FINC20018 Managerial Finance: Financial Analysis of Abilene Oil

This report provides a financial analysis of Abilene Oil and Gas Limited, an ASX-listed company, aiming to assist prospective investors in making informed decisions. It critically evaluates the company's annual report for the year ending 2017, incorporating business finance theories. The analysis covers shareholder value enhancement, share price history, trading volume, return on investment, equity valuation, investment project appraisal, dividend policy analysis, and overall cost of capital. The report concludes that the company has failed to maximize shareholder value based on key metrics such as earnings per share, shareholder return, and return on capital employed. It recommends shareholders sell their shares due to the company's poor financial performance and uncertain future prospects. Most of the company's joint venture projects have not yielded positive results. The overall cost of capital is estimated to be 20.68% based on the company's capital structure.

Accounting
Assignment

Analysis of the Abilene Oil and Gas Limited
Prepared By
Student’s Name:
Date:
Executive Summary
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This report demonstrates a sincere effort put by a financial analyst to assist the prospective
investors of the Abilene Oil and Gas Limited, an ASX listed Company, so as to enable them to
make an informative decision about the investment opportunity offered by it through the help of
the critical evaluation and analysis of the annual Report for the year ending 2017 along with the
adequate conceptual framework provided by the various theories of the business finance.
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Table of Contents
Introduction................................................................................................................ 3
Main Body................................................................................................................... 4
Analysis of the company’s price History and trade volume........................................6
Calculation of the short term and long-term return for the investment in the
company and reason for the volatility of its growth...................................................6
Valuation of the equity for the company and recommendation.................................7
Evaluation of the company’s investment projects......................................................8
Analysis of the dividend policy of the company.........................................................9
Estimation of the overall cost of the capital and current capital structure...............10
Conclusion................................................................................................................ 11
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Introduction
Abilene Oil and Gas Limited were known as World Oil Resources Limited prior to
December 2014 to the world community is a South Melbourne, Australia based
company engaged in the development, exploration and production of the Oil and
Gas. The primary region of its operation is the mid-continent region along with the
Kansas and Oklahoma. The basis of our analysis is a few of the parameters or in
other words the major evaluation criteria in this case for the company are
shareholders value enhancement, company’s shares price history and the
consequent trading volume for last two years for the financial year ending 2017
and 2016, return on investment from the company, recommendation to the investor
on the basis of valuation of the equity, company’s investment projects appraisal,
analysis into the dividend policy of the company and finally the overall cost of
capital of the company and analysis of its current capital structure. In the following
section, the things are discussed in detail (Abdullah & Said, 2017).
Main Body
Measurement of the successfulness of the company in terms of its contribution
towards the enhancement of the shareholder's value
The major factors determining the shareholder's wealth or value maximization are
as follows:
a. Earnings per share
The earnings per share for the year ending 2016 were -0.3cents that reached to -0.7
cents in the year 2017.
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b. Shareholders Return
The shareholder's return percentage was -64% in the year 2016, that showed bit
improvement though still lying negative and standing as -22.2%.
c. Return on capital employed
The return on capital employed was -12% in the year 2016 that became worse as -
121% in the year 2017.
d. Return on equity
The return on equity for the year 2016 was -21.6% that reached to -298.8 in the
year 2017.
e. Net Profit margin
It was -332.2% in the year 206 and further deteriorated at -3158.50% in the year
2017.
f. Operating profit margin
In the year 2016 the operating margin was -274.4% and the year 2017 made it to -
2815.90%.
g. Market capitalization
Market capitalization was $4m in the year 2016 and further came down to $3m in
the year 2017.
From the above critical presentation of the factual figures, it is clearly demonstrated
that the company has completely proved to fail the fulfilment of the objective of the
shareholder's value maximization (Bennouna, Meredith, & Marchant, 2010).
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Sources: Simply Wall Street
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Sources: Simply wall street
Analysis of the company’s price History and trade volume
The share price history of the last two years showed that the share price has
declined to such a great volume, there is no point of discussion of its trading volume
as the share price was .007 cents and that reached to .008 cents in the year 2017.
It is because all the growth and earnings are providing the negative results; hence
there is no hope that it can be traded at a great volume in the past as well as the
present (Boghossian, 2017).
Calculation of the short term and long-term return for the
investment in the company and reason for the volatility of
its growth
There is no point for the calculation of the short term and the long-term rate of
return for making an investment in the company. It is because in terms of short
term return it is unable to provide the dividend that could be easily evident from the
learning of its past years financial as it has not earned any profit in the past, hence
the dividend payout is 0%. If we want to go for calculating the long-term return in
making an investment in the Abilene Oil and Gas Limited, then the same shall be
calculated as under:
The rate of return in the Long-term investment in the company
= Share price in the year 2017- Share price in the year 2016/ share price in the year
2016
.008cent-.007/.007*100
=14.28%
The major reason for the volatility of the price of the share of the Abilene Oil and
Gas Limited is as follows:
A. Economy-wide reasons
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From the macro-economic viewpoint, the primary reasons for the volatility as could
be evident from the following scenario, the domestic and export demand for oil and
gas, changes in the oil and gas prices. But the industry has shown remarkable
growth in terms of its business both in terms of production and in terms of revenue
growth too. Hence despite better economic scenario offered by the economy the
company could not perform (Cayon, Thorp, & Wu, 2017).
B. Firm-Specific reasons
The specific reasons that could be seen in the case of the Abilene Oil and gas
limited is that its results of operations and net cash flow along with the net tangible
assets all are providing the negative figures, hence the prospect of incasing its
share price is completely vanished in this case or in other words we may say that it
is showing the lack of capital or capital inadequacy so that it can think about to
make investment in the profitable project (Kaufmann, 2017). Even in the annual
report for the year ending 2017 the auditor has clearly expressed her doubt for its
continuity as a going concern. When there is no guarantee that the organization
shall continue its operation in the future period, then the question for an increase in
the market price of the share cannot be thought at all
Valuation of the equity for the company and
recommendation
The current market price of the share of the company= Current value of equity in
2007/ / Outstanding number of shares
=962299/397614352
=962299/397614352
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=962299/397615152
=.03$
As the current market price is .007 cents, though it is lower than the current value
of per equity share, still it is to be suggested to the shareholders of the Abilene Oil
and gas limited should start selling their shares. There are the reasons for
suggesting the same. The first being there is no single evidence to show that in
future it can bring improvements in terms of growth and revenue in future. Further,
all the shareholder's return is constantly being shown in negative (Vieira, O’Dwyer,
& Schneider, 2017). Hence in future, the market value of the shares of the company
may be zero even. Hence it is the best time to sell the shares to prevent the
occurrence of future losses.
Evaluation of the company’s investment projects
A summary of the company’s projects are as follows
The first one is Klick East Oil Field project in which the company has a 49.2% stake
with the net revenue interest of 40 %. It is a long-term project which started in the
year 2011and has not proved itself a worthwhile project in terms of its return in
form of revenue, hence again planning to review its operational feasibility. Hence it
cannot be designated as a profitable project
The second project is of Welch- Barnhardt wherry Project in which it is a 50%
stakeholder. The first operation was started in the year 2014, but till date, it could
not prove itself as a stable project with the constant production return. Hence again
not a profitable project and is long term in nature.
The Kinsley project in which CMX was the operator in which the company had 35%
stake, but at the year-end, the same project has been relinquished as was informed
to it by the CMX. Hence again it was not a profitable project to be chosen (Webster,
2017).
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The same scenario could be seen in the Mount lookout prospect with the 50% stake
of the company again the same was relinquished.
One of the important projects was Rodina resources LLC in Kansas USA in which
the initial working interest was 49 %, but as it was a joint venture project and 30%
of the joint venture stake was sold and the present stake of the company left for
only 34.03%. It seems to be a profitable project and the drilling operation is
expected to commence from the first quarter of 2018.
Another major project is Rawlins county Prospect in which the company has a 49%
stake but has not yet become operational and already major contribution in terms
of cost has been evidenced.
Central Kansas uplift appraisal and development project with the 49% stake in the
project got its base in the year 2014 in which all the wells under the project are in
operating status except the one which is going to start operation after 30th June
2017 (Wellmer, 2018).
Another Project in which the company has a 49% stake in Pratt county prospect
joint venture. The economic potential of the project is still under consideration.
From the above, it is quite clear that most of the projects undertaken by the Abilene
Oil and gas limited are in form of the joint venture but before making the
commitments to such project much thought was not given because of which it must
suffer a lot. As none of its projects could provide any basis to bring or give a positive
direction to its status of the operation (Webster, 2017).
Analysis of the dividend policy of the company
There is not much to discuss the dividend policy of the Abilene oil and gas limited, it
is because the current financial condition is clear indication to the fact that it is
unable to pay back the capital that was invested by its shareholders once upon a
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time. Moreover, the dividend distribution is only possible when the company may
earn a profit. But for last two years or even before that it could not earn such
amount of revenue even to ensure the continuity of its operation, hence there is no
question of dividend payment arose in past (Wendt, 2018).
Estimation of the overall cost of the capital and current
capital structure
In the give case the Abilene oil and gas Limited’s balance sheet for the year ending
30th June,2017 shows that the amount of equity is $962299 and the debt is
$1237500, for which the amount of interest in form of finance cost as reflected by
its statement of Income for the same year is $317383,.Hence the Cost of the debt
before tax is coming 25.65% and as in the given case the rate of tax has not been
provided in the income statement , Hence it has been assumed that it is the after-
tax cost of debt. The cost of equity has been taken as the required rate of return as
expected by the investors from the company that has been calculated above as
14.28% (Stacey, 2018).
Hence the Weighted average cost of capital or the overall cost of capital is
mentioned hereunder
= Cost of equity*value of equity/ Total value of the firm+ Cost of Debt* value of
debt/ total value of the firm.
=14.28%*$962229/$2199729+25.65%*1237500/2199729
=20.68%
Total Value of the firm= Value of the Equity+ value of the debt
=$962229+$1237500
=$2199729
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