In the Exhibits, you will find three main financial statements for two fictitious oil companies. Both firms are involved in exploration, extraction, operation, transportation and refining. Distribution of their products differs from country to country, relying on a varying mix of directly controlled channels and distributors.
South Petrol is a relative newcomer in the field and was started in the late twentieth century to explore, extract, refine and distribute oil from onshore fields in the South Mediterranean basin. Initially operating under heavy government supervision, protectionist rules, it must now compete on the open market. It started operations in mainly onshore and offshore fields at modest depths. It must now explore, develop and operate fields that are both further away from their home base (drilling permits have recently been obtained in both Brazil and Angola), at further depths in the ground and, more often than not, offshore (and increasingly in deep-sea fields). Its sales are both local and international and the customer base is, as of 2013 and for the foreseeable future, very diversified.
North Petrol is a long established oil producer. It started operations in the early 1920s. Its facilities were largely reduced to shambles during World War II. The 1950s saw its rebirth in all fields, domestic and international, exploration and production and refining. Since the early 60s, North Petrol has developed an acknowledged expertise in deep-sea offshore drilling, as its traditional onshore fields were drying out (and were dry in the late 70s). In 2013 it was recognized as one of the leaders in the world in deep-sea drilling as well as in medium depths on the continental shelf. It operates exploration and production rigs in many countries. Its sales are both Europe wide and international. The customer base has long been very diversified.
Required
You are an investment advisor who has been approached by a wealthy industrialist who would like to invest a significant amount of her resources in the oil industry. Which of these two firms would you recommend to your client as a potential investment and why (please limit your analysis to these two fictional firms and the data provided). You must choose one and exclude the other, even if you feel a diversified approach might make more sense for your client.
The market capitalization of each firm (share value times number of outstanding shares) is deliberately not communicated in this mini-case as such information might guide or bias your judgment, since a share value is also defined by the relative attractiveness of an investment compared to other investments with similar or different levels of risks.
On the basis of an analysis of the three years of financial performance of these two firms, which firm do you feel offers the best potential for your investor client, and why? Remember that the past is a possible indicator of the future, but the past is the past and the investor is looking for the future (preparing for future growth, risk level of returns and being a going concern, and time horizon of visibility are the three core elements you need to document on the basis of the past data provided).
It is clear you do not have all the information you would probably want to collect on the markets, the oil reserves controlled, the level of replacement of depletion by new finds, the various levels of specific risks affecting each firm, etc. These data would definitely be of use in your decision. They are not available in this mini-case, but it might be useful to list them and identify where they might be found to enlighten your analysis. The assignment is for you to use only the financial information available to formulate your recommendation and build an argument supporting it.