(Oil Search Limited)report and analysis of the financial performance of a selected company

This assessment task is a written report and analysis of the financial performance of a
selected company in order to provide financial advice to a wealthy investor. It will be
based on financial reports of a listed company on the ASX . This assignment requires your
group to undertake a comprehensive examination of a firm’s financial performance
Oil Search Limited
Oil Search Company is an oil company located in Guinea and operates in other countries
across the world as well. below is an analysis of the company performance in the market and
contains a recommendation on areas that need improvement.
1. Description of the Company
Oil Search Limited is one of the largest oil company located in Papua New Guinea. The
company was established in the year 1929. The company plays a big role in the economy of
Guinea with its contribution to the GDP of the country. For example, in 2006, the company was
able to contribute 13% of the countries GDP. The company is traded in the Australian Stick
Exchanges and Port Moresby. The market capitalization Oil Search Limited is estimated to be
around US$12 billion. The government of new Guinea claims more than 17% ownership in the
company. The company has experienced growth over the years and now has its own branches in
countries like Libya, Egypt, and Yemen. Operating in these markets has provided the company
with an upper hand in the market over its competitors in the industry because they have been
able to increase their customer base in the market (Jeffrey, 2012). Also, the company has been
able to increase its revenue because of its operation in the foreign countries. The foreign market
tends to offer a great opportunity to the company because its performance has been on the
increase since it was established despite the logistic challenges that it experiences. In fact, the
company participates most in community development. This is part of the company’s corporate
social responsibilities in the market that it operates. In reference, to the companies 2013 report, it
indicated that the company had spent more that US$ 8 million in community development
activities. Basically, this initiative has helped the company to be accepted in the market because
of their will to uplift the community.
2. Ownership Governance Structure of the Company
The company is owned by a number of shareholders that have put their money in form of an
investment. The shareholders provide capital for establishment of the business. Each shareholder
has a certain percentage in the company. Therefore, this is an indication that the proceeds
realized from the business are shared according to shareholder equity that has been invested in
the business. Mubadala Investment Co. is among the largest shareholders that have invested in
Oil search limited with a substantial capital of 196,604,177 which represents 12% shareholder
equity in the company. Capital Research & Management Co. is another investment organization
that have put their stake in Oil Search Limited. The company has got 73,746,987 which
represents a 4.84% investment in the oil company. Massachusetts financial company, BlackRock
fund investors, and Fil Investment Management are among the companies that have invested in
Oil Search Company. The shareholders are responsible for the decision making and management
of the company because they have an interest.
On the other hand, the company uses vertical management where it has managers and directors
among other junior employees that aid in the management process that is intended to achieve
both the long-terms and short-term goals of the company. Richard John Lee is the chairman of
the company and the one responsible with chairing the committee of the company and helps in
the decision making as well. Peter Robert Botte is the managing director of the company who is
responsible for the governance of the company the director is responsible in the decision-making
process as well and tries to manage the employees and identify the potential markets that the
company can put its more investments. Mel Anglo and Fiona Elizabeth are among the board
members of the company (Horner, D., & Dawsonera. 2013 p 56). The play the role of helping the
director and managers of the company in the governance process. Both the shareholders and the
board of management work hand in hand to ensure that the goals and objectives are achieved on
a timely manner. Also, this collaboration aids the company to overcome its challenges in the
market because of the generation of ideas and skills from the above-mentioned parties.
3. Fundamental Ratios of Oil Search Company
Ratios are very important in organization because they depict the performance of the company at
a glance. It makes it easier to establish the progress of a company after a certain period without
having to look into details of the financial statements of the company. There are a number of
groups that use the ratios and for various reasons. To begin with, the stakeholders are among the
people that utilize ratios. It is because they have invested their money in a company and thus
they are more interested about the performance of the company. On the other hand, the
management makes use of the ratios because they aid in evaluating their performance and helps
in highlighting areas that they need to improve on (Simanovsky, 2010). Thirdly, interested
investors might find ratios to be very useful because they are able to assess the ability of the
company in the market before putting their money. The following are some of the fundamental
ratios for the company that indicate the performance and progress of the company.
Liquidity ratio
Current ratio = Current assets/ current liabilities
For year 2016 Current ratio = 10,126,129/ 4,074,781 = 2.48
For year 2017, Current ratio = 10,512,498/ 3,758,906 = 2.79
From the above calculations, it clearly shows that the company’s current ratio for the year 2016
and 2017 was 2.48 and 2.79 respectively. This indicates an increase between the two years for
the company. Therefore, this implies that the company is in a position to offset its debts
whenever they arise (Mott & ebrary, 2012). All the stakeholders may have equal interest about
the ratios of the company because they are interested with the performance. For instance,
financial institution need such analysis in order to establish if the business is in a position to pay
its debts.
Financial leverage ratios
Debt ratio = total debt/total assets
For year 2016 = 4,074,781 /10,126,129= 0.40
For year 2017, = 3,758,906/10,512,498 = 0.36
Shareholder equity ratio = total shareholder equity/total assets
For year 2016 = 4,725,316 /10,126,129= 0.47
For year 2017, = 4,937,754/10,512,498 = 0.47
The debt ratio for Oil Search Limited was 0.4 and 0.36 for the year 2016 and 2017 respectively.
This decrease indicates an improvement between the years and thus implies that the company is
in a stable condition since the ratio indicates a lower value hence it is capable of meeting debts
whenever they arise. On the other hand, it is clear that the company maintained its shareholder
equity ration at 0.47 for both years (2016 and 2017). Shareholder equity aids to leverage the
operations of the company in the market. In most cases, the higher the shareholder equity, the
greater the influence that the shareholders have in the company. This includes making critical
decisions in the market that affects the company in one way or another. Therefore, the company
should not depend on borrowing too much in order to leverage their operations.
Efficiency/Turnover ratios
Total asset turnover = sales/ Total Assets
For year 2016 = 1,235,908 /10,126,129= 0.12
For year 2017= 1,446,001/10,512,498 = 0.14
The total asset turnover for 2016 and 2017 emerged to be 0.12 and 0.14. There was a slight
improvement between the two years. These ratios indicate that the company has certain number
of assets thus making them more advantageous compared to other companies operating in the
industry. However, there is need to consider increasing the number of assets for the company in
order to increase its stability in the industry.
Profitability ratio
Profit margin = Net income/Net sales
For year 2016 = (195,999/1,235,908) 100 = 15.85%
For year 2017= (194,728/1,446,001) 100 = 13.46%
The profit margin 15.85% for 2016 and 13.46 for 2017 indicate that the company is making it
big in the market with high profits from the business (Ryan, 2004). There was a slight decrease
between the years and its important that the company considers improving its profits to a higher
level. This will help them strategize on how to expand the business.
4. i.
ii. the graph above indicates that there exists a close relationship between the company
share price and the all Ordinaries that are plotted against. This indicates that the situation
is volatile. The graph indicates that the share price index seems to be changing from time
to time thus signifying different performances for the company during the different
5. Significant announcements that have influenced the share price of Oil Search
Oil search company share price has increase in the recent period. This in turn has been attributed
to a number of factors. First, the company is affected by the macroeconomic factors which
include the benefit of economic of scale. The good performance that the company has been
recording over the years has aided it to be able to expand its operation in Guinea and other
potential markets across the world. As such, the expansion has benefited the organization by
increasing its share price in the market. Investors in the market are able to compare the high
share price of the company with other competitors and realize that the company share price will
be on the increase in the coming years (Ryan, 2004). The expansion resulting from the
economies of scale has help the company to create more assets in the market and increase its
revenue as well. This increases the level of stability in the market which creates confidence
among shareholders and investors. In addition, it shows that the company’s changes in
management has played a significant role in ensuring that the share price is maintained on the
top. Management is very critical when it comes to Oil Search Company.
The company has been interested mostly on the performance in the market which includes their
share price in the market. Different managers in position have exhibited different performance
levels that has made the board consider changing the management especially when the company
is facing challenges in the market. Improving on management performance is among the factors
that has influenced the company’s share price over a long time that they have been in operation
in the market. Another aspect that has improved the company share price is the change of focus
in the market (United States, & Geological Survey (U.S.). 2011). Oil Search Limited tend to
have its own goals and objectives. However, the management of changes focus in the market in
order to maintain high performance always. This usually happens when they realize certain
potentials on other areas that they had not previously. Exploitation of these potentials has
impacted on the company performance for quite a long period now. Finally, the company
depends on the strategies that their competitors are using in the market in order for them to
employ counter strategies as well. this concept of game theory has aided the company to
maintain a good record in the market and keep up with the competition that is being exerted by
their competitors. The strategies that are being used by the company keeps on changing
depending on the market conditions.
6. a. Beta value of the company is 1.00
R a = 0.04 + 1.00 (0.06-0.04)
= 0.0208*100 = 2.08%
c. The company is a “conservative” investment because it is trying as much to mitigate
the risks that are prevalent in the market (United States, & Geological Survey (U.S.).
2011). Investing in lower risk investments helps the company to spread its revenue in the
market where the returns are guaranteed unlike other risky investments. Some of the
investments that the company is investing in include the high corporate bonds.
i). WACC = (E/V x Re) + ((D/V x Rd) x (1 – T))
E = market value of the firm’s equity (market cap)
D = market value of the firm’s debt
V = total value of capital (equity plus debt)
E/V = percentage of capital that is equity
D/V = percentage of capital that is debt
Re = cost of equity (required rate of return)
Rd = cost of debt (yield to maturity on existing debt)
T = tax rate
E = ($12,422.46/$4,074,7.81) * 0.0208)) + ((47% * 4,074,7.81) * (1-0.03)
= 3.7 = 0.0037
ii) Implications of WACC
A higher WACC signifies that the company is at risk because the investors in the company will
require an additional pay in order for them to be able to assume the risk that they are exposed to
by the management. The WACC helps the management of the company to be able to estimate
some of the future or expected costs that is brought about by all its sources of capital. This
includes the cost of debt, the return required
8. i . Stability of the debt ratio
The debt ratio for the company for 2016 and 2017 was 0.4 and 0.36 respectively. The
slight improvement between the years is a clear indication that the company was gaining
stability in the market. The slight decrease was towards the betterment of the company.
Therefore, there is need for the company to ensure that they are able to maintain a lower
debt ratio in the market.
ii. In order to adjust the gearing ratio of Oil Search Limited, the management of the
company is striving hard to ensure that they are repaying their debtors in order to reduce
the borrowed capital that tends to increase the debt ratio of the company (Plunkett, 2006).
Also, the company is buying back the shares from those shareholders that are willing to
sell their shares. This tends to increase the company’s shares and thus this increases the
number of assets that the company.
9. Dividend policy refers to a set of guidelines that are usually employed by the company to
determine the earnings that should be paid to the shareholders that claim shares in the
company. The dividend policy is usually decided by the company directors who estimate
the earnings per share after evaluating the profits that the company has made after
repaying its debts. The company employs a regular dividend policy to its shareholders.
This is because the company gets some regular earnings from its businesses. The
company prefers this type of policy because it is used to create confidence among the
shareholders in the company. Confluence among the shareholders is very important in the
market because it is the main source of equity for the company. Also, regular policy helps
in stabilizing the share value of the company (Plunkett, 2006). Stability is always
important in a competitive market because it signifies better performance by the
company. In addition, the goodwill of the company and regular incomes to the
shareholders are maintained. However, the company has a choice on whether to
implement another policy depending on the performance of the company or suggestion
from the shareholders through a voting process. Each dividend policy that is used by the
company often has its own advantages and disadvantages.
10. Letter of Recommendation
To the Management
Oil Search Limited
PO Box 842
Port Moresby
NCD 121
Papua New Guinea
RE: Recommendation
From the above analysis conducted for your company, the results indicated a lot about your
performance in the market. In essence, the company is performing well except for a few areas
that I feel that more needs to be done in order to ensure that the future of the company is bright.
There are various challenges that the company has faced and more are ahead still coming. The
most important thing is to ensure that the company is able to implement strategies that will see
them gain more stability in the competitive market. First, the current ratio of the company need
to be improved and maintained at a higher level. This is very important because it will increase
the ability of the company to offset its debts whenever they are overdue. in order to improve on
the current ratio, there is need for the company to consider increasing more assets for the
company. This can be by buying more assets that may include increasing the machineries and
other fixed assets for the company. On the other hand, it is evident that the debt ratio of the
company needs to be improved. The ratio needs to be decreased in order to minimize the risk that
the company is often exposed because of the high number of debts. In this case, the management
need to consider repaying the debts from the proceeds that are realized from the profits of the
company (Plunkett, 2006). This could be achieved by considering to buy their shares back from
the shareholders. Increasing the shares of the company is very advantageous even in making the
decision-making process to be simpler. In most cases, companies where the shareholders have a
high number of shares, they are likely to influence more on the decision-making process because
of their high amount of capital that is invested in the business.
Also, I recommend that the company to be keen on the competition that exists on the oil
industry. The middle-east is one of the market with great potential and that offers direct
competition for your company. In fact, the company should benchmark on the middle-east
companies in order to understand some of the strategies that are employed by the companies
from those regions. Such strategies will help improve the company performance. In addition, the
oil market is broad and it’s the duty of the management to look for new markets across the world
and exploit these opportunities. On matters concerning the WACC, it is important that the
company considers ways that will enable them to reduce the WACC in order to minimize the risk
in the market. Minimizing the risk will ensure that no extra cash is paid to the shareholders in
order to increase their confidence. Also, mitigating risk is important because this assures the
stakeholders that the company is set to operate in a foreseeable future (Plunkett, 2006). Also, the
management needs to ensure constant checks and conduct an evaluation quarterly or semi-
annually on performance. This will help identify the areas that pose challenges to the company
and some remedies provided to such areas. In brief, the company performance is good with good
profits from the market. Improvements will make the company even more better that it is now.
Yours faithfully
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