Oil & Gas Operations Industry - Research Paper Example

? Investment Analysis and Executive Summary This paper will assess my portfolio in the Oil and Gas industry. This is an industry that operates at a very challenging environment, characterized by frequent fluctuation of oil prices and stringent regulatory framework. More importantly, the industry has to contend with uncertainty that has characterized the recent decades. Despite these challenges, analyst have continued to forecast positive trends in this industry, particularly because the demand of gas and oil is on the rise, coupled with more advanced technology, which has improved production processes and fundamentally reduced production cost. My choice of portfolio in this industry is majorly motivated by the need to strike a balanced diversification, with the aim of spreading risks across different companies with different risk profiles, as well as maximizing the returns. In particular, I have diversified the portfolio across different companies that have invested from different geographical background, including the United States, United Kingdom, China, and Russia. Although the 10 companies that my portfolio cuts across, deals with similar products, there are slight differences on the combination of products that they deal with, which boost my diversification profile. This report will also provide a brief summary of each company, and some key reasons why I intend to invest in them. Most of the reasons are motivated by the need to diversify and mitigate the risks from different companies. The report has identified various challenges that this industry is undergoing, which has led to a conclusion that it has a high risk profile, but one worth investing in because of its optimistic long-term prospects. A comprehensive analysis of movement of prices of the shares for four weeks that ended mid May has been undertaken. Evidently, there has been a decline of share prices for all companies, which has led to loss of value of my portfolio, but this has not significantly affected my goals of making capital gain in the long-term, because these are short-term fluctuations, which are not likely to last for long. Essentially, I have undertaken the valuation of my portfolio in terms of US Dollar, and hence had to convert the value of shares that are traded in other currencies such as Chinese Yuan. This has significantly affected the accuracy of valuation of the portfolio as the exchanges rates are mere estimates. Different trends are made clear by use of tables and graphs. At the end, I have carried out a percentage analysis and found that the shares have fundamentally lost value. I have also used the Dow Jones Industrial Average as a benchmark to assess the performance of my portfolio. Investment Analysis A brief overview of Oil & Gas Operations Industry The oil and gas industry is operating under a challenging and a dynamic global marketplace and a progressively more adamant group of participants. The regulatory demand is increasingly putting pressure on the operations, and the demand growth is becoming sluggish, while the existing reserves are more expensive and difficult to generate. As the demand to meet future demand builds up, worldwide alliances are becoming more significant. Over the recent years, oil price fluctuation has become the order of the day. In spite of this, the companies in this industry have a challenging task of ensuring they focus on the medium to long-term conditions if they are to make credible decisions and achieve their growth targets. Investing in people, technology and R&D are critical to ensuring a lasting competitive edge (Dybvig & Stephen, 1985). The industry has to contend with mounting uncertainty that is particularly typical of the current decade. With tighter regulations and new policies to adhere to, long term planning and strategy are very critical, given the uncertain environment. In a bid to balance the mounting demand with sustainable and sufficient energy, oil and gas companies are adopting new technologies to supply the world with new energy sources and hydrocarbons. The supply of gas and oil, therefore, has been heightened with a technology that has seen a breakthrough in unconventional hydrocarbons, such as coalbed methane, bitumen and shale oil and gas. As the market continues to become more competitive, industry analysts have continued to forecast a positive trend in oil and gas demand. Besides the demands, there are several other positive trends, including improvements in refining and improved GDP. However, these positive signals cannot be so impressive considering the 2008 economic crisis, which left the industry in tatters. As such, there is a significant upward pressure on the prices of oil and gas. This is contributed by the geopolitical turbulence that has hit Islamic countries, from Middle East to North Africa, as well as a general speculation of an upsurge in commodities market (Bodie, Kane& Marcus, 2009). If the oil prices will continue with the upward trend, then mending up of the economy may come under a threat, which will affect the oil and gas demand in the future. This problem will be exacerbated by the fact that the markets are fundamentally oversupplied. As already discussed, the uncertainty that has gripped the industry is constraining unrestrained optimism, which is marked in all sectors, but more pronounced in the downstream sector. In this sector, the uncertainty emanated from the so called refinery ‘golden age’, which took a high toll in 2006 when refiners were enjoying high profit margins as a result of increased oil demand. Therefore, the refining market is still finding a way of avoiding recurrence of such conditions in the future. This incidence left a market full of persistent overcapacity in OECD nations. In spite of the grim prospects, the industry can draw some optimism from adapted tactics for the uncertain market circumstances. Strategizing a business, which is flexible enough to capitalize on the changing market dynamics will be critical to any promising prospects in this industry, in the coming years (Christopherson, Wayne & Andrew, 1999). Brief Profiles of each company in your fund and key reasons for selection ExxonMobil This company is a major lubricant and producer of other specialties. The company is a major producer of base stocks. It has three outstanding market brands that include Mobile SHC, mobile Devlag and mobile 1 lubricant - many equipment and vehicle manufacturers trust this company for delivery of technologically superior products. The company has a dense network of stations and distributor channels throughout the world where its products can be found. I have selected Exxon mobile due to the fact that it is the biggest super majors, giving it a strong competitive edge. Its large production operations reserves and diversity, possession of one of the largest E&P portfolios and its technological superiority are some of the benefits attributed to its efficiency and, which motivated me to invest with it. Chevron It is an American multinational energy Corporation with the presence in more than 180 nations. Its operations cover all aspects of gas, oil, and geothermal energy industries that include mining; refinement, marketing and transportation; sale and manufacture of chemicals; and also generation of power. Chevron is among the top 6 major oil companies. This being the largest oil company in the world, I want to invest in it with the hope that its expansive size might boost its performance. PetroChina Company Limited This Chinese oil company is the listed arm of state owned china National Petroleum Corporation (CNPC) with headquarters in Dongcheng District, Beijing. It is the main oil producer in china and has traded in Hong Kong and New York. It announced its plans to issue stock in shanghai in November 2007 and subsequently entered trading in shanghai index. I will mainly invest in this company so I can spread my risk to Asia, and also because it’s a duopoly, which reduces its risk. Bashneft This Russian company, Bashneft (MICEX-RTS: Bane) is one of the largest producer of oil in the country. This company operates 140 oil and natural gas fields in Russia and has an annual oil production of 16 million tones. It owns three refineries in Ufa producing 820, 000 (bbl/d), which is equal to 130, 000 (m3/d) and 100 petrol stations. In March 2009, the Russian holdings Sistema bought a controlling stake in this company for $. 2.5 billion. The key reason why I intend to invest with Bashneft is because I expect it to maintain its positive momentum in future. This is attributed to the fact that it has outperformed Russian market for the past one year. Based on promising positive catalysts and attractive valuations, there is every reason to be optimistic about its performance (Otkritie Capital, 2011). Occidental petroleum This company explores, develops, produces and markets crude oil and natural gas. It also manufactures and markets a variety of basic chemicals, Vinyl and performance chemicals. The company also treats transports and markets natural gas, crude oil, NGLS, condensate, carbon dioxide and generates and markets power. I have selected this company to serve for my regional diversification strategy. Marathon Oil Corporation This is an independent international energy company specializing in explorations and production of oil, sand mining and integrated gas. The company is based in Houston, Texas and has a number of assets delivering a constant growth to crude oil production. The company has bases in the US, UK, Angola, Canada, Equatorial Guinea, Libya, Indonesia, Region, Norway, Poland and Iraqi Kurdistan. I have selected this company to serve for my regional diversification strategy. Hess Corporation This American based integrated oil company, which was formerly Amerada Hess, is based in New York City. It explores, produces, transports and refines crude oil and natural gas. About 1,360 of its branded filling stations constitute its chain of operations that market gasoline to consumers in 16 states along the east cost of the US. Refined oil products, as well as natural gas and energy are marketed to customers all over the east Coast of the United States through these outlets. Although towered over by most giant companies of its kind, Hess comfortably lay on position 55 in the 2009 fortune top 500 rankings. I have selected this company to serve for my regional diversification strategy. Anadarko Petroleum Corporation This company is headquartered in the Woodlands, SPD Montgomery county Texas. It is one of the world’s largest independent oil and gas mining companies with around 2.3 billion barrels of oil, equivalent of proven reserves and production of 206 million barrels as at December 31, 2008. This company employs a worldwide workforce of about 4,700. I have selected this company to serve for my regional diversification strategy. Halliburton It is one of the biggest oil field services company with outlets in more than 70 countries in the world. It has several subsidiaries, affiliates, branches, brands and divisions worldwide, with a capacity to employ over 60,000 people. The company has two Headquarters based in Houston and in Dubai where the chairman and CEO David Lesar works and Resides and propels the company’s Eastern Hemisphere Growth. This company remains intergraded in the United States of America. I have selected this company to serve for my regional diversification strategy. Cairn Energy Cairn energy is an independent oil and natural gas exploration and trading company based in Edinburg, United Kingdom. It has a presence in Albania, Bangladesh, Greenland, India, Nepal and Tunisia. Its production capacity is approximately 33000 barrels of oil per day. The main operations are in India, where it has made more than 20 discoveries in Rujastan, including a major oil discovery in Mangala. By 30th June 2010, it had total proven commercial reserves of 247.4 barrels of Equivalent or 39,330,000 cubic meters. I have selected this company to serve for my regional diversification strategy. Any steps which you have taken to diversify within the industry sector I will adopt the conventional diversification that advocates spreading equity (my total money) among various geographies. For example, I will consider it safest to invest in companies, within the oil and gas industry sector that are spread around the world. In this case, I will spread my portfolio in United States, Russia, United Kingdom and china. In addition, I will spread my portfolio across different companies, which deal with different products, within the energy sector (Barber & Terrance, 2000). Your assessment of the risk profile of the fund is it high or low risk? Why? The current industry outlook is that: It is too difficult to adjust the long-term prices that are used in weighing up production and exploration projects because prices keep changing - most companies still keep their prices at $25-$35 rather than the current prices of $50-$60. The previous periods of high prices of 1970 are evidence that high prices are not sustainable (Reilly & Brown, 2011). This period was preceded by drastic fall in prices due to a very high supply faced with a very low demand. Emerging oil players have set their prices at $ 40 per barrel, and this will in some way dictate the long-term prices. Uncertainty of tax regimes and royalty deals changes common in the developing nations are progressively diminishing with the newest world scale field. With this in mind, oil, gas and electricity producers have intensified plans to guard their profits and economic levels, but while this may be considered ideal in the short run for all those companies exposed to high levels of risk climate, it is not a solution to the entire industry. Following the above assessment, I will consider this aforementioned fund as bearing high risk in the long-term perspective (Banerjee, 1990). Under Stock Fund Valuation we have provided: Calculate the total value of your fund each week and a final valuation at the final valuation date in mid-May-2010. With the initial of USD 10,000,000, I will distribute my portfolio as follows: Company No. Of Stock Purchase price Per Stock ($) Total($) W 1 W 2 W 2 W 4 ExxonMobil 65 65.5 64 60.2 60.5 Chevron 76 76.7 75.5 71.5 72.2 PetroChina 68 68.1 66 62.2 63.4 Bashneft 30 30.5 29 27 27 Occidental Petroleum 83 83.6 84.7 76.9 78.3 Marathon Oil 17.5 18.98 18.5 17.9 17.96 Hess 65 64.7 62.7 55.7 55.4 Anadarko Petroleum 71 72.3 69.4 58.2 56.7 Halliburton 33 34.16 29.9 26.8 27.5 Cairn Energy 465 467 459 426.4 447 Company No. Of Stock Purchase price Per Stock ($) Total($) week 1 week 2 week 3 week 4   ExxonMobil 3000 65 195000 196500 192000 180600 181500 Chevron 8000 76 608000 613600 604000 572000 577600 PetroChina 10000 68 680000 681000 660000 622000 634000 Bashneft 10000 30 300000 305000 290000 270000 270000 Occidental Petroleum 2000 83 166,000 167200 169400 153800 156600 Marathon Oil 20000 17.5 350000 379600 370000 358000 359200 Hess 20000 65 1300000 1294000 1254000 1114000 1108000 Anadarko Petroleum 20000 71 1420000 1446000 1388000 116400 1134000 Halliburton 15000 22.06 331000 512400 448500 402000 412500 Cairn Energy 10000 465 4650000 4670000 4590000 4264000 4470000           10,000,000 10265300 9965900 8052800 9303400 Chart 1: Prices trends of the portfolio for the first 4 weeks after the initial investment The effect which foreign currencies had upon the final valuation of the portfolio The investment in foreign companies, which use currencies other than US Dollars, for example, Petrochina Company will have a considerable impact on the valuation of my portfolio. Whenever I buy shares from such a company, I will not only be betting on the performance of the company, but also performance of the currency. The strengthening of the currency will mean that the value of the stock will go up, and when the currency loses against the US dollar, value of the stock will drop. Under Stock Fund Performance Analysis we have provided: The percentage increase or decrease of the fund at the end of the project when compared to the first week First week (10265300-10000000)/10000000 =0.027 =2.7% Increase Last week (9303400-8052800)/8052800 =0.155 =15.5% Increase Although I have lost $696600, the portfolio seems to be picking up, as evidenced from the percentage increase, which has increased by 12.8%. Perhaps I will make money in the future. Chart 2: The Dow Jones Industrial Average Chart 3: US Transport sector When compared to the Dow Jones industrial average as shown in chart 3, the performance of my portfolio is not badly off. At least it is evident that, though there was a decline between the first and the third week, it was not as significant as that of the market benchmark. This could be an indication that, although the industry experienced a general decline in performance, the companies I have invested in were not significantly affected. On the other hand, comparison of my portfolio with that of the US transport sector shows that my portfolio is not doing very good. This could be attributed to the frequent fluctuation of oil prices, which destabilizes the performance of oil and gas industry. Although such occurrences will also affect the transport sector, it takes time before significant changes can be experienced in its portfolio. Highlight those shares in the fund that performed the best and worst over the period of tracking and if possible explain why this was the case. Company Initial investment week 4 Percentage increase (decrease) ExxonMobil 195000 181500 (6.9%) Chevron 608000 577600 (5%) PetroChina 680000 634000 (6.7%) Bashneft 300000 270000 (1%) Occidental Petroleum 166,000 156600 (5.7%) Marathon Oil 350000 359200 2.6% Hess 1300000 1108000 (14.8%) Anadarko Petroleum 1420000 1134000 (2.01%) Halliburton 331000 412500 24.6% Cairn Energy 4650000 4470000 (3.9%) The shares of Hess Company registered the poorest performance, with 14.8% decline; and those of Halliburton registered the best performance, with 24.6% performance. The shares for Hess Company performed poorly because the company’s general performance was not good and hence a loss in demand of its shares. On the other hand, the shares for Halliburton performed impressively well because their demand was high following optimistic speculation as the company had registered improved returns. Conclusion My key objective of investing in this portfolio is to make a capital gain in the long-term, as well as to enjoy dividends during the period that I will hold this portfolio. The oil and gas is a competitive industry, which despite recording frequent decline in shares prices as a result of endless uncertainty, the demand for its products is ever high and hence making of profits is almost assured throughout the year. As such, the payment of dividends is quite encouraging. Although the portfolio has evidently lost value in the course of the four weeks, I am still confident of achieving my object, since the performance of the companies in the long-term is very promising. Seasonal upheavals are typical of this industry, and they are less consequential. References Banerjee, B. (1990). Financial Policy and Management Accounting. London: PHI Learning Pvt. Barber, B.M., & Terrance, O. (2000). Too Many Cooks Spoil the Profits: Investment Club Performance. Financial Analysts Journal, 56(1), 17–25. Bodie, Z., Kane, A., & Marcus, J. (2009). Essentials of Investments. New York: McGraw-Hill Irwin. Christopherson, J. A. Wayne, E.F., & Andrew, L. (1999). Performance Evaluation Using Conditional Alphas and Betas. Journal of Portfolio Management, 26 (1), 59–72. Dybvig, P.H., & Stephen, A.R. (1985). The Analytics of Performance Measurement Using a Security Market Line. Journal of Finance, 40(2), 2-56. Otkritie Capital. (2011). Bashneft. Retrieved from: http://fincake.ru/stock/investideas/7590 Reilly, F.K., & Brown, K.C. (2011). Investment Analysis and Portfolio Management, New York: Cengage Learning Read More