Analysis of New Zealand Oil and Gas Limited

Executive Summary

This report attempts to analyze and evaluate the performance and the competition environment of New Zealand Oil and Gas Limited (NZO) and tries to exert the contemporary economic competition strategic theories to provide some constructional suggestions which could lead to create NZO’s competition advantages and healthy strategic development through focusing on the characteristics, strengths, weakness and potential development of NZO. In this report, whether NZO is a worth investing will be discussed by using five methods to analyze, which include SWOT analysis, Porter’s five forces analysis, Financial Ratio Analysis, Competitors Analysis and Scenario Analysis. According to analyzing this company, there are three points that cannot be ignored. Firstly, the result of analysis indicates that The New Zealand Oil and Gas Limited should increase more costs than before because of the dramatically increasing oil price. In this situation, it is negative impact on NZO. Secondly, Although The New Zealand Oil and Gas Limited has a leadership in New Zealand market; it still has relatively low competitive capability in the international market. The main reason is that people in New Zealand have a strong awareness of protecting environment. Therefore, It is hard for NZO to do a lot of oil and gas mining. As a result, NZO can merge and acquire some companies in other countries to improve its status in the international market. Overall, NZO is good enough for a possible investment based on all information we have analyzed.

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The New Zealand Oil and Gas Limited explores and develops oil and gas fields, and produces petroleum products and natural gas. Being the New Zealand’s major oil and gas company, New Zealand Oil and Gas Limited plays a role of leading supplier of petroleum products mainly including three major development projects: Tui oil, Kupe gas/oil and Pike River coal. The NZO established a wide range of production and exploration interests in NZ and Australia. Major NZ interests were the Ngatoro field (35.4%), the Kupe field (16.5%), a number of exploration prospects (onshore and offshore Taranaki), and the Pike River coal resource (72%). (New Zealand Oil and Gas Limited, 2012). Also, New Zealand Oil and Gas Limited has made crucial progress in identifying new opportunities in Indonesia and Tunisia.

General Company Description

According to New Zealand Oil and Gas Limited (2013), it listed in 1981 after a public issue of 40 million shares at 50 cent each. In 2009, NZO changed its CEO; the name of new CEO is Peter Griffiths (NZ Oil & Gas Directors and Staff, 2013). The New Zealand Oil and Gas Limited is the leading supplier of petroleum products in the New Zealand market. The annual report also presents that in 2013, there were seven major shareholders, whose shares held exceeded 10 million. Compared with the shareholders in 2013, there were only four main shareholders who had more than 10 million shares (NZ Oil & Gas Annual reports, 2013). The most significant changes in shareholders is JPMorgan Chase Bank, who had 10.80% of the issued capital in 2012, but had only 3.65% of it in2013, dropping from the 1st place to the 4th place (NZ Oil & Gas Annual reports, 2012). There were also director changes from 2011 to 2013. Prof R F Meyer retired from the Board in October 2010. Rodger J Finlay and Mark Tume were appointed as Independent Directors on 28 February 2012. Furthermore, in 31st January 2008, NZO had 411 million shares with a current market capitalization of $339.703 million.

Industry/Sectored Analysis

Oil and Gas industry is commonly considered as one of the most essential industries in the world, not only because it holds large importance for all of oil producing countries, but also provides raw materials for the petrochemical industry (plastics, pharmaceuticals, agrochemicals, etc). In recent years, New Zealand government is taking active measures to promote the domestic exploration and development, formulate preferential policies to continuously introduce new blocks in the international bidding. The level of oil and gas exploration and development in New Zealand is not high, especially the vast sea area, has a great potential for exploration and development. At present, the Taranaki basin oil and gas production has been at the failure stage, production declines quickly. Improving the recovery efficiency and prolonging the service life of the old oil fields are also the main challenges in the oil industry in New Zealand. For a long time, the New Zealand does not attach great importance to the exploration and exploitation of oil and gas, but New Zealand oil policy in recent years has greatly changed, pursuing positive policies to attract investment of exploration and development, gradually developing international bidding activities, actively attracting foreign investment. Moreover, New Zealand's political and economic stability, the government formulated preferential and flexible taxation policy to attract foreign investment and protect the profits of exploration and development. With rapid development of relevant industries, the demand of petroleum products also grows obviously.

However, following this positive developing trend of oil and gas industry, surplus capacity of this industry is diminishing as time goes on. That is why, nowadays, oil and gas industry needs to pay more attention on additional capacity building in order to meet the increasing market demand. This need of additional capacity building usually requires a large amount of investment, and the return is difficult to be achieved in short term. Most investors do not want to face a long- period return with comparatively more uncertainties. Also, in past few years, investment returns of oil and gas industry cannot meet investors’ favors as much, so, investors are fear that future return cannot cover their invest cost.

SWOT Analysis

SWOT Analysis is a strategic planning tool used to evaluate whether a project or a business worth to investment (Wikipedia, 2013). It can help investors know the advantages, disadvantages and core competitiveness of the company clearly. The method includes four parts- Strength, Weaknesses, Opportunities and Threats. The first two parts are internal factors of company whereas the other two are external factors.

Strength

The NZO is one of the largest oil refinery companies in NZ and it has been publicly listed for more than 50 years. Therefore, it has extremely outstanding production technology, rich experience in energy market operations and a full set of perfect quality control system. These points helped them won a solid market position and attract more and more market opportunities. NZO has two promising production assets which make the company more competitive. Moreover, the company developed two new overseas markets, Indonesia and Tunisia, which expand the size of markets. With developing the human resource, NZO has strong and capable teams who are using their experience and expertise to explore and evaluate new business opportunities. In addition, they have a completed organization system to manage all products. For example, they have a strong dealer network, a good relationship with suppliers and a leadership in the market environment.

Weaknesses

Even though NZO has a great management system, some problems can’t be avoided. One of the serious problems is some bad debts which could bring the company economic pressure. Although the investing overseas markets create lots of business opportunities, it adds risk because of a variety of complicated factors such as change of policy and culture difference. The size of oil market is comparatively small because New Zealand only has less than 5 million people in population (Wikipedia, 2013). Hence the company has lowered completive in New Zealand market. Hence the competitiveness of the company in New Zealand has been reduced.

Opportunities

As the consideration for nature protection is enhanced, cleaner energy is getting more and more concerned. On the basis of existing resource, the company can develop more clean energy technologies such as removing sculpture from diesel and benzene from petrol to create environment-friendly products to attract customers. They can try to merge other small energy companies or form strategic alliances with other global retailers. Focusing on specific markets such as Europe or the Greater China Region also can increase business opportunities.

Threats

As oil is a natural resource and there are limited oil suppliers on the world, hence the cost of oil will be higher in the future. Hence, it will have a lower the bargaining power to improve. The price of oil will be more and more expensive in the future because oil is a kind of nonrenewable resources and the number of oil suppliers is limited in the world. Another threat comes from a variety of new energy such as wind and tidal power; they are much cheaper and reproducible.

Porter’s Five Forces Analysis

Porter’s Five Force Analysis is a kind of theoretical model to analyze the industry and business strategy. The model basing on the industrial organization economics deuces the five forces which determine the intensity of competition and the market attractiveness. The market attractiveness is the profit level of industry, so “Less attractiveness” means a combination of the aforementioned five forces will reduce the overall industry profit level; while a very attractive industry lacks it means that the industry is close to a perfectly competitive market, manufacturers profit margins in the industry tends to 0. Bargaining power of customers y

Bargaining power of buyer is negatively related to the number of buyers. That means if there are many buyers, then the bargaining power will be low.

Because of the character of the oil and gas industry, there are many different buyers and use every day including business and personal usage. Therefore, the large amount of the consumption leads to a low bargaining power of customers. Bargaining power of suppliers

The suppliers are the oil mining and extraction firms. Supplier power is high because OPEC controls 40% of world’s supply of oil and, has a strong influence on the price of oil. There are not a lot of oil and gas companies existing in the world and because of the decrease in the natural resources like oil and gas, the bargaining power of suppliers is high. Threat of new entrants

The threat of new entrants is low because barriers to entry include high capital cost, economies of scale, distribution channels, proprietary technology, environmental regulation, geopolitical factors and so on. The level of competition and specialized knowledge in exploration is very high. In addition, fixed costs are high for petroleum products. Therefore, it is very hard for new firms to enter the market. Threat of substitute products or services

The threat of substitutes is low and it comes from nuclear power, hydroelectric, biomass, geothermal, solar, photovoltaic, and wind. Nuclear and hydroelectric energy sources are not a threat within the next decade because of government regulation, environmental concerns, and a high barrier to entry. Further, photovoltaic sources are limited by technological issues and geothermal sources are limited by geographic availability. The only potential threat could be biomass. However, efficiency levels of biomass do not have available to compete with oil and gas now. Finally, as an old energy, coal is not an environmental and effective resources compared with petroleum products. Intensity of competitive rivalry

The intensity of competitive rivalry is low, because Intensity of rivalry depends on the size of market and the number of competitors. According to New Zealand’s situation, because of the geographical area and the populations, New Zealand could be a relative small market. Moreover, the number of competitors in oil and gas are seldom in New Zealand, so the intensity of rivalry could be very low in New Zealand. Summary of Porter’s Five Forces Analysis:

In the short time period, the oil and gas industry will be stable because of a low intensity of rivalry, a low bargaining power of buyers, a high barrier to new entrants. However, in the long tome period, petroleum products will be replaces by a new energy which is more effective, more environmental and has less costs, so the oil and gas industry will be unstable.

Financial Ratio Analysis

Financial ratios are used in this assignment to measure the performance of New Zealand Oil and Gas Limited (NZO) for the year ended 30 June 2012. For comparison purposes, we also generate financial ratios for the reporting year of 2011 in order to evaluate the performance of the company by comparing financial ratios of 2011 and 2012. Usually, financial ratios are classified into five major areas, namely, Liquidity, Leverage, Profitability, Efficiency and Market Value. Those ratios for New Zealand Oil and Gas Limited (NZO) are generated from company annual report for the period of 2011 – 2012 as attached in table (Appendix A).

Liquidity Ratio

Liquidity Ratios are used to measure the short-term solvency of a company. They show the ability of the company to quickly convert its assets into cash to pay its short-term debts. The higher the ratios, the more liquid the company and the less likely the company experience financial distress in short-term basis. The liquidity ratio consists of current ratios, quick ratio and interest coverage ratio. Data shows that both current and quick ratio for NZO declined from 2011 (6.28 and 6.22) to 2012 (7.04 and 6.99) while interest coverage ratio indicating increase from 0.38 in 2011 to 2.67 in 2012. However, both current ratio (6.28) and quick ratio (6.22) for those two periods (2011 – 2012) are still greater than 1, which indicate that the company had sufficient funds to pay its liabilities. Leverage ratio

Leverage Ratios are used to measure the extent of the company's financing with debt relative to equity and its ability to cover interest and other fixed charges. They address the company's long-term ability to meet its financial leverage. The higher the ratios, the more indebtedness the company owes, which signals that the possibility the company will be unable to earn enough to satisfy its debt obligations. Liquidity Leverage ratio for NZO’s in 2012 is 8.10 which is lower than the year 2011 of 14.24. However, the liquidity Leverage ratio for both years still more than 1. This indicated that NZO Company still in the position to meet their current obligations although the ratio reduced from 2012 to 2011. Based on Bodie, Kane and Marcus (2011), the lower the interest coverage ratio in 2012 indicates that the risk of bankruptcy of New Zealand Oil and Gas Limited is higher than last year.

Profitability Ratio

Profitability Ratios measure the overall earnings performance of a company and its efficiency in utilizing assets, liabilities and equity. Net Profit Margin, return on equity, return on total assets, and Return on Capital Employed included are part of the ratio. Except for Net Profit Margin which shows reduced from 2011 of 71.84 to 17.09 in 2012, the rest three ratio’s indicated significant increase in 2012 compared to 2011 where they rose from negative to above zero points. This trend shows that, Profitability of New Zealand Oil and Gas Limited in 2012 are higher than in 2011 but not so significant. Efficiency Ratio

Efficiency Ratios demonstrate how efficiently the company uses its assets and how efficiently the company manages its operations. Inventory turnover ratio declined significantly from 122.52 in 2011 to 86.85 in 2012. At the same time, asset turnover slightly increase from 0.23 in 2011 to 0.24 in 2012. It is obvious that the efficiency of the firm’s use of assets has just been improved slightly from 2011 to 2012. In contrast, Day receivables are reduced from 52.39 days (2011) to 49.39 days (2012). Average collection period in this year becomes shorter than last year. It means the company can collect cash faster than last year.

Market Value Ratio

Market Value Ratios are used for value comparison. These Ratios are not contained in financial statements and they can only be calculated from publicly traded companies. At first, both Market-to-book and price-earnings ratio are declared from 2011 to 2012. According to Body, Kane and Marcus’s opinion (2011), a low market-book-value is “seen by some as providing a ‘margin of safety’” (p.641). Moreover, Market-to-book can measure growth opportunities. This company has a higher price-earnings ratio in this year than last year. It means that the company’s stock in 2012 is less attractive than it in 2011 which has a higher price-earnings ratio. On the other hand, earnings yield is increased.

Competitors Analysis

Competitors’ analysis is an assessment to assess a company’s strengths and weaknesses and compare it to their main and potential competitors, in term of performance. To compare the performance of NZO’s company to the others, we use the financial ratios as indicators and select Contact Energy Limited (CEN) as the competitor, by considering that these two companies have similar nature of business in the area of energy. The appendix B lists the main financial ratios of NZO and CEN.

In terms of profitability, NZO performed better in year 2012 which demonstrates that it enables to generate more cash inflows and gain more profits compared to CEN, for example, NZO has a higher ROA which indicates that NZO can generates more profits relative to its total assets compared to CEN. Furthermore, NZO has stronger ratios in terms of liquidity which means that it holds more cash and with strong repayment capability and solvency. In addition, leverage ratio is an important indicator which measures companies’ ability to meet their financial obligations.

In this ratio, NZO has a relatively lower interest coverage ratio, which indicates that it slower to pay interest on debt compare to CEN. However, in examining of asset utilization we can find that NZO performs better than CEN due to the higher assets turnover that they have, as well as fixed assets turnover; this suggests that NZO enables generate more revenues with same amount of assets compared to CEN. Lastly, NZO has slightly higher P/E ratio which expects to see higher earnings growth in the future compared to CEN, and CEN’s investors are willing to pay more in per dollar of earnings.

To conclude, generally NZO performance in a better position compared to CEN in accordance with the above analysis (New Zealand Oil and Gas Limited Annual Report 2012, Contact Energy Limited Annual Report 2012).

Scenario Analysis (Good/Average/Poor)

Scenario analysis is focusing on analyze possible future performance of company by considering three circumstances which are: good condition, average condition and poor condition. By doing this analysis, good condition will forecasts the best prospectus of NZO, while poor condition indicates vice versa.

As we aware, the unpredictable exploration stage may influence and restrict the growth of companies involved in oil and gas industry. As a consequence, it has the most significant impact on the profitability of the oil and gas industry, as the companies’ profit becomes fluctuate owing to the volatile of the exploration stage.

Based on the NZO’s latest two years financials in terms of profitability, we can conclude that they are currently in a good financial position in accordance with financial ratios listed in appendix (New Zealand Oil and Gas Limited Annual Report 2012). NZO expected to have growth of their net profits next year for the amount of $19.9 million, it means that they at the good conditions. Furthermore the company operations in Kupe and Tui projects combined provided the company with NZ$116.4 million in revenues for the financial year. More to the point, the contribution to operating profits was NZ$52.3 million. Of these two projects, Kupe was again the main contributor providing profits of $31.9 million. Its status as a core long-term earnings base for the company was further enhanced in July 2012 with a 13.4% increase in the proved and probable (2P) reserves for gas and oil in the field.

The Tui project generally performed to expectation producing on average 6,000 bond and contributing operating profits of $20.4 million. The operator refined its signaled reduction of the estimated proved and probable (2P) reserves in the Tui fields to 41 mmbbls. The resultant production profile would take field life to 2019. However, there is potential, currently being assessed, to add to reserves through additional drilling at Pateke and/or by drilling at least one untested prospect within the permit area. With those revenues from Kupe and Tui project which generate millions of dollars for the company indicate that New Zealand Oil and Gas Limited is in the good condition.

Conclusions and Recommendations

In conclusion, the collected data and its discussion indicated that The New Zealand Oil and Gas Limited has some small lacking. Firstly, the result of analysis indicates that The New Zealand Oil and Gas Limited should increase more costs than before because of the dramatically increasing oil price. Secondly, Although New Zealand Oil and Gas Limited has a leadership in New Zealand market; it still has relatively low competitive capability in the international market. The main reason is that people in New Zealand have a strong awareness of protecting environment. Therefore, it is hard for NZO to do a lot of oil and gas mining. As a result, here are some useful recommendations for NZO. Firstly, this company can merge and acquire some companies in other countries to improve its status in the international market. Secondly, NZO can develop its exploration technology to make its process of producing more environmental and consistent with the requirement of sustainable development. Overall, NZO is positive company for a possible investment based on its financial ration analysis, competitor analysis, and scenario analysis

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