets by 2020 for 40% of board members to be female. Important for diversity and
inclusion, this ratio was chosen to demonstrate a change towards continuing diversity at the
highest level where inequality has been prevalent for many years.
Reserves Replacement Ratio
Reserves within the Industry are vital to the continuing operations of each company.
It has been picked for its ability to demonstrate the company’s ability to replace
resources as they are used through proven sources
68
2.3 Project supervisor record sheet:
Student to maintain record
Student Name: ……………
Project Supervisor: ………
The completed sheet must be scanned into the project as the last page
when the work is submitted.
Dat
e
Discussion/Progress Date of
Next
meeting
Tutor
Signature
Meeting 1 24/10/19
Discussion regarding the structure
of the Interim project draft – have
emailed a copy to John for a review of
progress
04/11/19
69
Dat
e
Discussion/Progress Date of
Next
meeting
Tutor
Signature
Meeting 2 04/11/19
Queries on project – review of
Aims and Objectives
11/11/19
Meeting
3 11/11/19
Questions regarding PESTLE and
structure of report
25/11/19
Meeting
4 25/11/19
Feedback from Interim project
draft submission
03/12/19
Meeting 5
03/12/2019
Emailed final project queries 13/01/202
Meeting 6
13/01/2020
Feedback on Interim submission 03/02/202
70
Dat
e
Discussion/Progress Date of
Next
meeting
Tutor
Signature
Meeting 7
03/02/2020
Discussion on structure of the
Final Project
17/02/202
Meeting 8
17/02/2020
Review of work completed so far
and discussion surrounding ratio
analysis.
02/03/202
Meeting 9
02/03/2020
Unable to make the meeting due
to a poorly child, but did discuss this
with John via email.
Please use a continuation page if necessary.

 
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