THE OIL & GAS INDUSTRY ANALYSIS
Introduction:
In this coverage we will just try to understand as to how an Oil & Gas Industry works, its
Revenue fetching aspects, and other economic factors.
This is just a foundation level analysis for beginners who are just a novice to view the corporate scenario.
Basics:
Initially lets dust put our basic ideas on formation of various petroleum products.
Classification of Petroleum Products:
a) Petrol
b) Kerosene
c) Diesel
d) Naphtha
e) ATF
During the process of purifying Katcha Oil, the above various products tends to emerge at different stages
Now this distillation stands classified into three types:
1 .Heavy Distillation (furnace oil and thaar)
2. Medium Distillation (Diesel, Kerosene & ATF)
3. Light Distillation (LPG & Petrol)
These Sectors have to satisfy the needs of both households and industries.
Governments Participation:
Predominantly in all countries, the concerned Government tends to have huge intervention due to the following:
1. The Revenue seems to huge in form of Excise Duties, or the so called Sales tax.
2. On the expenses front, a country has to spend large
How do these Companies Attracts Income?
The key is VOLUME of business.
But the volume of Business is directly dependent on the Economic Growth.
The majority of consumers are
1. Fertiliser Factories (Naphtha & Natural Gas)
2. The Aviation Sectors
The Growth of Electricity, tourism, Agriculture also contributes to the growth factor.
On the other hand, the existence of Natural Gas imposes threat.
The Sector’s relationship with Household:
- Due to the growth of this sector in miscellaneous areas, its demand among public has grown up.
- Naturally if the income of households tends to increase, then usage of Cars, Bikes and LPG connections tends to expand.
The Sectors Expenditure Front:
- The price of Katcha oil forms the major chunk of expenses for this sector.
- Hence the companies will have a careful watch on these issues.
- And on the other side the Exchange rate also needs to be considered which can seriously affect the price of raw material.
How does one needs to analyze and select the Shares?
a) The Refining Process:
· To increase the refining capacity, investment needs to be huge.
· The factor of Environmental disaster also to be considered.
· The Companies in Light and Medium Refining Process can be resorted into for investing.
· Naturally those Companies which have huge refining capacity can produce diversified products at ease.
· Further these products needs to be branded by the same company which produced it in order find a decent margin.
· Those Companies which can co ordinate all technologies together in the right combination can make bumper Profits:
· This means that involving in the raw material business and developing of its own sales network, and this process of developing own sales network is called FORWARD INDUCTION.
· And on the other side the process of finding out the sources for Katcha oil basins are called BACKWARD INDUCTION
· So we now realize that there can be no advantage where a company specializes in Refining process alone.
· Companies with own sales network can also prefer to lease it up.
b).The Management Efficiency:
Since Predominant of the companies in these sector are government owned, the officers in charge of the management are to be highly efficient and effective.
If they aren’t flexible with respect to the market fluctuation, then the company is at stake.
c) The Government:
· The Most important factor is the Government ruling at the centre.
· The Price movement of product is at its discretion.
· There are situations where it assures to make good the losses incurred by the company due to price rise but whereas the settlement is not as quick as the company expects.
· Moreover the settlement mechanism can also be through Issue of Bonds and hence the investor needs to exercise careful diligence in selecting up Oil and gas sectors.
RATIOS TO BE ANALYZED:
Following Ratios will help us to select the shares of the concerned companies.
1. PE ratio:
· What Does Price-Earnings Ratio - P/E Ratio Mean?
A valuation ratio of a company's current share price compared to its per-share earnings.
Calculated as:
·
For example, if a company is currently trading at $43 a share and earnings over the last 12 months were $1.95 per share, the P/E ratio for the stock would be 22.05 ($43/$1.95).
· EPS is usually from the last four quarters (trailing P/E), but sometimes it can be taken from the estimates of earnings expected in the next four quarters (projected or forward P/E). A third variation uses the sum of the last two actual quarters and the estimates of the next two quarters.
Also sometimes known as "price multiple" or "earnings multiples.
2. Price to Book value:
· A ratio used to compare a stock's market value to its book value. It is calculated by dividing the current closing price of the stock by the latest quarter's book value per share.
Also known as the "price-equity ratio".
Calculated as:
·
A lower P/B ratio could mean that the stock is undervalued. However, it could also mean that something is fundamentally wrong with the company. As with most ratios, be aware that this varies by industry.
This ratio also gives some idea of whether you're paying too much for what would be left if the company went bankrupt immediately.
CONCLUSION:
We believe that the facts stated above would have given the very basic fundas that is very much essential for anyone who intends to learn the financial concepts of Oil & Gas Industry.
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