Key Petroleum Limited Financial Analysis

This assignment requires a thorough financial analysis of Key Petroleum Limited. The analysis should cover key financial ratios, trends in profitability, liquidity, and solvency. The report must also identify and evaluate the company's risks, considering factors like market volatility and regulatory changes. Finally, investment recommendations should be provided, tailored to different investor profiles (risk-averse vs. risk-seeking).

Running head: FINANCE FOR BUSINESS
Finance for Business
Name of the university
Name of the student
Authors note

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FINANCE FOR BUSINESS
Table of Contents
Description of company:..................................................................................................................2
Ownership and governance structure of company:.........................................................................2
Calculation of performance ratios:..................................................................................................3
Significant factors influencing the share price of Oz Minerals:......................................................6
Calculation of Beta values and expected rate of returns:................................................................7
Weighted average cost of capital:....................................................................................................7
Debt ratios for the past two years:...................................................................................................8
Dividend policy:..............................................................................................................................9
Letter recommendation:...................................................................................................................9
Description of company:

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Key petroleum limited is an Australian oil and gas company that is publicly listed that
has a strategic focus on pursuing unconventional and conventional programs of wildcat
exploration in canning basins and North Perth operating in Western Australia. It is located in
prospective onshore acreage in remote areas of Western Australia. Company was incorporated in
year 2006 and it is based in Nedlands, Australia and engages themselves in exploring, acquisition
and oil and gas properties development (Keypetroleum.com.au 2018). Some of the principal
activities of the group involve exploration and acquisition of permits with the intention of
identifying economic gas and oil reserves. The objective of company is to drill follow up wells
within contagious on a discovery at Dunnart 2 and the two structures that are matured and under
review to drill status are Wattle Groves and Conder south leads. Organization has a well-built
strategy for unlocking petroleum potential over acreage with a dedicated technical team, having
operatorship over the entirety of its permit portfolio and holding high equity positions. Portfolio
of Canning basin consists of a number of exploration opportunities and numerous exciting
developments (Keypetroleum.com.au 2018).
Ownership and governance structure of company:
It is provided by constitution of company that total number of directors should not be less
than three and more than nine and the qualification of shareholder is not required. The company
has notified the names of substantial shareholders in accordance with section 671B of
corporation act 2001 and they are listed below:

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The maximum number of shareholdings that are held by shareholders is 17.73% held by
ASF oil and gas holdings Pty limited, followed by Star surpass limited having 14.03%. Start
Grand Global limited having 13.63, Elite ray investments limited having 8.02 and Forever new
limited having 7.42% of shareholdings (Keypetroleum.com.au 2018). It can be seen that all the
substantial shareholders are different companies and therefore, key Petroleum limited can be can
be classified as non-family company.
Shareholders having more than 5% shareholdings include all the above named
shareholders and none other shareholders hold more than the given shareholding percentage.
Non-executive chairman of Key petroleum limited is Rex Turkington and Kane Marshall
is the managing director of company and being a full time employee. Min Yang and Geoff baker
is the non-executive director of company. Robert Lerace is the chief financial officer of company
(Keypetroleum.com.au 2018).
Mr Baker and Mr Yang are both the directors of ASF group limited and they are the
ultimate holdings of ASF oil and gas holdings Pty limited and hold shares in Key petroleum
limited.

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Calculation of performance ratios:
$ $ $ $ Trend
Particulars` 2014 2015 2016 2017 2014 2015 2016 2017
Net Profit after Tax
(NPAT) A
-
133295
9
-
211773
5
-
218670
9
-
11447
31
-
100.0
%
-
158.9
%
-
164.0
%
-
85.9%
Total Assets (TA) B
582020
4
782580
0
611137
4
61269
71
100.0
%
134.5
%
105.0
%
-
105.3
%
Ordinary Equity
(OE) C
353015
10
368445
50
375404
70
38535
283
100.0
%
104.4
%
106.3
%
-
109.2
%
Total Liabilities D 784149
327022
4
298340
7
30794
23
100.0
%
417.0
%
380.5
%
-
392.7
%
Return on Assets
(ROA)
E=
A/B
-
22.90%
-
27.06%
-
35.78%
-
18.68%
-
100.0
%
-
118.16
%
-
156.23
%
-
81.58
%
Return on Equity
(ROE)
F=A/
C -3.78% -5.75% -5.82% -2.97%
-
100.0
%
-
152.22
%
-
154.27
%
-
78.67
%
Debt Ratio
G=D
/B 0.135 0.418 0.488 0.503
100.0
%
310.16
%
362.34
%
373.0
5%
The variable TA/OE captures total assets of company and ordinary equity attributable to
shareholders. ROA is return on assets, ROE is return on equity, and they are the profitability
ratios used for determination of profitability position of company. Both of these terms
incorporate the variable total assets and ordinary equity. Profitability of company is measured by
these two components such as total assets and ordinary equity. The above two profitability ratios
are related to the asset turnover and profit margin. The relationship of higher return on assets is
explained by profit margin. Return on assets is dependent upon total assets and an increase in
total assets will lead to decrease in this ratio if the profits are remaining constant (Bekaert and
Hodrick 2017). If there is increase in profit as well as increase in value of total assets, then the

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magnitude of increase in each variable determine whether the ratio will increase or decrease.
Ordinary equity on other hand is a component of return on equity and an increase in equity along
with increase in profits will increase the ratio value.
From the above figures computed, it can be seen that figures for both ROA and ROE are
negative. ROE is in favorable position compared to ROA. Value of ROE for year 2916 and 2017
stood at 5.82% and 2.97% respectively. On other hand, computed figures for ROA stood at
35.78% and 18.68% respectively. Value of ROE is favorable than ROE is because the amount of
total ordinary equity is more than total assets (Block et al. 2015).
Graph with the description of results:
12/1/2015
1/1/2016
2/1/2016
3/1/2016
4/1/2016
5/1/2016
6/1/2016
7/1/2016
8/1/2016
9/1/2016
10/1/2016
11/1/2016
12/1/2016
1/1/2017
2/1/2017
3/1/2017
4/1/2017
5/1/2017
6/1/2017
7/1/2017
8/1/2017
9/1/2017
10/1/2017
11/1/2017
12/1/2017
-0.4
-0.2
0
0.2
0.4
0.6
0.8
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Stock Price Movement
key petroleum limited All Ordinaries Index
The above chart depicts the monthly movement in share price of Key petroleum limited
along with the ordinary index. Blue line indicates share price movement of company and orange
line indicates movement in ordinary index. In the current scenario, share price of company
moved below the ordinaries index (Finance.yahoo.com 2018). It can be seen from the chart that
movement in price of shares has been much volatile since the beginning of year 2017. Price

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remained stable for few month in the mid of year 2016. The ordinaries index remained volatile
throughout the years of analysis compared to share price that experienced much volatility in the
beginning and end of year of analysis. Share price line in the beginning of year 2017 went much
above the index line, then went down, and again shoots up significantly. After mid of year 2017,
price went down and again rose.
Significant factors influencing the share price of Oz Minerals:
The volatility of share price of Key petroleum limited is influenced by both internal and
external factors. Company relates internal factors to undertaking of several projects during the
financial year 2017. Some of the factors that led to wide fluctuations and higher volatility in
share price is because of its acquisition activities and entering to several projects that is likely to
add significant value to the portfolio of company. Acquisition of 100% of ownership into three
exploration permits of Eromamga and cooper basins along with Drill search energy Pty limited.
One of the most considerable transactions that has affected share price is with Beach energy
control and its entry into onshore of UK (Raudla et al. 2015).
Sudden volatility experienced by the share price of Key petroleum limited in the mid of
year 2016 is attributable to execution of sale and purchase agreement for acquiring AWE Perth’s
100% interest in production licenses. Acquisition was witnessed with having a productive
material exploration and oil pool being consistent with portfolio approach of organization. It
provided organization with flexibilities for commercializing the possible discoveries in future.
All this strategic efforts on part of management of group has led to such volatility in the price of
shares. On 13th October 2017, announcement was made by Key petroleum for entering into the
agreement of building terms for the acquisition of interest in production license

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FINANCE FOR BUSINESS
(Finance.yahoo.com 2018). On 28th July, 2018, the acquisition of organization was completed by
the company that shoots up its price.
This higher volatility in the prices of shares of company is attributable to the international
crude oil price volatility and experiencing an upward bias due to cutting down of production by
petroleum exporting countries in spite of increasing demand for oil. Oil price is moving in a
wide range due to sudden and abrupt swings in supply (Koh et al. 2014).
Calculation of Beta values and expected rate of returns:
The calculated value of Beta of company of Key Petroleum limited stood at -1.01232.
Assuming market risk premium at 6% and risk free rate at 4%, the required rate of return for
company is recorded at 1.98%.
Particulars Amount
Beta of the company A -1.01232
Risk Free Rate B 4%
Market Risk Premium C 6%
Required Rate of
Return
D=B+[Ax(C-
B)] 1.98%
Conservative investment is an investment strategy that is used by company to preserve
the value of their portfolio by investing in lower risk securities. However, it can be seen that
share price of organization is extremely volatile and they are fluctuating on a wider range and
this shows that investment strategy of company is not conservative. Investors investing into
shares of this company would be facing considerable amount of risks due to its extreme
volatility.

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Weighted average cost of capital:
Particulars Amount
Weight
age Cost
Return
Rate
Tax
Rate WACC
Total Long Term Debt 0.00% 30.00% 0.00%
Total Equity 3047548 100.00% 1.98% 1.98%
TOTAL 3047548 100% 1.98%
Key Petroleum limited does not have any amount that is attributable to the long-term debt
and therefore, there are no finance costs (Michalak 2016). Therefore, in such scenario, required
rate of return is equivalent to weighted average cost of capital. Hence, value of weighted average
cost of capital stood at 1.98%.
WACC from the management perspective is defined as the blended cost of capital that
the company is required to pay for using capital of both debt and equity holders. It is regarded as
minimum cost of capital and management for making investment decisions in the evaluation of
projects uses it. Higher value of WACC is associated with higher risks with the operation of
firm (Dudid et al. 2014). Management using WACC does the expected cost of financing all the
sources. Therefore, they intend to lower down the rate of WACC for seeking investment that
does not carry considerable amount of risks.
Debt ratios for the past two years:
The debt ratios calculated for two financial year 2016 and 2017 is .488 and .503
respectively. It can be seen that debt ratio has fallen in year 2017. This fall in debt ratio is
attributable to increase in value of ordinary equity at a higher rate than total liabilities of

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company. The management of company has not amended the gearing ratios and there has been
not share buyback and repayment of borrowings.
Dividend policy:
The income derived from dividend of financial assets at fair value through profit and loss
and the recognition of same is done in the comprehensive income as per of revenue. No
dividend or voting right is carried on performance rights. In the current financial year, company
has not paid any amount of dividends.
Letter recommendation:
To,
LMN
Dear Sir,
For recommending investors to incorporate Key Petroleum limited in the investment
portfolio, it is said that inclusion of this stocks would be profitable. The computed ratios
depicting profitability position of company is not favorable as indicated by the figures. Return on
assets and return on equity are negative in figures. Solvency position of company is not favorable
as indicated by increase in debt ratio in the current year. After the detailed evaluation and
analysis of profitability and solvency position of Key petroleum limited, it has been ascertained
that company is highly volatile. Evaluation of the share price for the period of two years, it can
be said that movement in the share price has been extremely volatile resulting from some of the
strategic options undertaken by company. Investors would be recommended to not make any
investment in this company. However, the risk lover investors who seek making investment in
risky stocks can opt for making investment in the shares of this company. Therefore, investors

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who does not intend to make investment in risky stocks should not be recommended to make
investment in shares of Key Petroleum limited.

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Reference and Bibliography list:
Bekaert, G. and Hodrick, R., 2017. International financial management. Cambridge University
Press.
Block, S.B., Hirt, G.A., Short, J.D., Danielsen, B.R. and Perretta, M., 2015. Foundations of
financial management. McGraw-Hill Ryerson.
Brigham, E.F. and Daves, P.R., 2014. Intermediate financial management. Cengage Learning.
Dudin, M., Lyasnikov, N., Yahyaev, M. and Kuznecov, A., 2014. The organization approaches
peculiarities of an industrial enterprises financial management.
Finance.yahoo.com. (2018). KEY.AX Analyst Opinion | Analyst Estimates | KEY PETROL
FPO Stock - Yahoo Finance. [online] Available at:
https://finance.yahoo.com/quote/KEY.AX/analysts?p=KEY.AX [Accessed 29 Jan. 2018].
Irimia-Dieguez, A.I., Medina-Lopez, C. and Alfalla-Luque, R., 2015. Financial Management of
large projects: A research gap. Procedia Economics and finance, 23, pp.652-657.
Karadag, H., 2015. Strategic financial management for small and medium sized companies.
Emerald Group Publishing.
Keypetroleum.com.au. (2018). INVESTORS | Key Petroleum. [online] Available at:
http://www.keypetroleum.com.au/latest_news/2017 [Accessed 29 Jan. 2018].
Koh, A., Ang, S.K., Brigham, E.F. and Ehrhardt, M.C., 2014. Financial management: theory and
practice. Cengage Learning.

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Mazzarol, T., Reboud, S. and Clark, D., 2015, July. The financial management practices of small
to medium enterprises. In Small Enterprise Association of Australia and New Zealand 28 th
Annual SEAANZ Conference Proceedings (pp. 1-3).
Michalak, A., 2016. The cost of capital in the effectiveness assessment of financial management
in a company. Oeconomia Copernicana, 7(2), p.317.
Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial
management: Principles and applications. Pearson Higher Education AU.
Raudla, R., Karo, E., Valdmaa, K. and Kattel, R., 2015. Implications of project-based funding of
research on budgeting and financial management in public universities. Higher Education, 70(6),
pp.957-971.
Titman, S., Keown, A.J. and Martin, J.D., 2017. Financial management: Principles and
applications. Pearson.