Nautical Petroleum Plc Market And Financial Performance Finance Essay
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This report evaluates the Nautical Petroleum's market and financial performance for the past two years by studying the annual reports of 2009 and 2010. The report also highlights the economic factors that the group faces to illustrate its current risks and growth. This will include the social and technological concerns related to the industry.
Furthermore, the company's overall market coverage has been briefly analyzed along with its customer profile, distribution channels and the product offerings as compared to its competitors. The report will also establish the ownership and control of the business highlighting the expertise of management.
Thereafter, the financials of the company will be assessed through the examination of its profitability and returns.
Finally, this report will provide an investment suggestion on basis of the asset value per share given by the company.
Introduction to Nautical Petroleum PLC
Nautical Petroleum plc is an independent hydrocarbon exploration and development company listed on the London AIM. The company was listed on the Alternative Investment Market (AIM) in April 2005. A 75% interest in Nautical Petroleum AG, a subsidiary of International Energy Group AG (IEG), was transferred into Nautical Holdings Limited. This entity participated in the Reverse Takeover (RTO) in April 2005 which created Nautical Petroleum plc as a listed entity on AIM. (History, Nautical Petroleum)
Nautical Petroleum plc intends to become a significant producer of heavy oil, initially in the United Kingdom Continental Shelf (UKCS) and in Europe. Currently, the company's operations span to UK, France and Ireland and the aim is to secure further heavy oil discoveries in the UKCS and EU through acquisitions, farmins and licensing rounds. (www.oilbarrel.com)
Marketing and Economics
INDUSTRY SECTOR & MARKETS & CUSTOMERS
Nautical Petroleum operates in the Energy sector and its core business is trading of crude oil and refined oil products. The company has established a worldwide representation in major oil trading hubs with international activity serving a clientele which includes most of the recognized participants in the global crude oil, gas and reï¬ned products markets. Nautical Petroleum undertakes physical oil trades with private and state sector oil producers, oil majors, independent traders, reï¬ners, power generators and other consumers.
The market for these UK heavy oils remains strong, specifically from specialist refiners. This is reflected in prices achieved for Alba, Captain and Harding (Nautical's acquisitions).
COMPETITORS
Nautical Petroleum competes with major players in the market like British Petroleum (BP), Shell and Elf and also with the smaller but listed companies like Enterprise Oil Plc, Falkland Oil and Gas, Northern Petroleum Plc, WHAM Energy Plc, Encore Oil Plc, etc.
RGFC has to compete with a number of competitors in the UK food industry, particularly in the bakery and confectionery sector. A few of the major competitors of RGFC include Greggs PLC, Abf Grain Products Ltd, Warburtons Limited, Warburtons Holdings Limited, Rank Hovis, British Bakeries, Baxters, United Biscuits (Holdings) Plc and Allied Bakeries.
SOCIAL ISSUES
The major social issue related to the oil and gas industry is the pollution caused due to oil spills, both for aquatic as well as land forms. Another issue that has been highlighted by a recent study about social and environmental effects on communities which are economically dependent on the oil and gas industry is "social dysfunction and biological impoverishment". The research, published in Conservation Biology, revealed that over a nine year period the number of registered sex offenders in energy 'boomtowns' was two to three times higher than towns dependent on other industries. Other symptoms of social change seen in energy boomtowns across the western United States include the use of illicit drugs, domestic violence, wildlife poaching and a general rise in crime. The research suggests that these changes occur because of the differences between the traditional rural residents and the incoming workforce. (Rise of sexual Predators in Oil & Natural Gas Boomtowns, http://www.medicalnewstoday.com/articles/179328.php)
TECHNOLOGICAL ISSUES
Petroleum science has evolved from rudimentary geology to elaborate supercomputer-based calculations and 3D views of the subsurface. It has taken the drilling process from a "let's try over there" guessing game to the precise targeting of ever smaller pockets of fields that have already produced for half a century, as well as areas that have produced nothing before.
It requires state of the art technologies to extract the hydrocarbons as well as highly skilled and competent professionals to manage the industry. The E&P industry is using cutting technology to locate hydrocarbons and optimize efficiency in production. These technologies include the use of complex reservoir modeling and simulation, nuclear magnetism, sonic and ultra-sonic technologies, magnetic resonance, advanced chemical engineering, fluid mechanics, telecommunication, process engineering etc.
As "easy-oil" has become a thing from the past, the industry is moving towards frontier areas to increase production. Optimizing the recovery of hydrocarbons from the existing production fields (called "brown fields") remains an existing challenge.
Growth and Risks of the Company
Nautical has exhibited strong growth prospects and is committed to progressing both Mariner and Kraken projects to field development plan (FDP) submission and adding value to the third leg of material appraisal and exploration opportunities.
Notwithstanding the growth of the company, that the fact still remains that in common with all oil and gas exploration and production operations, there is uncertainty and therefore risk associated with operating parameters and costs. Whilst costs can be budgeted with a reasonable degree of confidence, operating parameters can be difficult to predict and often outside the Group's control. In addition, other risks, including industrial accidents, technical failures, labour disputes, environmental hazards, machinery breakdown, unavailability of parts, government action, war and terrorism, are all beyond the Group's control.
Oil and Gas Exploration, Production Risks and Insurance
There are risks inherent in the exploration and production of oil and gas. This area of business, by its nature, involves significant risks, and hazards, including environmental hazards, industrial incidents, labour disputes, fire, drought, flooding and other natural calamities. The occurrence of any of these hazards can delay or interrupt production, increase production costs and result in liability to the owner or operator of the oil and gas asset. The Group may become subject to liability for pollution or other hazards against which it has not insured or cannot insure.
Market Risk
The marketability of any oil or gas discovered will be affected by numerous factors beyond the control of the Group. These factors include market fluctuations, proximity and capacity of oil and gas pipelines and processing equipment and government regulations including regulations relating to taxation, royalties, allowable production, importing and exporting of oil and gas and environmental protection.
Environmental Factors
The operations of the Group are dependent on environmental regulations in every jurisdiction it operates in. Environmental legislation and permits are liable to develop in a way which will require more austere standards and enforcement, augmented fines and penalties for non-compliance, stricter environmental assessments of projects and an increased degree of responsibility for companies and their directors and employees. There can be no assurances that such new environmental legislation once implemented will not oblige the Group to incur significant expenses and undertake significant investments which might adversely affect the Group's business, financial condition and operational results.
Licenses and Title
The Group's exploration and production activities are dependent upon the grant of appropriate licenses, concessions, leases, permits and regulatory consents which may be withdrawn or made subject to limitations. The decisions to advance explorations may call for other companies' participation whose interests and objectives may differ from those of the Group.
Volatility of Oil and Gas Prices
There has been a wide fluctuation in oil and gas prices and they are affected by several factors over which the Group does not hold control, including currency exchange fluctuations, world production levels, consumption patterns and global or regional political events. The collective effect of these factors is next to impossible to forecast. Consequently as a result of the above factors, price forecasting can be difficult to predict or imprecise.
Currency and Exchange Rate Fluctuations
Since commodity prices are conventionally denominated in the US$, majority of the income of the Group will be expected in US$ and the Group is therefore exposed to volatility in exchange rates.
Contractual risks
All agreements are subject to interpretation, and some agreements are not binding. There is no guarantee that the Company will be able to enforce all its rights under its agreements or arrangements with third parties.
Competition
There exists aggressive competition in the petroleum industry, mainly for the discovery and acquisition of commercially viable properties. The Group will compete with other exploration and production companies, many of which possess greater financial resources in comparison to the Group, for leases and other interests plus for the retention of qualified personnel. These factors might prove to be a hindrance for the Group to lock new exploration areas or recruit and retain talent.
Financing risks
The furthering of the Group's properties is based on its ability to obtain finance through the farming-out of projects, public financing or supplementary means. There is no assurance that the Group will successfully be able to obtain the requisite financing. Any additional equity financing may be dilutive to Shareholders and debt financing, if available, may entail restrictions on operating activities. In case the Group is unsuccessful in obtaining additional finance as required, it may be required to reduce the scope of its operations or anticipated expansion.
Taxation
Future changes to the nature and basis of taxation may impact on the net revenues and cash flows of the Group.
Political
Although political conditions in the countries in which the Group may operate are generally stable, changes may occur in their political, fiscal and legal systems, which might affect the ownership or operation of the Group's interests, including, inter alia, changes in exchange rates, control regulations, expropriation of oil and gas rights, changes in government and in legislative and regulatory regimes.
Liquidity of the Group's Shares
The market for the Group's shares may be highly volatile and subject to wide fluctuations in response to a variety of factors which could lead to losses for Shareholders. These factors include amongst others; additions or departures of key personal, litigation if any, press, newspaper and other media reports and the results of appraisal and exploration activity.
Legal Systems
Some of the countries in which the Group may in the future, operate, have legal systems which are not as developed as those in established economies. In such cases, this can result in uncertainties, ambiguities, inconsistencies and anomalies, and/or difficulties in obtaining redress through the local courts, and ultimately in investment risks that do not exist in more developed legal systems.
Ownership and Management
The board of Nautical Petroleum Plc is led by Chairman John Conlin who is also a Non-Executive Director and joined the board in June 2009. Out of 63,408,291 ordinary shares (as on 30 June 2010), J Conlin holds nil (but holds 60,000 share options). Similarly, Finance director Will Mathers and Non-Executive Director Philip Dimmock hold zero ordinary shares but possess 200,000 and 250,000 share options instead. The highest number of ordinary shares is held by Chief Executive Stephen Jenkins and Commercial Director Paul Jennings who hold 876,096 shares each (1.38 percent) apart from holding 1,125,000 and 800,000 share options respectively. The Non-Executive Director Patrick Kennedy holds 75,000 ordinary shares (0.12 percent) and 250,000 share options.
Financial Performance Evaluation: Profitability, Liquidity and Gearing
PROFITABILITY
The cost of sales, including impairment and operating costs of extended well test equipment, was £157,000 in 2008 which rose significantly to £2,500,000 in 2009. Again in 2010 it dropped to a mere £84,000. Since the revenue for the year 2008 was zero, the group incurred a gross loss of £157,000. Because of the significant increase in the costs and only a marginal increase of £25,000 in sales, the loss increased to £2,475,000 in 2009. Though, in 2010 the Group's financial position improved due to increase in sales and cost reduction, thereby limiting the gross loss to £16,000. As a result, the Group's gross profit margin has improved from - £9,900,000 in 2009 to -£23,500 in 2010. Similarly, the net profit margin has shown a remarkable improvement from -£23,548,000 in 2009 to -£3,354,000 in 2010. Return on capital employed (ROCE) shows a similar trend. Since the Group has incurred losses through the considered period, there has been negative ROCE, though there has been a decrease in the losses and ROCE has gone up to -2.8% in 2010 in comparison to -10.5% in 2009, approximately by one fifth.
LIQUIDITY
The current ratio of the group was 4.4:1 in 2008 which was considerably lower compared to 24.3:1 in 2008, reflecting significant decrease in the liabilities. The liabilities of the group decreased steeply at 82.63% over the period of 2008 to 2009. But in contrast, in 2010 the assets fell sharply exhibiting a decline of 36.14% because of which the current ratio dropped to 14.2:1. This trend indicates that even though the Group has been running in loss, its ability to meet its short term financial obligations is adequate enough.
The liquid or acid test ratio also represented exactly the same trend in the financial period considered. This is due to the reason that the quick assets of the Group are same as the current assets since there has not been any inventory.
In terms of efficiency, the group showed an improved performance over the financial years with respect to repaying of the payables. The trade creditors show a constant reduction from £1,806,000 in 2008 to £504,000 in 2009 to £312,000 in 2010. Therefore, the trade payable days has reduced from 4141 days to 1337 days from 2008 to 2010 (though it significantly reduced to 73 days in 2009).
Also, the trade receivable days of the Group reduced significantly from 7114 in 2009 to 2509 in 2010, illustrating the fact that fewer funds were tied up with debtors for each £1 of sales in 2010 than in 2009. But, since the past three years (2008 to 2010) a significant amount of approximately £470,000 has been given on debt.
GEARING
Nautical Petroleum Plc is lowly geared. The annual report suggests that the business has negligible debt and non-current borrowings. The Group's borrowings, in terms of accruals and amount owed to related companies, have dropped remarkably over the three years. The gearing ratio of the group tells us that the gross gearing reduced greatly from 4.36 to 0.51 during the period from 2008 to 2009. Though, in 2010 it increased to 0.99, it still remains low. This highlights the fact that the Group has just 1% borrowing, and the business is majorly financed by equity.
Attractiveness of the Group's Equity Shares
Settlement as of 04/02/2011, at 5:45 p.m.
Nautical Pet fractionally up, achieving a modest profit of +0.37%. After a weak start to the day at 536, above the previous session's low, we saw steady growth as trading continued and a bullish close of 547, near the session high. In the weekly comparison, Nautical Pet's trend is more pronounced than the FTSE AIM 100 Ix trend line, revealing investors' greater propensity to buy Nautical Pet stock compared to the index.
Status and Trend Analysis
Technically, Nautical Pet is in a strong uptrend with resistance in the 561.7 area, while the most immediate support is listed at 517.7. The trading outlook is positive, with the bulls likely to target the 605.7 level (green line in the chart).
Risk Analysis
Here's a word of caution for risk-averse traders, who should consider this a potentially risky investment given that intraday volatility is up at 8.97. Buying or selling decisions should primarily be made in an intraday context, as daily volume has fallen to 170,167, against a volume moving average of 402,945 for the last month.
The earnings per share for Imperial Tobacco Group rose from 50.6 pence to 65.5 pence from 2008 to 2009, indicating the fact that the earnings available to the shareholders increased by about 30 percent. As mentioned in 2009's annual report of the company, its adjusted earnings per share have grown by 15 percent on a compound annual basis.
The dividend per share also showed a remarkable hike from 62.93 pence in 2008 to 73 pence in 2009 amounting to a 17 percent increase in the value distributed amongst the shareholders.
As mentioned in the Chairman's statement in the annual report of the group:
"Over the past ten years we have outperformed the FTSE All-Share Index by 286%.
With dividends reinvested, £100 invested in Imperial Tobacco ten years ago would now be worth £517 compared to just £134 invested in the FTSE All-Share Index." (Chairman's Statement, Annual Report 2009)
Total Shareholder return over the past ten years
Graph showing Imperial Tobacco Group PLC's performance against the FTSE All-Share index for the past ten years
Source: Imperial Tobacco Group, Annual Report 2009
Although the dividend yield increased to 3.18 percent, the dividend cover of the business remained constant over the year at 1.1 times.
The price per earnings ratio of the group was 29.75 times, which reveals the fact that the capital value of the share is quite high compared to its current level of earnings. This reflects the market confidence concerning the future of the business and that the investors are prepared to pay more in relation to the earnings stream of Imperial Tobacco Group. But this value has dropped by 30 percent over the fiscal year. Similarly, since the market price of the share has not risen significantly in comparison to the remarkable increase in the cash flow per share, the price to cash flow ratio also dropped from 11.30 pence to 5.65 pence in 2009.
Overall, the sales volume of the group has fallen in Russia, Spain, Ukraine and the US due to the rise in the counterfeit cigarette market and also because smokers generally have switched from cigarettes to cheaper tobacco in the economic slowdown. The price to earnings ratio and the price to cash flow ratios have also fallen significantly. On the other hand, the company still has a good dividend yield and strong profitability from operating activities. The PE ratio also suggests that the stock might be undervalued.
Hence, considering all the parameters on the whole, it is recommended for the existing shareholders to hold their investment. For those who are yet to invest, the company's prospects look good only in the long term.
Appendix
INVESTMENT RATIOS
Note: Market price taken as on 30th November 2009 is 1886 pence.
XVI Dividend per share (DPS) = Taken from Director's Report
2008 DIVIDEND PER SHARE = 62.93 p
2009 DIVIDEND PER SHARE = 73 p
XVII Earnings per share (EPS) = Taken from Income Statement
2008 EARNINGS PER SHARE = 50.6 p
2009 EARNINGS PER SHARE = 65.5 p
XVIII Dividend Yield = Total Dividend/Current Market Price x 100
2009 DIVIDEND YIELD = 59.93/1886 x 100 = 3.18%
XIX Dividend cover = EPS/DPS
2008 DIVIDEND COVER = 50.6/45.6 = 0.804
2009 DIVIDEND COVER = 65.5/59.93 = 0.897
XX Price Earnings Ratio = Current Market Price/EPS
2009 PRICE EARNINGS RATIO = 1886/ 63.40 = 29.75
XXI Price to Cash flow = Current Market Price/Cash flow per Share
2009 PRICE TO CASH FLOW = 1886/334 = 5.65 pence
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