Financial Analysis Of Beach Energy Limited And Santos Limited

Overview of Companies and Core Activities

The report summarizes the financial analysis of Beach energy limited and Santos Limited for the past two years. It gives a brief overview about the companies and their core activities along with the explanation of their competitive advantages. It also includes the performance analysis with the help of various categorized ratios. Furthermore, the analysis is also supported by graphical presentation and comparison of share price movements with the changes in the market indices. The value of stock of Beach energy and Santos limited are calculated by applying the Constant Dividend Growth Rate Model and the outcome is compared with the current share prices in order to conduct the valuation of companies’ stock. After conducting the whole analysis, recommendation has been provided to the investors regarding the selection the company for the purpose of making investment. The report also helps in determining the corporation which is financially sound and healthy. In the last, a conclusion is given which summarizes the overall findings of the analysis.

It is an Australian company engaged in the business of oil and gas exploration, production and development and investment in the resource industry. The core activities of the company involve exploration and development of hydrocarbons. Beach Energy operates through segments named as Cooper Basin, Other Australia and International. Cooper Basin deals with selling of oil and gas products from Australian production. The international segment is involved in seeking interest in the areas outside Australia. The segment of Other Australia deals with the off shore and on shore production and exploration of the resources. The activities of the company involved the sale of oil and liquid hydrocarbons. The competitive advantage of the company is that it can pull back its annual capital expenditure by taking the advantage of weak prices. This will help the company to focus more on its core activity areas like Cooper Basin. Currently, company’s share is trading at AUD $2.14 with a market cap of $4,531.29 million (Reuters. 2018).

It is an Australia based natural gas company that is engaged in the development, production and exploration of natural gas both on-shore and off-shore. Products developed by the company include Liquid petroleum gas (LPG), ethane, methane, Coal seam gas (CSG), condensate and oil and others. The operating areas of the firm comprises by its segments are Cooper Basin, Northern and Western Australia, Gladstone LNG and Papua New Guinea (PNG). Santos has its operations established in Asia and Australia and it performs its operations through it segments. The competitive advantage of Santos is that its gas resources are acquired at substantial discount. Moreover, its capital efficient expansion from its existing liquefied natural gas (LNG) base is considered to be a cost advantage for the company. The company is listed on ASX with a ticker STO.AX having a market capitalization of $8,519.11 million with a share price of AUD $7.33 (Reuters. 2018).

Short term solvency

• Current ratio: It is a financial metric which measures the financial strength of the company by determining its capability in paying off the current liabilities with the use of its current assets (Saleem and Rehman, 2011).

Analysis of Financial Performance

The CR of Beach and Santos has increased in the past two years. The CR of Santos was 1.90 in 2016 which rose to 2.07 in 2017. Similarly, the CR of Beach was 2.93 in 2016 that further increased to 4.14 in 2017 (Refer Appendix). The reason for the Santos high ratio was the significant reduction in its current liabilities as compare to the fall in its current assets.  The short term debt of the firm reduced from $579 million to $264 million last year which boosted up the ratio (Santos. 2017).

In case of Beach Energy, company does not have any sort of short term debt and also its creditors fall to $66 million from $90 million. Furthermore, its current assets increased from $436 million to $522 million due the strong cash generation in the last year. All these events boosted up the ratio and make it higher than Santos’s current ratio.

• Quick Ratio: another metric which also measure the financial health of the firm by valuating its quick assets against the current liabilities. The ideal ratio is 1:1 which is to be maintained by every firm (Nikolai, Bazley and  Jones, 2009). 

 The QR of both the companies has shown upward trends as Santos’s ratio increased from 1.67 to 1.76 and Beach energy’s ratio rose to 3.75 from 2.41 last year respectively (Refer Appendix). The reason for the upsurge in case of Santos was the increased receivables of the company and reduced inventory (Santos. 2017). On the other hand, Beach energy has the higher ratio due to the significant reduction in inventory which led to the generation of more cash in the business. Its cash balance increased from $199 million to $348 million which was sufficient enough to meet its reduced CLs.

• Debt-Equity ratio: It determines the capital structure of the firm by comparing the debt and equity component of the companies. Its shows the amount of resources that are funded by debt and the portion of assets funded through equity (Parrino, Kidwell and Bates, 2011).

The D/E ratio of Santos was higher than that of Beach energy. In 2016, it was 73% which reduced to 54% in 2017 (Refer Appendix). This was due to the noteworthy reduction in company’s debt reflected by the repayment of long and short term obligations. Its component of long term debt reduced from $6571 million to $4710 million which make the ratio to fall (Santos. 2017). On the other hand, Beach energy reported a D/E ratio of 14% to 11% last year (Refer Appendix). The reason for having such a low ratio is the high reliability of the company on its shareholders’ equity. It has very low debt portion and depends more on equity (Beach Energy. 2017). Comparatively, the capital structure of Santos is more prominent.

• Debt ratio: it measures the total liabilities of the firm against its total assets in order to determine the long term solvency of the business. It shows the portion of assets financed through debt (Lee, Lee and Lee, 2009).

The DR of Santos has been reduced last year but was still more than the ratio of Beach energy. It was 54% in 2016 that fall to 48% in 2017 (Refer Appendix). Reason being, significant reduction in total liabilities of the company was more than the decline in its total assets. This reflected that the company is more focused on reducing its debt component (Santos. 2017). In case of Beach energy, the ratio was 34% in 2016 that reduced to 26% last year. Low debt component and increased assets contributed to the fall in ratio.

• Inventory turnover ratio: it is an efficiency metric which measures the ability of the firm in converting its stock into cash in order to generate high turnover (Jenter and Lewellen, 2015).

Valuation of Stocks

 The ITR of Santos was 4.17 times in 2016 which increased to 5 times in 2017. This was due to the fall in company’s average inventory which reflected that it is efficient enough to convert its stock into cash. However, when compared it is observed that Beach energy has high ratio in both the years with 4.41 times and 6.43 times respectively. This was due to the low cost of sales of the company and a huge decline in its inventory (Beach Energy. 2017).

• Debtor turnover ratio: this metric measure the amount of time a company takes to collect its receivables efficiently in order to book high sales.

The DTR of Santos was higher than Beach energy’s ratio in last two years. It was 6.85 in 2016 and 7.44 in 2017 (Refer Appendix). On the other side, DTR of Beach was 5.34 and 6.49 in 2016 and 2017 respectively. The reason behind having high ratio was the increased revenue of Santos which was contributed by the sale of its inventory, PPE and other assets (Santos. 2017). The revenue of Beach energy was lower than Santos but reduction in its average debtors boosted up the ratio last year, reflecting increased efficiency of the company (Beach Energy. 2017).

• Asset turnover ratio: It shows the amount of sales made from the efficient utilization of company’s total assets. It reflects the competency of the firm in maintaining its assets effectively and efficiently (Kimmel, Weygandt and Kieso, 2010). 

The ATR of Santos has increased in the last two years but it was lower than the ATR of Beach energy. In 2016, it was 0.17 which increased to 0.21 in 2017. On the other hand, Beach energy reported the ratio of 0.32 and 0.37 in last two years (Refer Appendix). The reason for such increase and higher ratio was that the proportion between Beach Energy’s sales and average total assets was higher than the proportion of Santos’s sales and assets. Moreover, the average assets of Beach energy have also increased along with the rise in revenue which eventually boosted up the ratio (Beach Energy. 2017).

• Net profit margin: it shows the amount of profit made by the company out of its total sales. It expresses the profit as a percentage of sales. A high NPR shows strong profitability of the company (Gibson, 2011).

The NPR of Santos was negative in the last two years at -40% and -12%. This was due to the loss made by the company during the period. This was due to the high operating expenses and cost of sales. In addition the increased impairment charges of the company contributed to the net loss. In case of Beach energy, the NPR turned positive to 60% from -106% last year (Refer Appendix). Reason was the increased profit of the company stimulated by reduced operating expenses and increase in the oil prices (Beach Energy. 2017).

• Return on Assets: it shows the profit earned by the company on its total assets and available resources (Higgins, 2012). 

Due to the loss made in past years, the ROA of Santos was negative in 2016 and 2017. Although the ratio increased from -6.9% to -2.6% because of the reduction in loss amount last year. The reverse trend was notice in ROA of Beach energy as it increased from -36.2% to 20.5%, highly boosted by the upsurge in profit figure.

• Return on Equity: It also reflects the profitability of the company by determining the amount of return company offered to its investors on the capital invested by them in the business (Bragg, 2012). 

Recommendations for Investors

The ROE of Santos was negative because of the declines equity and losses made by the company in past years. The ratio of Beach Energy turned positive from -54.8% to 27.7% because of the increased equity and profits. Many of the investors were attracted due to the profit turnaround that has taken place in 2017.

• Earnings per share: it shows the portion of net income directly attributable to the each outstanding share of the company (Bragg, 2012). 

Santos has negative EPS throughout the years because of the loss incurred during the periods. Beach energy’s EPS increased from -0.39 cents to 0.20 cents due to the upsurge in net income. Also, the number of shares issued by the firm rises during 2017.

• P/E ratio: It reflects the amount an investor is willing to pay for each dollar of earnings. It is also known as price multiple.

The P/E ratio of Santos was negative which means investors cannot expect high growth in future. On the other hand, the P/E ratio of Beach energy increased from -1.31 to 2.69 with an upsurge in its EPS (Refer Appendix). This reflected that investors are expecting high growth in company’s share in future.

Santos Limited

The below graph depicts the monthly share price movement of Santos Limited compared with the fluctuation in all ordinaries index. It can be observed that the trend line of market seems to be stable as compare to the variations reported by company’s average return. Initially, both the market and company have negative return but in the end of 2015, Santos provides return of 27.79% higher than the market. After that, the returns fall and became negative while the market was still positive. In starting of 2016, company offered high return of 23.60% when the market was positive. Post that period, the average return of Santos started falling and became negative too but the market remains almost stable. Thus it can be said that the share prices of company are not very much affected by the changes in ordinaries.

Beach Energy Limited

From the below graph, it can be interpreted that there were high fluctuation in company’s average returns as compare to the market returns. In September 2015, Beach energy offered return worth 41.79% while the market was at 4.34%. After that company’s returns turned negative along with the market. In starting of 2016, Beach energy provided average return of 23.58% when the market was turning positive. During the entire year, the company gives positive returns with the low variation in ordinaries indices. After that in 2017, the returns fall and became negative while the market was still the same.  So, it can be said that the share price movements of Beach energy are in alignment with the changes in market.

Determination of Financially Sound Corporation

As Santos limited did not declared any dividend the value of its stock by using constant growth rate model cannot be derived. On the other hand, Beach Energy declared the dividend of 0.02 per share which valued its stock at $0.40. The current share price is $2.14 which is more than the calculated value. This means that the company’s share will fall in future and the investors have an opportunity to purchase them in coming years. Investors can book profit by selling the company’s share today and purchasing the same later on.

Recommendation Conclusion

From the above report, it is recommended that the investors must invest in Beach Energy Limited as it has high liquidity, profitability and efficiency position. Also its debt component is very low which eventually reduces the financial leverage of the company. Looking at the market performance, its EPS have increased and it has high P/E ratio which reflects growth in future. Moreover, company is paying dividends and high returns to its shareholders from the past year. Therefore, it can be concluded that Beach Energy Limited is healthier as compare to Santos in financial terms. Also, the investors can invest their money in this company in order to enjoy high and positive returns.

References 

Beach Energy (2017). Annual Report. [Online]. Available at: https://www.beachenergy.com.au/irm/PDF/6793_0/2017annualreport?IncludeUnapproved=83324855 [Accessed 27 September 2018].

Bragg, S. M. (2012). Financial analysis: a controller’s guide. New Jersy: John Wiley & Sons.

Gibson, C. H. (2011). Financial reporting and analysis. USA: South-Western Cengage Learning.

Higgins, R. C. (2012). Analysis for financial management. New York: McGraw-Hill/Irwin.

Jenter, D. and Lewellen, K. (2015). CEO preferences and acquisitions. The Journal of Finance, 70(6), pp.2813-2852.

Kimmel, P. D., Weygandt, J. J., and Kieso, D. E. (2010). Financial accounting: tools for business decision making. New Jersy: John Wiley & Sons.

Lee, A. C., Lee, J. C., and Lee, C. F. (2009). Financial analysis, planning and forecasting: Theory and application. Singapore: World Scientific Publishing Co Inc.

Nikolai, L. A., Bazley, J. D., and  Jones, J. P. (2009). Intermediate Accounting. USA: Cengage Learning.

Parrino, R., Kidwell, D. S. and Bates, T. (2011).Fundamentals of corporate finance. USA: John Wiley & Sons.

Reuters (2018). Beach Energy Ltd (BPT.AX). [Online]. Available at: https://www.reuters.com/finance/stocks/overview/BPT.AX  [Accessed 27 September 2018].

Reuters (2018). Santos Ltd (STO.AX) [Online]. Available at: https://in.reuters.com/finance/stocks/overview/STO.AX [Accessed 27 September 2018].

Saleem, Q. and Rehman, R.U. (2011). Impacts of liquidity ratios on profitability. Interdisciplinary Journal of Research in Business, 1(7), pp.95-98.

Santos (2017). Annual Report. [Online]. Available at: https://www.santos.com/media/4319/2017-annual-report.pdf [Accessed 27 September 2018].

Yahoo Finance (2018). Santos Limited (STO.AX). [Online]. Available at: https://finance.yahoo.com/quote/STO.AX/history?period1=1435689000&period2=1498761000&interval=1mo&filter=history&frequency=1mo [Accessed 27 September 2018].

Yahoo Finance (2018). Beach Energy Limited (BPT.AX). [Online]. Available at: https://finance.yahoo.com/quote/BPT.AX/history?period1=1435689000&period2=1498761000&interval=1mo&filter=history&frequency=1mo [Accessed 27 September 2018].

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