The company is called "Premier OIL" .It is an independent exploration and production company with oil and gas interests in Asia, the Middle East and Pakistan, the North Sea and West Africa. They have a Board of 12 directors [comprises Chairman, the Chief executive, three other executive directors and seven independent executive directors, who took a control of different areas]. They are Sir David John (Chairman), Robin Allan, Scott Dobbie, Ronald Emerson, Simon Lockett (Chief executive), Neil Hawkings, Prof. David Roberts, John Orange, Tonny Durrant, Joe Darby David Lindsell, and Michel Romeiu. The company has a reserve and resource base of 369 million barrels of oil equivalent (mmboe). The company has its headquarters in London, U.K. and employs around 360 people. Their current production exceeded 4, 0000 boepd (barrels of equivalent per day) during the early months of 2008. That gives them an increasing confidence that their production target of 50,000 boepd by the end of 2010 will be achieved. (Premier oil plc, Annual report 2008, 2007)
GROSS PROFIT MARGIN represents small change from 2007 to 2008. In 2007, for every $1 of sales gross profit was 54 cent, in 2008 - 52 cent. It shows a small fall of 2.21 cent gross profit for every $1. The reason that the GPM has fallen is that the proportion of cost of sales in 2008 is higher than in 2007.
OPERATING PROFIT MARGIN represents a slightly smaller difference from 2007 to 2008. In 2007, the company gained 38 cent of operating profit for each dollar, in 2008 for two cent higher per dollar lower. The reason is that the company's proportional increase in administrative expenses such as salaries and rents and overheads and cost of sales were increased over the proportional increase in Gross profit.
NET PROFIT MARGIN represents high change from 25.42% in 2007 to 42.40% in 2008. It means that in 2007 the company got 25.42 cent from each $1, but the next year company had received 16.98 cent more out of hundred. The reason is that company marginally increased its interest received from $10.7 million to $14.6 million, and there was also a greater proportional increase in finance costs and commodity hedges 93.2.
ROCE has increased for 1.48 % from 22.67 % in 2007 to 24.15 % in 2008. It means that shareholders can get more than in the previous year. The company has made 1.48 pence profit out of 1 in one year. It is quite profitable to invest money in this company, because capital employed is increasing, however it is still safe because they have increased their operating profit during the year. It is very attractive figure for all investors, because it has a very high return. For example, it is even higher than 18%, which is the UK average.
(Premier oil plc, Annual report 2008,2007)
CURRENT RATIO indicates the ability of the company to pay its debts and for its orders. It measures the liquidity of the company. In the Premier Oil plc., the liquidity decreased slightly from 1.88 for 0.03 pence less in the next year. The reason for it is that even liabilities were cut the assets had a major fall and the figures are lower, however the proportion of the assets is much bigger than proportion of liabilities, so the only advantage that they can gain now is to continue rising assets, cut liabilities and to increase the amount of cash in hand and the inventories. The situation in 2007 shows, that Premier Oils had an abundance of spare cash and they could have invested this money in further oil exploration activities for the benefit of the future.
ACID TEST RATIO indicates the ability of the company to pay its debts and for its orders excluding the stocks. It measures the liquidity of the company without the stock. The liquidity decreased a little from 1.84 for 0.02 pence less in the next year. The reason is that the current assets have decreased dramatically. Nevertheless the company has decreased its stock efficiently because the major fall in assets has pulled the figure of acid test down. The figures are attractive for the investors as the company managed to decrease its current liabilities, however they have less assets, but still more than enough to pay creditors without the value of the stock.
(Premier oil plc, Annual report 2008, 2007)
Gearing shows the proportion of total capital employed that is financed by Long-term loans. Theoretically, by means of calculations, the company's gearing is very high as t is above 50%. Usually, supermarkets are the ones that have low gearing.
INTEREST COVER represents the number of times the interest covered by profit. So, following the figures, from 2007 to 2008 company has made a progress, because their profits have rapidly gone up despite the fact that Interest has also gone up. It means that in 2008 interest is covered 13 times and in 2007 10 times, so it is a very high figure considering that UK average is 5 times. It is attractive figure for investors as returns from borrowed funds exceed the cost of paying interest.
(Premier oil plc, Annual report 2008, 2007)
Other factors that influence on decision:
- The accounts are subjective involve in large amount of estimation and judgment. This means that a lot of personal opinion is used in the account which is not based on facts. For example the value of stock or the rate of depreciation will be set by the opinion and view of the company accountant. Clearly no two accountants will think the same. This means that the value of the fixed assets e.g. oil equipment will decline in value at different rates.
- Accounts look backwards rather than forwards (we don't have forecasted information within the accounts) (all accounts are based on the historical data, it matters especially if you are looking to invest or give loan to the business) It shows the historical cost value, not the market value. This means that the value of stock such as oil may be valued at the price it was pumped up out of the ground which may be a different value to the market price at the moment. From January to July 2008 the market value of oil was at an all time high (average oil price of $98 a barrel in 2008) which would mean that oil extracted earlier in the year would have risen in value, making more profits even though the businesses did nothing to the oil to add value. (Energy prices Bloomberg.com)
- Goodwill (reputation, which adds value) is subjective. Goodwill is a valuation placed upon the value and loyalty of customers. The accountant makes an estimate by comparing the value of Goodwill of other similar businesses. Goodwill is not shown in accounts unless the business is for sale. This makes the value even more difficult to find out as for most of a business life no good will is shown even through the business may have many loyal customers.
- No information about human capital, no information about managing expertise (no value is given to the expertise) Nothing about stewardship- management of resources (how well the resources are used by them) This means that it is not possible to compare the ability of the management of the two businesses other than by comparing ratios such as profit margins.
- There is nothing about industry averages (is the industry doing well as a whole compared to other industries) All businesses operate within the competitive environment of an industry of similar firms (competitors) Accounts tell us nothing about the state of the competitors.. Competitors of Premier OIL plc. are Apache which is operating in Houston, Eni which is operating in Rome, Royal Dutch Shell who are operating in Hague in Netherlands. The reason that they are operating in the different countries is that the Premier Oil plc. is operating in many countries like U.K., Norway, Egypt, Mauritania, Congo, Pakistan, India, Vietnam, Philippines and Indonesia.
- Nothing about the economy (nothing about the sector).All businesses and their competitors operate within the economic environment and will be affected by external economic variables such as, inflation, economic growth, interest rates, and unemployment. Accounts do not pass comment about such variable and so it is sometimes hard to tell how these variables have effect the business performance. For instance, the goodwill is not given in the Premier Oil plc. Balance sheet.
- There is no information on the market price and shares. It is important to know the amount of shares issued, not just the value of the share capital. The trend in the share price is an indication what existing and potential investors think about the prospects of the business. This information is absent in the accounts.
- There is no information on the any litigation (any law cases) Oil companies operate in a dangerous environment. These businesses can cause harm to employee, customers and the environment. It would be unusual if either of these companies did not have people taking them to court with a grievance. If the company should lose any litigation, then it will be fined heavily which will decrease profits. Accounts do not show the number and size of future litigation.
- All of the figures hide more than they can reveal. For instance, 1000 pounds sales revenue can be generated from on sale at 1000, or 1000 sales at 1. The figures don't mention the method used to generate the sales revenue. In this case, selling the Oil is not that cheap, but many companies buy it in bulks, so they have discount on each barrel or liter. However, the petrol could be the one, used the most in the cities be the cars. It is not that expensive, but is not that cheap. But it is necessity for many people, so the sales are still going.
Finally, the company has shown high profitability ratios. This means that they are attracting figures for investors, especially Return on Capital Employed. The company has also shown that t is very liquid despite the fact that the current ratio and acid test has decreased from 2007 to 2008 a little. The company has done well during the recession period, which indicates the company's ability to perform well in its industry and show the flexibility of the company in the current competition. The gearing of the company is very high, which means they are taking a big risk, however the return is good. But some investors may prefer to take a risk and some not. So no strongly based judgments can be mentioned. In this case, as I am a risk taker, this option is quite good as the company is well-known and has a good reputation in the global market. So, I will invest $10,000 for this company as overall it is operating well both for shareholders and it's customers.
Overall, the task has been quite tricky as there were a few difficulties in reading the accounts. For example, long-term loans are referred as non-current liabilities. Consequences may be wrong figures indicating wrong facts and performance of the company.
The company has done well during the severe recession, so it is highly attractive to investors and other stakeholders. It must be doing well in its market pulling the industry average up.
Nevertheless, the task helped me to extract a lot of skills, such as better understanding accounts and before making any decisions to look to other factors, not only published accounts. It gives a better idea how the company is performing in the internal environment and external environment.
- Premier oil plc, Annual report 2008, official website, accessed December 9, 2009 at: http://www.premier-oil.com/render.aspx?siteID=1&navIDs=19,320,322
- Premier oil plc, Annual report 2007, official website, accessed December 9, 2009 at: http://www.premier-oil.com/render.aspx?siteID=1&navIDs=19,320,322
- Energy Prices Bloomber.com, accessed December 9, 2009 at: http://www.bloomberg.com/energy/