Petronas Gas analysis

TBS 980- International Financial Management Petronas Gas Berhad

Assessment 2-Research Project PETRONAS GAS BERHAD

PREPARED BY: WONG SU LI (4843320) CHIA JIE LING (4870979) ZHOU XIAO CHENG (4803966) SUBJECT: TBS 980 – International Financial Management LECTURER: DR.DENNIS CHOO SESSION: MAY 2014

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TBS 980- International Financial Management Petronas Gas Berhad

Table of Contents 1.0 Executive Summary..................................................................................................... 2 2.0 Introduction............................................................................................................... 3 3.0 Intra-firm analysis....................................................................................................... 4 3.1 Background............................................................................................................ 4 3.2 Revenue & Profit..................................................................................................... 6 3.3 Trend & Technical Analysis........................................................................................ 7 3.4 Fundamental Analysis............................................................................................... 8 4.0 Inter-firm Analysis (Comparison).................................................................................. 10 4.1 Ratio Analysis....................................................................................................... 10 A. PROFITABILITY RATIO...................................................................................... 10 B. ASSETS UTILISATION RATIOS............................................................................12 C. GEARING/ DEBT UTILISATION RATIOS...............................................................14 D. LIQUIDITY RATIOS........................................................................................... 15 E. SHAREHOLDER INVESTMENT RATIO.................................................................17 5.0 Political factors......................................................................................................... 19 5.1 Government subsidy............................................................................................... 19 6.0 Currency and Economic Factors.................................................................................... 20 6.1 Relationship between oil price and currencies fluctuations................................................20 7.0 Technology Changes Factor......................................................................................... 21 8.0 Environment and Social Factor……………………………………………………………………………………………………… …22 9.0 Recommendation and Conclusion.................................................................................. 22 10.0 Bibliography.......................................................................................................... 23 11.0 Appendix………………………………………………………………………………………………… …………………………………… 24

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TBS 980- International Financial Management Petronas Gas Berhad

1.0 Executive Summary Is Petronas Gas Berhad growth sustainable? Is it reasonable for investor to do investment? This is an investment research report on Petronas Gas Berhad (PGB) ratio analysis to analyze the sustainability and growth of PGB in comparison with the nearest peer competitor in the industry which is Shell Refining Company. The report analyzes the company performance in 5 different areas such as (1) Gearing/Debt Utilization Ratios, (2) Liquidity Ratio, (3) Profitability Ratio, (4) Assets Utilization Ratios and (5) Shareholder Investment Performance Ratio. Moreover, this is to measure the financial position on whether to invest in Petronas Gas Berhad by analyzing the data and also the strength and weaknesses of the company. On the other hand, the comment on the potential impact of currency fluctuations will discuss as below report. Lastly, an investment recommendation supported by appropriate data, comparative ratios and qualitative information will be suggested whether or not to invest in oil and gas industry.

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TBS 980- International Financial Management Petronas Gas Berhad

2.0 Introduction

Petroliam Nasional Berhad (Petronas) was established in August 17, 1974, fully owned by the Malaysian government. Petronas Gas Limited (PGB) has been operating for 30 years and still growing strong. Since its incorporation in 1983, PGB's business has been greatly expanded, although Challenges. Today, PGB prosperity of Malaysia's leading gas infrastructure, and utility companies, with operations in locations around the country. Through thirty years development and construction, Petronas has grown into a multinational integrated oil and gas company, under the ownership of three subsidiaries (Petronas Trading Co., Petronas Gas Co. and Malaysia International Shipping Co., Ltd.),. As Malaysia's national oil company, Petronas holds the right to own and manage the nation's oil resources and add value to it. PETRONAS manage all upstream operations within the territory of Malaysia, and participate in exploration and production by hiring a number of international oil and gas companies, development and production of oil and gas in Malaysia. Petronas also through subsidiaries directly involved in exploration, Ltd. Malaysia billion cubic feet of natural gas reserves. Until the year March 31, 2005 As of the end of the overall revenue Petronas for $ 36.1 billion, net profit of $ 9.4 billion. The company is the only ASEAN country to be included in the Fortune Global 500 companies, in 2005 the world's top 500, in the revenue and earnings were ranked 133 and 16.

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TBS 980- International Financial Management Petronas Gas Berhad

3.0 Intra-firm analysis 3.1 Background Petronas Gas Berhad (PGB) is one of the subsidiaries of Petronas Group. It has been listed in Kuala Lumpur Stock Exchange (KLSE) for more than 20 years with the symbol of PETGAS code 6033. The core businesses of PGB are Gas Processing, Gas Transmission, Utilities and Regasification. PGB owned some subsidiaries companies, and it also has joint ventures and investment on others companies. As we can see from the diagram below, PGB has 100% ownership on Regas Terminal (Sungai Udang) Sdn Bhd and Regas Terminal ( Pengerang) Sdn Bhd, 99% of Regas Terminal ( Lahad Datu) Sdn Bhd is also owned by PGB. Besides that, PGB also joint venture with Industrial Gasses Solution Sdn Bhd, Kimanis Power Sdn Bhd and Kimanis Power O&M Sdn Bhd. An Associate is found between PGB and Gas Malaysia Berhad, which PGB has 14% of the stakes. (OUR PROFILE, 2014). Strength: 1. One of the world’s strongest brand names. 2. Presence in motor-sport formula 1. 3. Diverse and huge operations. 4. Huge market potential. 5. Petronas has grown to be an integrated international oil and gas company with business interests in 35 countries. 6. Sponsored education to Malaysian students Opportunity: 1.Increasing fuel/oil prices. 2.Increasing natural gas market. 3.More oil well discoveries 4.Expand export Market

Weakness: 1. Cost of environmental hazards. 2. Legal issues. 3. Employment scam.

Threats: 1.Government regulations. 2.High competition.

. PGB is a very successful multinational company; it has been operasting over 50 countries around the world. This has include, the fist retail station in Cambodia, contract with China National Offshore Oil Corporation, Oil development and Pipeline project in Pakistanm, opened a new gas-based petrochemical

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TBS 980- International Financial Management Petronas Gas Berhad facilities in more than 8 countries like Yemen, Egypt, Niger, Cameroon, Indonesia, Gabon, and many others.

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TBS 980- International Financial Management Petronas Gas Berhad

3.2 Revenue & Profit Petronas has ranked at 75th Largest Company in the world by Fortune Global 500 Largest Corporation. Over the past 5 years, PGB has contributed much on the Petronas Group’s Revenue. Based on the annual report, the net earnings of PGB has continuously increasing from RM 928 million to RM 2,078 million, which is more than 100% within 5 years times. As we can see from the chart below, PGB experience lower revenue in year 2010 and 2011. This is because instead of focusing on sales, PBG has chosen to focus more on expanding its oil production and exploration globally. Although the three was dropped in sales revenue but it did affect the net profit of PBG. There were few reasons that cause the drop of sales revenue but increase in net profit of PBG in year 2010 and 2011. Firstly, as PBG has discovered advance technology and a better its oil productions system, it has led to the cost efficiency on PGB. This has directly lower down the cost of petroleum and gas produced and therefore, the lowering the cost has bring higher profit to PGB. Secondly, PGB has cut down its long term loan as there was better management system on its financing system. By lower down the payable debt, PGB has a lower interest pay on its financing cost, this has cause the net profit to increase. (Pandey, 2013)

Revenue & Profit of PGB ('000) 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1,500,000 1,000,000 500,000 0 2009

2010

2011

2012

2013

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TBS 980- International Financial Management Petronas Gas Berhad

3.3 Trend & Technical Analysis Petronas Gas Berhad has been listed in Kuala Lumpur Stock Exchange (KLSE) for more than 20 years. With the development of world technology and economy, the demand for petroleum and gas has tremendously increased.

Based on the diagram above, we can see that movement of PGB over the past 5 years. The share price has been growing since May 2010 from the price of RM10.00 per share up to RM25.00 July 2014. The 150% growth in the share price for the past 5 years has been attracting many investors to invest in it. Besides that, PGB has also been giving out high dividend over the years. The dividend per share of PGB has been maintaining on 45 cents to 55 cents in the past 5 years. (Stock Price Movement, 2014) Moreover, as we can see on the diagram, the white box highlighted the volume trading of PGB. We can see that although the share price of PGB is very high, but the Volume of trading is still very high also. This is due to the major players are mostly standing of large corporation investors, such as mutual fund company, big institutional, government institutions, fund managers and other.

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TBS 980- International Financial Management Petronas Gas Berhad PETGAS is currently trading at price of RM 23.60. From the chart above we can see that the first level of support is at price level of RM 15.00. However, we can also see a very strong second support level at the price of RM10.00. This means that if the share price drop, it will have a psychological level of support at the price which the investors think PGB worth to be. On the other hand, PGB is currently facing a resistance level of RM25.00. This means that investors are not willing to buy at price which more than this level. However, if the share price could breaks throw the first resistance level. The next resistance level will be RM 28.00. in short, PETGAS is now in an Uptrend, this stock are more suitable for long term investors as because its price is moving up in a long run and it is also giving out a good dividend. However, for low risk investors, they can choose to enter at slidely lower price and take profit when it breaks through the resistance level.

3.4 Fundamental Analysis

PROFITABILITY RATIO Gross Profit margin Return on investment (NET INCOME) Return on equity (NET INCOME) GEARING/ DEBT UTILISATION RATIOS Gearing ratio Long-term debt to asset ratio LIQUIDITY RATIO Quick ratio ASSETS UTILISATION RATIOS Inventory turnover Account receivable turnover SHAREHOLDER INVESTMENT PERFORMANCE RATIO Earnings per share Price earnings ratio Dividend per share

RM

RM

RM

RM

RM

('000) 2009

('000) 2010

('000) 2011

('000) 2012

('000) 2013

35.74% 9.44% 11.63%

36.57% 9.55% 11.72%

48.72% 10.50% 12.97%

49.49% 11.54% 15.59%

49.97% 15.58% 21.27%

0.17 0.16

0.16 0.16

0.15 0.14

0.22 0.20

0.15 0.14

10.72

11.11

5.05

1.81

1.44

14.99 10.68

14.19 10.00

13.15 7.16

17.53 10.02

50.43 5.47

46.90 0.21 44.98

47.60 0.21 50.00

54.60 0.28 40.00

71.00 0.27 50.00

105.10 0.23 55.00

Generally PGB is a very good profitability company in the past 5 years. In terms of profitability, we can see that it has increasing gross profit margin which is from 35.74% to 49.97%. This means that PGB has a 9

TBS 980- International Financial Management Petronas Gas Berhad very good control over it cost of inventories. Its return on investment and return on equity is also getting higher which are from 9.44% and 11.63% to 15.58% and 21.27%, thus PGB provides a high rate of return to its investors over the past 5 years. Besides that, PGB is also doing very good in debt utilization. In the past 5 years PGB is maintain its gearing ratio in 15% to 22%. It has a very good control on managing its borrowings and equity level. Moreover, the degree of control between the asset and long term debt is also well control. In year 2012, there is a slidely increase in long term debt to asset ratio, this is mainly due to the increase in assets and the assets are mainly finance by long term borrowings. PGB has a relatively low acid test ratio; this also means that its assets are illiquid. This is mainly due to the assets of PGB are those heavy machinery; it is not easy to find a buyer to purchase a costly machine in short time period. In year 2013, PGB has the highest inventory turnover; it is a good sign which showing the company is getting better in managing its inventories and sells its inventory at a faster way. As PGB business is growing, the account receivable turnover is getting lower. This may be due to the debtor could not pay back in a short time period as the amount of transaction is very high. Lastly, PGB has been giving very good return back to its shareholders. As we can see, over the past 5 years, the earning per share is growing at a very fast rate. When we compare in percentage, the earning per share is more than double in year 2013 compare to year 2009. Additionally, the dividend that distribute back to shareholders has also hits the highest at 55 cents last year. In conclusion, PGB is a very well manage company, it has been doing very good in the past 5 years by maximizing its shareholder’s profits.

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TBS 980- International Financial Management Petronas Gas Berhad

4.0 Inter-firm Analysis (Comparison) As a potential investor to make a decision that whether to invest in Petronas Gas Berhad, an analysis with the nearest competitor- Shell Refining Company to compare the inter-firm performance and profitability to analyze whether it is favorable to invest.

4.1 Ratio Analysis

A. PROFITABILITY RATIO A profitability ratio provides information on company’s ability to meet its short term, immediate obligations. (Drake, 2011). These are known as performance ratio. They compare profits and different levels with other figures and a higher ratio or percentage would signify the company is doing well. i.

Gross Profit Margin Gross Profit Margin shows the relationship between sales and cost of product sold, measure the ability of a company both to control costs of inventories or manufacturing of products and to pass along price increases through sales to customers. RM('000) PET GAS SHELL

RM ('000)

RM ('000)

RM ('000)

RM ('000)

2009

2010

2011

2012

2013

35.74%

36.57%

48.72%

49.49%

49.97%

4.66%

1.48%

0.87%

0.87%

0.70%

Based on the figure above, Petronas Gas gross profit margin is stabilizing over the 5 years. However, Shell has a decline of gross profit margin as compare to previous year. In this case, Shell has an increase in sales revenue; however cost increase by a greater proportion. Thus, there is a decline of gross profit margin. Hence, in my opinion, shell is not well managed and lack of control of their inventories and manufacturing of oil. In comparing both companies. Petronas Gas would be better to invest because it is creating profit from the sales. The main objective of shareholder is to maximize shareholder’s wealth. Therefore, this show the effectiveness of Petronas Gas’s sales team and shows the overall performance is better than Shell.

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TBS 980- International Financial Management Petronas Gas Berhad

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TBS 980- International Financial Management Petronas Gas Berhad

ii.

Operating Profit Margin Operating profit margin give analysts an idea of how much a company makes before interest and taxes, on each dollar of sales. It is one of the financial ratios used to determine the quality of a company. It measure the overall operating efficiency, incorporate all of the expenses associated with ordinary business activity. RM('000 )

RM ('000)

RM ('000)

RM ('000)

RM ('000)

2009

2010

2011

2012

2013

PET GAS

35.00%

37.61%

51.38%

51.47%

48.91%

SHELL

0.31%

0.25%

0.28%

0.13%

0.09%

If a company’s margin is increasing, it means that earning more per dollar of sales. Thus, the higher the margin is better. Operating profit margin of Shell is lower by comparing with Petronas Gas. This shows an unfavourable profitability of the business before financing costs. In comparing both companies, it is obviously shown that Petronas Gas is better for invest by comparing with Shell as it has higher operating profit margin. As a result, Petronas Gas are efficient in handling its operating expenses to maintain the overall efficiency. iii.

Return on Investment (ROI) RM('000)

RM ('000)

RM ('000)

RM ('000)

RM ('000)

2009

2010

2011

2012

2013

PET GAS

9.44%

9.55%

10.50%

11.54%

15.58%

SHELL

9.03%

3.09%

3.24%

2.26%

3.60%

Return on Investment is used to measure a firm’s profitability by describe the rate of return that management was able to earn on the firm’s assets for a given period of time. From the result, Petronas Gas has increase in ROI whereas Shell is declining over the past 5 years. This could explain that Petronas Gas is making more profits and earnings by each of the assets used by them. Petronas Gas have a more profitability strategies in order to increase the earnings and profits of the company and maximize the objective of shareholders. Hence, it is a very significant progress for Petronas to be able to achieve ROI 15.58%. The higher Petronas’s return on investment, the better the profits and lead to favourable return of investment.

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TBS 980- International Financial Management Petronas Gas Berhad

iv.

Return on Equity (ROE) The return on equity (ROE) helps to measure the return to the owners on the book value of their investment in a company. The return is measure as the residual profit after all expenses and charges have been made, and the equity is comprised of share capital and reserves. (Davies and Pain, 2002). RM('000)

RM ('000)

RM ('000)

RM ('000)

RM ('000)

2009

2010

2011

2012

2013

PET GAS

11.63%

11.72%

12.97%

15.59%

21.27%

SHELL

14.43%

5.08%

6.37%

5.32%

9.69%

Based on the figure above, Petronas Gas are increasing over the year whereas Shell had decline and increase to 9.69% in year 2013. According to Petronas’ annual report, this is because of improved profit after tax which increased income from fixed asset investment and lower cost of finance. The higher the return on equity, it is favorable to invest due to Petronas ROI hit and increase to 21.27%. Therefore, this gives investor confidence to invest because each dollar invested is generating higher profits which attract potential investors to invest. B. ASSETS UTILISATION RATIOS i.

Total Asset Turnover The total asset turnover is represents the amount of revenue generated by a company as a result of its assets on hand. It uses to measures managements efficiency in managing all of firm’s assets generation of revenues from the firms total investment in assets. . (Fraser and Ormiston, 1998). RM ('000)

RM ('000)

RM ('000)

RM ('000)

RM ('000)

2009

2010

2011

2012

2013

PET GAS

0.35 Times

0.32 Times

0.25 Times

0.27 Times

0.29 Times

SHELL

2.68 Times

2.93 Times

2.67 Times

3.61 Times

3.27 Times

Generally, the higher the asset turnover times, the smaller is the investment requires generating sales and thus the more profitable is the firm. (White and Sondhi, 1997). In this case, Shell gives a higher asset turnover as compare to Petronas. However, the new capital of extensive plant modernization introduce by Petronas to finance major project is expected to generate long-term positive result. Thus, the total asset turnover for Petronas show a consistency which shows the efficiency and effectiveness in utilizing its resources.

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TBS 980- International Financial Management Petronas Gas Berhad ii.

Account Receivable Turnover Account receivable turnover means how many times per year a company’s receivable collected. This ratio measures the effectiveness of the firm’s credit policies and indicates the level of investment in receivables needed to maintain the firm’s sales level. In the general rules, the higher the turnover, the faster the company able to collecting its receivable. High turnover indicates an efficient business operation for the regular operation. Besides that, if a company having a low or declining account receivable turnover, is shown that the company having a collection problem from its customers. In this kind of scenario, company should re-evaluate its credit policies to ensure timely receivable collections from its customers. RM ('000)

RM ('000)

RM ('000)

RM ('000)

RM ('000)

2009

2010

2011

2012

2013

PET GAS

5.47 Times

10.03 Times

7.15 Times

10.00 Times

10.68 Times

SHELL

5.27 Times

15.73 Times

10.38 Times

6.97 Times

2.14 Times

Petronas is having a high receivable turnover 10.68 times in 2013. Petronas is high efficient for the collection of the company from its company, it may show that the company having a good credit policies and business structure that ensure the company operating well with a sufficient cash flow from the customer. However, Shell is decreasing over the past 5 years and hit 2.14 times. This may be cause by having a long credit term offering to its customers or the company might having an amount of bad debt.

iii.

Inventory Turnover Inventory turnover measure the efficiency of the firm in managing and selling the inventory. RM ('000)

RM ('000)

RM ('000)

RM ('000)

RM ('000)

2009

2010

2011

2012

2013

PET GAS

14.99 Times

14.19 Times

13.15 Time

17.53 Times

50.43 Times

SHELL

9.06 Times

10.21 Times

8.60 Times

13.43 Times

10.67 Times

Based on the figure above, inventory turnover for Petronas increase over the years however Shell decreases to 10.67 times in year 2013. This shows that Shell have high inventory and low sales volumes. This is a bad sign where it doesn’t generate profits. In contrast, Petronas buy large quantities of inventories and take advantage of trade discount. It shows that Petronas are efficient in inventory management and lead to fewer funds tied up in inventories. This shows that Petronas is very efficient in keeping the inventory low and high sales volumes.

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TBS 980- International Financial Management Petronas Gas Berhad C. GEARING/ DEBT UTILISATION RATIOS i.

Long-term debt to asset ratio Long-term debt to asset ratio is defined as an indication of what portion of a company’s total assets is financed from long-term debt. It used to measure of the extent to which a company is using long-term debt. Besides that, it is an indicator of the long-term solvency of company. The higher the level of long term debt, the more important it is for a company to have a positive revenue and steady cash flow. RM ('000)

RM ('000)

RM ('000)

RM ('000)

RM ('000)

2009

2010

2011

2012

2013

PET GAS

0.1853

0.1848

0.1957

0.1562

0.2236

SHELL

0.3699

0.4101

0.5591

0.5912

0.6630

In comparing both companies, the result shown that both companies is having a steady long term debt ratio, this may be one of the reason that causes both company have positive revenue every year.

ii.

Gearing Ratio Gearing ratio has the meaning of the contribution of owner’s equity to borrowed funds and it able to explains the degree to which the business is funded by the owner as against the borrowed funds. If the gearing ratio of a company is 50% or less can be considered reasonable; if the gearing ratio is above 50%, it is consider being risky. This is because the funds are borrowed; the principal and interest are required to be paid irrespective of the performance of the business, therefore a high gearing ratio leads to high risk. (CIMA, 2004). RM ('000)

RM ('000)

RM ('000)

RM ('000)

RM ('000)

2009

2010

2011

2012

2013

PET GAS

0.1670

0.1649

0.1486

0.2236

0.1504

SHELL

0.0800

0.2275

0.3410

0.4300

0.4564

Gearing ratio of both company consider reasonable as it did not exceed 50% By comparing both companies, gearing ratio of Shell is higher and it explained that the company is dependence on borrowing and long-term financing. However, Petronas is lower gearing and it dependence on equity financing. Hence, Shell has higher level of financial risk due to the increased volatility of profits. Thus, it causes the gearing ratio of Shell higher.

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TBS 980- International Financial Management Petronas Gas Berhad

D. LIQUIDITY RATIOS i.

Current Ratio In order to test the company’s financial strength, current ratio can be calculated. It uses to calculate how many dollars in assets are like to be converted to cash within one year in order to pay debts that come due during the same year. (Lunt and Weaver, 2005). Current ratio below 1 shows critical liquidity problems because it means that total current liabilities exceed total current assets. Although the general rule explained that the higher the current ratio is better but, if a current ratio higher than 2.5 might indicate existence of idle or underutilised resources in the company. If a too high current ratio may explained that management has too much of cash on hand and they may be doing a poor job of investing it. (Drake, 2011). RM ('000)

RM ('000)

RM ('000)

RM ('000)

RM ('000)

2009

2010

2011

2012

2013

PET GAS

11.3972

11.7213

5.2232

1.8765

1.4719

SHELL

2.1131

2.8496

1.9479

2.0507

1.6020

Based on the figure above, both Petronas and Shell has sufficient to cover its current liabilities as the ratio for both years is more than 1. According to Shell annual report, due to higher volume of sourced products, the number of suppliers had increased and hence, this caused the increased in current liabilities in 2013. Thus, the higher the current ratio means that current asset is easily sufficient to cover current liabilities. However, we should not just judge on the positive side but also the limitation that Shell have to be aware such as even though a high ratio gives comfort to creditor, it may mean that the company is holding more in current asset than it requires in the short term. Thus, this is wasteful as current asset rarely earn income where stocks need to be sold in order to produce profits. (Lunt and Weaver, 2005). In my point of view, Petronas is better to invest as it has improved from 2009 to 2013 and and more stability.

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TBS 980- International Financial Management Petronas Gas Berhad

ii.

Quick Ratio This is also known as the acid test ratio because by eliminating inventory from current assets it provides the acid test of whether the company has sufficient resources to settle its liabilities. It is a more stringent test of liquidity than the current ratio, because it removes inventory from the equation. As we know that, inventory of a company is the least liquid of the entire current asset. If a company wants to liquidate inventory or turn it into cash, company need to find a buy and there are not easy to get a buyer. RM ('000)

RM ('000)

RM ('000)

RM ('000)

RM ('000)

2009

2010

2011

2012

2013

PET GAS

10.7249

11.1071

5.0508

1.8081

1.4380

SHELL

1.2161

1.6551

1.0025

1.0897

0.7893

However, as mentioned above, a high ratio is very comforting but may be wasteful. Generally, a ratio of 1:1 is considered ideal but many companies with very regular cash sales have very low ratios due to their lack of debtors. (Lunt and Weaver, 2005). Based on the figure above. Although Petronas showing a higher figure of quick ratio, this indicate the growing in sales, having quickly converting receivable into cash and showing the company is easily to cover its financial obligations. On the other hand, Shell’s decreasing quick ratio may explain that the company is over leverage, struggling to maintain or grow sales, too fast in paying bills or too slow in collecting receivables. As a result, Petronas’s quick ratio is satisfactory and better to invest.

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TBS 980- International Financial Management Petronas Gas Berhad E. SHAREHOLDER INVESTMENT RATIO i.

Price Earnings Ratio (PER)

ii.

Earnings Per Share (EPS) RM ('000)

RM ('000)

RM ('000)

RM ('000)

RM ('000)

PETRONAS GAS BERHAD

2009

2010

2011

2012

2013

Market price per share

9.70

9.80

15.20

19.52

24.28

Earnings per share

46.90

47.60

54.60

71.00

105.10

Dividend per share

44.98

50.00

40.00

50.00

55.00

P/E ratio

0.21

0.21

0.28

0.28

0.23

SHELL

2009

2010

2011

2012

2013

Market price per share

10.520

10.760

9.180

8.400

6.360

Earnings per share

(52.00)

35.00

(42.00)

(32.00)

(52.00)

Dividend per share

50.00

50.00

40.00

20.00

0.00

P/E ratio

-0.21

0.30

-0.22

-0.26

-0.12

The price-earnings ratio (P/E ratio) gives an indication of how optimistic the financial market is about a company’s future earnings. However, the earning per share ratio (EPS ratio) provides an indication of the amount of a company’s earnings that are attributable to each share of common stock outstanding. (Edmonds and McNair, 2008). P/E ratio helps investor to indicate that how long the earnings will take to recover the cost of the share. In the general rules, the higher P/R E ratio means that the more the market is willing to pay for each dollar of the particular company’s earnings because it shows higher growth expectations by investors. If the P/E ratio falls, the management need to look into the causes that have resulted into the fall of the ratio because the fall of the P/E ratio means that the willingness of market to buy the shares of the company is decreasing. In comparison of both companies, obviously that Petronas P/E is higher than Shell due to unfavourable negative P/E. Thus, Petronas is more sustainable because it give a higher P/E ratio that encourage investor to pay for each dollar of earnings that the company generate due to higher price that Petronas will grow in the future. Petronas shares are more attractive for investor to buy the share of the company, investors are expect more higher earnings from Petronas.

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TBS 980- International Financial Management Petronas Gas Berhad

iii.

Dividend Yield Ratio RM ('000)

RM ('000)

RM ('000)

RM ('000)

RM ('000)

2009

2010

2011

2012

2013

PET GAS

4.6371

5.1020

2.6316

2.5615

2.2652

SHELL

4.7529

4.6468

4.3573

2.3810

0.0000

From the formula, we are able to know that dividend yield ratio is the relationship between dividends per share and the market values of the shares. Dividend yield is the yield that a company pays out to its shareholder in the form of dividends. This is based on the company’s stock current market price (CIMA,2004). From the analysis above, dividend yield for both companies decreasing however there is no dividend yield for Shell in Year 2013. The result shows that the dividend yield ratio is facing a fall to 2013 and investor’s return on each dollar he invested is decreasing. As a result, for investors who are seeking for a long term investment with a consistent return every year, secure and less risky, they may hope to have a constant dividend per share to be pay from the company. Consequently, investor who seek high return may invest in Petronas because they have high return whereby current market price reflects future growth in earnings and dividends.

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5.0 Political factors 5.1 Government subsidy Malaysia is one of the oil-exporting countries, the government except control oil prices stabilize, but also give subsidies to people's daily using oil, currently subsidy policy status shows at below:

The price of oil and petroleum products are determined by the international market based on supply and demand. These are factors beyond our control. OPEC also plays an important role in setting oil production levels which in turn, affect the market price. Although Malaysia produces and exports oil, we are not a member of OPEC, nor are we a major oil producing country. As such we have no influence on how the price of oil is determined in the international market. Without subsidies, premium petrol (RON95) would cost RM2.73 per liter, and not RM 2.10 that we are paying now. In fact when a consumer buys a liter of premium petrol in Peninsular Malaysia, the Government bears 63 sen that is 39 sen in the form of taxes forgone and 24.20 sen in subsidies.The actual cost of diesel in Peninsular Malaysia is RM2.80 per liter. Consumers pay RM2.00 per liter because of the 59.13 sen subsidy and 19.64 sen tax forgone, per liter.

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6.0 Currency and Economic Factors 6.1 Relationship between oil price and currencies fluctuations As we know oil is one of the basic necessities in the world. It is also one of the most commonly trade commodities. Over the past 10 years, oil price has fluctuated significantly, which is from $60 a barrel in year 2006 to $147.27 a barrel in year 2008 and it was traded around $101 a barrel recently. Commodities are basically traded in USD, the most common example of it are oil and gold. Therefore, there is a correlation ship between USD and oil price.

According to research, there is an inverse relationship between oil price and USD. This meaning that, the rise of oil price will cause the USD to drop. This is related to the supply and demand concept, when oil price goes up, more USD is needed to demand for the same quantity of oil. This will then cause the supply of USD to increase. When supply of USD increases the price of USD will then drop and cause depreciation of USD against other currency. (Dollar, Gold and Oil Chart - Last Ten Years, 2014) Malaysia is the home country for PGB, and it is an oil export country. As we know US is one of the largest oil demand countries. When oil price increased, PGB can sell its oil at a higher price to US. It will then lead to higher profit margin. However, when PGB sell the oil to US, it will be dealing with USD. As mention earlier, increase in oil price will caused USD to depreciate. Therefore, when PGB want to convert its profits back to home country Malaysia, USD has actually depreciated against RM. The profits that convert back will then be lesser. In short, increase in oil price will give PGB a higher profit margin, but the profit will be lesser when it converts from USD back to RM because of currency has depreciate.

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7.0 Technology Changes Factor Petronas explore and production arm has pioneered the use of world’s first technologies, among which are sand control and clearing organic solids from production tubing. Malaysia’s first deepwater development project, Kikeh, utilises Truss Spar technology, the first outside the Gulf of Mexico and fabricated by our subsidiary MMHE. FPSO Kikeh, also fabricated by MMHE, has the largest and heaviest external turret in the world. We installed the world’s first onshore mercury management system to treat raw condensates, eliminating possible health, safety and environment (HSE) and operational hazards. Our top-of-the-range fully-synthetic passenger car lubricant, Syntium 5000, meets the highest Original Equipment Manufacturers (OEM) specifications and API standards. PETRONAS researchers have also successfully applied Green Chemistry in the removal of mercury from hydrocarbons and in the treatment of low quality crudes. Enhanced Oil Recovery (EOR), carbon dioxide (CO2) management, contaminants removal, green and sustainable technologies are being pursued with accredited with ISO standards for engineering systems and solutions. Engineering solutions are focused on asset integrity and optimization.

8.0 Environment and Social Factor Moreover, Petronas continuously seek ways to contribute to the communities wherever they operate in order to create a positive impact to the society. Petronas sustainability framework which focuses on 7 key result can be seen as per diagram below:

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9.0 Recommendation and Conclusion In my point of view, whether or not a potential investor should invest in Petronas Gas Berhad or Shell Refining Company is difficult to conclude because the analysis done using the financial statement of similar business may be misleading because applying different accounting policies. For example, the 2 companies might be adopting different depreciation method such as straight-line and reducing method. The inventory valuation can be different in adopting FIFO and weighted average. Next the invalidating inter-companies comparison is used in different measurement base. For example, non- current assets reported at historical price cost or revaluation. Furthermore, there is having different definition for ratios. (Elliott and Elliott, 2008). For example, the numerator for ROCE may be operating profit, profit before interest and tax, profit before interest, profit after tax etc. Lastly, ratio analysis is just a forecasting for investor to make prediction; it is not accurate because external factor might be affected such as inflation, political issues and also the fluctuations of foreign currency may need to take into considerations. Therefore, this provides limited useful information as it is inadequate for an investor has a better understanding of the company’s past performance trend and future expectations. Apart from that, external factors such as market risk or uncertainty arising from changes in the market prices and their impact on the performance of the business. Both oil and gas industries are exposed to include interest rates, foreign currency exchange rates that could adversely impact the financial position and future cash flow of the company. Besides that, foreign currency exchange risk is the risk that the fair value or future cash flows of financial instruments will fluctuate because of changes in foreign currency exchange rate. This, it is important to implement foreign currency management policy in order to minimize economic and significant transnational exposure arising from currency movement. Hence, potential investor is able to access the risk exposure of the investment and determine the appropriate strategies such as hedging in order to minimize their exposure to the foreign currency risk. On the other hand, it is also depends on investor whether or not to take the risk for this investment. Based on this research and comparison with the peer competitors in the same sector oil and gas industry, potential investor can invest in Petronas because it is reasonable and the company is actually favorable and doing well in the overall market. Therefore, investor may want to consider a long-term investment in Petronas as it has a growth potential and has average financial stability. Moreover, if the potential investor is seeking for short term investment, Shell is also reasonable because the company’s current ratio and quick ratio is favorable and have sufficient funds. 25

TBS 980- International Financial Management Petronas Gas Berhad Next, Petronas has higher P/E ratio compared to Shell. Thus, this will encourage investor to invest because they are taking the risk to generate more income and due to higher price that IJM will grow in the future. Last but not least, in my opinion, Petronas can constantly improve efficiency should such as adapting just-in-time to avoid holding more stocks. Although there is a decline in the efficiency and effectiveness in managing its resources, Petronas was still able to generate profit. In my point of view, I would recommend investor to invest in Petronas because it’s financially stable and it will be a reasonable investment to generate income. However, potential investor should do more research and observation to have a better understanding and view of the company’s stability, sustainability and profitability. It is whether potential investor willing to take the risk on their judgment because ratio analysis is just a forecasting of the future.

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10.0 Bibliography

Anas Alam Faizli (2013) Higher royalty versus state ownership of Petronas, Available at: http://www.freemalaysiatoday.com/category/opinion/2013/04/30/higher-royalty-versus-state-ownershipof-petronas/ (Accessed: 25 July 2014). Baidu Baike (2013) Introduction of Petronas, Available at: HTTP://baike.baidu.com/view/1854001.htm (Accessed: 25 July 2014). CIMA, 2004, ‘Strategic Level paper P8 Financial Analysis CIMA Study Text’, 1st edition, The Financial Training Company Limited Dollar, Gold and Oil Chart - Last Ten Years. (2014). Retrieved July 20, 2014, from Macrotrends: http://www.macrotrends.net/1335/dollar-gold-and-oil-chart-last-ten-years Drake, P.P., 2011, ‘Financial Ratio Analysis’, date accessed 21st November 2011, Available online, (Accessed: 25 July 2014) http://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf Elliott, B., and Elliot, J, 2008, ‘Financial Accounting and Reporting’, 12th edition, Pearson Education Limited Fraser, L.M., and Ormiston, A., 1998, ‘Understanding Financial Statement’, 5th edition, Prentice Hall International Guang yong SUN (2011) How Malaysia explore Oil, Available at: http://www.in-en.com/article/html/energy_16311631961221294.html (Accessed: 25 July 2014). Lunt, H., and Weaver, M., 2005, ‘Financial Accounting Fundamentals’, 1st edition, CIMA Publishing

Mbaskool (2012) SWOT Analysis for Petronas, Available at:http://www.mbaskool.com/brandguide/energy/403-petronas.html (Accessed: 25 July 2014).

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TBS 980- International Financial Management Petronas Gas Berhad OUR PROFILE. (2014). Retrieved July 8, 2014, from PETRONAS Gas Berhad: http://www.petronasgas.com/exrate/Pages/aboutus.aspx Pandey, T. (2013). Petronas net profit drops 45% to RM8.7b. Kuala Lumpur. Peavler, R., 2011, ‘What is the times interest earned ratio and what does it measure?’, date accessed 18th November 2011, Available online http://bizfinance.about.com/od/financialratios/f/Times_Interest_Earned_Ratio.htm

Stock Price Movement. (2014). Retrieved July 18, 2014, from malaysiastock.biz: http://www.malaysiastock.biz/Corporate-Infomation.aspx?type=C&value=KLCI&securityCode=6033 Walton, P., 2000, ‘Financial Statement Analysis: An International Perspective’, 1st edition, Business Press Thomas Learning

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11.0 Appendix Petronas Gas Berhad Five Years Financial Summary

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Shell Refining Company Five Years Financial Summary

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