Financial Analysis of Oil and Gas Development Company Finance Essay

INTRODUCTION

Oxford brookes university provided an opportunity for an ACCA student to obtain a degree of BSC(hons) of applied accounting by passing the Oxford university research and analysis project.This is not only an opportunity to obtain a OBU degree but a chance to extend and improve my skill and as well as the practical application of my knowledge acquired during the CAT and ACCA.

There are twenty topic given by the Oxford university.I have chosen the topic number eight The business and financial performance of an organisation over a three year period.The company I have chosen is OGDCL(oil and gas development company limited) and the year under consideration is 2008-2010.

INTRODUCTION OF THE COMPANY

OGDCL is the largest oil and gas company in Pakistan.it has a monoply and stands with a government support.Being the national oil and gas company OGDCL holds the flagship of the country's exploration and production sector.it will be worth noting that the company is a market leader in Pakistan,in terms of reserves,production and acreage.The company contributes 21% of Pakistan's total natural gas production and 54%of its oil production.There are 75 OGDCL fields in Pakistan of which 45 fields are owned and operated while 30 fields are Non-operated.the company is also registered in London Stock Exchange in addition to country's own major stock exchanges.The company is all set to ride the wave of E&P activity.The company is with the vision of becoming the leading producer and supplier of oil and gas in the international market by using all the possible options including strategic treaty.Being the most stable company,sales revenue and profits of the company currently enhanced by 9% and 6.5% to Rs 142.572 billion and Rs 59.177 billion respectively.

COMPANY HISTORY

The government of pakistan established Oil and Gas Development Corporation(OGDCL)under an ordinance dated 20th september 1961 as a statutory corporation to undertake exploration and development of oil and gas resources.The company was converted into a public limited company in 1997 and renamed as Oil and Gas Development Company Limited(OGDCL).

MOTIVATION TO CHOOSE THIS TOPIC

My academic knowledge and prior understanding during my study of ACCA,regarding accounting and finance,is the key factor of motivation for me to choose the topic of financial statement and business analysis of the organization.Financial reporting,performance management and control and financial information management are the subjects which I have studied and which truly relate to the financial statement and business analysis.This project offers me to apply this knowledge and skills in a real business scenario.

Reasons to choose the company

I have selected this organizaton (OGDCL)for analysis because it is the largest and the most stable organization so far in the country.As it is also listed in the London stock exchange so,it seems more appropriate to choose this company for analysis because ACCA is also a qualification which has bais in UK so it will provide me the opportunity to analyze its financial position and financial performance in international context.Moreover,the monoply of the company in the field of Petroleum and Gas exploration and production enhanced my motivation to pursue the analysis project of the organization.

RESEARCH AIM AND OBJECTIVE

1. he primary objective of my report is to evaluate the financial performance of the company in context of overall business performance of OGDCL for the year 2008-2010
2. the research aim to provide the impartial and objective opinion on the financial as well as the business performance of the company.

RESEARCH QUESTION

1. what actually is the business strategy of the OGDCL
2. what is the existing and preceding two financial position of the company
3. what factors affecting the financial and business performance of OGDCL during the period 2009 to 2010.
4. what are the implication of OGDCL future growth

OVERALL RESEARCH FRAMEWORK AND TOOLS USED TO ANSWER THE RESEARCH QUESTION

In order to evaluate the financial performance of OGDCL the following tools are used in the report

Ratio analysis

Horizontal analysis

Vertical analysis

BUSINESS ANALYSIS

Business analysis is the set of tasks and techniques used to work as a liaison among stakeholders in order to understand the structure, policies and operations of an organization, and to recommend solutions that enable the organization to achieve its goals. It involves understanding how organizations function to accomplish their purposes and defining the capabilities an organization to provide products and services to external stake holders. It includes the definition of organizational goals, how those goals connect to specific objective, determining the courses of action that an organization has to undertake to achieve those goals and objectives, and defining how the various organizational units and stake holders within and outside of that organization interact.

Need to perform of a business analysis:

Business analysis is performed to understand the current state of a company (OGDC) or to serve as a basis for the later identification of it's business needs. It also defines and validate solutions that meet OGDC's business needs, goals and objectives.

Techniques applied for business analysis:

There are various business techniques used to carry out the analysis. The major ones used are:

SWOT analysis:

This is an effective business tool in carrying out a company's internal and external analysis. Company's internal analysis can be carried out looking at the Strengths and Weaknesses whereas external analysis requires looking at the Opportunities and Threats. OGDCL's Strengths, Weaknesses, Opportunities and Threats have been looked at in this analysis which are as follows:

Strengths

OGDCL is the largest oil and gas company in Pakistan.

It has a monopoly and a great confidence in the Oil and Gas market due to Govt of Pakistan's support.

It is also listed on an International Stock Exchange.

OGDC has Dynamic & Strong Financial Position due to the experience of four decades.

It holds nearby fifty blocks/ concession which are the enormous combination among other oil and gas companies in Pakistan.

Paramount business locations which are found after long process.

Best quality process and procedures.

Experienced and technical workforce.

Innovation of wells through expert Geologists.

Confidence of the customers.

The company is being expanded to other countries of the world like Yemen, Sudan, Iraq and Nigeria.

Weaknesses

Unsatisfied workforce: Recently there was a labour strike at OGDCL which affected lot of its business.

Lack of marketing expertise.

Undifferentiated products or services in relation to the competitors.

Lack of coordination of operations.

Government Influence.

For employees there is a slow promotion process which reduces the performance.

Lack of check and balance.

Opportunities

Moving into new market segments that offer improved profits.

A developing market such as the Internet.

Mergers, joint ventures or strategic alliances.

A market vacated by an ineffective competitor.

Large workshops for training and development.

Support of the Ministry of Petroleum and Natural Resources.

Better Competitive Position.

POTER'S FIVE FORCES MODEL ANALYSIS

This model describes the OGDC in relation to its economic environment. The competitive position of an OGDC depends on five competitive forces. Together these forces determine the overall profit potential of the company. Although, looking at an individual firm , its ability to earn higher profit margins will be determined by weather or not it can manage the five forces more effectively than competitors. All five forces together provide a good overview of the company and can help to estimate OGDCL's further profit potential. The five forces are discussed one by one:

Industrial Rivalry

This describes the intensity of competition of a company between other companies. In case of Oil and Gas Development Company Limited the major competing companies are National Refinery Limited (NRL), Pak-Arab refinery limited (PARCO) and Pakistan Refinery Limited (PRL). They are competing with OGDCL on the basis of their products and pricing making it heard for any new rivals to enter. The rivalry is intense because the OGDC is equally sized enough among these companies. Therefore, the switching cost of OGDC is relatively low as the fixed cost is huge enough which encourage the competitors to fill unused capacity by price cutting. The switching cost in oil and gas industry is relatively low.

Threat of Potential Substitute

Threat of substitute exist in OGDC because the product's demand is affected by the price change of a substitute product e.g. LNG substituting CNG. The price elasticity of oil and gas products like Petrol and CNG is affected by the substitute products because more substitutes are becoming available and the demand become more elastic since customers have more alternatives such as CNG, LPG, and LSD etc. Because of the availability of close substitute of oil and gas product the company may raise prices. While the threat of substitutes typically impacts OGDC through price competition, there are other concerns in accessing the threats of substitute like the substitutability of liquid oxygenated products and bio-fuels versus gas, oil and diesel.

The Bargaining Power of The Buyers

The major buyers of OGDC's products are Attock Petroleum Limited (APL), Pakistan State Oil Company LTD, Shell Pakistan LTD, Caltex Oil Pakistan LTD and Total Parco Pakistan LTD. The bargaining power of the buyers is weaker because they have the threat of forward integration by the producers like Saudi Arabian Oil Company (SAUDI ARAMCO), British Petroleum (BPP), etc who can take over their own distribution or retailing. Significant buyer switching cost which means buyer cannot easily switch to another product. Buyers are fragmented which means the buyers have no particular influence on product and producer supply critical portions of buyers input.

The Bargaining Power of The Suppliers

In opposition to OGDC the major suppliers of crude oil and natural gas are Saudi Arabian Oil Company (SAUDI ARAMCO), E.N.I Pakistan LTD, B.H.P Petroleum, Pakistan Petroleum Limited, Orient Petroleum International Private Limited (O.P.I (PVT) LTD), O.M.V Pakistan, and British Petroleum. Therefore, the suppliers are powerful they have an influence on producing industry such as selling raw material at a higher price to capture some of the industry profits. They can integrate forward. They have the information of their buyer.

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