Working Capital Management Profitability: Woodside Petroleum Ltd Case Study

Opportunities and Threats Affecting Woodside Petroleum Ltd's Profitability

Discuss About The Working Capital Management Profitability?

Woodside Petroleum Ltd is linked with petroleum exploration and production, which is used in Australia. The company comes under Oil and Gas industry, while they deal in producing petroleum products. Petroleum and LNG are the key product that is produced by Woodside Petroleum Ltd, which is allowed them to accumulate profits over the past fiscal years (Woodside.com.au 2018). From the valuation of company's operations relevant opportunity and threats could be identified, which might affect its revenue generation capacity. The major opportunity for your organization is the rising demand for Petroleum products around the world. Majority of the manufacturing, production houses, and vehicles uses petroleum products, which is an adequate opportunity for the company to improve its profitability in future. This rising trend of using petroleum product has allowed majority of the oil producing companies to increase their revenue to support future oil exploration projects.

However, certain threats are also identified from the evaluation, which could hamper profitability of the organization in immediate future. Threats from substitute is a major problem for oil producing companies, where thermal power and solar energy are replacing maximum of the sales conducted by oil producing companies. The second threat for Oil and Gas companies is the declining value of crude oil in the market, which is reducing actual revenue collection of Oil and Gas organization. The constant decline in value of oil in the world market is threatening oil and gas company’s existence, which is a major threat to Woodside Petroleum Ltd revenue. Both the threats identified would directly affect revenue generation capacity of Woodside petroleum Limited and increase their expenditure. On the other hand, Atil, Lahiani and Nguyen (2014) argued that due to the reduced prices of crude oil products the increment in substitute demand is declining, which is relatively a positive action for oil and gas companies.

From the evaluation of above table, cash conversion cycle of Woodside petroleum cans be identified, which is relatively declining in 2016, as compared to 2015. This is due to declining sales, which was conducted during 2016. In comparison to its peers the cash conversion cycle is relatively depraved, leaving BHP Billiton. This indicates low financial position of the organisation and depraved cash availability to support its operational activities. Nobanee (2014) stated that with the help of cash conversion cycle investors can detect cash availability of an organization, which allows them to meet at a good investment decision. Improvement in Woodside petroleum cash conversion is needed or problems may arise in conducing daily operations.

Calculating Cash Conversion Cycle and Comparing with Peers

Example of short term debt financing is short term bank loan, which is accumulated by companies to support their obligations. in addition, long term debt financing example is bond issue, which is conducted by companies to expand its process and increase their production capability. From the evaluation of both C2 and C3 notes, the company has used long term debt financing to support its operational activities. The increment in bonds and debt facilities from 2015 to 2016 is an indication that the company has acquired capital for improving its operation. On the other hand, Huang, Ritter and Zhang (2016) argued that increase debt accumulation could eventually lead to insolvency, which might hamper operational capability of an organization and force them to liquidate.

The calculation conducted in the above table mainly stated market bond value of Royal Dutch Shell, which is at the levels of $97.96. on the other hand, the value identified in the figure provided in the assessment is $98.00.  this irrelevant decline of the bond value is due to the change in yield rate.  the coupon payment is fixed for the bond, while interest rate varies from time to time. This increment in interest rate from coupon rate mainly reduces value of the bond, which is seen for Royal Dutch Shell bonds. Hence, further increment in interest rate could force the bond to sell at par value, which is seen currently for Royal Dutch Shell bonds. According to Ballotta. and Kyriakou (2015), bond valuation allows investors to detect market value of an existing Bond and make relevant investments to support their return requirements.

The above calculation mainly helps in identifying theoretical share value of Royal Dutch Shell, which could allow investors in making adequate investment decisions. Furthermore, the current price level of the organization is mainly at € 28.93, while the theoretical share price is at € 44.06. This indicates that more growth in share value of the organization can be achieved in future, which would allow investors to increase the return from investment. Hence, buying shares of Royal Dutch Shell is adequate, which would allow investors to improve their capital growth. Lazzati and Menichini (2015) mentioned that by using dividend discount model investors can detect investment opportunities, which might increase their return from investments and raise their portfolio value. On the other hand, D'Amico (2016) dividend discount model mainly utilizes one factor for determining actual share value of an organization, which can be manipulated by organizations.

Debt Financing Strategies Used by Woodside Petroleum Ltd

From the valuation of 5.94% and 8% WACC, Adequate cost of capital for the organization is identified. The NPV provided from 5.94% WACC was relatively at the levels of 3,109,533,659, which is high and provides the company with adequate returns. However, the WACC of 8% mainly indicates a negative value of -1,800,863,909, while stating the loss portrayed from the project. Hence, with 5.94% WACC the gas project is viable, while with 8% WACC the project is not viable for Royal Dutch Shell. With the use of net present value organizations can detect actual viability of the project and understand the returns that could be provided from their investment (Lokman et al. 2017). However, certain projects due to no cash inflow are not able to support time value of money, which could directly affect company's ability to increase firm value. Currently, the WACC of 5.94% is providing a positive net present value for Royal Dutch Shell, which is a positive indication for the company. On the other hand, the WACC of 8% is portraying a negative valuation for the project, which indicates that cash flow of the project is not supporting time value of money.

Reference

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Ballotta, L. and Kyriakou, I., 2015. Convertible bond valuation in a jump diffusion setting with stochastic interest rates. Quantitative Finance, 15(1), pp.115-129.

D'Amico, G., 2016. Generalized semi-Markovian dividend discount model: risk and return. arXiv preprint arXiv:1605.02472.

Eliasson, J. and Börjesson, M., 2014. On timetable assumptions in railway investment appraisal. Transport Policy, 36, pp.118-126.

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Lokman, S., Volker, D., Zijlstra-Vlasveld, M.C., Brouwers, E.P., Boon, B., Beekman, A.T., Smit, F. and Van der Feltz-Cornelis, C.M., 2017. Return-to-work intervention versus usual care for sick-listed employees: health-economic investment appraisal alongside a cluster randomised trial. BMJ open, 7(10), p.e016348.

Nobanee, H., 2014. Working capital management and firm's profitability: an optimal cash conversion cycle. International Research Journal of Finance and Economics. March (120), pp.13-22.

Woodside.com.au. (2018). Woodside Energy | Home. [online] Available at: https://www.woodside.com.au/Pages/home.aspx [Accessed 20 Jan. 2018].

Yazdanfar, D. and Öhman, P., 2014. The impact of cash conversion cycle on firm profitability: an empirical study based on Swedish data. International Journal of Managerial Finance, 10(4), pp.442-452.