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Evaluate the financial performance of Esso Ltd and provide an understanding on the financial position of the organization from the year 2013 to 2017.
 

Gross Profit Margin

The current study is based on assessing the performance of Esso Ltd that is the UK company that is engaged in the exploration, production and sale of oil, crude natural gas. The report will be providing ratio analysis to evaluate the financial performance of Esso Ltd and provide an understanding on the financial position of the organization from the year 2013 to 2017. Alongside a comparative analysis will be performed for a UK based oil industry company named State Oil to better provide an insight into the operational insight into the organizations performance.

The oil and gas trends since the year 2000 has declined steadily between the year 2000 and 2014 with a modest upturn during the year 2015. The production of gas declined during 2000 and 2013 however it increased in 2015 (Kelland 2014). Against the falling production of oil and gas the increasing prices for most of the period meant that the income of industry remained between £25 billion and £30 billion from the year 2000 to 2013 but fall during 2015 to £20 billion largely because of declining prices (Comyns and Figge 2015).

The price of brent crude oil have reached the all-time high of $145 per barrel from July 2008. The yearly UK whole sale price have declined to 68 pence per therm in 2013 to 43 per therm in 2015 and 35 per “therm” during 2016 (Yusuf et al. 2014).

The UK oil and gas investments came into the scenario during the year 2013 through a reverse listing. There was a stunning increase in the value of shares since the companies listed under this oil gas industry seeks investment particularly in the domestic conventional oil and gas sector (Shukla and Karki 2016). The shares of the company currently stand 8.5p with multiple amount of fund raisings. The total number of shares have taken to 3,538 million with UK oil and gas market cap standing around £300 million.

Clearly, UKOG presently running at an annualised revenue of £208,000 with an operating loss of around £2.1 million, falling slightly short of £300 million market cap (Cordes et al. 2016). The current market conditions with 8.5 per share and £300 market cap the UK oil and gas is assured of commercial rise in production and growth.

Esso Ltd is engaged in the exploration of production, transportation and sale of crude oil, natural gas, petroleum and chemical products in United Kingdom (Asche et al. 2015). The company is engaged in refining, distribution and marketing of petroleum products.

Net Profit Margin

State Oil Ltd was incorporated in 2000 as the parent company of group. It is viewed by the oil industry as the leading independent petroleum trading company and activity features in media publications.  

  1. Esso aims to make fundamental respect for the human rights and responsibly administering the impact on community by making valued social investment for social and integral success of business (Paterson 2017).
  2. The company makes local investment directed to address the public community such as social and economic challenges.
  3. As the part of environmental impact the company is working to mitigate the climate risk by working towards reduced emission and energy efficient products. 

Gross Profit:

The gross margin helps in representing how well the organization is performing by deriving gross profit returns from the turnover of stock (Scott 2015).

Gross Profit Margin

2016

2015

2014

2013

State oil ltd.

0.79433358

1.27649994

1.229935

1.545232

Esso ltd.

7.07

5.82

-0.14

2.14

Figure 8: Figure representing gross profit margin

Source: (As created by Author)

  • The gross profit margin for state oil ltd during the year 2013 stood 1.54 which declined in 2014 to 1.22. Though, it marginally gained in 2015 to 1.27 but again fell significantly to 0.79 in 2016.
  • Esso ltd reported a slightly tumultuous gross profit margin as in 2013 the margin stood 2.14 and further decline to -0.14 in 2014. The company took measures in 2015 which led to gross profit margin to increase to 5.82 and 7.07 in 2015 and 2016 respectively.  
  • Unlike the Esso Ltd, State Oil ltd faced competitive trade environment though the gross profit margin represented less but there has been a slow growth of the company. Esso Ltd gross profit margin stood strong since the company has better trading environment.

The net profit margin is used to represent how better the company is able to generated profit from its stocks (Schaltegger and Burritt 2017).

Net profit margin

2016

2015

2014

2013

State oil ltd.

0.16138422

0.41

0.56

0.82

Esso ltd.

4.53

6.63

-2.45

0.03

Figure 9: Figure representing net profit margin

Source: (As created by Author)

  • The net profit margin for State oil represented a declining trend over the period of five years. The net profit margin during 2013 stood 0.82 where as it subsequently declined to 0.16 during the year 2016.
  • Esso Ltd though represented a strong trend in net profit margin despite incurring loss in 2014. The net profit margin has significantly grown in 2015 however it declined by 2.10% in 2016 to stand at 4.53%.

Return on equity refers to the amount of net income returned as the proportion of shareholder’s equity (Williams 2014). The operating return on equity helps in measuring the profitability of the organization by revealing the amount of profit an organization generates with the money of shareholders.

Operating Return on Equity Calculation

2016

2015

2014

2013

State oil ltd.

17.4204998

19.386888

31.67789

34.00869

Esso ltd.

19.4371152

38.7130802

-15.6591

0.222883

Figure 10: Figure representing Operating Return on Equity

Source: (As created by Author)

  • The operating return on equity for State Oil Ltd has represented a falling trend over the period of four years as the ratio stood 34.00 during 2013 and continued its declining trend until 2016. The ratio stood 19.38 during 2015 and declined subsequently in 2016 to 17.42.
  • Esso Ltd represented a rising trend in spite of suffering a loss in 2014. The operating return on equity for Esso Ltd in 2013 stood 0.22 and stood 38.71 in 2015. However, in 2016, it fell significantly to 19.43.

The return on capital employed represents the financial ratio that measures profitability of the company and the efficiency with the help of which the capital is employed (Warren and Jones 2018).

Return on Capital Employed

2016

2015

2014

2013

State oil ltd.

16.6085136

18.1958365

29.43385

31.02985

 Esso ltd.

15.4114365

29.81316

-13.0461

0.17452

Figure 11: Figure representing Return on Capital Employed

Source: (As created by Author)

  • The return on capital employed for State Oil Ltd during the year 2013 strongly stood 31.02. However, from there onwards State Oil posted rather declining trend as the ROCE stood 18.81 and 16.60 in 2015 and 2016 respectively.
  • Esso ltd on the other hand provided a return on capital employed of 0.17 in 2013 however it negatively stood in 2014 to -13.04. Though the return on capital employed for Esso Ltd in 2015 gained strength in 2015 which fell to 15.41 in 2016.
  • Esso Ltd has presented a significant improvement in ROCE and has increased more than double in 2016 despite incurring a downward trend in 2014. The return on equity cannot be termed worse however it requires to be reversed.

Current Ratio:

The current ratio is primarily used to provide an idea regarding the ability of the organization to pay its debt back with its assets (Henderson et al. 2015). The current ratio is used to make an approximation of an organization financial health.

Current Raito

2016

2015

2014

2013

State oil ltd.

-103.068741

-115.9062

-110.548

-115.792

Esso ltd.

-177.655311

-164.66431

-139.77

-133.894

Figure 12: Figure representing Return on Capital Employed
Source: (As created by Author)

  • The current ratio for State Oil Ltd represented a negative trend over the period of four years as the ratio stood negatively in 2013 to -115.79 and in 2014 it stood -110.54. During the year 2015 and 2016 current ratio for state oil stood -115.90 and -103.06 respectively.
  • Esso ltd also reported a similar negative trend in the current ratio for the firm which stood negatively in 2013 at -133.89 and in 2016 the ratio stood -177.65.
  • An assertion can be bought forward the both the company lacks the ability of paying off its debts. 

The debt equity ratio represents the financial ratio that helps in reflecting the relative proportion of shareholder’s equity and debt which is used to finance the organization assets (Reid and Myddelton 2017).

Debt/Equity Raito

Long Term Liabilities

2016

2015

2014

2013

State oil ltd.

-935

-1195

-1245

-1303

Esso ltd.

-297000

-283000

-275000

-373000

Figure 13: Figure representing Debt/Equity Ratio

Source: (As created by Author)

  • State Oil Ltd reported a negative debt to equity ratio of -9.59 in 2013 and over the four-year period the ratio stood negatively at -4.88.
  • Esso Ltd also reported a negative debt equity ratio of -27.71 in 2013. Whereas in 2016 the ratio stood negatively at -26.12. The company has higher amount of debt in proportion to its equity.

Operating leverage represents the measurement of the extent to which an organization incurs fixed and variable costs (Trotman et al. 2015).

Operation Leverage

2016

2015

2014

2013

State oil ltd.

63.9660652

6.38464481

5.079368

5.654264

Esso ltd.

27.0970395

32.7884615

51.7077

43.68049

Figure 14: Figure representing Operating Leverage

Source: (As created by Author)

  • The operating leverage for the State Oil Ltd organization presented a rising trend as in 2013 the operating leverage for State Oil stood 5.65 and in 2014 it stood 5.07. Similarly, for 2015 ratio stood 6.38 while in 2016 it increased Significantly to 63.96.
  • Esso Ltd represented a gradually falling trend in its operating leverage as it stood 43.68 in 2013 and declined to 27.07 in 2016.
  • Esso has higher proportion of Fixed assets with higher proportion of intangible assets that have remained constant over four-year period. 

The asset turnover represents how effectively an organization is using its asset to generate sales.

Asset Turnover

2016

2015

2014

2013

State oil ltd.

102.91287

44.3885377

48.12706

42.58551

 Esso ltd.

3.40446304

4.49796913

0.532888

5.878999

Figure 15: Figure representing Debt/Equity Ratio

Source: (As created by Author)

  • The asset turnover for State oil has increased over the last four-year period. The turnover stood 42.58 in 2013 and significantly increased to 102.91 in 2016.
  • Esso ltd reported an inferior asset turnover with the ratio standing 5.87 in 2013 and subsequently fell to 3.40 in 2016.
  • The asset turnover for Esso Ltd requires improvement in order to generate higher sales revenue.

The debt collection periods the number of days required to collect debt from customers (Reid and Myddelton, 2017).

Debt Collect Period

2016

2015

2014

2013

State oil ltd.

25.2

26

31.65

29.91

Esso ltd.

45.01

25.51

20.66

21.67

  • The debt collection period for Esso Ltd stood 29.91 in 2013 and stood 31.65 in 2014. In in 2015 it stood 26 and 25.2 in 2016.
  • The debt collection period for Esso Ltd stood 21.67 in 2013 and in 2014 it stood 20.66. However, in 2015 and 2016 it stood 25.51 and 45.01 respectively.
  • This represents the Esso has higher Debt Collection period than State Oil Ltd.

The trade payment period represents the total number of days taken by a company to pay its creditors.

Trade Payment Period

2016

2015

2014

2013

State oil ltd.

-4.98537758

-2.6179539

-0.3832

-1.18344

Esso ltd.

-2.99057763

-3.5596894

-17.8718

-3.3589

Return on Equity

The trade payment period for State Oil Ltd stood negatively in 2013 to -1.18 and over four-year period the figure increased to -4.98.

Esso ltd reported a tumultuous trade payment period of -3.35 in 2013 and increased to -17.87 in 2014. However, in 2015 onwards the collection period declined to -3.55 and -2.99 respectively.

Diluted Earnings Per Share:

The diluted earnings per share represents the profit derived per share along with the common stock equivalents (Reid and Myddelton, 2017).

Earnings Per Share

2016

2015

2014

2013

State oil ltd.

1.82898551

2.731

3.639

3.906

Esso ltd.

0.31239092

1.52631579

-0.75439

0.030702

The diluted earnings per share for State Oil represented a falling trend as in 2013 it stood 3.90 and in 2014 it fell to 3.69. Further in 2015 and 2016 the EPS stood 2.71 and 1.82 respectively.

Esso Ltd reported a relatively stable EPS as the figure stood 0.30 in 2013 and fell to -0.75 in 2014. However, in 2015 it gained to 1.52 and fell subsequently in 2016 to 0.31.

Considering the market movement, the EPS for Esso Ltd though remained lower but can be considered stable with exception to 2014 whereas State Oil reported a falling drop in its share price with EPS currently standing 1.82.

Conclusion: 

The comparative analysis provides that Esso Ltd has reported a stable profit margin ratio and efficient total asset turnover while State reported a relatively lower stability in its net profit margin with continuous fall in share price. The analysis can be concluded by stating that State oil is not suitable for short term investment. Whereas Esso Ltd has strong profit margin with robust asset turnover hence the company is suitable for deriving short deriving profit from investment.   

References

Asche, F., Oglend, A., and Osmundsen, P. 2015. Modeling UK natural gas prices when gas prices periodically decouple from the oil price.

Comyns, B., and Figge, F. 2015. Greenhouse gas reporting quality in the oil and gas industry: A longitudinal study using the typology of “search”,“experience” and “credence” information. Accounting, Auditing and Accountability Journal, 28(3), 403-433.

Cordes, E. E., Jones, D. O., Schlacher, T. A., Amon, D. J., Bernardino, A. F., Brooke, S., ... and Gates, A. R. 2016. Environmental impacts of the deep-water oil and gas industry: a review to guide management strategies. Frontiers in Environmental Science, 4, 58.

Henderson, S., Peirson, G., Herbohn, K., and Howieson, B. 2015. Issues in financial accounting. Pearson Higher Education AU.

Interactive Investor. 2018. UK Oil and Gas Investments Share Price | UKOG Stock News | Interactive Investor. [online] Available at: https://www.iii.co.uk/research/LSE:UKOG [Accessed 31 Mar. 2018].

Javaherdashti, R., Nwaoha, C., and Tan, H. 2016. Corrosion and materials in the oil and gas industries. CRC Press.

Kelland, M. A. 2014. Production chemicals for the oil and gas industry. CRC press.

Limited, E. 2018. Esso UK Limited: Private Company Information - Bloomberg. [online] Bloomberg.com. Available at: https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapid=6437743 [Accessed 31 Mar. 2018].

Macve, R. 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision, Tool, Or Threat?. Routledge.

Office for Budget Responsibility. 2018. Oil and gas revenues - Office for Budget Responsibility. [online] Available at: https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/oil-and-gas-revenues/ [Accessed 31 Mar. 2018].

Paterson, J. 2017. Behind the Mask: Regulating health and safety in Britain's offshore oil and gas industry. Routledge.

Prax.com. 2018. Brands – Prax Group. [online] Available at: https://prax.com/about-us/brands/ [Accessed 31 Mar. 2018].

Reid, W., and Myddelton, D. R. 2017. The meaning of company accounts. Routledge.

Schaltegger, S., and Burritt, R. 2017. Contemporary environmental accounting: issues, concepts and practice. Routledge.

Scott, W. R. 2015. Financial accounting theory (Vol. 2, No. 0, p. 0). Prentice Hall.

Shukla, A., and Karki, H. 2016. Application of robotics in onshore oil and gas industry—A review Part I. Robotics and Autonomous Systems, 75, 490-507.

Trotman, K., Carson, E., and Gibbins, M. 2015. Financial accounting: an integrated approach. Cengage Australia.

Warren, C. S., and Jones, J. 2018. Corporate financial accounting. Cengage Learning.

Williams, J. (2014). Financial accounting. McGraw-Hill Higher Education.

Yusuf, Y. Y., Gunasekaran, A., Musa, A., Dauda, M., El-Berishy, N. M., and Cang, S. 2014. A relational study of supply chain agility, competitiveness and business performance in the oil and gas industry. International Journal of Production Economics, 147, 531-543.

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