Company Analysis (Oil and Gas Sector)

By: #18 Deepak Nair # Gaurav Talreja #8 Laxmanan Iyer #46 Vishwanathan V. #45 Abhishek Sundaram

OBJECTIVE: The objective of this project is to analyze and interpret the cost structure and segment performances for companies in the Oil and Gas Sector having multiple product lines.

Contents
OBJECTIVE: .................................................................................................................................................................2 INTRODUCTION..........................................................................................................................................................4 COMPANIES ANALYSED: .........................................................................................................................................6 METHODOLOGY AND DATA SOURCE: ....................................................................................................................7 FIRM WISE ANALYSIS .................................................................................................................................................8 PROFIT AND LOSS ACCOUNTS OF THE COMPANIES...............................................................................................8 COMMON SIZE P&L OF COMPANIES ......................................................................................................................9 ANALYSIS OF COMMON SIZE P&L........................................................................................................................ 10 1. GAIL:............................................................................................................................................................. 10 2. RIL: ............................................................................................................................................................... 10 3. IOC: .............................................................................................................................................................. 11 4. ONGC: .......................................................................................................................................................... 11 5. BPCL: ............................................................................................................................................................ 11 INDUSTRY ANALYSIS ............................................................................................................................................... 12 SEGMENT ANALYSIS (RATIOS) ................................................................................................................................ 13 1. GAIL:............................................................................................................................................................. 13 2. RIL: ............................................................................................................................................................... 13 3. IOC: .............................................................................................................................................................. 14 4. ONGC: .......................................................................................................................................................... 14 5. BPCL: ............................................................................................................................................................ 14 ANALYSIS OF THE COMMON SEGMENTS:.............................................................................................................. 15 CONCLUSION........................................................................................................................................................... 15 BIBLIOGRAPHY ........................................................................................................................................................ 16

INTRODUCTION Indias Oil and Gas Industry has an interesting mix of Oil & Gas companies from the government and private sector. Except for some companies providing ancillary and drilling services, most of the companies are huge with billion dollar balance sheet and huge operations as is the case with the Oil and Gas Industry worldwide. Except for Reliance Industries, the upstream sector of oil and gas production and distribution is dominated by government owned companies which are heavily regulated. The petroleum industry is usually divided into three major components: Upstream, midstream and downstream. Midstream operations are usually included in the downstream category. UPSTREAM The upstream oil sector is a term commonly used to refer to the searching for and the recovery and production of crude oil and natural gas. The upstream oil sector is also known as the exploration and production (E&P) sector. The upstream sector includes the searching for potential underground or underwater oil and gas fields, drilling of exploratory wells, and subsequently operating the wells that recover and bring the crude oil and/or raw natural gas to the surface. MIDSTREAM The midstream industry processes, stores, markets and transports commodities such as crude oil, natural gas, Natural Gas Liquids (NGLs), and Liquefied Natural Gas (LNGs, mainly ethane, propane and butane) and sulphur. DOWNSTREAM The downstream oil sector is a term commonly used to refer to the refining of crude oil and the selling and distribution of natural gas and products derived from crude oil. Such products include liquefied petroleum gas (LPG), gasoline or petrol, jet fuel, diesel oil, other fuel oils, asphalt and petroleum coke. The downstream sector includes oil refineries, petrochemical plants, petroleum product distribution, retail outlets and natural gas distribution companies. The downstream industry touches consumers through thousands of products such as petrol, diesel, jet fuel, heating oil, asphalt, lubricants, synthetic rubber, plastics, fertilizers, antifreeze, pesticides, pharmaceuticals, natural gas and propane.

MAJOR PLAYERS IN INDIA Reliance Industries ONGC Corp GAIL India Cairn India BPCL Indian Oil Corporation Ltd (IOCL) Hindustan Petroleum Corp. Ltd Oil India Ltd Petronet LNG Ltd.

COMPANIES ANALYSED:
GAIL GAIL (India) Limited, is Indias flagship Natural Gas company, integrating all aspects of the Natural Gas value chain right from exploration to marketing. It emphasizes on clean fuel industrialization, creating a quadrilateral of green energy corridors that connect major consumption centers in India with major gas fields, LNG terminals and other cross border gas sourcing points. The business has achieved lying of Natural Gas high pressure trunk pipeline, LPG Gas Processing Units & Transmission pipeline network, oil and gas Exploration blocks, OFC network offering highly dependable bandwidth for telecom service providers etc. GAIL has been entrusted with the responsibility of reviving the LNG terminal at Dabhol as well as sourcing LNG.GAIL is one of the best performing stocks in the Energy Industry in India in the last couple of years. It is a well managed fast growing company in one of the best sectors in India with high competitive barriers. RELIANCE PETROLEUM The Flagship Company of the Ambanis and Indias largest Private Company Reliance Industries is also an Oil and Gas Giant .The Company has seen very sharp growth in the last decade and is diversifying into Retail. .The Company is also one of the biggest exporters in India with one of the largest petrochemical and oil refining complexes in the world at Jamnagar. INDIAN OIL CORPORATION LIMITED The company covers the entire hydrocarbon value chain from refining, pipeline transportation and marketing of petroleum products to exploration & production of crude oil & gas, marketing of natural gas, and petrochemicals. Indian Oils cross-country network of crude oil and product pipelines, spanning 10,899 km and the largest in the country, meets the vital energy needs of the consumers in an efficient, economical and environment-friendly manner. Like IOCL it is also suffers from government mal-interference and not a good investment. ONGC ONGCs wholly-owned subsidiary ONGC Videsh Ltd. (OVL) is the biggest Indian multinational, with 40 Oil & Gas projects in 15 countries. The company earned a revenue of approx Rs. 20,000 crores with net profit margin of 34% in Dec10.It holds largest share of hydrocarbon acreages in India & contributes over 79 per cent of Indians oil and gas production. ONGC created a record of sorts by turning Mangalore Refinery and Petrochemicals Limited (MRPL) around from being a stretcher case at BIFR to the BSE Top 30, within a year.

BPCL BPCL is along with HPCL and IOCL, a major distributor of petroleum, cooking gas and diesel in the Indian market. Bharat Petroleum produces a diverse range of products, from petrochemicals and solvents to aircraft fuel and specialty lubricants and markets them to hundreds of industries and several international and domestic airlines.

METHODOLOGY AND DATA SOURCE:

We have taken Annual reports of the companies of the year 2010-11 from their respective websites. We have taken datas for the years 2009-10 and 2010-11 from these reports. There after we have prepared a template, i.e. common-size statement as well as a template for the purpose of segmental analysis of these companies. Using these statements we have made analysis of each firms current year performance in comparison to its previous years performance. We have also performed the inter company performance comparison for year 2010-11. Form the analysis we have reached derived conclusions which has been included in latter part of this report.

FIRM WISE ANALYSIS

PROFIT AND LOSS ACCOUNTS OF THE COMPANIES

COMMON SIZE P&L OF COMPANIES

ANALYSIS OF COMMON SIZE P&L

GAIL: Gails sales have increased significantly 30% YoY. It continues to generate 93% of its total revenue through its operations. The materials consumed though has fallen this is because of the sales of stock from the last year apart from minor reductions in raw material consumption costs. The purchase has grown by 43% YoY and the part it forms of total income earned is 63%. Employee costs as a part of total income has reduced however the monetary value of employee costs has increased by 19% YoY. The same is the case with office admin and selling expenses which have fallen to 9% of the income generated while the monetary value has increased by 8%. Miscellaneous expenses have increased by 73% however the part it forms of the total incomes is insignificant. The costs incurred in manufacturing is 80% as against the 78% it stood at the previous year implying that for every Rs 100 sold the company had costs of Rs. 80. The costs in monetary terms have gone up by 33% primarily due to huge expenditure on purchases. EBITDA has fallen to 20% implying Rs 20 earned on every Rs 100 sold as against the Rs. 22 profit earned the previous year. Obviously this is due to the increase in the cost incurred in manufacturing the product. The amount spent on depreciation has increased by 8% however the part it forms of the total income is lower at 2.48% as against 2.98% in the previous year. The EBIT of the company has grown 19% YoY but it is only 17% of the total income earned. Interest charges too have fallen by 2% the reason for which, needs to be investigated by looking at the balance sheet of the company.PBT stands at 16% as compared to last years 17%, however it has grown by 20% monetarily. The taxes have fallen mainly on account on higher depreciation charge as compared to the previous years. PAT is at 11% as against 12% in the previous year, but it has grown 21% YoY. The fact that profits have grown eve though the costs of production have gone up can e attributed to the rise in the number of units sold which offset the effect of higher prices. Another reason why profits did not fall as much is due to the increase in depreciation charge on assets. RIL: RIL has earned 97% of its revenue from its operations as against 92% in the previous year which is a good sign; moreover the revenue generated is 30% more than the previous year. Its income from other sources has fallen by almost 60% in monetary terms and forms only 3% of total income earned. Raw material consumption has increased by 31% which forms 74% of the total revenue in making the product. Purchases have fallen by 7% in monetary terms from the previous year and form only 3% of total income. Manufacturing costs form 28% cost of total income with office expenses forming a major portion of the costs being 6% of the income and having risen 30% YoY. Operating expenses for 85% of total income is up 30% in monetary terms from the previous year. EBITDA is 14% of the income and has fallen 4 % which is a reason for concern. RIL needs to reduce its manufacturing and costs to make the business more profitable. They are managing to increase the sales however the costs are eating into their profits. They depreciation costs have increased YoY. This is because of assets added in 2010. It appears that RIL is expanding its capacities to meet a growth in sales. EBIT is down by 13% monetarily and forms 10% of the total income. Interest charges are up 17% but forms only 0.88% of the total income. PBT is again down due to the increase in the interest and depreciation charges. PAT is down by

21% from last year on account of increased cost which is a reason for concern. RIL needs to reduce its costs to increase its profitability since it is the costs that are eating into their profits though sales have gone up. IOC: IOC earns only 89% of its total income from its operations there has been a 22% growth in the sales revenue and 20% growth in its income from other sources. The material costs have gone up by 25% monetarily with both raw material and purchases costs increasing by 25%. The part raw materials and purchases form of the total income stands at 47 and 40% respectively. Manufacturing expenses have increased by18% by and it forms only 9.82% of the total costs as against 10.09% in the previous year. The total operating expenditure is 97% of the income and has increased by 25% over the previous year. EBITDA is down by 20% and is only 5% of total income earned. Depreciation as a part of the total income remains at 1.55 % but it has grown by almost 40% from the previous year. EBIT too is down by 33% and forms 4% of total revenue. The interest rate charge has decreased by 18% from last year with PBT lower by 33%. PAT stands at 3% of income down by 27% implying only Rs 3 profit made for every 100 Rupees sold as against the Rs 4 made in the previous year. ONGC: ONGC earnings from its operations have decreased and stands at 94% of total revenue as against 95% last year though it has grown by 16%. The income from other sources has increased by 39%. Expenditure on materials has increased by 25% YoY and forms 25% of income. Manufacturing costs are up by 15% with employee, Royalty and miscellaneous expenses forma major portion of the income. The operating expenditure is 55% as against 53% of total income in the previous years and is up 20%. EBITDA has increased by 13% however EBITDA is only 45% of total income which might signify a slowdown in sales growth. EBIT is 28% of income depreciation charges have increased by 10% in monetary terms though it forms only a minor 1.3% of income. The Taxes paid has grown by 7.26% though the part it forms of the total income has fallen to 9% as against the 10% in the previous year. PAT has grown 16% and forms 182% of the total income earned. BPCL: BPCL earn 98%, as against 94% in the previous year, from its operations which has grown by 24% from the previous year. Its income from other sources has fallen by 50% and forms 2% of its total income. The expenses on raw material and purchases have grown by 21% with a growth of 22% and 21% in raw material and purchase expenses respectively. They form 90 % of income earned. Manufacturing costs have increased marginally by 5.33% and the part they form of the total income is 6% as against 7% in the previous years showing that they are reducing the overhead costs of production. Total operation expenditure stands at 96% of income with a growth of 21% YoY. EBITDA has grown 10% but it forms only 45% of the total income as against the 47% it formed the previous year due to the rise in material expenses. Depreciation and other expenses have increased. EBIT is up 5 % YoY but forms only 2.6% of the total income. There has been an increase in PBT in monetary terms this might be due to an increase in sales however the return on every 100 rupee sold dropped to Rs. 1.81 as against 2.11 in the last year.

INDUSTRY ANALYSIS
On examining the common size profit and loss account we notice that RIL and BPCL generate maximum revenues through their operations of 97.43% & 97.61% respectively while IOC generates the least at 88.81%. Year on year growth in revenue from operations is the greatest in GAIL and RIL at 29.53% & 30.47% respectively while growth in total revenue generated is maximum in GAIL, however GAIL performs better on total revenue generated year on year which has increased by 29.54%. RIL has maximum expenditure on raw materials at 73.99% of its total revenue with a year on year growth of 31.84% while GAIL spends the least at 6.10% of total revenue generated. The expense on purchases however is maximum by GAIL at 62.93% of total income and has increased 43.06% YoY and least in ONGC (ONGC itself extracts crude and hence purchases are low). The total material costs in RIL, as a percent of income is the greatest at 86.99 % with a growth of 25.49% YoY, while ONGC is the least at 25.63% of total income. Manufacturing costs of ONGC is the greatest at 28.96% of total income while BPCL has the least at 6.34 % of total income. The YoY growth in manufacturing expenses at RIL has grown by 28% a trend that needs to be arrested since it is eating into their profits most of these costs arise out of office, administration, selling and other expenses which can be controlled. Even IOC and BPCL need to look at controlling their expenses mainly material expenses, perhaps the consumption of materials isnt done optimally because of which costs have increased. The total operating expenditure of IOC and BPCL is the highest at almost 97% of total income. EBITDA is the highest in ONGC and BPCL at 45% of total income which is good since it implies that for every Rs. 100 sold they earn Rs. 45 as income before depreciation and taxes, ONGC inches above BPCL since the growth in EBITDA is at 13.44% as compared to 10.75% of BPCL. IOC has the lowest EBITDA of 4.74% of total income implying they earn only close to Rs. 5 on every Rs. 100 sold, it is disconcerting that it has fallen 19% YoY. The EBIT is the highest in ONGC at 27.71% of income which is down on account of high depreciation charges. The EBIT of BPCL has, however dropped drastically from EBITDA - a phenomena that needs to be analyzed further in detail, causing it to have the lowest EBIT of 2.6% of total income. The EBIT of RIL and IOC is showing a retarding growth and the management needs to make radical changes in its spending on manufacturing costs to stop this decline in profits, perhaps an improvement in methods of production and an up gradation can be an option to reduce costs. Again ONGC offers the best PAT at 18.20% of total income implying Rs. 18.20 is available for shareholders for every Rs. 100 sold which is very good it has also shown an increase of 15.69% from the previous year. GAIL too has a respectable 11.12% available to give shareholders and it has grown 20% YoY. RIL and IOC are showing a negative trending in their PAT a matter of concern for the management. BPCL gives the least PAT at 1.11% of total income and it has grown only marginally by 1.28%. If we were to pick the company that has been performing well, based on the common size statements, we would pick ONGC, but the growth of GAILs PAT is much greater than that of ONGC so GAIL might prove to be a better bet. IOC and RIL need to contain this downward trend they have witnessed in their profits while BPCL needs a thorough analysis to understand why their profits drop drastically after having one of the highest EBITDAs among these companies.

SEGMENT ANALYSIS (RATIOS)

GAIL: GAIL generates 11.45 % of its revenue from transmission; it has fallen from the 12.48 % in the previous year. The margins on the same are 71.39% as against 66.40% in 2010 and the ROA is 21.21% as against 18.21% in 2010. GAIL generates its maximum revenue from Natural Gas. It forms 65% of the total income earned which is up from the previous years 59.02%. The margins earned in this segment are however the lowest at 3.98%, although it is up from the previous years 2.81%. The ROA on Natural Gas is at 177.65% which is extremely good as it implies for every Rs. 100 spent the segment generates Rs. 117.65. There has been a fall in the revenue generated by petrochemicals as a part of total revenue, it is 8.37% of total revenue as against the 10.74 % it was the previous year. It offers a 40.29% margin against the 45.72% it offered last year. The ROA for it is at2.94% as against the 3.7 it offered the previous year. The LPG segment revenue forms 7.94 % of total revenue as against the 10.48% it formed last year. The margins are down from last year and is at 17.44%. The ROA is an astounding 258% for this segment as against 51.91% I the previous year. City Gas contributes 2.95 % to total income, marginally higher from the last year. The margins on this segment is down to 25.48 as against 29.16 in the previous year and the ROA is 24.38% as against 26.55% in the previous year. Based on the above observations we can conclude that GAIL must try and increase its sales in the transmission segment since the margins are greater in the segment and the margins are increasing. Margins need to be improved through reduction in costs in the natural gas segment since the sales in this segment form a chunk of their earnings. The same applies to LPG segment. RIL: RILs petrochemical business contributes 24.48% to total revenue as against 27.92% in 2010. The margins are slightly lower from the previous year and the ROA has increased to 20.88% as opposed to the 18.87% in 2010. The refining segment of RIL generates most of its revenues. 67.50% is contributed to the total revenue figure by the refining segment. The margins for this segment stands at 4.92% as against 4.45% in 2010. The ROA is 8.71%

for this segment up by 1.75% from 2010. Oil and Gas segment provides 5.68% marginally higher than the previous year. It margins for this segment is 42.77%, it is down by about 1.5% from the previous year. The ROA for the segment is 10.35%. Based on the above data e can say that RIL needs to improve its margins by controlling expenses in the refining segment to leverage the sales capability of this segment. Moreover an improvement in the Oil and Gas segments sales will also improve the companys profitability. IOC: IOC generates most of its revenue from its petroleum segment. The margin this segment offers is 4.18 which is lower than the 6% it offered in 2010. The ROA has fallen by almost 4 % and is 9% for 2011. Petrochemicals business contributes 1.83% of the total revenue. This segment is performing badly and is making losses. It is making a loss of 30% and the ROA is -9%. IOC needs to improve the margins on its petroleum business since this appears to be its core segment. A change in the expenses will work wonders for their profits also introduction of better methods of production will improve segments profitability. The same applies to the petrochemical business wherein the company must try and reduce costs so as to at least contain the losses. ONGC: ONGCs E&P segment generates 50% of its revenues as against the 53% it did last year. The margins are down too by almost 8-9%. And so is the ROA which is 42.73% as against 50% in 2010. Refining generates 34% of the total revenue as against 33.08% but its margins are down by.35% from 2010. The ROA is 9.34% as against 11% in 2010. The revenue from refining segment has grown by 1% but the margins have dropped by 0.4%. The ROA too has reduced by about 1.5%. ONGC needs to improve margins on both of its segments to ensure they dont making losses on their segments especially the refining segment whose margins seem to be dropping quite fast. BPCL: BPCL generates 99.96% of its revenues from its downstream activities that include liquefied petroleum gas

(LPG), natural gas and refining of crude oil. The margins are low at 2.16% and have dropped almost 1%, BPCL needs to hit the panic button and rework its cost structures. The ROA has fallen by about 1.6% and stands at 6.01%. The E&P segments contribution is negligible however it is making losses of 52.43% from the 43.21% profit it was making in the previous year, the company needs to look into this immediately to see whether its a trend or a one off phenomena. The ROA has also fallen by almost 10% from the previous year.

ANALYSIS OF THE COMMON SEGMENTS:

Petrochemicals: Petrochemicals segment is a part of GAIL, RIL and IOC. It contributes 8.4%, 24% and 1.83% of the revenue in GAIL, RIL and IOC respectively. The petrochemical business is performing exceedingly well in GAIL as compared to the other 2 companies. The margins received by GAIL is 40.29 as compared to the 14.10% and (30% Loss) made by RIL and IOC. The ROA is the greatest in RIL with 21% returns while GAIL gets an ROA of 2.94%. ROA of IOC is negative and stands at -9%. RIL and GAIL need to analyze the costs of GAIL to understand as to where they are having excessive costs. They might even have to analyze the process of production to improve efficiency and hence profitability. Refining: The refining business of RIL is performing better that of ONGC having a margin of 4.92% as against 3.98%. However this difference is marginal and could be attributed to government regulation considering that ONGC is State-run and also that RIL is achieving efficiency due to its volume of sales as this seems to be their core segment. The ROA in ONGC is however better than that of RIL. E&P: The E&P segment of ONGC is outperforming that of BPCL significantly while BPCL is making losses of 52% ONGC is making profits of 64% though the margins have reduced from the previous year. BPCL needs to look at its process and cost to understand where it has underperformed in comparison to ONGC and rectify it. The ROA on ONGCs E&P segment is 42.73% while that of BPCL is (1.62%)

CONCLUSION
As per the analysis we inferred that GAIL is the best bet amongst the firms. The firm has the second highest PAT after ONGC however the growth rate of GAIL is higher than ONGC making it a more probable bet than ONGC. The segments of GAIL are also outperforming the segments of ONGC and are show better ratios.

BIBLIOGRAPHY
Websites Books Cost Accounting A.K Bhattacharya Accounting and Finance for Non-Specialists Peter Atrill, Eddie Laney www.google.com www.ril.com www.gail.nic.in www.bharatpetroleum.com www.ongcindia.com www.iocl.com