FIN203 - Trimester 1: Corporate Finance Performance Analysis Report

This report analyzes the financial performance of Santos, an Australian oil and gas company, focusing on its 2014 performance. It examines working capital efficiency, liquidity ratios, and debt financing strategies, revealing a decrease in working capital efficiency and an over-reliance on debt. The report evaluates short-term liquidity, highlighting the importance of operating cash flow, while also exploring convertible bonds as hybrid securities. It assesses the company's capital budgeting decisions, including NPV and IRR calculations for a project, and considers the impact of revenue changes on the project's viability. The conclusion summarizes the findings, emphasizing the need for improved capital efficiency and the feasibility of the project. The analysis is based on the provided annual report and news articles related to the company's financial strategies.

Running head: CORPORATE FINANCE
Corporate finance
Name of the Student
Name of the University
Author Note

1CORPORATE FINANCE
Table of Contents
Introduction......................................................................................................................................2
Discussion........................................................................................................................................2
Answer (a)....................................................................................................................................2
Answer (b)....................................................................................................................................3
Answer (c)....................................................................................................................................3
Answer (d)....................................................................................................................................4
Answer (e)....................................................................................................................................4
Answer (f)....................................................................................................................................4
Answer (g)....................................................................................................................................5
Answer (h)....................................................................................................................................5
3. Capital budgeting.........................................................................................................................6
Answer (a)....................................................................................................................................6
Answer (b)....................................................................................................................................6
Answer (c)....................................................................................................................................6
Answer (d)....................................................................................................................................7
Answer (e)....................................................................................................................................7
Conclusion.......................................................................................................................................7
References........................................................................................................................................8

2CORPORATE FINANCE
Introduction
Incorporated on 18 March 1954, Santos is an Australian independent oil and gas
producing company which supplies the energy needs for major parts of Asia and Australia. The
main aim of the organisation is to create value for its shareholders. The company’s three fold
strategy focuses on three aspects called transforming, building and growing. Its activities are in
accordance with meeting its vision and mission. This task will discuss various aspects of the
financial performance of the company and form an idea of the efficiency of its operations
(Santos.com 2019).
Discussion
Answer (a)
Working capital is the difference between current assets and current liabilities in a given
financial year. Working capital efficiency is used to measure whether the company has adequate
cover for short term assets in meeting its short term obligations. In case of Santos, the working
capital efficiency has decreased from 1.204 to 1.061. In general, a current ratio of 1.2 and higher
is considered to be efficient. It can be said that the capital efficiency of Santos in 2014 is not
adequate and the operating style of the company is quite risky. It should be improved upon for
the next financial year (Robinson et al. 2015). This can be done by focussing on improving its
share of current assets and by reducing its dependence on the short term borrowings. Due to the

3CORPORATE FINANCE
global fall in oil prices, the company should try to reduce its debt as it would lead to an
overburden on the company to perform well financially. However, it would be difficult due to
the existing conditions in the market. Hence, the company’s main focus should be on improving
its financial condition in an efficient manner and not further deplore its condition by depending
on debt sources for funding (Easton and Sommers 2018).
Answer (b)
Short term liquidity is the ability of the company to meet its short term obligations using
immediate convertible assets available. The quick ratio and operating cash flow ratio for 2014 is
0.74 and 0.95. The operating cash flow is efficient as the company can meet most its obligations
using the operating cash flow. The quick ratio is not sufficient and the company needs to work
on it for the next year (DeFusco et al. 2015).
Answer (c)
From the annual reports of 2014 of Santos, the company is undertaking a debt heavy
approach to finance its working capital requirements. The net cash flow is negative for the
financial year. As the current assets are not sufficient to meet the short term obligations, it is
undertaking debts of short tern to long term to facilitate its working capital requirements for the
given year (Crowther 2018)

4CORPORATE FINANCE
Answer (d)
A convertible bond is a debt security that provides interest payments of the same amount
on a regular basis and can be converted into equity shares or common stock of a company on the
wish of the bondholder. It can be done multiple times during the lifetime of the bond.
A hybrid security is one which combines the features of two or more financial
instruments into one. Convertible bond is similar to a normal bond but is effected by the price
movements in the stock market like that of those securities traded in the market. Hence, it is
evident that a convertible bond is the most common form of hybrid security (Santos.com 2019).
Answer (e)
As per source 1, the company predominantly uses long term debt which forms more than
half of its total loans. They have a maturity period of more than one year. They use the direct
form of debt financing as it is mentioned in the financial statements that the company mostly
borrows from banks and other financial institutions by providing collateral securities. They also
use indirect sources of financing but not to the extent of direct financing (Santos.com 2019).
Answer (f)
As per the balance sheet, the short term interest-bearing loans and borrowings have
increased from 189 million to 327 million. The long term interest-bearing loans and borrowings
have increased from 5582 million to 7925 million. The primary reason for the increase in debt is
the draw downs on debt to fund the increasing need for the capital expenditure program and the
impact of the exchange rates on US$ denominated debt (Lorenz, Kruschwitz and Löffler 2016).

5CORPORATE FINANCE
Answer (g)
The yields on hybrid securities of Santos have increased from 3.5 % to 5% in 2014. This
has happened due to the perception that the funds are available at a very low cost. However, of
late, they have come under pressure due to the decrease in oil prices internationally and a further
issue of these securities by the company. The price of the bonds would decrease due to the fall in
oil prices as their demand would decrease due to the change in yield rates (Coates 2014)
Answer (h)
Bond price in 2008
Face value of bond = $ 1000
Coupon rate = 4.5%
Interest = $ 1000 * 4.5% = $ 45
Bond price = C *( 1-(1+r)-n)/r + F / (1+r)n
Where c = $ 45, r = .04, n = 12
Bond price = 1046.93
Bond price in 2015
Face value of bond = $ 1000
Coupon rate = 4.5%
Interest = $ 1000 * 4.5% = $ 45
Bond price = C *( 1-(1+r)-n)/r + F / (1+r)n
Where c = $ 45, r = .05, n = 5

6CORPORATE FINANCE
Bond price = 978.35
Holding period return = (978.35 + (45*9) – 1046.93) / 1046.93 =32.13%
Capital gain = (978.35+(45*9) – 1046.93) = $ 336.43 (Magni 2015)
3. Capital budgeting
Answer (a)
Free cash flow
Answer (b)
NPV when WACC is 5.94% is $ 3,305.95 million
NPV when WACC is 8% is - $ 1633.22 million
Answer (c)
IRR = 7.26%
Discounted payback period = 17.10 years
As the IRR is 7.26% which is more than the WACC of 5.94% and as the project’s initial
investment will be recovered within in 17.10 years which is less than the project’s useful life that
is 20 years, at 5.94% discount rate the project is acceptable that is the financing the project is
ideal (Nobes 2014)

7CORPORATE FINANCE
Answer (d)
If instead of 2% the revenue increases at the rate of changes in the price of oil per barrel
during the period of April 2015 to September 2015 that is by 3.5% the NPV at WACC of 5.94%
will increase from $ 3,305.95 million to $ 7,831.76 million and NPV at WACC of 8% will
increase from negative $ 1633.22 million to positive $ 1,882.20 million (Koziol 2014)
Answer (e)
Considering the variables like cost of capital, depreciation, growth in revenue it is
identified that the revenue is more sensitive to NPV that is with little change in revenue there is
high change in NPV (Cao, Chychyla and Stewart 2015).
Conclusion
From the above it can be concluded that the working capital efficiency has decreased
from 1.204 to 1.061. In general, a current ratio of 1.2 and higher is considered to be efficient. It
can be said that the capital efficiency of Santos in 2014 is not adequate and the operating style of
the company is quite risky. The operating cash flow is efficient as the company can meet most its
obligations using the operating cash flow. The quick ratio is not sufficient and the company
needs to work on it for the next year. Further, from the computation of project ExxonMobil-led
Papua New Guinea LNG it is identified that the project is feasible and will generate profit for the
entity.

8CORPORATE FINANCE
References
Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement
audits. Accounting Horizons, 29(2), pp.423-429.
Coates IV, J.C., 2014. Cost-benefit analysis of financial regulation: Case studies and
implications. Yale LJ, 124, p.882.
Crowther, D., 2018. A Social Critique of Corporate Reporting: A Semiotic Analysis of Corporate
Financial and Environmental Reporting: A Semiotic Analysis of Corporate Financial and
Environmental Reporting. Routledge.
DeFusco, R.A., McLeavey, D.W., Pinto, J.E., Anson, M.J. and Runkle, D.E., 2015. Quantitative
investment analysis. John Wiley & Sons.
Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.
Koziol, C., 2014. A simple correction of the WACC discount rate for default risk and bankruptcy
costs. Review of quantitative finance and accounting, 42(4), pp.653-666.
Lorenz, D., Kruschwitz, L. and Löffler, A., 2016. Are costs of capital necessarily constant over
time and across states of nature?: Some remarks on the debate on ‘WACC is not quite right’. The
Quarterly Review of Economics and Finance, 60, pp.81-85.
Magni, C.A., 2015. Investment, financing and the role of ROA and WACC in value
creation. European Journal of Operational Research, 244(3), pp.855-866.
Nobes, C., 2014. International classification of financial reporting. Routledge.

9CORPORATE FINANCE
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
Santos.com. 2019. Santos - Home. [online] Available at: https://www.santos.com/ [Accessed 15
Jun. 2019].