Investment Opportunity Report: ELK Petroleum Limited

Ownership governance

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).

1. 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.

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:

 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
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).

1. 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:

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 the company should enhance the level of current assets to manage the risk position of the company (Eberhartinger, Genest and Lee, 2017).

Fundamental ratios

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 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)

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.

Liquidity ratios

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 /		5,39,236	24,61,449
Sales revenue  (note used operating revenue)	# days	47,673	64,31,324
Answer:  (note the above needs to be x 365)		4128.57	139.70

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)

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 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

1. 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 -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.

1. Changes into the stock price:

Short term solvency position

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.

1. 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.

ANOVA
	df	SS	MS	F	Significance F
Regression	1	0.000613	0.000613	0.037403	0.848506
Residual	21	0.344264	0.016394
Total	22	0.344877
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	0.006776	0.027192	0.249179	0.805643	-0.04977	0.063324	-0.04977	0.063324
X Variable 1	-0.25005	1.292927	-0.1934	0.848506	-2.93884	2.438739	-2.93884	2.438739

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).

1. 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%

Tax rate = 30.0%

Kd =  6.5%*(1-30%)

Long term solvency position

= 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 = r_D (1- T_c )*( D / V )+ r_E *( 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.

1. Debt ratio:

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)

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.

1. 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.

1. Letter of recommendation:

Investors.

Place.

Subject: Letter of recommendation.

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.

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.

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, https://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, https://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