Finance for Business Masters: AGL Energy Ltd and Oil Search Ltd Analysis

This report provides an analysis of AGL Energy Ltd and Oil Search Ltd for investors interested in the Australian market. The report covers liquidity ratios, profitability ratios, capital structure ratios, share price evaluation, significant factors, beta and expected return, dividend policies, and a letter of recommendation.

Running Head: Finance for business Masters
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Project Report: Finance for business Masters

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Contents
Introduction.......................................................................................................................3
1. Company descriptions..............................................................................................3
1.1 AGL ENERGY LTD........................................................................................3
1.2 OIL SEARCH LTD..........................................................................................4
2. Performance ratios...................................................................................................4
2.1 Liquidity ratios.................................................................................................4
2.2 Profitability ratios.............................................................................................5
2.3 Capital structure ratios......................................................................................7
3. Share price evaluation..............................................................................................8
4. Significant factors....................................................................................................9
5. Beta and expected return........................................................................................10
6. Dividend policies...................................................................................................11
7. Letter of recommendation......................................................................................12
References.......................................................................................................................14

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Introduction:
The investment in any stock or the company is crucial part for an individual or the
corporate as it is riskier than the investment into the government bonds. However, the return
from those stocks is also higher than the government bonds. In case of investment into the
stock of an organization, the investors and the analyst are supposed to evaluate various
factors such as the trend in the financial position and financial performance of the business,
stock volatility, risk associated with the company, the expected return from the business etc.
(Kaplan and Atkinson, 2015). All of these evaluation make it quite easier for the investors
and the analyst to identify the investment level of the stock and company so that a better
decision could be made.
The financial evaluation process is bit complex but an analyst could apply these tools
and methods in a proper way to manage the performance and lead towards a better conclusion
about the investment position. In this report, AGL ENERGY LTD and OIL SEARCH LTD
has been taken into the context to measure that whether the investment into the Australian
market is beneficial for the foreign investors and out of both the stocks, which one is better
for the purpose of long term and short term investment. Various financial analysis methods
have been applied while performing the study on both the companies to recommend the
investors about the better company.
1. Company descriptions:
At the first place, the history, activities, competitive strength, changes in the business
etc has been studied, which are as follows:
1.1 AGL ENERGY LTD:
AGL energy limited is an energy utility company which is offering its services in the
Australian market. The main products of the company includes energy, wind power, natural
gas generation, coal seam gas etc. the services of the company includes electricity generation,
electricity distribution, retailing of electricity, natural gas distribution etc. the company has
been founded in 1837 by the name if Australian gas light company. In the year of 2006, the
name has been changed by AGL energy limited. The company is offering the services to
around 3.6 million business customers and residential in the Australian states (Home, 2018).

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The main competitive advantage of the company is its numerous projects and the great
market base.
1.2 OIL SEARCH LTD:
Oil search limited is the largest oil and gas exploration company in the Australian
market which is offering its services in the Australian market. The main products of the
company include various projects related to the gas and oil explorations. The company has
been founded in 1929 and from that time, the company has accomplished various projects. In
the year of 2006, the company has offered a great amount of dividend to its shareholders. The
company is contributing around 13% in the industry’s GDP which is a great number (Home,
2018). The main competitive advantage of the company is its goodwill and investor’s trust.
2. Performance ratios:
Ratios are the study which is performed on the final financial statements of the business
in order to summarise the information and make the figures easier for the individuals and the
investors. It measures the different financial level of the business such as the short term
solvency level, long term solvency level, profit generation capabilities of the business etc.
(Moles, Parrino and Kidwekk, 2011) the study on the performance ratios of the company are
as follows:
2.1 Liquidity ratios:
Liquidity ratios are the financial ratios which are used to identify the short term
solvency ratios of the company. The current assets, current liabilities, cash position etc of the
business are taken into the concern to measure that whether the liquidity risk of the company
is higher or in the control of the management.
In case of AGL ENERGY LTD, it has been found that the current ratio level and
quick ratios level depict that whether the company is able to pay all the debts against the
current funds of the business. On the basis of the below table, it has been found that the
current ratio has been reduced from 1.46 to 1.33 whereas the quick ratios has been lowered
from 1.29 to 1.2 (Morningstar, 2018). It explains that the funds have been reduced by the
business. However the liquidity level is in control of AGL limited.
AGL ENERGY LTD
Liquidity Ratios 2015 2016 2017

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Current Ratio
Current Assets / 3,459,000 3,587,000 3,625,000
Current liabilities 2,373,000 2,553,000 2,731,000
Answer: 1.46 1.41 1.33
Quick ratio
Current Assets -
Inventory / 3,063,000 3,173,000 3,274,000
Current Liabilities 2,373,000 2,553,000 2,731,000
Answer: 1.29 1.24 1.20
(Morningstar, 2018)
Further, in case of OIL SEARCH LTD, it has been found that the current ratio has
been improved from 1.98 to 2.05 whereas the quick ratios have been improved from 1.74 to
1.90. It explains that the funds have been improved by the business. It explains that the
associated cost of the company is higher and the liquidity risk is lowest.
OIL SEARCH LTD
Liquidity Ratios 2015 2016 2017
Current Ratio
Current Assets / 1,562,982 1,567,217 1,650,462
Current liabilities 789,213 762,627 803,559
Answer: 1.98 2.06 2.05
Quick ratio
Current Assets -
Inventory / 1,375,758 1,419,598 1,528,644
Current Liabilities 789,213 762,627 803,559
Answer: 1.74 1.86 1.90
(Morningstar, 2018)
2.2 Profitability ratios:
Profitability ratios are the financial ratios which are used to identify the profit
generation capabilities of the company. The net profit, gross profit, sales, equity, assets etc of
the business are taken into the concern to measure that whether the profitability level of the
company is enough competitive or not (Madura, 2014).
In case of AGL ENERGY LTD, it has been found that the different profitability ratios
are calculated to measure that whether the company is able to generate enough funds or not.

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On the basis of the below table, it has been found that the return on equity has been improved
from 2.5% to 7.1%, further, the gross profit margin has been reduced from 26.4% to 25.6%
and the net profit level has been improved from 2.04% to 4.36%. It explains that the profit
have been managed by the business. However, few reductions have been seen in the profit
management capabilities of the business.
AGL ENERGY LTD
Profitability Ratios: 2015 2016 2017
Rate of return on ordinary
equity
Net profit / 218,000
-
408,000 539,000
Total equity 8,806,000 7,915,000 7,574,000
Answer: 2.5% -5.2% 7.1%
Gross profit margin
Gross profit / 2822000 3034000 3167000
Sales Revenue 10678000 11150000 12359000
Answer: 26.4% 27.2% 25.6%
Net profit margin
Net profit / 218,000 -407,000 539,000
Sales Revenue % 10,678,000 11,150,000 12,359,000
Answer: 2.04% -3.65% 4.36%
(Morningstar, 2018)
In case of AGL ENERGY LTD, it has been found that the return on equity has been
improved from -0.8% to 6.1%, further, the gross profit margin has been reduced from 75.9%
to 75.4% and the net profit level has been improved from -2.48% to 21.76%. It explains that
the profit have been managed by the business. However, few reductions have been seen in the
profit management capabilities of the business.
OIL SEARCH LTD
Profitability Ratios: 2015 2016 2017
Rate of return on
ordinary equity
Net profit / - 53,904 124,095 387,297
Total equity 6,445,881

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6,530,287 6,330,454
Answer: -0.8% 1.9% 6.1%
Gross profit margin
Gross profit / 1647992 1151002 1340881
Sales Revenue 2170446 1625222 1779509
Answer: 75.9% 70.8% 75.4%
Net profit margin
Net profit / -53,904 124,095 387,297
Sales Revenue % 2,170,446 1,625,222 1,779,509
Answer: -2.48% 7.64% 21.76%
(Morningstar, 2018)
2.3 Capital structure ratios:
Capital structure ratios are the financial ratios which are used to identify the long term
solvency position of the company. The debt, asset, equity, interest amount, earnings etc of the
business are taken into the concern to measure that whether the long term solvency position
of the company is enough competitive or not.
In case of AGL ENERGY LTD, it has been found that the different capital structure
ratios are calculated to measure that whether the company could manage all the funds and
debt in an efficient manner. On the basis of the below table, it has been found that the debt to
asset ratio, interest coverage ratio, gearing ratios etc of the business has been changed. It
explains that the solvency position have been managed by the business (Morningstar, 2018).
However, few changes in the debt level must be done by the business to improve the
solvency level.
AGL ENERGY LTD
Capital Structure ratio 2015 2016 2017
Debt to asset ratio
Total debt 4,654,000 4,136,000 4,153,000
Total assets 15,833,000 14,604,000 14,458,000
Answer: 0.294 0.283 0.287
Interest cover ratio
EBIT / 811,000 521,000 1,319,000
Interest expenses 250,000 236,000 237,000

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Answer:
3.24
4
2.20
8
5.56
5
Gearing ratio
Long term liabilities / 4,654,000 4,136,000 4,153,000
Capital employed 13,460,000 12,051,000 11,727,000
Answer:
0.34
6
0.34
3
0.35
4
(Morningstar, 2018)
Further, in case of OIL SEARCH LTD, it has been found that the different capital
structure ratios are calculated to measure that whether the company could manage all the
funds and debt in an efficient manner. On the basis of the below table, it has been found that
the debt to asset ratio, interest coverage ratio, gearing ratios etc of the business has been
changed. It explains that the solvency position have been managed by the business. However,
few changes in the debt level must be done by the business to improve the solvency level
Capital Structure
ratio 2015 2016 2017
Debt to asset ratio
Total debt 6,921,536 6,701,183 6,343,549
Total assets 14,156,630 13,994,098 13,477,562
Answer: 0.489 0.479 0.471
Interest cover ratio
EBIT / 558,107 603,513 487,912
Interest expenses 262,692 264,793 249,036
Answer:
2.12
5
2.27
9
1.95
9
Gearing ratio
Long term liabilities
/ 6,921,536 6,701,183 6,343,549
Capital employed 13,367,417 13,231,471 12,674,003
Answer:
0.51
8
0.50
6
0.50
1
(Morningstar, 2018)
3. Share price evaluation:

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Share price of AGL and OSH has been compared with the AORD stock price. The
stock price evaluation is as follows:
Figure 1: Share Price evaluation
Report:
The stock price of both the stocks has been evaluated on the basis of the AORD stock
prices. On the basis of the evaluation on the AGL stock, it has been found that the average
return of the stock is 1.02% and the volatility of the stock is 1.40 as well as the correlation of
the company is 0.24 (Yahoo Finance, 2018). It explains that the return of the stocks are
higher as well as the volatility in the stock price is lower. The stock price of the company is
correlated with the AORD stock price at a great level (AFR, 2018).
Further, on the basis of the evaluation on the OSH stock, it has been found that the
average return of the stock is 0.66% and the volatility of the stock is -0.36 as well as the
correlation of the company is -0.19 (Morningstar, 2018). It explains that the return of the
stocks are lower against the AGL stock as well as the volatility in the stock price is lower.
The stock price of the company is less correlated with the AORD stock price (Reuters, 2018).
4. Significant factors:
The significant factors of the company have been evaluated behind the changes in the
stock price of the company. In case of AGL limited, on 31/10/2016 the macro economical
factors have affected the stock price of the company due to which the stock price of the AGL
has been improved by 20.69% (AFR, 2018). As well as, on 31 Dec 2017, 18.99% reduction

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has been seen in the stock price of the business because of dividend announcement (Yahoo
finance, 2018).
Further, in case of Oil search limited, on 31/08/2016 the contract with the new
companies have affected the stock price of the company due to which the stock price of the
AGL has been improved by 11.16% (Reuters, 2018). As well as, on 31 Dec 2017, 10.74%
improvement has been seen in the stock price of the business because of the industry factors
(AFR, 2018).
5. Beta and expected return:
The beta values explain about the fluctuations in the stock price of the company. On the
basis of Reuters (2018), it has been found that the beta coefficient of AGL and OSH stock is
0.65 and 0.84.
AGL OSH
Beta 0.65 0.84
(Reuters, 2018)
Further, according to the given case the risk free rate and market risk premium of the
business is 5% and 6%. The CAPM model has been applied on both the companies to
identify the expected rate of return. On the basis of evaluation on AGL, it has been found that
the required rate of return of the business is 8.9% (Yahoo Finance, 2018). Further, in case of
OSH limited, it has been found that the 10.04% return could be expected from the stock of
Oil search limited. It explains that the return from the oil search limited is higher. Though,
the associated risk with oil search limited is also higher in the industry.
It explains that if the investors want to control on the risk and return both the
position than the stock of AGL is better option than the stock of oil search limited.
AGL
CAPM (Cost of equity)
Risk free rate 5.00%
RM 6.00%
Beta 0.650
Required rate of return 8.90%
OSH
CAPM (Cost of equity)

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Risk free rate (Rf) 5.00%
RM (Rm) 6.00%
Beta 0.840
Required rate of return Rf*
(Rm-RF)*Beta 10.04%
(Yahoo finance, 2018)
6. Dividend policies:
Dividend policies are defined as a way to distribute the profits of the company among
the stockholders of the business. The different dividend policies are followed by the different
companies in order to manage the stock price, stock position and the market capital of the
business. Mainly, there are two type of dividend policies which are followed and applied by
the companies in its operation in order to identify that how much profit must be distributed
among the stockholders of the business (Higgins, 2012).
Dividend policies are mainly of two type i.e. relevant dividend policies and irrelevant
dividend policies. Relevant dividend policies explains that the investors always look for the
total return and dividend from a stock in order to identify that whether the investment must be
done or not. So, a company is required to offer a great amount of dividend to the stockholders
of the business. However, in case of irrelevant dividend policies, it has been found that the
profits must be retained by the business for internal funds (Madura, 2014). The return and the
profits could be managed by the shareholders through selling the stock in the market.
In case of AGL limited, it has been found that the dividend of the company was 0.36,
0.91 and 1.17 in the year of 2015, 2016 and 2017. The earnings level of the company has also
been improved from last 3 years. Thus, the dividend payout ratio of the company has been
evaluated and it has been found that the dividend payout ratio of the company is quite higher.
Company is focusing on offering a great dividend to the shareholders in order to improve the
attractiveness of the company in the market (Morningstar, 2018). The company is following
the relevant dividend policies.
AGL
2015-06 2016-06 2017-06
Dividends AUD 0.36 0.91 1.17
Earnings per share 0.33 -0.6 0.81
Payout Ratio % * 109.09% 151.67% 144.44%
(Yahoo finance, 2018)

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Further, in case of oil search limited, it has been found that the dividend of the
company was 0.06, 0.07 and 0.09 in the year of 2015, 2016 and 2017. The earnings level of
the company has also been improved from last 3 years. Thus, the dividend payout ratio of the
company has been evaluated and it has been found that the dividend payout ratio of the
company has been reducing at great level (Morningstar, 2018). Company has lowered the
dividend amount in order to retain the profit for the future investment of the business. It
explains that the company is following the irrelevant dividend policy.
OSH
2015-06
2016-
06
2017-
06
Dividends AUD 0.06 0.07 0.09
Earnings per share -0.04 0.08 0.25
Payout Ratio % * 150.00% 87.50% 36.00%
(Yahoo finance, 2018)
7. Letter of recommendation:

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To,
Mr. Mark (client)
Street, NSW
Australia.
Subject: Recommendation letter
Dear Mark,
Your concern about the investment into the Australian market has been studied by the
financial analyst team. On the basis of your choice, the AGL limited and Oil search limited,
oil and gas industry, has been taken into the context to perform the study and measure that
whether the investment must be done in the companies or not.
The ratio analysis study has been performed firstly on both the companies and it has
been found that the current funds have been reduced by the AGL limited in current year.
However the liquidity level is still in control of AGL limited. Further, in case of oil search
limited, the funds have been improved by the business and it explains that the associated cost
of the company is higher and the liquidity risk is lowest.
Further, in case of profitability analysis, it has been found that few reductions have
been seen in the profit management capabilities of the business. Though, the position of AGL
limited is better. Further, in case of capital structure ratio, solvency position has been
managed by the AGL limited by a better way than the oil search limited. It explains that the
performance of AGL limited is better.
In addition, on the basis of required rate of return evaluation, it has been found that if
the investors want to control on the risk and return both the position than the stock of AGL is
better option than the stock of oil search limited. In terms of dividend polices, AGL is
following the relevant dividend policies.
It recommends you to invest into the stock of AGL limited in order to get better return
for the long term.

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References:
AFR, AGL LIMITED, Viewed Sept 30, 2018, https://www.afr.com/business/energy/gas/how-
agl-energy-got-caught-out-on-gas-20180618-h11iox
AFR, Oil search LIMITED, Viewed Sept 30, 2018,
https://www.afr.com/research-tools/OSH/shares-forecast
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Home, AGL LIMITED, Viewed Sept 30, 2018, https://www.agl.com.au/
Home, Oil search LIMITED, Viewed Sept 30, 2018, http://www.oilsearch.com/
Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Madura, J. 2014. Financial Markets and Institutions. Cengage Learning.
Moles, P. Parrino, R and Kidwekk, D. 2011. Corporate finance, European edition, John
Wiley &sons, United Kingdom.
Morningstar, AGL LIMITED, Viewed Sept 30, 2018,
http://financials.morningstar.com/balance-sheet/bs.html?t=AGL&region=aus&culture=en-US
Morningstar, Oil search LIMITED, Viewed Sept 30, 2018,
http://financials.morningstar.com/cash-flow/cf.html?t=OSH&region=aus&culture=en-US
Reuters, AGL LIMITED, Viewed Sept 30, 2018,
https://www.reuters.com/finance/stocks/overview/AGL.AX
Reuters, Oil search LIMITED, Viewed Sept 30, 2018,
https://www.reuters.com/finance/stocks/overview/OSH.AX
Yahoo Finance, AGL LIMITED, Viewed Sept 30, 2018,
https://finance.yahoo.com/quote/AGL.AX/history?
period1=1443551400&period2=1538245800&interval=div
%7Csplit&filter=div&frequency=1mo
Yahoo Finance, Oil search LIMITED, Viewed Sept 30, 2018,
https://finance.yahoo.com/quote/OSH.AX/history?p=OSH.AX

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