Savina Business Finance Final( Edited).docx

CALTEX AUSTRALIA – WOODSIDE PETROLEUM busin

Business Finance Report INVESTOR ANALYST REPORT Submitted by

2019

Business Finance Report 2019 Executive summary Long term growth, development, profitability and sustainability required efficient and effective decision making and wonderful performance. For such results and outstanding performance holistic evaluation is the key. Elementally, critical evaluation of any business necessitates managerial teams/groups, investors/stakeholders. The credibility, accuracy, consistency, transparency and relevancy are the basis of strong financials of a company. Keeping all this information in consideration, business and financial analysis of two companies working in the same sector i.e Caltex Australia and Woodside is done, as an analyst. The comparative analysis details the managerial and financials comparisons providing sound recommendations for the investor client to make his investment decision. The in-depth research leads towards sharp and radiant conclusion, leaving the client to make his valuable decision of choosing which company to invest and associate with. The comparative analysis, charts, diagrams are extracted from company websites, news and journal articles and academic books regarding the topic.

Page | 1

Business Finance Report 2019 Contents Executive summary......................................................................................................................... 1 Introduction: .................................................................................................................................... 4 About the company: ........................................................................................................................ 4 Caltex Australia ........................................................................................................................... 4 History of Caltex ..................................................................................................................... 4 Organizational structure of Caltex:.......................................................................................... 5 Planning and controlling management systems: ......................................................................... 5 Woodside Petroleum ................................................................................................................... 5 History ..................................................................................................................................... 6 Tabular Comparative analysis ................................................................................................. 7 Factors for long term shareholder Value ........................................................................................ 7 Calculation and Comparison of selected performance ratios ......................................................... 8 Performance ratios....................................................................................................................... 8 Liquidity and profitability Ratio ................................................................................................. 8 Caltex Australia Profitability Ratios ........................................................................................... 9 Woodside petroleum Profitability ratios ................................................................................... 10 Liquidity ratios of Caltex Australia ........................................................................................... 10 Liquidity Ratios of Woodside petroleum .................................................................................. 11 Income statement analysis of Caltex ......................................................................................... 12 Income statement Analysis of Woodside petroleum ................................................................. 13 Share price movement Analysis.................................................................................................... 14 Relation between share price and investment ........................................................................... 14 Caltex’s share price Analysis .................................................................................................... 15 Woodside’s share price analysis ............................................................................................... 15 Comparative share price analysis .............................................................................................. 17 Calculation and Analysis of WACC ............................................................................................. 17 Comparison of current capital structure weights....................................................................... 17 Woodside Petroleum ...................................................................................................... 17 Caltex Australia .............................................................................................................. 18

Page | 2

Business Finance Report 2019 Weighted average cost of capital - calculation.......................................................................... 18 Capitalization ................................................................................................................................ 19 Capital structure Ratios ............................................................................................................. 19 Conclusion: ................................................................................................................................... 20 Recommendations ......................................................................................................................... 21 References ..................................................................................................................................... 22

Page | 3

Business Finance Report 2019

Caltex Australia and Woodside Petroleum Introduction: Our company; ‘Blink Strategic Investment Group’ is providing a financial and business report for a strong foreign investor. The companies analyzed and compared are Caltex Australia and Woodside Petroleum. This report will widen investors information for immediate, wise and long term investment decision making.

About the company: Caltex Australia Caltex Australia limited is a renowned fuel supplier and an integrated marketing company. Caltex is known for offering its customers with products like fuel, diesel, biofuel and aromatic blends. Caltex purchases, distributes, refines, and supplies the petroleum products. Caltex Australia operates with initiating two major segments marketing and the supply chain. Caltex Australia was founded in 1900 having its headquarter in Sydney Australia.

History of Caltex: The history of Caltex fold back when Ampol , the oil importer was listed on Australia Stock Exchange in the early year 1940. Both Ampol and Caltex were consistent competitors which provided refinery services back then. With the passing time Ampol acquired companies like Total and Caltex. The merger of Caltex and Ampol’s , made it the largest known refiner company in Australia. The company has over 4000 current employment with highly skilled and trained employees.

Page | 4

Business Finance Report 2019 Organizational structure of Caltex: Planning and controlling management systems: Planning and controlling systematic regulations require managers of Caltex and their supervision. The latest and upgraded technology helps Caltex’s management to plan and then to direct the planning of the company accordingly. Caltex has specific software named rocket roster, rocket roster generates the salary or wages amount when the managers just enter the hours they have worked. This has made controlling and planning properly managed with on time and proper payments to the employees. Human resource management of Caltex congregates the individual goals with the organization’s goals which make it a perfect fit for the company to work in.

Woodside Petroleum: Woodside petroleum is a Australian oil and gas exploration company. The company specializes in development, evaluation and production of oil and hydrocarbons. The company has been segmenting in six of the major segments. The segments include North West shelf business unit, Page | 5

Business Finance Report 2019 Australia oil business unit, Pluto business unit, browse business unit United States business unit and many others. Woodside petroleum operates in regions like China, Japan, Brazil, United Kingdom, Australia and America. Woodside limited was founded on 26th July, 1954, having its headquarter located in Perth Australia (Woodside.com.au, 2019). History Woodside petroleum was established in the year Australia discovered its oil range. Woodside’s name was derived from a small town near victoria. The company aims in doing the right things and delivering the most reliable service to attract the customer’s loyalty. The company aims in maintaining strong position for providing higher returns to its shareholders and missionizes to become the best oil refinery of the country (Woodside, 2018) Corporate governance of Woodside petroleum: Woodside petroleum has proper corporate governance and a maintained organizational culture with the right blend of ethical, integral and moral aspects. Woodside aims to process long term success with the valuing of every individual part of the corporate governance of the company. The company’s core framework includes the strategic planning and implementation with admiration, work balance, regulations, standards and quality maintenance of the company. Below is the model of Woodside’s corporate governance:

Page | 6

Business Finance Report 2019 Tabular Comparative analysis Caltex Australia

Woodside petroleum

Founded in 1900

Founded in 1954

Headquarter in Sydney

Headquarter in Perth

Stock code CTX

Stock Code WPL

Fuel and petroleum suppliers

Oil and gas exploration company

Share price declined

Share price increased

Factors for long term shareholder Value: Here’s a flowchart valuing the importance of shareholders, considerate by both the companies.

Long Term Shareholder Value

Productivity Strategy

Cost Structure

Asset utilization

Growth Strategy

Expanding Revenue Opportunities

Customer Value

Page | 7

Business Finance Report 2019 Calculation and Comparison of selected performance ratios: Performance ratios: Financial ratios are the most common tool to analyze the financial performance and position of the companies. Fundamentally, they are retrieved from the company’s financial statements. Financial ratios are defined as company’s determination of information for the financial purposes.

Liquidity and profitability Ratio: The external investors have questions, which they find important enough to be answered by the company’s management. Taking an example, consider an investor wants to know the company’s ability of an existing borrower as to the aspect of making decisions and principle payments. Investors are keen enough to come up to an conclusion foreseeing the company’s future earnings respective to its liquidation. In such case, financial statements analysis and cash flow movements prove very insightful. According to Brigham and Houston (2009), perfect financial analysis includes performance analysis showing the financial position and stability of the company.

Profitability Ratios:

Page | 8

Business Finance Report 2019 Liquidity Ratios

Caltex Australia Profitability Ratios Ratios Net profit Margin Return on assets

Operating income margin

Formula Net Income * Net Sales Net Income * (Beginning + Ending Total Assets) / 2 Operating Income Net Sales

Return on investment

Net Income * Long-term Liabilities + Equity

Return on equity

Net Income * Equity

2016 0.46

2017 0.08

2018 0.09

2.72

2.62

2.77

-0.90

0.002

0.009

3.98

4.91

4.45

5.89

5.02

6..7

Page | 9

Business Finance Report 2019 Woodside petroleum Profitability ratios Ratios Net profit Margin

Formula Net Income * Net Sales Net Income * (Beginning + Ending Total Assets) / 2 Operating Income Net Sales

2016 0.77

2017 0.79

2018 0.80

3.59

3.93

4.15

0.33

0.49

0.41

Return on investment

Net Income * Long-term Liabilities + Equity

4.71

5.23

5.84

Return on equity

Net Income * Equity

6.00

6.60

6.96

Return on assets

Operating income margin

Liquidity ratios of Caltex Australia Ratios

Current ratio

Formulas

Year 2016

Year 2017

Year 2018

1.43

1.16

1.35

0.66

0.41

0.53

Current Asset/ current liabilities

Quick Ratio

Liquid Assets/ current liabilities

Debt/equity

Total liabilities/ total equity

0.25

0.19

0.27

Page | 10

Business Finance Report 2019 Liquidity Ratios of Woodside petroleum Ratios

Year 2016

Year 2017

Year 2018

0.93

0.93

1.7

1.36

1.48

1.53

Quick Ratio

Liquid Assets/ current liabilities Total liabilities/ total equity

0.18

0,20

0.23

Debt/equity

Current ratio

Formulas

Current Asset/ current liabilities

Liquidity and the profitability of a company share inverse relation. If one is increasing, the other is decreasing. There are conflicts in the profitability and liquidity. The liquidity management conceptualizes for receiving serious attention globally and all part of the economy. Managers and the businessmen look forward for devise strategies of managing their daily operations and increase the maximization of shareholder’s wealth. Comparing the net profit, Caltex Australia has net profit lesser than Woodside and this shows the company has been struggling with its profitability, this indicates higher and greater weightage of liabilities in the company’s financials. On the other hand, Woodside petroleum’s financial ratios are positive and in an increasing manner, giving Caltex an tough competition. As per the analyzing, we think it is certainly not a good idea to make a decision of investing in Caltex, as an investor, the profitability and return on investment is what matters the most and unfortunately Caltex chart has been evaluated as declining, whereas Woodside petroleum is definitely a better and surplus option to take notes of.

Page | 11

Business Finance Report 2019 Income statement analysis of Caltex

The table above shows income statement data of Caltex from previous three years and forecasted data for the coming two years. As per the forecasted income statement, the company’s sales income is slightly predicted to drop in 2020 as compared to the year 2019. But the yield, operating profit and the net income of the will increase going from 550 in 2018 to 608 in 2020.

Page | 12

Business Finance Report 2019 Income statement Analysis of Woodside petroleum

Woodside’s annual income statement shows how well the company managed pulling its sales back up from 3908 in 2017 to 5031 in 2018 ,and expected to increase even more in the coming years going up to 5768 in the year 2020. Alongside, the yield, operating profit and sales are positively in a supportive predicted manner for woodside petroleum.

Page | 13

Business Finance Report 2019 Share price movement Analysis: Relation between share price and investment:

Investment and share price have are closely interlinked with the investment models. Managers look forward to making decisions for investing when they see how well the investment can be beneficial for the betterment of the company. Share prices reflect information to the investors like how well the firm’s expected value is there what and how the share price movement of the company is fluctuating. Increasingly, it has been recognized that the share markets are solely not efficient and are likely to deviate after a while from the fundamental value of expectation. Keeping this in mind, that the share prices which are not really fundamental can distort the actual investment decisions and planning (Poterba et al., 1995).

Different researchers portray difference thoughts regarding the importance and relevant of share price. Taking the example of (Chirinko and Schaller, 1996), they state that the management who link or signify with the long term market value if the company are likely to ‘scrap the plans with the response of highly volatile short run changes in the prices’ whereas on contrary there is another part of literature which explains that the share price and its analysis helps in providing core price signals to the main managers of corporate investment decisions (Fischer and Merton, 1984). If this would happen, the inefficiencies would lead to distorting the major investment decisions. Managers can also benefit from the non-fundamental movement of the share prices. This means that on analyzing if the managers know they are quite overvalued, they can strategize by taking advantage of low cost of capital by issuing the capitalization of the firm (Fischer and Merton, 1984).

Page | 14

Business Finance Report 2019 Caltex’s share price Analysis

(Marketscreener.com, 2019) Caltex Australia is yet another company, which could not keep away the scandals approaching it. The scandal of Caltex for underpaying its employees and for work exploitation has affected the company’s shares very rapidly in a declining manner. As per the stock price, its analysis shows that it has been doing good, but the fluctuations have led to serious decline from the past year 2018 till the current year 2019.

Woodside’s share price analysis

Page | 15

Business Finance Report 2019 Analysis: Although Woodside is known as a high level competitor, the company has capitalization over $ 30.4B. Woodside shares daily volume over 2 million shares for the dollar volume of $60 million Aud. Despite being an Australian company, it deals in USD. The research of the share price shows that there are many factors that affect the rising and falling of the share price. There are chances that the stock price would also be affected by the various economic factors like the interest rate, inflation, deflation etc. Similarly if the company borrows money from a bank with higher interest, the cost of debt would also be higher resulting in reduction in the dividends. In the case of Woodside petroleum, the stock price kept increasing March 2018, going from $28.4 in January to $40 in September in months. The share price trend of the company has shown positive and growing outcome, however during the financial year 2016 there has been continuous fluctuation from sudden decline to sudden increase back and forth. During 2018, in this one year the Woodside’s share price took height with almost doubling in months. There are many reason as to which this sudden change might have happened. First of all the reason can be that the earnings of the company has been increasing. The profitability trend has been rapidly flowing positively. Secondly the greatness and easiness at which the customers can avail their service i.e. products like fuel, petroleum and energy have made them competitively stronger. Since Woodside has already maintained a competitive advantage, many of the investors find it an attractive company to invest in as that demand also increases the share price valuation. Comparing both the company’s share price movement

Page | 16

Business Finance Report 2019 Comparative share price analysis: According to the share price comparative analysis we can see that Woodside petroleum has been doing tremendously better in the stock market as compared to Caltex. With unfortunate scandals and fines Caltex current comparative share analysis shows negative 30% decline whereas Woodside petroleum is at positive 20%. The difference is quite clear and vigilant from the trend above. The Woodside petroleum has purchased over 50% of the Scarborough gas asset from Mobil.The Company’s purchase has also brought ownership to over 75% with higher expenses of development as well. The company aims to keep itself tracked with more projects to come and with production of over $100 million barrels of oil by the year 2020. All these strategies have doubled Woodside petroleum’s profitability. On the other hand, Caltex have cut their capital expenditures over 40% during the years 2014 to 2018. The major drawback was cutting the employee list dropping over 400,000 workers out and letting them go. This not only led the Caltex’s management to revise their employee hiring plan but it called the company out of many projects that were lined up, deferring them. But fortunately the oil and energy sector has developed and turned out of emerging from the turmoil it has been stuck in. yet still, Caltex Australia lags behind the pack with the growth that is lower than 23.11% over the past years. The companies’ slow growth and effectiveness seems unaware of the competition. The oil and energy company, Caltex has future expectations but it may also experience expensive stock relative.

Calculation and Analysis of WACC Comparison of current capital structure weights

 Woodside Petroleum Current capital structure weight The assets of the Woodside Petroleum are financed by the equity and debt. Therefore, the capital structure would include the weights of equity and debt. Weight of equity = E / (E+D) = 22556.740/ (22556.740 + 50007.08687453) = 0.8183 Page | 17

Business Finance Report 2019 Weight of Debt = D /(E+D) = 5007.08687453/ (22556.740 + 5007.08687453) = 0.1817  Caltex Australia Current capital structure weight The assets of the Caltex Australia are financed by the equity and debt. Therefore, the capital structure would include the weights of equity and debt. Weight of equity = E / (E+D) = 4689.520/ (4689.520 + 584.936948513) = 0.8891 Weight of Debt = D /(E+D) = 584.936948513/ (4689.520 + 584.936948513) = 0.1109

While comparing the capital structure of Woodside Petroleum and Caltex Australia, it is concluded that the weight of equity for Woodside Petroleum is less than the Caltex Australia. Whereas the weight of the debt of the Woodside Petroleum is greater than the Caltex Australia. The difference between the Weight of equity is 0.0708 and between weight of debt is 0.0708. The difference is equal in both the cases.

Weighted average cost of capital - calculation Woodside Petroleum WACC = E/ (E+D) * Ke + D/(E+D) * Kd * (1-t) = 0.8183(15%) + 0.1817(7%) (1-30%) = 0.122745 + 0.012719(0.7) Page | 18

Business Finance Report 2019 = 0.122745 + 0.0089033 = 0.1316483 = 13.16% Caltex Australia WACC = E/ (E+D) * Ke + D/(E+D) * Kd * (1-t) = 0.8891(15%) + 0.1109(7%) (1-30%) = 0.13336 + 0.007763(0.7) = 0.13336 + 0.0054341 =0.138 The WACC of the Caltex Australia is higher than the Woodside Petroleum. The higher value of WACC indicates that decrease in the valuation and increase in the risks.

Capitalization Capital structure Ratios These capital structured ratios however provide useful insight in the financing techniques used by the company for its long term existence, continuity and solvency problem.

Ratios

Formula

Caltex (year2018)

Total debt to assets

Total liabilities/ total assets Long term debt/total assets Total debt / total equity EBIT/ Interest Expense

0.53

(Woodside petroleum 2018) 0.38

0.13

0.20

1.05

0.63

7.06

9.27

Capitalization ratio Debt to equity ratio Interest coverage ratio

Page | 19

Business Finance Report 2019 All short and long term debts are considered while analyzing the capital structure of any business. After assessing the debt and equity from the balance sheet, we can see that Woodside has higher leverage ratio which means it has aggressive capital structure. The aggressive capital structure means the company tends to take risks more often and uses debts more equity to finance the assets. Whereas Caltex Australia is known to have a lower leverage ratio which means it has conservative capital structure and they are not risk takers that much. Higher leverage can take Woodside petroleum to higher growth rate, which can be alarming for Caltex. Caltex needs to mix and blend debt and equity.

Conclusion: This business finance report comes to an conclusion by considering and supporting the comparative analysis of both the companies. It is quite vigilant how effectively the upper management runs the lower management provides support and motivation equally. Managers strive for the achievement of reasonable level of the profitability. Therefore the report, concludes that investing in Woodside petroleum is a wise decision, as comparison to considering Caltex currently. Managerial and financial drawbacks have led Caltex face serious fall in its share price, and profitability chart, but the strategizing ability and the determination of stabilizing the business once again, can lift Caltex up. Meanwhile, Woodside petroleum from the managerial and financial aspect is stronger, their returns on assets and net margins are way higher than Caltex. Woodside’s debt level has been constant. The constancy of debt along with generation of operating cash flow over $2.40 billion indicates the operational efficiency of the company.

Page | 20

Business Finance Report 2019 Recommendations After the research, both managerial and financial of both the companies, there are some recommendations There is a need for Caltex’s management to follow standards and principles which are highly essential for operational excellence. Thus, we are aware of the fact that Caltex has been targeted and fined for unethical procedures and manner of business. The aim of principles is to improve the operating standards and environment with adaptation of change. Other than that, concentration on equity prices by both the companies as a mechanism adoption needs to push investors to realize the companies earning capabilities. Since equity rise has increased contributing to about 30 percent of the financing requirements, Caltex and Woodside should take it attentively strategizing around it. Then, demand needs to be forecasted so that the companies know where they can lead serious competitive advantage by focusing on their core competencies.

Effort

•Expectancy

Performance •Instrumentality

Rewards

•Valence

The WACC of the Caltex Australia is higher than the Woodside Petroleum. The higher value of WACC indicates that decrease in the valuation and increase in the risks. Performance of Caltex can improve by achieving maximum rewards with meeting maximum expectations of the customers they serve and target. Howsoever quality leads quantity, and the difference needs to be understood and realized.

Page | 21

Business Finance Report 2019 References (WPL), W. (2019). Woodside Petroleum (WPL) Financial Ratios. [online] Investing.com. Available at: https://www.investing.com/equities/woodside-petroleum-limited-ratios [Accessed 24 Jan. 2019]. Asx.com.au. (2019). [online] Available at: https://www.asx.com.au/asx/share-priceresearch/company/WPL [Accessed 23 Jan. 2019]. Chirinko, R. and Schaller, H. (1996). Bubbles, fundamentals, and investment: A multiple equation testing strategy. Journal of Monetary Economics, 38(1), pp.47-76. Doctor, T. (2019). Woodside Petroleum: Raising Billions To Fund The Development Of Another Large Gas Project. [online] Seeking Alpha. Available at: https://seekingalpha.com/article/4168400-woodside-petroleum-raising-billions-funddevelopment-another-large-gas-project [Accessed 23 Jan. 2019]. Fischer, S. and Merton, R. (1984). Macroeconomics and finance: The role of the stock market. Carnegie-Rochester Conference Series on Public Policy, 21, pp.57-108. Kankanamage, C. (2016). The relationship between board characteristics and earnings management: evidence from Sri Lankan listed companies. Kelaniya Journal of Management, 4(2), p.36. Marketscreener.com. (2019). Caltex Australia Limited : Financials, earnings estimates and forecasts for Caltex Australia Limited | CTX | MarketScreener. [online] Available at: https://www.marketscreener.com/CALTEX-AUSTRALIA-LIMITED-6492233/financials/ [Accessed 23 Jan. 2019]. Poterba, J., Samwick, A., Shleifer, A. and Shiller, R. (1995). Stock Ownership Patterns, Stock Market Fluctuations, and Consumption. Brookings Papers on Economic Activity, 1995(2), p.295. Woodside.com.au. (2019). Purpose & Strategy - Woodside Energy. [online] Available at: https://www.woodside.com.au/about-us/purpose-strategy [Accessed 23 Jan. 2019]. Compensation Agreements Between Ceylon and Caltex, Esso, and Shell. (1965). International Legal Materials, 4(06), pp.1074-1089. Hašková, S. (2012). The Cost of Information in Dependence on the Investor Relation to the Risk. Folia Oeconomica Stetinensia, 11(1), pp.73-85. Sax, J. and Andersen, T. (2018). Making Risk Management Strategic: Integrating Enterprise Risk Management with Strategic Planning. European Management Review.

Page | 22