AG151 Finance And Accounting

Introduction:

The current company British Petroleum is looking forward to make a takeover bid on Royal Dutch Shell Plcisknown, as Shell incorporated in United Kingdom is a international oil and gas company. Shell is active in large number of areas under the oil and gas industry which comprises of exploration, production, refining and distribution. The company currently reported a net profit of 3,973,000 in its last financial year of 2015 with sales being 233,117,000 for the financial year (Baker and Haslem 2015). Shell is primarily engaged in the administration of a vertically incorporated oil corporation and possesses industrial proficiency in all phase of upright incorporation. The oil and gas industry of UK produces 1.42 million “Beopd” with 98% of the production arising out of offshore fields.

Strategy Forward:

Shell is strategically looking forward to make stronger its leadership in the oil and gas industry, by positioning the corporation for growth and development in respect to the global transition of low carbon energy system. Shell employs the strategy of strengthening its security along with environment and social responsibility to underpin its business approach. The company is strategically centred to develop simpler company with the objective to develop higher and more predictable returns by growing its free cash flow per share (Titman and Keown 2015). Shell currently aims to invest in compelling projects so that it can cut down its cost by selling its non-core business since it will help in shaping the business as highly resilient and focussed oriented company. The company currently engaged in the forward planning of cutting down its carbon intensity. The company’s forward looking plan consist of analysing the materialist financial statement concerning the exposure to the market risk against the statement expressing the management anticipations. 

Ratio Analysis:

The ratio analysis takes into the consideration the profitability ratio, liquidity ratios, efficiency ratios and financial ratios. Under the profitability ratio, the return on capital for the financial year of 2015 it is found that the company reported the figure of 8.17 prior to the financial year 2014 where the company reported 10.60 of ROCE representing. The return on equity reported in the financial year 2014 comprised of 8.64, which significantly fell in 2015 to 1.19. The gross profit percentage reflected marginal increase from 17.18 to 18.15 in the year 2015. Shell reported a current ratio of 1.15 in 2015 however, it increased to 1.31 subsequently in 2015 (Epstein and Buhovac 2014). The quick ratio on the other hand, reported by shell was 0.88 in 2014, which improved to 1.04 representing a positive liquidity position. Upon analysing the Efficiency ratio of Shell it is found that the cash conversion cycle reported by the company was negative with -0.6 in 2014, which subsequently increased to 10.68 in the year 2015. The Price earnings ratio however, increased in the year 2015 as Shell reported the price earning of 41.26 in 2015, which is a superior than the previous reporting period of 2014.

Cash Flow:

Net amount of cash flow from the “operating activities” lays down the sum amount of “cash receipts and payments”, which is linked with the sale of oil gases, chemicals and other products. The major apparatus of cash flow offer a settlement from returns for the phase provided in the “statement of consolidated cash flow”. This helps in reflecting the organisations capability to produce cash together for its distribution to the shareholder and investment (Cai and Xie 2016). The net amount of cash from the operating activities represents a fall of 45.0 billion in 2014. The decrease is mainly characterised as the company’s fall in income, which led to the significant decline in the oil and gas prices. From the analysis, it is evident that the most vital element creating an impact on the company operating cash flow is the movement in earning and working capital, whichis largely impacted by the realised cost for crude and natural gas (Spronk, Steuer and Zopounidis 2016). The company strategy of developing returns that are more predictable by growing its free cash flow per share does not seem to be in accordance with the current scenario of its Cash Flow.

Non-Performance Indicators:

The key financial performance indicators of Shell are as follows

Refinery and chemical plant availability: Refinery and the availability of the chemical plant are considered as the weighted average of the original uptime of the plants reflecting the proportion of highest probable uptime (Hajek, Olej and Myskova 2014). This indicatoris evaluated in the form of operational excellence of the manufacturing facilities.

Equity sales of liquefied natural gas: Equity sales of LNG is measured as the operational indicators of performance in the with high market demand.

Delivery of project: The project delivery involves approximately 20 shell operated capital projects, which are currently in the execution phase with the accuracy of 82% in the year of 2015 (Nobes, 2014).

Conclusion

The company can be considered as growing and has directed its exploration to the majority of the onshore reserves. In line with the growing trend, the company is moving forward to the deep-water exploration with thick layer of oil and gas reserves. Several researchers have indicated that the company is positioned to maintain its dividend growth of 6.6%. Shares have increased by 0.3% ever since the exit of Brixit, which initially fell down to as low as 8%.   

Recommendations:

The performance over the time has been good however, the company can still gain faster growth and wider market share from the below stated recommendations.

1. The company lacks modern retail outlets, which has affected its market share. It is recommended that the company could improve its outlets to meet the modernization of its competitors.
2. The company lacks sufficient operations in every city therefore; it is recommended that it could improve its operations in every city to capture new markets.

Limitation of the Analysis:

1. Latest data for the year 2016 was not available which was one area of limitations in this analysis
2. Unavailability of data for shells business in the areas of trading and renewables.  
3. There were limitations in the areas of operation level strategy concerning the individual business due to the unavailability of annual report of 2016.

Reference list:

Baker, H.K. and Haslem, J.A., 2015. Information needs of individual investors.

Cai, Y.J. and Xie, M.L., 2016. Analysis of inventory and financial performances of Esprit based on its corporate financial reports. International Journal of Inventory Research, 3(4), pp.337-375.

Epstein, M.J. and Buhovac, A.R., 2014. Making sustainability work: Best practices in managing and measuring corporate social, environmental, and economic impacts. Berrett-Koehler Publishers.

Gigler, F., Kanodia, C., Sapra, H. and Venugopalan, R., 2014. How Frequent Financial Reporting Can Cause Managerial Short?Termism: An Analysis of the Costs and Benefits of Increasing Reporting Frequency. Journal of Accounting Research, 52(2), pp.357-387.

Hajek, P., Olej, V. and Myskova, R., 2014. Forecasting corporate financial performance using sentiment in annual reports for stakeholders’ decision-making. Technological and Economic Development of Economy, 20(4), pp.721-738.

Nobes, C., 2014. International Classification of Financial Reporting 3e. Routledge.

Spronk, J., Steuer, R.E. and Zopounidis, C., 2016. Multicriteria decision aid/analysis in finance. In Multiple Criteria Decision Analysis (pp. 1011-1065). Springer New York.

Titman, S. and Keown, A.J., 2015. Financial management: Principles and applications. Pearson.