HI5002 Finance for Business: Investment Report on ELK Petroleum

This report provides an investment recommendation for ELK Petroleum Limited, analyzing the company's products, services, and governance structure. It evaluates financial statements, stock prices, debt costs, equity costs, and dividend policy to assess investment viability. Key findings include a detailed examination of ownership governance, highlighting that major shareholders are independent of the board, reducing potential manipulation. The report also analyzes fundamental ratios, including liquidity, solvency, asset utilization, profitability, and market value, revealing a decline in company performance. Stock price analysis compares ELK's performance against the AORD index, indicating a negative correlation. The report concludes that investing in ELK Petroleum Limited may be risky due to its continuous decline in performance.

Running Head: Finance 1
Project Report: Finance

Finance 2
Contents
Introduction.......................................................................................................................3
1Company description......................................................................................................3
2. Ownership governance structure..................................................................................3
3. Fundamental ratios........................................................................................................5
4. Stock price....................................................................................................................9
5. Changes into the stock price.......................................................................................10
6. Calculations................................................................................................................10
7. WACC........................................................................................................................11
8. Debt ratio....................................................................................................................12
9. Dividend policy..........................................................................................................13
10. Letter of recommendation.........................................................................................13
References.......................................................................................................................15
Appendix.........................................................................................................................16

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Introduction:
The report emphasizes on the investment opportunity of an organization. This report
has been prepared to offer a recommendation to client of the company about the investment
into a particular company, for this project, ELK petroleum limited company has been taken
into the concern of the study. For evaluation the investment opportunity of the company,
product, services, industry hospital etc of the company has been studied firstly and further the
study has been conducted on the governance structure of the company to identify the
manipulation of the final financial statement of the company.
In addition, the report focuses on the financial statement, stock price, debt cost, equity
cost, total cost of capital, debt position, dividend policy etc to recommend the client about the
short term and long term investment into the company. The report explains that the
investment into the company could be risky in current period as the performance of the
company in continuously decreasing.
1. Company description:
ELK petroleum limited is an oil and gas company which develops and produces the oil
and gas product in the United States and Australian market. The major activities of the
company includes carbon dioxide (CO2) which enhances the enhanced oil recovery project in
the Wyoming’s Grieve oil filed in the united states. The subsidiary companies of the
company are also involving into various oil and gas projects (Reuters, 2018). The company
has been listed in Australian stock exchange in the year of 2004 and from that time it is
trading its stock from one stock exchange only. The current projects of the company are one
of the largest projects in US market and it has helped the company to enhance the market and
financial base (Home, 2018).
2. Ownership governance structure:
Ownership governance of an organization explains about the top people and investors
who invests and holds the most of the stock of the company. On the basis of the study on the
annual report (2017) of the company, it has been recognized that the there are only one
company which has more than 20% ownership in the company. HSBC CUSTODY
NOMINEES (AUSTRALIA) LIMITED holds 267,130,763 shares in the company which is
31.18% of total stock of the company. HSBC CUSTODY NOMINEES (AUSTRALIA)
LIMITED is not related with the directors and the board of members of the company.

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Figure 1: Shareholders information
Further, CITICORP NOMINEES PTY LIMITED and MR ROBERT ANTHONY
HEALY are two more people who have more than 5% ownership in the stock of the
company. They have 7.03% and 6.26% ownership in the company.
Main people:
Main people are the term which is used for the people who plans and implements all
the activities of the business. Main people include all the board members, executive directors,
chief executive officer, chief financial officer etc.
In case of ELF petroleum limited, it has been found that the main people of the
company are as follows:
The chairman Nealy Taylor
Board members Bradely Lingo
Board members Russell Krause
Board members Tim Hargreaves

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Board members Mathew Healy
Chief executive officer Bard Lingo
(Annual report, 2017)
The above table explains about the main people of the organization, the ownership
coherence and the main people do not have any connection with each other. The company
who has more than 20% holdings in the stock of the comapny explains that the owners do not
have any family connection with the directors of the company.
In addition, it has been recognized that the two stockholders of the company has more
than 5% ownership in the stock of the company and both of those are no the directors and the
board of members of the company. It explains that the ELK petroleum limited has managed
the governance structure in such a way that no complexity could be arrived and directors are
not in the charge to manipulate the accounts of the company for their personal interest (Gorry
et al, 2017).
3. Fundamental ratios:
Fundamental ratios explain about the financial statement of the company in various
forms. It evaluates the performance of the company and explains that how well the company
is performing in concern with the solvency position, market position, profitability position,
liquidity position etc. It compares the financial performance of the company from last year to
measure the changes and level of financial performance of organization.
In case of ELK petroleum limited, it has been recognized that the performance of the
company has been changed at a huge level from 2016 in 2017. Following is the details of the
fundamental ratios of the company:
Short term solvency position:
ELK petroleum limited’s liquidity position has been recognized to identify the
capability of the company to meet its short term debts of the company. It is useful at the time
of liquidation of the company and explains about the better level of the company.
Short term solvency position has been evaluated on the basis of two liquidity ratios
which are current ratio and quick ratio. Current ratio explains that the liquidity position has
been hampered from last year due to higher current liabilities of the company. It explains that

Finance 6
the company should enhance the level of current assets to manage the risk position of the
company (Eberhartinger, Genest and Lee, 2017).
In addition, the quick ratio calculations express that the entire current assets of the
company could be liquidate at any time and thus the current ratio and the quick ratio of the
company is similar. It recommends to the company to enhance the level of assets to manage
the debt payment capability of the company.
Liquidity
Ratios 2016 2017
Current Ratio 2,016 2,017
Current Assets / 1,99,03,942 1,98,68,341
Current
liabilities 1,35,69,509 2,27,90,893
Answer: 1.47 0.87
Quick ratio 2,016 2,017
Current Assets -
Inventory / 1,99,03,942 1,98,68,341
Current
Liabilities 1,35,69,509 2,27,90,893
Answer: 1.47 0.87
(annual report, 2017)
Long term solvency position:
ELK petroleum limited’s long term solvency position has been recognized to identify
the capability of the company to meet its long term debt at any time to the debt holder of the
company. It measures the risk and the cost level of the company and offers a vase about the
capital structure position of the company as well.
Long term solvency position has been evaluated on the basis of two ratios which are
gearing ratio and debt ratio. Gearing ratio explains that the long term liability position has
been lowered from last year as well as the capital employed of the company has been
improved. It explains that the gearing position of the company has been improved. It explains
that the company should reduce long term liabilities a bit to maintain the optimal capital
structure (Higgins, 2012).
In addition, the debt ratio calculations express that the long term liabilities and the
total assets level of the company has been improved and it has lead to higher debt ratio. It

Finance 7
explains about a better and competitive level of the company to manage the long term debt
and solvency position of the company.
Capital Structure Ratios 2016 2017
Gearing ratio 2,016 2,017
Long term liabilities / 2,54,76,159 9,57,64,550
Capital employed 4,82,60,389 12,24,22,368
Answer: % 0.528 0.782
Debt ratios 2,016 2,017
Long term liabilities / 2,54,76,159 9,57,64,550
Total assets 6,18,29,898 14,52,13,261
Answer: 0.41 0.66
(Morningstar, 2018)
Asset utilization:
ELK petroleum limited’s asset utilization and efficiency position has been recognized
to identify the capability of the company to manage the various activities and the working
capital of the company. It measures the total time period in which the cash conversion cycle
of the company take place and the total performance of the company.
Asset utilization position has been evaluated on the basis of two ratios which are
payment turnover ratio and receivable turnover ratio. Payment turnover ratio explains that the
account payable position has been lowered from last year as well as the cost of sales of the
company has been improved. It explains that the payment turnover ratio of the company has
been reduced still it is quite competitive from last year. It explains that the company should
manage the same position so that the business could be run in lower working capital.
In addition, the receivable turnover ratio calculations express that the performance of
the company has been improved from the last year. The current position of the company is
much improved.
Asset Efficiency Ratios 2016 2017
Trade payable payment
period ratio 2,016 2,017
Accounts payable/ 1,22,96,272 50,24,893
Cost of sales 3,16,666 56,76,322
Answer: (note the above needs
to be x 365) 14173.10 323.11
Receivables Turnover (days) 2,016 2,017
Average trade debtors /
5,39,23
6
24,61,44
9

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Sales revenue (note used
operating revenue)
#
days
47,67
3
64,31,32
4
Answer: (note the above needs to
be x 365) 4128.57 139.70
Profitability ratios:
ELK petroleum limited’s profitability position has been recognized to identify the
capability of the company to generate the profit on the basis of the total investment and the
sources available to the company. It measures that the profitability level of the company has
been improved from last year.
Profitability position has been evaluated on the basis of two ratios which are gross
profit margin ratio and net profit margin ratio. Gross profit margin ratio explains that the
profitability position has been improved from the last year. It has taken place due to higher
revenue of the company.
In addition, the net profit margin ratio calculations express that the net profit of the
company has been lowered from the last year. Due to it, the net profit margin of the company
is in negative.
Profitability Ratios: 2016 2017
Gross Profit Margin 2,016 2,017
Gross profit /
-
2,68,993 7,55,002
Sales Revenue (note used operating
revenue) 47,673 64,31,324
Answer: -564.2% 11.7%
Net profit margin 2,016 2,017
Net profit / -71,68,313 -1,05,53,200
Sales Revenue % 47,673 64,31,324
Answer: -15036.42% -164.09%
(Morningstar, 2018)
Market value ratios:
ELK petroleum limited’s market position has been recognized lastly to identify the
capability of the company in managing and operating the business and the stock price in the
market. Market value ratios explain that the performance of the company has been improved
from the last year.
Earnings per share position of the company have been improved from last year.
Hovered, still the ratio is in negative. Further, the price earnings ratio of the company also

Finance 9
explains about the negative amount and shows about the bad performance of the company in
the market.
Market value Ratios 2016 2017
Earnings per share 2,016 2,017
Net income -71,68,313 -1,05,53,200
Weighted average shares
outstanding 26,31,76,566 81,98,95,342
Answer: -0.027 -0.013
Price earnings ratio 2,016 2,017
Price per share / -0.01
Earnings per share 0.75
Answer: -0.017
4. Stock price:
Stock price of the company from last 2 year in context with the index price are as
follows:
Figure 2: Stock price comparison
Report:
The above graph explains that the stock price of ELK and AORD are less fluctuate,
However, the ELK prices are bit more fluctuate in nature than AORD. The average returns f
both the securities were 0.01 and 0.00 respectively from last 2 years. It explains that the stock
of company and the index are stable. The correlation study explains that both the stocks are -

Finance 10
0.04 correlated to each other which explain about the negative relationship of both the stock
(Brigham and Ehrhardt, 2013).
Further, it has been measured that the stock price of Elk is not driven the stock price f
AORD. AORD stocks are driven by one of the largest company of stock exchange only. It
leads to the conclusion that the stocks are not related to each other.
5. Changes into the stock price:
On the basis of stock price of last 2 years of the company, it has been measured that the
company has faced various sudden changes into the last 2 years (Yahoo finance, 2018). The
changes have occurred because of various reasons which are internal as well as external
factors. Such as, on 31-8-2016 and 30-9-2016, the company has faced huge decrement in the
stock price of the company. Financial times (2018) explains that these changes have occurred
due to loss of the company in its new project.
Further, on 31-8-2017, the stock price of the company has again lowered due to
dividend announcement of the company. The company has announced fewer amounts than
expected (AFR, 2018). However, on 31-12-2017, stock price has been improved by 449.25%
because of new project announcement and industry changes (Bloomberg, 2018). It also
explains that the current stock price of the company is quite better from last 2 years and
explains about the average performance of the company.
6. Calculations:
Beta calculations:
Beta explains about the fluctuations of the company in context with the stock price of
the company. The beta calculations have been measured on the basis of last 2 years stock
price. The beta of the company is -0.25.
ANOV
A
df SS MS F Significa
nce F
Regress
ion
1 0.000613 0.000
613
0.037
403
0.848506
Residua
l
21 0.344264 0.016
394
Total 22 0.344877
Coeffic Standard t Stat P- Lower Upper Lower Upper

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ients Error value 95% 95% 95.0% 95.0%
Interce
pt
0.0067
76
0.027192 0.249
179
0.805
643
-0.04977 0.0633
24
-
0.04977
0.06332
4
X
Variabl
e 1
-
0.2500
5
1.292927 -
0.193
4
0.848
506
-2.93884 2.4387
39
-
2.93884
2.43873
9
CAPM:
In addition, the CAPM of the company has been evaluated which explains about the
3.5% return from the equity of the company.
Calculation of cost of equity (CAPM)
Risk free rate = 4.00%
RM = 6.00%
Beta = -0.250
Required rate of return = 4% + (6%-4%) * -0.25
3.50%
Conservative company:
The evaluation explains that the beta of the company is lower and explains about the
less fluctuation of the company whereas the cost of equity of the company is also lesser and
explains that the risk and the return from the equity of the company is average and thus the
company is a conservative one to make investments (Gibson, 2011).
7. WACC:
WACC of the company has been calculated to measure the total cost of the company
and the discount factor of the company. The WACC has been calculated on the basis of the
cost of debt and cost of equity of the company. Above calculations explains that the cost of
equity of the company is 3.5% and the cost of debt of the company is as follows:
Calculation of cost of debt
Outstanding debt = 7,25,87,986
interest rate = 6.50%

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Tax rate = 30.0%
Kd = 6.5%*(1-30%)
= 4.55%
It explains that the cost of debt of the company is 4.55%. Further, it explains that the
weighted average cost of capital of the company is as follows:
WACC = rD (1- Tc )*( D / V )+ rE *( E / V )
WACC = 6.5%*(1-30%) * (72587896/99245804) + 3.5% * (26657818/ 99245804)
= 4.555 * 73.14% + 3.5% * 26.86%
= 4.27% (Halili, Saleh and Zeitun, 2015)
It explains that the weighted average cost of capital of the company is 4.27%.
Implications:
The WACC of the company is 4.27% which explains that the company has to pay to
the debt holder and the shareholders of the company 4.27%. It explains that it becomes
important for the company to generate 4.27% of total capital to pay the entire interest and
dividend amount to the revenant party. Thus, before making an investment, company should
evaluate the project and identify that whether the company would be able to generate profit
more than 4.27% or not. If the company is able to make profit more than 4.27% then only the
company should invest into the project.
8. Debt ratio:
Optimal capital structure:
Optimal capital structure is the point of capital structure of the company where the
risk and the cost of the company are balanced. The current capital structure of the company
has been improved from last year and explains about 66% of long term liabilities against the
total assets of the company. The capital structure of the company is not stable. It explains that
the company is required to make the debt ratio 55% so that the risk and cost of the company
could be managed.
Debt ratios 2,016 2,017
Long term liabilities / 2,54,76,159 9,57,64,550
Total assets 6,18,29,898 14,52,13,261
Answer: 0.41 0.66
(Monringstar, 2018)

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Gearing ratio:
Gearing ratio explains about the total liabilities against the total capital of the
company. It measures that the long term liabilities of the company has been improved due to
higher debt issue in the market as well as the capital structure has been enhanced due to
equity issue as well. The company has enhanced the borrowing and equity amount from the
market for the new project and current gearing ratio of the company is 78.2%.
Gearing ratio 2,016 2,017
Long term liabilities / 2,54,76,159 9,57,64,550
Capital employed 4,82,60,389 12,24,22,368
Answer: % 0.528 0.782
It explains that the debt position of the company is not great and it is required for the
company to reduce the level.
9. Dividend policy:
Dividend policy could be of relevant dividend policy and irrelevant dividend policy.
The annual report, 2017 of the company explains that the company has not paid any amount
to the stockholders of the company because of net loss. However, the company is following
the relevant dividend policy to measure and enhance the performance of the company. The
relevant dividend policy is followed by the company to attract the customers on the basis of
good dividend amount.
10. Letter of recommendation:
To,
Investors.
Place.
Subject: Letter of recommendation.
Investor,
Your portfolio has been evaluated and on the basis of your request about adding the Elk
petroleum limited in your portfolio, our team has performed a fundamental study on the
company.

Finance 14
Annual report (2017) of the comapny explains that the liquidity position, profitability
position, efficiency position and market position of the company are not in the favour of the
company and has affected the position of the company negatively. In addition, it has been
found that the company is not following any proper financial strategies and policies to
manage the business of the company.
The market position of the company is not good also. The company has not paid dividend
amount from last few years because of huge losses. The stock price of the comapny also
briefs about the lower changes into the company.
So, it is recommended to you to not to add ELK petroleum limited into your portfolio as it
would lead the portfolio towards the losses and entire portfolio would be affected due to it.

Finance 15
References:
Gibson, C.H., 2011. Financial reporting and analysis. South-Western Cengage Learning.
Halili, E, Saleh, A and Zeitun, R. 2015. 'Governance and Long-Term Operating Performance
of Family and Non-Family Firms in Australia', Studies in Economics and Finance, vol.32,
no.4, pp.398-421.
Higgins, R.C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice.
Cengage Learning.
Eberhartinger, E., Genest, N. and Lee, S., 2017. Practitioners’ Judgment and Deferred Tax
Disclosure: A Case for Materiality.
Gorry, A., Hassett, K.A., Hubbard, R.G. and Mathur, A., 2017. The response of deferred
executive compensation to changes in tax rates. Journal of Public Economics, 151, pp.28-40.
Morningstar, Viewed May 24 2018, http://financials.morningstar.com/cash-flow/cf.html?
t=ELK&region=aus&culture=en-US
Yahoo Finance, Viewed May 24 2018, https://finance.yahoo.com/quote/ELK.AX/history?
period1=1464028200&period2=1527100200&interval=1mo&filter=history&frequency=1mo
Reuters, Viewed May 24 2018,
https://www.reuters.com/finance/stocks/company-profile/ELK.AX
Home, Viewed May 24 2018, https://www.elkpet.com/about-us/profile
Annual report, Viewed May 24 2018, https://www.elkpet.com/images/downloads/Elk-
Petroleum-2017-Annual-Report-web.pdf
Bloomberg, Viewed May 24 2018,
https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=22384738
AFR, Viewed May 24 2018, http://www.afr.com/research-tools/ELK/share-prices/shares-
news
Financial times, Viewed May 24 2018,
https://markets.ft.com/data/equities/tearsheet/forecasts?s=ELK:ASX

Finance 16
Appendix:
ELK PETROLEUM LTD (ELK) CashFlowFlag INCOME
STATEMENT
Fiscal year ends in June. 2016-06 2017-06
Revenue 47673 6431324
Cost of revenue 316666 5676322
Gross profit -268993 755002
Costs and expenses
Sales, General and administrative 1827213 4049011
Depreciation and amortization 43458 68112
Interest expense 489939 1300041
Other operating expenses 4538710 5891038
Total costs and expenses 6899320 11308202
Income before income taxes -7168313 -10553200
Net income from continuing operations -7168313 -10553200
Net income -7168313 -10553200
Net income available to common
shareholders -7168313 -10553200
Earnings per share
Basic -0.03 -0.01
Diluted -0.03 -0.01
Weighted average shares outstanding
Basic 263176566 819895342
Diluted 263176566 819895342
EBITDA -6634916 -9185046
ELK PETROLEUM LTD (ELK) CashFlowFlag BALANCE
SHEET
Fiscal year ends in June. 2016-06 2017-06
Assets
Current assets
Cash
Cash and cash equivalents 18103239 6316535
Total cash 18103239 6316535
Receivables 539236 2461449
Inventories

Finance 17
Prepaid expenses 1261467 377973
Other current assets 10712384
Total current assets 19903942 19868341
Non-current assets
Property, plant and equipment
Gross property, plant and equipment 42208271 121123753
Accumulated Depreciation -521474
Net property, plant and equipment 41686797 121123753
Equity and other investments 239159
Other long-term assets 4221167
Total non-current assets 41925956 125344920
Total assets 61829898 145213261
Liabilities and stockholders' equity
Liabilities
Current liabilities
Accounts payable 12296272 5024893
Short-term debt 8752340
Capital leases 4245 4812
Other current liabilities 1268992 9008848
Total current liabilities 13569509 22790893
Non-current liabilities
Long-term debt 22075192 72587986
Capital leases 20011 14157

Finance 18
Other long-term liabilities 3380956 23162407
Total non-current liabilities 25476159 95764550
Total liabilities 39045668 118555443
Stockholders' equity
Common stock 66082643 82494232
Other equity 2257740 3867912
Retained earnings
-
45201751 -70143403
Accumulated other comprehensive
income -354402 10439077
Total Stockholders' equity 22784230 26657818
Total liabilities and stockholders' equity 61829898 145213261
ELK PETROLEUM LTD (ELK) Statement of CASH FLOW
Fiscal year ends in June. AUD. 2016-06 2017-06
Cash Flows From Operating Activities
Cash Flows From Investing Activities
Investments in property, plant, and equipment -175654 -3524440
Property, plant, and equipment reductions 22667
Purchases of investments -211992 -66089
Sales/Maturities of investments
Purchases of intangibles
Sales of intangibles
Other investing activities -2999881
-
69930685
Net cash used for investing activities -3364860
-
73521214
Cash Flows From Financing Activities
Debt issued 91869335
Debt repayment -141289
-
20489755
Common stock issued 25360794 9515919
Repurchases of treasury stock -957374 -796046
Other financing activities
-
13752370
Net cash provided by (used for) financing
activities 24262131 66347083

Finance 19
Effect of exchange rate changes -75825 22727
Net change in cash 20821446 -7151404
Cash at beginning of period 1567344 17477259
Cash at end of period 22388790 10325855
Free Cash Flow
Capital expenditure -3062976
-
53120834
Free cash flow -7348527
-
57130156