Financial Analysis of Dana Gas - Example

ANNUAL REPORT PROJECT: DANA GAS of A. Introduction Dana Gas is an integrated oil and gas company that engages in the manufacture and exploration of oil and gas products such as natural gas liquids, oil and gas. The company also processes, transports, promotes, distributes and sells petroleum and natural gas products. Among the international markets in which Dana Gas seeks to sell dry gas and other petroleum products is Bahrain, Syria, Algeria, Oman and Egypt.1 Dana Gas also explores, mines, transports, refines and sells crude oil. These oil and gas products are utilized as feedstock and fuel to the petrochemical, industrial and the power sectors. Dana Gas has its home office headquarters in Sharjah in the United Arabs Emirates. However, the company has a numerous offices located in Egypt and in the Kurdistan Region of Iraq. Dana Gas has offices in Bahrain, Saudi Arabia and in the United Kingdom. Given that Dana Gas has various offices in the Gulf Region, Asia and Africa, this means that the company’s main geographical regions of operation include the Middle East, South Asia and North Africa. This is normally, abbreviated as MENASA. It operates in United Arab Emirates, Kurdistan Region of Iraq and Egypt. The Chief Executive Officer (CEO) of Dana Gas is Patrick Allman-Ward. Before appointment as Chief Executive Officer, Patrick Allman-Ward had worked with Shell for more than thirty years and as a very successful General Manager of Dana Gas Egypt.2 Given that Patrick Allman-Ward has worked in senior positions in the Middle East and in the Gulf Region, he possesses rich experience in the oil gas industry, with comprehensive knowledge of Dana Gas.3 In Egypt, Dana owns 26.4% of the stock of Egyptian Bahrain Gas Derivatives Company, EBGDCo. This company has a LPG extraction plant at Ras Shukhier on the Gulf of Suez. Also through its Dana Gas Egypt subsidiary, the company owns 100% share in El Manzala, West El Qantara and West El Manzala concessions. Also, in Egypt, Dana Gas has a 50% working interest in the Komombo Concession. In the Kurdistan Region of Iraq, Dana Gas has a 40% shareholding in Pearl Petroleum Company Ltd. In the United Arab Emirates, Dana Gas has an interest in the Sharjah Western Offshore Concession. Dana Gas engages in a project in the United Arab Emirates that is concerned with the purchase of imported gas in the Arabian Gulf for further transportation to Sharjah for further processing. Dana Gas owns the United Gas Transmission Company 100%, while it owns 35% of CNGCL.4 The latest fiscal year for Dana Gas ended on the 31st of December, 2013. The independent accountant (Auditor) of Dana Gas is Ernst & Young. Having audited the consolidated financial statements of Dana Gas and its subsidiaries, which comprise the consolidated statement of financial position as at 31 December 2013 and other financial statements, Ernst & Young provided an independent auditors’ report. The financial statements of Dana Gas that were audited by Ernst & Young also include a consolidated income statement, consolidated statement of cash flows, consolidated statement of comprehensive income and the consolidated statement of changes in equity. Ernst & Young also audited a summary of significant accounting policies and other explanatory information provided by Dana Gas.5 Ernst & Young said that the 31st December 2013, financial statements of Dana Gas were a fair representation of the financial position of the company in all material respects. These financial statements also reflected the financial performance and cash flows of Dana Gas, as per the provisions of International Financial reporting Standards. According to Ernst & Young, emphasis was drawn to note 11 of the consolidated financial statements of Dana Gas. This discloses that a delay in launching gas supplies led to the launch of arbitration proceedings by a key supplier of the Group against an ultimate supplier. Attention was also drawn to note 23 of the consolidated financial statements. This note explains the beginning of arbitration proceedings with the Kurdistan regional Government of Iraq.6 The company’s consolidated financial statements were compliant to the provisions of the UAE Commercial Companies Law of 1984, as amended and the Articles of Association of Dana Gas. The company kept proper books of account. This is because the information provided in the company’s consolidated financial statements was consistent with the book of account, as per the findings of an inventory that carried was carried out to investigate harmony between the directors’ report and the books of account. Since there were no violations of the UAE Commercial Companies Law of 1984, as amended, or the Articles of Association of Dana Gas, there was no material effect on the company’s business and financial position. Given that Dana Gas is listed in on the Abu Dhabi Securities Exchange, The most recent price of the company’s stock was 0.85 AED by May 1st, 2014, 14:15 UAE Time.7 The company has not declared any dividends. Therefore, there is no latest dividend per share value reported to present. B. Industry Situation and company Plans The oil and gas industry is characterized by competition given that all companies in this sector seek to achieve a greater on the market. In addition, demand for energy, especially natural gas has been rising and is expected to rise in the future, with the fundamentals of the energy industry remaining strong. It is expected that demand for oil and gas product will rise significantly, outstripping the supply by oil and gas companies in the Middle East, according to the International Energy Agency.8 Dana continues to make prior preparations to address the expected increase in demand in future. Given that Dana Gas is the only gas producing company that is independent and MENA-focused, it is well placed to profit from the speculated increase in the long term demand for gas in the region. Therefore, Dana Gas emphasizes on commitment to mutual long term superior performance. The value of existing oil and gas assets and projects has been maximized. The company also pursues growth through strategies such as targeted acquisitions and new business development across the gas value chain. C. Financial Statements Income Statement In a single step income statement, all revenue is shown together at the top while all the expenses are shown together, after revenues. On the other hand, in a multi-step income statement, the gross profit is shown as the difference between the cost of goods sold and the net sales. Details are shown in each category of revenue and expense. All the other revenues other than the sales revenue are shown below the operating expenses, in a separate section near the bottom of the income statement called ‘other revenue’. Similarly, interest expense and other expenses of the non-operating category are shown in another section named ‘other expense’, near the bottom of the income statement. Income tax is shown separately from all other expenses, before net income. Dana Gas adopts a multi-step income statement format because details about each category of income or expense are shown in the company’s income statement are shown. In addition, other revenues, other than the sales revenue have been shown after operating expenses. The income statement of Dana Gas shows income tax separately from all other expenses, before showing the net income or profit for the year. The gross profit for Dana Gas for 2013 was 1.055 billion AED, while the gross profit of the company for 2012 was 1.301 billion AED. The income from operations for Dana Gas for 2013 was 765 million AED, compared to 836 million AED of income from operations for the company in 2012. The net income for Dana Gas was 571 million AED in 2013, while the company realized a net income of 605 million AED in 2012.9 Despite earning more revenue in 2013 than 2012, Dana Gas had to pay more in royalties in 2013, compared to 2012. Also, the cost of sales, depreciation and depletion were higher in 2013 than in 2012. This led to a decrease in the gross profit that Dana Gas realized in 2013, compared to 2012. The net income for Dana Gas decreased from 2012 because in 2013, the company incurred more expenses in issues like share of loss of a joint venture and other expenses. Consequently, the net income of Dana Gas had to decrease in 2013, compared to 2012, though the income tax expense for 2013 was slightly lower than 2012. Balance Sheet In 2013, Dana Gas had a value of 12.907 billion AED for total assets while in 2012; there were 12.755 billion AED of total assets. In 2013, a shareholders’ equity of Dana Gas was 9.321 billion AED, compared to 8.859 billion AED for 2012. As for liabilities, Dana Gas had a total of 3.586 million AED in 2013, compared to 3.896 million AED in 2012.10 Based on the above information in 2013, there were 12, 907 million AED of assets, 9,321 million AED of shareholder’s equity and 3,586 million AED of liabilities. Assets = Liabilities + Stockholders’ Equity 12,907 = 9,321 + 3,586 12,907 = 12,907 In 2012, there were 12, 755 million AED of assets, 8,859 million AED of shareholder’s equity and 3,896 million AED of liabilities. Assets = Liabilities + Stockholders’ Equity 12,755 = 8,859 + 3,896 12,755 = 12,755 Therefore, Assets = Liabilities + Stockholders Equity for Dana Gas for the past two years. Statement of Cash Flows In 2013, cash flows from operations amounted to; 389 – 161 + 4 + 286 + 29 + 11 – 11 – 711 – 26 + 78 = (112). Therefore, the company’s cash flows from operations in 2013 were less than net income. In 2012, cash flows from operations amounted to; 326 – 52 + 11 + 315 + 33 + 33 – 7 – 623 – 4 – 18 - 7 = 7. Therefore, the company’s cash flows from operations in 2012 were less than net income. Dana Gas is expanding through investing activities. For instance, the company spent significant funds to purchase property, plant and equipment during the two years under analysis. The company also obtained intangible assets, most probably from acquisitions. Dana Gas finances its investing and operation activities through borrowings. The company issued an ordinary Sukuk, which matured at the end of 2012. The company also arranged to issue a convertible Sukuk. Proceeds from the Sukuk were used in acquiring and developing assets. The company further arranged for refinancing from the Sukuk. Both the ordinary and convertible Sukuk are secured against the shares of the main subsidiaries of Dana Gas that are based in Sharjah. Overall, Dana Gas has recorded an increase in cash over the past two years from 601 million AED to 748 million AED. 11 D. Accounting Policies Dana Gas uses a historical cost basis in the preparation of its consolidated financial statements. However, the company does not use historical costs for investment property, available-for-sale financial asset and assets at fair value, which the company has measured at fair value, through the profit and loss account. Dana Gas has prepared the consolidated financial statements following the International Financial Reporting Standards that have been issued by the International Accounting Standards Board (IASB). The company states property, plant and equipment at cost net of accumulated depreciation or accumulated impairment losses, if any. Depreciation is calculated using the straight line method, based on the estimated useful lives of the assets and land is excluded from any depreciation. Dana Gas records short term investments at a fair value that reflects market conditions at the reporting date. Gains and losses that may arise from changes in fair values of investments are recorded in the income statement. An accredited, external, independent valuer performs an annual evaluation by using the International Valuation Standards Committee’s recommended valuation model. When short term investments are withdrawn permanently and there is no expected future economic benefit from their disposal, they are derecognized. The difference between the net disposal proceeds and the carrying amount of the investment is recognized in the company’s income statement, in the period of derecognition. The company states inventories at the lower of cost and net realizable value. Included in the cost is the purchase price, production cost, transportation and other directly attributable expenses. Spares’ and consumables’ costs are determined using a weighted average basis. The difference between the estimated selling price in the ordinary course of business and the estimated costs of completion and the estimated costs necessary to make the sale is the net realizable value. Accounts receivable in Dana Gas are recorded at original invoice amount less provision for any uncollectable amounts. Doubtful accounts are estimated, if it is no longer probable to collect the full amount. Bad debts are written off upon confirmation that there is no possibility of recovery. The company recognizes revenue to the extent that it is feasible that financial profits will flow to the Group and the revenue can be reliably calculated. Therefore, net revenue is the fair value of the receivable or received consideration less discounts, rebates, royalties, and sales taxes or duties. Upon transfer of risks and rewards of ownership to the buyer, revenue from the sale of hydrocarbons is recognized because it is considered that the title has passed to the buyer. Revenue from surplus funds invested with financial institutions is recognized on an accrual basis. E. Financial Analysis. (All Figures are AED Millions Except Ratios) a) Liquidity Ratios Working Capital  Working Capital = Current Assets – Current Liabilities 2013 12,907 - 518 = 12,389 2012 12,755 – 3,845 = 8,910 Dana Company had a higher level of working capital in 2013, implying that it could use its capital effectively in case it was unable to borrow on short notice. The company could also pay off its liabilities easily. Current Ratio Current Ratio = Current Assets/Current Liabilities 2013 12,907/ 518 = 24.9 2012 12,755/ 3,845 = 3.3 The company’s working capital is healthy because its assets can pay off its liabilities. Receivables Turnover Receivables Turnover = Net Credit Sales/Average Accounts Receivable 2013 1,686/845 = 1.99 2012 1,821/2,485 = 0.73 Dana Gas could extend credit and collect debts more effectively in 2013, compared to 2012. Days’ Sales Uncollected  Days Sales Uncollected = (Accounts Receivable/Net Sales) × 365 2013 845/1,686 = 0.50 2012 2,485/1,821 = 1.36 Cash from sales would be actually received after half a day in 2013, compared to a period of one and half days in 2012. Inventory Turnover  Inventory Turnover = Cost of Goods Sold/Average Inventory 2013 242/217 = 1.12 Times 2012 194/198 = 0.98 Times Days Inventory on Hand Days Inventory on Hand = Number of Days in the Period/Inventory Turnover for the Period 2013 365/1.12 = 326 Days 2012 365/0.98 = 373 Days In 2013, it could take 326 days to sell average inventory, compared to 373 days in 2012. Payables Turnover Payables Turnover = Total Supplier Purchase/Average Accounts Payable 2013 242/518 = 0.47 Times 2012 194/473 = 0.41 Times Days payable  Days Payable = (Accounts Payable/Cost of Goods Sold) × 365 2013 518/242 = 2.14 Days 2012 473/194 = 2.42 Days Operating Cycle Operating Cycle = [Inventory/ (Cost of Sales/365)] + [Accounts Receivable/ (Credit Sales/365)] 2013 [217/(242/365)] +[845/(1,686/365)] = 145.9 2012 [198/(194/365)]+[2,485/(1,821/365)] = (124.4) Financial Period Financial Period = (Accounts Receivable/Credit Sales) × 365 2013 (845/1,686) × 365 = 182.9 Days 2012 (2,485/1,821) × 365 = 498.1 Days It could take 183 days and 498 days to convert receivables into cash in 2013 and 2012 respectively. b) Profitability and Total Asset Management Financial Ratios Profit Margin (i) Profit Margin = Gross Profit/Net Sales 2013 1,055/1,686 = 0.63 2012 1,301/1,821 = 0.71 (ii) Net Profit Margin = Net Profit/Net Sales 2013 571/1,686 = 0.34 2012 605/1,821 = 0.33 Asset Turnover Asset Turnover = Sales/ Total Assets 2013 1,686/12,907 = 0.13 2012 1,821/12,955 = 0.14 Return on Assets Return on assets = Net Income/Total Assets 2013 571/12,907 = 0.04 2012 605/12,955 = 0.05 c) Liquidity Financial Ratios Cash Flow Yield Cash Flow yield = Cash Flow from Operations/Net Profit 2013 459/571 = 0.80 2012 612/605 = 1.01 Cash Return on Sales Cash Return on Sales = Net Profit/Sales 2013 571/1,686 = 0.34 2012 605/1,821 = 0.33 Cash Return on Assets Cash Return on Assets = Cash Flow from Operations/Total Assets 2013 459/12,907 = 0.04 2012 612/12,955 = 0.05 Free Cash Flow Free Cash Flow = Net Cash Flow from operations – Capital Expenditures 2013 459 -315 = 144 2012 612 - 221 = 391 d) Financial Risk Financial Ratios Debt to Equity Ratio Debt to Equity Ratio=Total Debt/Total Equity 2013 3,568/9,321 = 0.38 2012 3,896/8,859 = 0.44 Return on Equity  Return on Equity = Net Income/Shareholder’s equity 2013 571/9,310 = 0.06 2012 605/8,844 = 0.07 Interest Coverage Interest Coverage = EBIT/Interest Expense 2013 765/260 = 2.94 2012 836/253 = 3.30 e) Operating Asset Management (Cash Cycle) Financial Ratios Receivables Turnover Receivables Turnover = Net Credit Sales/Average Accounts Receivable 2013 1,686/845 = 1.99 2012 1,821/2,485 = 0.73 Dana Gas could extend credit and collect debts more effectively in 2013, compared to 2012. Days’ Sales Uncollected  Days Sales Uncollected = (Accounts Receivable/Net Sales) × 365 2013 845/1,686 = 0.50 2012 2,485/1,821 = 1.36 Cash from sales would be actually received after half a day in 2013, compared to a period of one and half days in 2012. Inventory Turnover  Inventory Turnover = Cost of Goods Sold/Average Inventory 2013 242/217 = 1.12 Times 2012 194/198 = 0.98 Times Days Inventory on Hand Days Inventory on Hand = Number of Days in the Period/Inventory Turnover for the Period 2013 365/1.12 = 326 Days 2012 365/0.98 = 373 Days In 2013, it could take 326 days to sell average inventory, compared to 373 days in 2012. Payables Turnover Payables Turnover = Total Supplier Purchase/Average Accounts Payable 2013 242/518 = 0.47 Times 2012 194/473 = 0.41 Times Days payable  Days Payable = (Accounts Payable/Cost of Goods Sold) × 365 2013 518/242 = 2.14 Days 2012 473/194 = 2.42 Days Operating Cycle Operating Cycle = [Inventory/ (Cost of Sales/365)] + [Accounts Receivable/ (Credit Sales/365)] 2013 [217/(242/365)] +[845/(1,686/365)] = 145.9 2012 [198/(194/365)]+[2,485/(1,821/365)] = (124.4) Financial Period Financial Period = (Accounts Receivable/Credit Sales) × 365 2013 (845/1,686) × 365 = 182.9 Days 2012 (2,485/1,821) × 365 = 498.1 Days It could take 183 days and 498 days to convert receivables into cash in 2013 and 2012 respectively. f) Supplemental Operating Asset Management Financial Ratios Working Capital  Working Capital = Current Assets – Current Liabilities 2013 12,907 - 518 = 12,389 2012 12,755 – 3,845 = 8,910 Dana Company had a higher level of working capital in 2013, implying that it could use its capital effectively in case it was unable to borrow on short notice. The company could also pay off its liabilities easily. Current Ratio Current Ratio = Current Assets/Current Liabilities 2013 12,907/ 518 = 24.9 2012 12,755/ 3,845 = 3.3 The company’s working capital is healthy because its assets can pay off its liabilities. g) Market Indicator Financial Ratios Price Earnings Ratio Price Earnings Ratio = Market Price per Share/Earnings per Share 2013 0.85/0.086 9.88 2012 0.85/0.092 9.24 Dividend Yield Dividend Yield = Annual Dividends per Share/Price Per Share 2013 0/0.086 - 2012 0/0.092 - Since the company had not declared any dividend for the two years, there was no dividend yield. Notes 1Energy Business Review. Company Overview. 2014. http://www.energy-business-review.com/companies/dana_gas_pjsc 2 Dana Gas.Management. 2014. http://www.danagas.com/en/section/about-us/boardandmanagement/management 3 Dana Gas. Dana Gas Announces New Chief Executive Officer. July 9, 2013. http://www.danagas.com/en/pressrelease/media-center/press-releases/dana-gas-announces-new-chief-executive-officer.html 4 Dana Gas. Dana Gas PJSC: 2013 Consolidated Financial Statements. 2014. http://www.danagas.com/en/section/media-center/annual-report-1 5 Ibid,. 6 Ibid,. 7Ibid,. 8 Ibid,. 9 Ibid, 9. 10 Ibid, 10. 11 Ibid, 23. Bibliography Dana Gas. Dana Gas Announces New Chief Executive Officer. July 9, 2013. http://www.danagas.com/en/pressrelease/media-center/press-releases/dana-gas-announces-new-chief-executive-officer.html Dana Gas. Dana Gas PJSC: 2013 Consolidated Financial Statements. 2014. http://www.danagas.com/en/section/media-center/annual-report-1 Dana Gas. Management. 2014. http://www.danagas.com/en/section/about-us/boardandmanagement/management Energy Business Review. Company Overview. 2014. http://www.energy-business-review.com/companies/dana_gas_pjsc Read More