A research based on the business analysis of the Tullow oil as compared to BHP Billiton working in the oil industry.
INTRODUCTION OF THE RESEARCH TOPIC
The main aim of the research is to analyse the profitability of Tullow oil, a UK based firm, and BHP Billiton, Australian Oil Company, in order to comment on the recent overall performance of both companies in the oil industry. This in turn will allow studying the impact of the varying economic factors and the shift in the cultural environment in which the businesses function. The analysis is based on the study of the challenges which the companies with operations spread across the globe have to face.
This research will provide an analysis by studying two companies. One located and established in UK namely Tullow Oils and the other will be BHP Billiton a company with an Australian origin. This research will study the financials of both the companies to analyze the profitability and the stability of both to determine the challenges which both have to face in the industry.
The oil industry is a very competitive business. It is a very important commodity and nearly all the countries across the globe are constantly in the quest to acquire most of the oil. This has increased the exploration of the oil in various countries.
There are various factors which may be of prime importance for the competitors competing in the same industry. The factors may be categorized as:
- Increased cost of storage due to the geographical factors
- Increased cost of labour due to the change in economic and the geographical factors
- Fluctuating growth of the industry
- Diversity amongst the competitors
- Variation in the strategic stakes required to function in the industry
- Product differentiation of that of the competitors
- Government policies, etc.
The above mentioned factors help in analysing the problems which the competitors may face when operating in the same industry but belonging from different geographical locations. The oil industry includes the several different processes such as discovering of the reserves of oil across the globe in various regions, extraction of the oil reserves in the world, refining of the crude form of oil into its various extracts, marketing and transportation of the products worldwide. In performing the business functions various economic and cultural factors turn out to be the major hurdles which the companies have to face. These hurdles directly influence the financial performance of the companies.
Financial results are one of the important indicators of the overall performance of the organisation. The financial ratios and results present a complete overview of the situation and performance of the organisation in reference to whole industry.
The research questions highlight the focus of the research. In order to do so a careful analysis is conducted and a set of review questions are prepared to identify the problems which the existing companies are facing (Saunders, Thornhill, & Lewis, 2009). The main research question which will be explored in this research project is “Is Tullow oil has been able to overcome the impacts of financial crisis in comparison to other companies in the industry?’. The supporting research questions are as follow:
- Which company is showing high performance; Tullow oil or BHP Billiton?
- How the companies are able to overcome the impacts of financial crisis?
- How the financial performance of the companies can be improved in future?
LITERATURE REVIEW
Organisations all over the world are facing different issues and challenges and are looking for different methods and strategies for creating sustainable competitive advantage over other competitors in the industry (Kennerley & Neely, 2002). In order to come up with sustainable growth strategies it is first important for the organisations to measure and monitor the overall performance and profits. There are different methods for measuring and monitoring the performance of the organisations. One of the most used and famous methods in this regard is the financial analysis of the organisations. The financial analysis provides detailed and thorough analysis of the organisations operating in any particular industry (Rocha & Gartner, 2011). The financial results are one of the most effective measures of monitoring and evaluating the performance of the organisations because all external and internal issues are directly reflected by the profitability and other financial indicators of the organisations (Fridson & Alvarez, 2011).
Within financial analysis, the most widely used technique is of the financial ratio analysis (Delen, Kuzey, & Uyar, 2013). The financial ratio analysis makes it easy to compare the performance of two different organisations operating in the same industry. Financial ratios are divided into different categories and each category reflects the performance of the organisation with respect to separate domain or area (Gibson, 2012). Some of the famous categories of financial ratios are (Liou & Ding, 2010):
- Liquidity or solvency ratios
- Profitability ratios
- Asset efficiency ratios
- Financial leverage or debt ratios
- Market value ratios
These categories are further divided into different ratios.
Liquidity ratios:
These ratios are used to analyse the liquidity position of the company. Ratios such as current ratio, quick ratio and cash ratio are used to analyse the liquidity position of the firm.
Profitability ratios
Profitability ratios analyse the profitability of the company. Ratios like operating profit margin, gross profit margin, net profit margin, return on assets, return on investment and return on equity are used to analyse the profitability of the company.
Asset efficiency ratios
This category of ratio analyses how efficient the company is. Ratios that are included in this category include inventory turnover, accounts receivable turnover, cash cycle etc.
Financial leverage ratios
This category analyses the capital structure of the company. Ratios like debt to assets ratio, debt to equity, interest coverage ratio are included in this category.
Market value ratios
Ratios that are related to the market price of the company are included in this category. Ratios like price to earnings ratio, book value to market price, earnings per share, dividend payout ratio etc are included in this category.
The financial ratios are used by different organisations and firms in order to regularly monitor and evaluate the overall performance and compare it with other competitors (Sim, Liu, Gopalkrishnan, & Li, 2011). Financial ratios are also important tools compare the position of the organisation against the benchmarked performance or position (Halkos & Tzeremes, 2012).
Several research studies have claimed the importance of the financial ratios in the overall process of performance and business analysis (Jiang & Lee, 2012). However it is important for the organisations to use the financial ratios and tools in effective and efficient manner in order to take reap benefits from these tools (Giordani, Jacobson, Von Schedvin, & Villani, 2011).
METHODOLOGY
The analysis of the companies will be based on the secondary data. The analysis of the companies would be done on the basis of the calculations of the profitability of the firms which are operating in the same industry for the past years. The operations of the companies will be thoroughly analysed in their respective sectors of businesses including a detailed analysis of the company’s earnings and the price of the share in the market.
The research will be quantitative in nature as it will be based on financial ratio decomposition approach. The secondary data is the data which already exists and the researchers have gathered that data to be reused by other researcher (Jankowicz, 2005). The secondary data comprises of the quantitative and the qualitative data. The Quantitative data is related with numbers and figures where as the qualitative data is associated with immeasurable factors like feelings and view points (Patton, 2002).
The data which will be used for conducting this research will be the secondary data. Quantitative data will be collected from the financial reports of the companies that are available from the websites. These financial reports will be analyzed and the related surveys conducted by other researcher’s for their research. To analyse the price of the company’s share, websites such as Yahoo! Finance will be used. The only limitations which can arise on using the secondary data are that the data may have been collected for a different purpose. This will signify the importance of proper referencing of the data which has been used (Maylor & Blackman, 2005).
This research is exploratory in nature. The purpose of this research is to highlight and identify the challenges which the companies have to face when their business functions are spread globally and the competitors are functioning from various different locations situated across the globe.
Exploratory type of research is the investigation of a situation which would draw a small conclusion and provide a clear view of the problem. The purpose of an exploratory research is to gain information of the topic on which the research is conducted (Sekaran, 2006).
TIMESCALE / RESEARCH PLANNING
The entire research will be completed in a time period of 18 weeks.
ETHICAL IMPLICATIONS CONSIDERED WHILE WORKING ON THIS RESEARCH
The ethical implications which are directly linked to this research are that the information which is provided in this research must be properly linked and referenced. The acknowledgement must be given to those who have contributed to the formation of this research. The data which is being analyzed in this research is the secondary quantitative data which will be backed by the facts and figures which have directly been accessed from the company’s financial information provided in the financial analysis of the companies which have been discussed.
This research is an analysis of two companies which are competitors functioning in the same industry but are from different economic regions. The variable economic challenges which the companies have to face in order to function in that particular industry must be noted. The quantitative data of the companies will be acquired from the financial portrayal of the company. So before concluding to anything the information which has been used to draw that conclusion must be referenced and acknowledged.
List of References
Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications.
Fridson, M. S., & Alvarez, F. (2011). Financial statement analysis: a practitioner's guide (Vol. 597). Wiley.
Gibson, C. H. (2012). Financial reporting & analysis: Using financial accounting information. South-Western Pub.
Giordani, P., Jacobson, T., Von Schedvin, E., & Villani, M. (2011). Taking the Twists into Account: Predicting Firm Bankruptcy Risk with Splines of Financial Ratios. Riksbank Research Paper Series, no. 87.
Halkos, G. E., & Tzeremes, N. G. (2012). Industry performance evaluation with the use of financial ratios: An application of bootstrapped DEA. Expert Systems with Applications, vol. 39, no. 5, pp. 5872-5880.
Jankowicz, A. (2005). Business Research Projects, London: Thomson Learning.
Jiang, X., & Lee, B. S. (2012). Do decomposed financial ratios predict stock returns and fundamentals better?. Financial Review, vol. 47, no. 3, pp. 531-564.
Kennerley, M., & Neely, A. (2002). Performance measurement frameworks: a review. Business performance measurement: Theory and practice, pp. 145-154.
Liou, F. M., & Ding, C. G. (2010, July). Examining the Trajectory of Competitive Advantage with Financial Ratios. In Annual London Business Research Conference.
Maylor, H, & Blackman, K. (2005), Research Business & Management, Basingstoke, UK: Palgrave Macmillan.
Patton, M. (2002), Qualitative research and evaluation methods. Thousand Oaks CA: Sage Publications Inc.
Rocha, C. H., & Gartner, I. R. (2011). Firms’ Output Growth And Financial Ratios. International Business & Economics Research Journal (IBER), vol. 1, no. 11.
Saunders, M, Thornhill, A, & Lewis, P. (2009), Research Method for Business Students, London: Financial Times Prentice Hall.
Sekaran, U. (2006). Research Methods for Business, NJ: John Wiley & Sons, Inc.
Sim, K., Liu, G., Gopalkrishnan, V., & Li, J. (2011). A case study on financial ratios via cross-graph quasi-bicliques. Information Sciences, vol. 181, no. 1, pp. 201-216.
