YJ Oil and Gas Industry
Introduction
YJ Oil and Gas Ltd. in UK is one of emerging company in recent years which is prospering steadily in past couple of year on the back of Initial struggle by founding CEO Oliver Penn.
This success came on the back of specialists hired by Oliver Penn. Those specialists while working on three fields of Oil and Gas named “AAA”, “BBB” and “CCC” has explored the reserves with such great ability that led Company to increase its supply, ultimately maximizing the revenues and Profit in FY 2013 & 2014.
YJ Ltd. is using method “Upstream” relates to Exploration & Production (E & P). YJ Ltd. has applied for four Licenses in order to meet corporate objectives, shareholders expectations and market demand of Oil and Gas.
YJ has implemented IT system in 2005. Which includes multi-currency nominal ledger, a fixed assets register, Survey and scanning software packages, Health, safety and environmental (HSE) and Production of Environmental Impact.
Since and IPO of YJ Ltd, it has applied for eight licenses and four of them are in waiting list. YJ has won the bid in fields of DDD, EEE, FFF while cannot grab license of GGG field.
YJ Oil and Gas Ltd. has been successful to secure the bid in three licenses. YJ Ltd, at initial will work to explore, appraise and develop those exploratory wells in order to meet share and stake holders’ interest and keeping execute goals in front
Global issue is decreasing of Energy resources which comprises Gas and Oil reserves. Estimation suggest that Oil and Gas reserves will last probably 60 years. On contrary, technology advancement is helping companies to extract more of these energy reserves, which adds to global problems.
There are two type of license of Oil and Gas reserves. One is test drilling and other is E&P. The home government will give license to company which has technical ability, financial capacity and avoid environmental issues.
The point center of attention is “long term future with specific regard to inherent lack of sustainability of fossil fuels”. Higher prices is one way to stop the excess usage in commercial and domestic. But E&P cannot determine the prices which actually is determine by market itself.
Oliver Penn has to retire due to illness and this promote Ullan Shah to CEO. Ullan Shah is contemplative whether to buy 200,000 shares. YJ Ltd is listed on UK stock exchange listed Alternative investing market (AIM) in 2007 an initial public offering (IPO) of US$60 million.
The Executive table of YJ Ltd. have six executive directors, five non-executive director and one non-Executive Chairmen. This attract more investments from individuals of YJ Ltd. YJ Ltd has not issued any further shares since 2007. YJ Ltd in 2005-2007 and then four years from 2007-11, has faced loss and thus not issue any dividend to its shareholders since loss of four years.
Issues faced by the YJ oil and gas industry:
The issues are described according to their importance and rankings. 1) Financial Issues:
The most important and the critical issue is the finance issue of the YJ oil and gas industry because this type of industry is capital intensive.
Importance:
A huge amount of cash or investment is required to remain competent and survive in the industry. All the activities of any firm is based on the financial conditions. Finance department is the back bone of the company so it should be the best in working. The financial position of the YJ oil and gas industry is calculated and given in the form of appendixes on page no##
Recommendations:
Current of the industry is 1.3 which is considered to be good but the quick ratio seems to be low as compared to the industry average this effect is due to the inventories. In oil and gas industry inventory should not be stored at high volume because in the PSA agreement, the government shares the profit with contrast to the production not with the sales or inventory. So, keeping inventory is not good for this industry. They should sell the oil and gas as soon as they produce.
The all three profit ratios like Gross, Operating and net are low with compared to the industry averages. The company should reduce the time period, use new technology and should reduce expense in order to increase profitability. 2) Ethical Issues:
Issue:
The company face some issues regarding ethics like fake signature of Mr. Brown.
Importance:
The ethics are important to carry out the regular business operations and activities. The ethics guide the employee to carry activities which are right. Ethics differentiate the right and wrong. Ethics are important to carry business activities in a right way instead of earning profit through illegal ways in order to earn leaps and bounds.
Recommendation:
The company can improves its ethics by giving them trainings and by carrying activities in a way that every employee is under supervision. Company should display sign board regarding ethics at work sites. And they should also improve ethics by giving employees ethics book to remind employee to follow ethics. 3) Technology issue:
Issue:
YJ has adopted technology since 2005. Ever imagined you have window XP 2006 installed on your laptop and then work with current software and application. It is impossible. YJ is in utmost need of updated technology and IT system.
Importance:
Current fields need latest induction of technology so maximum amount of reserves can be explore. Similarly young people are needed at workplace to handle new technology.
The reserves are covered under thousands feet of rock that’s why due to lack of technology the companies are unable to find the reserves. But such reserves can only be uncovered with the help of technology like 3D visualization which gives the exact map of beneath surface.
With the help of technology, YJ can extract maximum amount of oil and gas reserves. This will increase revenue quickly and ultimately showing attractive income statement for share and stakeholder
Recommendations:
Since YJ outsources it’s all operations from the other companies so it should select those companies for E&P operations which have all the latest technology so that the risk of failure may be lower down. 4) Health and safety issues:
Issue:
Health and safety is an important issue in the oil and gas industry because of the nature of the work many lives of the workers can be in danger by a small explosion in the field. So the workers may dead or suffer with the illness.
Importance:
Every company need sound and heathy employees and it became a compulsion in Oil and gas industry due to work nature. Safety measurements are integral part of success for any company. YJ can motivate their workforce by having sound policy regarding health and safety issue in company.
Health is mostly known as the mental and physical condition of body. And that’s why company should emphasis on the health of their employees. As health is very important factor in such type of work nature where physical fitness is very important to operate the machinery in order to do drilling and exploration. Therefore company must provide insurance guidance and policy in order to ensure the health and safety of the employees.
Safety is a state of avoiding from the future accidents like explosion while drilling.
Recommendations
For this purpose the company must have to ensure the employees safety in order to start the exploration with great care. Company should have to focus on safety measurements like helmet, fire protecting uniform, mask, gloves and other similar measurements.
Safety also includes the environmental safety. It includes protecting the natural environment by adopting modern technology and machinery. So that both environment and employees are protecting from such type of activities.
5) Unsuccessful oil fields:
Issue:
YJ faced a loss of US$20m due to the unsuccessfulness of an oil field that affected the industry and the investors’ expectations.
Importance:
It is very important to select the right oil fields which have a large amount of proven reserves of oil and gas. Because the expenses of test drilling and the production are very high and the company faces a serious threat of these loses.
Recommendations:
Test drilling need to be conduct under careful eye of supervisor. Result must be accurate about how long those exploratory wells will generate oil and gas for YJ. Any wrong judgment of results, ambiguity in test drilling process can trigger heavy downfall of YJ. The latest technology should be used to access the oil and gas reserves.
Analysis
SWOT analysis
Strengths | Weakness | * Lucrative, cash producing and AIM listed. * Corporate strategy is effective and will change subject to policy of Company. * Exceptional personnel. * Resilient Health, Safety and environment risk management and control. * Moral usage of outsourcers. * 12 new sites in exploration and 4 licenses bid made. | * Funds absence. * Potential uncertainty triggered by new CEO. * Low bargain power to win license bid against larger companies. * Out dated IT systems. | Opportunities | Threats | * Revolutionary technology. * Develop new oil and gas fields currently under investigation. * Farming in. * Farming out. | * Governmental intervening in current and valued market. * Downfall oil and gas prices. * Environmental calamity. * Outsourcer issues i.e. business failure, poor service, cause environmental issue. |
PEST analysis Political | Political challenges of oil rich countries like iran Iraq and Libya.Bid wining of licenses from governments.Awareness of health rights and creation of new policy about Health and Safety measurement. | Economic | Global trade and industry position disturbing oil and gas prices. Currency fluctuations influences for foreign processes. Fluctuating market prices for oil and gas cannot be handled. | Social | Developing consciousness and focus on sustainability and safety.Level of Consumption (current forecast are for rising consumption).Natural gas considered cleanest fossil fuels. | Technology | New technologies will be costly at initials.Advancement in Explorations from wells. |
Five forces analysis | Factors increasing forces | Factors lowering force | Buyer power(neutral) | YJ has no power to set the price in market. | Little power to individual customers- there is a market price that they simply have to take even large purchasers cannot demand price reduction. | Supplier owner(HIGH) | Government is the only authority issuing License, indicating Monopoly. Maybe limited number of skilled outsource companies like drilling companies. | | Competitors(HIGH) | Large influential companies having lots with excess funding on hand.Mammoth competition among small companies in similar oil fields. | Large companies are keeping eye to find new reserves to explore. | New entrants(low) | Oil and gas is industry contributes lucrative profits, pulling new entrants in market like Yj. | New entrants will not enjoy easy funding, what have been major success part of YJ.New entry is heavily reliant on tools and proficiency. | Substitutes(low) | Energy sources like solar and nuclear power can also be consider. | Transportation is also heavily dependent on Petrol. Gas is still the vital for Domestic and upcoming customers. |
Ansoff matrix and methods of growth | Existing Market | New market | Existing product | Find new exploration and License with bid secured.Improvement in IT system.Greater productivities in exploration.Farming in.Farming out. | Creating customer valued relationships specifically Gas Customers. | New product | Shifting to new energy products will help company to maintain customers, actually making it new product in new market. | Further upstream allied companies.Drilling companies. Major contracts. Service companies.Midstream. Downstream. |
Stakeholder analysis Mandelow’s matrix | Low interest | High Interest | Low power | Minimal InterestSuppliers’ workforceIrregular Customers | Keep informedMinor traders & outsources.Most workforces and minor directors.Groups around oil fields.Regular customers (if any) | High power | Keep satisfiedMost influential stockholders.Banks.Home Governments authority in issuing licenses.Industry officials. | Key playersCEO and ChairmanMajor out sources (drilling companies) |
Critical success factors
YJ ltd. must win the bid in license to so it can prove its credential: * Technical ability what government ask for from companies? * Clean slate in past of taking environment measurement and making new environment policy. * Oil and gas production relies on financial capacity.
What other critical factors can play role: * Adopting new technology to compete in strong market. * Worthy project managing. * Supplier/outsourcer and management good relations. * Heathy relationships between government and management.
Financial Analysis
Profitability analysis: 1) Gross Profit Margin: Gross Margin = Gross Profit/Net Sales * 100 Gross profit= 79.6/174* 100 Gross profit= 45.74 %
YJ saw gross profit 445.74% in FY2014. Expenses are higher and ultimately affecting profit of YJ.
2) Operating Profit Margin: Operating Margin = Operating Profit / Net Sales * 100 Operating Margin= 57/174*100 Operating Margin= 32.75%
Daily working and operations calculation shows there is 32.75% Operating Profit.
3) Net profit Margin: Net margin= net profit/ net sales*100 Net margin= 41/174*100 Net margin= 23.56%
YJ saw 23.56% Net profit which is relatively low when compared to industry average which actually is around 30%. 4) Return on Assets:
Return on Assets = Net Income / Assets * 100
Return on assets= 41/234.1*100
Return on assets= 17.5%
YJ is earning 17.5% on its Assets after operations of its work activity.
Liquidity Analysis: 1) Current ratio: Current ratio= current assets/ current liabilities Current ratio=45.1/32.4 Current ratio=1.3
YJ liquidity is above 1 (1.3) and is good in industry. This tells YJ can easily meet with short term liabilities. 2) Quick ratio:
Quick ratio= (current assets-inventories)/current liabilities
Quick ratio= (45.1-25.0)/32.4
Quick ratio=0.62
Quick ratio is 0.62 which is low as 1:1 is industry average and shows that company is able to meet its short term obligation. But here YJ heavily relies on inventory.
This ratio shows how well YJ is paying short term obligations with cash. The ratio answer is 0.62 and mean YJ has 62% of cash available to pay its liabilities.
The financial capacity of the YJ can be calculated by the various factors like:
Debt Financing:
The bank of YJ could provide the bank overdraft of US$5m maximum amount to the YJ limited at the annual interest rate of 12% per year. But the banks refuse to dig deep in the oil and gas industry because of the uncertainty attached to that business. And the bank of England has issued the guidelines on the maximum loans to the E$P business. The oil and gas business is capital intensive, a lot of investment is required to expand the operations so the banks should be cautious about the lending being more than the three times the operating profits of the latest published accounts.
The banks must have to provide the balanced the needs of the industries due to prosper the economic activities, necessary for the new jobs.
Equity Financing:
The second option of the financing is the equity financing the YJ is having the registered share capital of US$50m and they issued only US$10m by the IPO in 2007. It will be better for the YJ to issue the new share to the public and generate the finance needed to expand the operations like drilling in the new fields. The newly appointed CEO ullan shah is also planning to purchase the 200000 shares in the market it is a positive thing that will encourage the general public to purchase the shares. The management will work for the protection of the investor’s right because they are also having the shares under their belt. The shares prices of the YJ is also high in these days because they started generating the revenues.
Cash:
The YJ cash and cash equivalent for the year ended 31st march 2014 is US$13.6m, and the forecasted cash and cash equivalent for the year ended 31st march 2015 is US$80m. So the cash needs for the new fields are pretty much in the range of the finance capacity of the YJ.
Ethical issue
The ethics are important to carry out the regular business operations and activities. The ethics guide the employee to carry activities which are right. Ethics differentiate the right and wrong. Ethics are important to carry business activities in a right way instead of earning profit through illegal ways in order to earn leaps and bounds.
Each company in these days is looking to grab every opportunity to achieve their objectives. Doing all these things in ethical perspective is what YJ is looking after.
YJ executives’ members must not follow their personal interest and should go for organization’s goals. Protecting the natural environment and care is also part of ethical duty for oil and gas of YJ Ltd. Every work at YJ must be keep confidentiality and employees avoid sharing workplace information to competitors.
YJ has always supported those who followed on ethical way and will guard their employees irrespective of their business productivity
Business Ethics:
YJ ltd priority is to conduct its business activity in ethical way. Current CEO wants YJ to take strong stance whenever ethical issue arise. It has already be seen told to work personnel if they found breaching company’s ethical line, will be reprimanded by CEO. Bribery and Gold plating are few of issue that YJ ltd will face.
Corporate Social Responsibility:
YJ can make name by adopting CSR policy and protecting finite fossil fuels usage. Since YJ Ltd keeps strong check and surveillance on ethical issues, a policy adopted by YJ and necessary in Oil and Gas industry.
Greenbies party who attacked E&P industry and protested about the excess usage of finite fossils. Greenbies party will also appreciate this step and it will see no more protest on YJ. This will help Ullan Shah to park his brand new BMW 650i and entering office happily.
Health Insurance:
YJ ltd work activity is injury prone and have strong tendency of accident to labor force on workplace. By offering insurance to personnel so they can feel protected. It will also motivate workers and will bring more of their best in work hours.
Although their productivity is not major focus, but keeping ethical issue in mind YJ can adopt this way and will be in WIN-WIN situation.
Fundamental ethical Practices;
YJ expects from its employees to work under ethical guide line. Workplace behavior, performing work described in standard operating procedure and use of YJ instrument for the purpose of attaining goals of said organization. Diversity of Culture norms should not be affected by ethical policy as YJ have employees from UK and work in Asia and Africa.
E&P are Goal Oriented:
E&P industries are goal oriented and do not motivate its employees in work. Rather higher risk is involved in company work activity and CEO will determine to achieve company’s goal so share and stake holders can see an attractive income statement and profit and loss statements.
Current era put employees before company because these employees are working to achieve company’s goals. So YJ can stimulate their employees and distinguish themselves from other competitors by adopting people oriented policy.
Avoid Ethical Controversy:
YJ although been strict in ethical issues, YJ is in need of policy to avoid the controversy like Mr. Paul Brown. Such controversy in workplace will taint the image of YJ in market. YJ should make it clear to employees that about its ethical standards and clearly communicate all the code of conduct that employees will observe so YJ can take strong stance on ethical issues.
Solution of problems acquired by YJ BOARD
Whether to test all three new fields (EEE, FFF, and GGG)
YJ applied for licenses and now YJ is offered by government to get that licenses within two weeks.
Solution:
Yes, the YJ should get all three licenses and should start drilling.
Finance issues:
The field GGG has been farmed out to LG in order to generate revenue that will be used in drilling and exploration of other two fields EEE and FFF.
The total expense for the drilling and exploration of EEE and FFF is US$45m. YJ having net cash and cash equivalent is US$13.6m. The net profit for the year ended 31st March, 2014 is US$41m and the operating profit is US$57m. YJ spend its revenue for the further exploration of potential fields and YJ having enough cash to spend on these three fields.
Managerial issues:
YJ having a good team and staff but if YJ wants to expand its operations then YJ should have to recruit young and talented workforce.
Further expansion of explorations and development of hydrocarbon resource in the 21st century needs young talent and stimulation of emergent new leadership (Brett F. 2007).
Farm out offer
Government offered YJ Company to accept the license agreement to test drill at three new sites within two weeks (EEE, FFF and GGG). YJ Company lacking the financial and managerial capability to test drill at all three sites.
A company named Liquid gold (LG) offered an interesting farm out deal to YJ for site GGG. The deal includes an option payment of US$10m, which is payable on 31 august 2014 which is not repayable and another amount of US$10m which is also payable to YJ in small installments under conditions.
This is the issue faced by YJ Board whether to accept the offer or not.
Alternatives actions: 1) YJ should accept the Farm out offer under by making changes in the given terms and conditions by LG. 2) YJ should accept the offer under given conditions. 3) YJ should reject the offer.
Evaluating Alternative solutions: 1) YJ should accept the offer under making following changes in the offer: * The option payment should be US$15m, because it helps in starting period of drilling as YJ lacks finance. * The completion time of the test drilling should increase by 31 march 2017 because E&P companies mostly takes 1-3 years for drilling.
2) YJ should accept the offer because of following: * The field contains 8 to 10mmbbl/mmbble of oil and gas. * Total amount that YJ gets from this reserve is US$88m to US$110m excluding discount. * The total predicted cash need for GGG is US$18m according appendix 1 to the briefing paper given on Page # 7 of scenario.
3) YJ should reject the offer because of following: * If LG reject YJ proposed changes. * If YJ reject LG’s offer of farming out. * YJ should simply wait and see what they could get from the GGG field after post drilling. * In 2015, forecasted operational revenue and profit will grow up referred to appendix 1 page ###. By that increase in revenue and profit YJ will be able to invest in GGG field in 2015 but the important factor is that YJ have to wait for a year.
Recommended Actions:
YJ should go with the first action.
* The optional payment should be increased to US$15m, the reason of that increase is YJ lacking the financial capability. * This amount will help us to start the drilling without taking loan or equity financing or arranging cash from other sources for that specific project. * If the field contains the reserve according to the geologist report then it will be good for both YJ and LG. * If in case the field is barren then YJ will not suffer a losses of drilling expenses. * Total drilling expenses at GGG is US$18m according appendix 1 to the briefing paper given on Page # 7 of scenario. * YJ get US$15m at the start and after getting license from the government YJ gets US$2m and after drilling 100m deep in the sea YJ gets another US$2m. Total payment that YJ receive is US$19m.
Long Term Future of YJ:
Every company has unforeseeable future. But finite fossil and limited life of Oil and gas reserves are worrying reason for Oil and gas industry. Ullan Shah, the CEO has also inform the executive of Yj ltd. that Yj has seven year future left in its currently three field “AAA, BBB and CCC”. All the executives of Yj put on grim face since then.
This report will please Ullan Shah to conduct another meeting and inform all the executives that following are options: * YJ ltd. have young workforce with innovative ideas to extract reserves with lag time. * Fields of “EEE and FFF” will provide YJ ltd. abundant reserves with advance technology. * Field of GGG will be farm out and it bring more of reserves from field of GGG. * Yj ltd. has also applied for four more licenses which are in earlier stages of their process. * Yj ltd. expert personnel will develop the new and current oil and gas fields. * Solar and Wind power are alternatives Yj can undertake to take the business forward. * Yj can launch new energy products which will also fall in oil and gas industry, giving another reason that Yj will carry on it business.
Above point are glimpse of long term future of Yj ltd thus Ullan Shah should remain optimistic and need to have young guns in workforce and improved technology to achieve these objectives.
