Abilene Oil And Gas Limited: Company Overview, Governance, Financial Performance And Stock Analysis

About the Company

The report contains an overall analysis of company’s financial performance. It includes the calculation of key ratios like ROA, ROE and debt ratio. It also includes the estimation of WACC, analysis of debt ratio and details about the movements in stock prices and dividend policy followed by the company.

Abilene Oil and Gas Limited is an Australian company engaged in production, development and exploration of resources, focusing on oil and gas. It operates in the exploration sector within United States. The strategy of the company is to build oil production assets, increase drilling location and to add exploration possessions in the region. The main aim of Abilene is to target high return projects and raise funds by keeping the overheads and corporate costs low. It holds interest in projects like Klick East Oil field, Welch-Bornholdt Wherry project, Kinsley Prospect situated in Oklahoma and Kanas and many other projects. The company is listed on ASX with a ticker ASX: ABL (Abilene.com.au, 2018).

Main substantial shareholders

• 20% or more shareholdings: Holdrey Pty Ltd with a holding of 23.73%
• More than 5% shareholdings: Zaimo Nominees Pty Ltd (15.36%), Bond Street Custodians Limited (14.24%), Bond Street Custodian Limited (10.78%), PJP Group Pty Ltd (5.82%), Mr Itzchak Benedikt + Mrs Rozette Benedikt (5%).

Main people involved in firm governance

• The Chairman: Mr Paul Salter (Non- Executive)
• Board members: Mr Craig Donald Mathieson and Mr Mordechai Benedikt (Non-Executive Directors).

Neither of these members are involved in more than 20% shareholding nor is any shareholder of more than 5% holding involved in firm governance.

1. ROA and ROE

 Financial data for the years 2014 to 2017 has been taken from the annual reports of the company.

Abilene oil and gas Limited Financial Statements for year 2014-16
Particulars	2014	2015	2016	2017
	AUD$	AUD$	AUD$	AUD$
EBIT	-1,917,303	-6,632,562	-806,714	-2907657
Net profit	2,048,588	5,540,642	-882,696	-3495060
Total Assets	6,118,655	5,100,430	8,547,292	6,085,976
Total Liabilities	879,401	306,191	4,049,933	5,123,677
Shareholders’ Equity	5,239,254	4,794,239	4,497,359	962,299

1.        Rate of Return on Assets
	2014	2015	2016	2017
A. Net income	2,048,588	5,540,642	-882,696	-3,495,060
B. Total assets	6,118,655	5,100,430	8,547,292	6,085,976
(A/B)	33.48%	109%	-10%	-57%

2.       Rate of Return on Equity
	2014	2015	2016	2017
A. Net income available to equity shareholders	2,048,588	5,540,642	-882,696	-3,495,060
B. Shareholder’s Equity	5,239,254	4,794,239	4,497,359	962,299
(A/B)	39.10%	115.57%	-19.63%	-363.20%

3.    Debt Ratio
	2014	2015	2016	2017
A. Total Liabilities	879,401	306,191	4,049,933	5,123,677
B. Total assets	6,118,655	5,100,430	8,547,292	6,085,976
(A/B)	14%	6%	47%	84%

	2014	2015	2016	2017
	AUD$	AUD$	AUD$	AUD$
EBIT	-1,917,303	-6,632,562	-806,714	-2,907,657
NPAT	2,048,588	5,540,642	-882,696	-3,495,060
OE	5,239,254	4,794,239	4,497,359	962,299
TA	6,118,655	5,100,430	8,547,292	6,085,976
EBIT/TA (1)	0	-1	0	0
NPAT/EBIT (2)	–        1.07	–        0.84	1.09	1.20
TA/OE (3)	1.17	1.06	1.90	6.32
NPAT/OE (4)	0.39	1.16	–        0.20	–        3.63
1*2*3 = 4	0.39	1.16	–        0.20	–        3.63

The variable TA/ OE reflects the concept of DuPont analysis, in which it is used as an equity multiplier. The analysis breaks down ROE into its components like total assets, net profit, owner’s equity and EBIT. The equity multiplier is used to measure the changes in ROE with respect to the changes in its components. Fluctuations in the multiplier do affect the relationship between return on assets and return on equity. In regards to ROA, equity multiplier has negative or no relationship with this ratio.  A high multiplier denotes high degree of financial leverage and increase in it will result in rise of ROE and fall of ROA. When sales increases, ROA rises making the ROE to increase but the variable TA/OE remains the same. Hence changes in the return on asset ratio does not affect equity multiplier, but both can equally bring changes in ROE (Leach and Melicher, 2011).

In 2014 and 2015, company’s ROE was greater than its ROA and especially in year 2015, company had the highest profits resulting in a huge increase in its return on equity ratio as compare to 2014. Moreover, with an upsurge in its net income, the owners’ equity had fall in the same year which boosts up the ROE. The company made losses in the next two years, resulting in negative ratios. A major fall in ROE can be noticed in 2016 and 2017 as compare to ROA. The negative profits are the reason for negative returns (Wright, et. al. 2013).

1. Graphical Representation of movements in stock prices

Structure of Governance and Ownership

Figure 1: Stock prices of Abilene Limited

(Sg.finance.yahoo.com, 2018)

Figure 2: Share prices of ASX S&P 200

(Au.finance.yahoo.com, 2018)

The above figures shows the movements in the share prices of Abilene and ordinaries index. The trend in stock prices of company is compare to the trend in prices of market index. Many ups and downs were there in the share prices of the company in past two years. In starting of 2016, the prices were increasing and in month of April, it was 0.016. A sudden fall of $0.009 was there in May and then an increase of 0.013 was noticed in June. After that, the prices continues to fall in the subsequent months of 2016. During the same year, the market rise and less fluctuations were there. Talking about 2017, company’s prices change between $0.009 to 0.007 and in September 2017, it was $0.013. On the other hand remains almost stable. So it can be said that company’s stock is independent of market index, as when the ASX rises, the share price of Abilene falls.

1. Abilene Limited made an announcement on August 22, 2017 about its loan agreement with a related entity of Mr Craig worth $420,000. The purpose of this agreement was to fund oil and gas activities of the company and to maintain working capital (Asx.com.au, 2017).
2. On September 2017, company releases its annual reports to the shareholders, providing them the information about its operations and earnings. The loss of 2017, has affected the share prices of Abilene.
3. The company updated about the drilling activities at Logan County joint venture project. On September 21, 2017 it announced about the commencement of drilling activities at the project (ASX, 2017).

1. The beta of Abilene is not given so it is calculated as per the average return of the share prices.

SUMMARY OUTPUT
Regression Statistics
Multiple R	0.35739078
R Square	0.127728169
Adjusted R Square	0.086191416
Standard Error	0.284319251
Observations	23
ANOVA
	df	SS	MS	F	Significance F
Regression	1	0.248580278	0.248580278	3.0750638	0.094086964
Residual	21	1.697586169	0.080837437
Total	22	1.946166447
	Coefficients	Standard Error	t Stat	P-value	Lower 95%	Upper 95%	Lower 95.0%	Upper 95.0%
Intercept	-0.013301134	0.063841209	-0.208347152	0.8369654	-0.146066197	0.1194639	-0.146066197	0.11946393
X Variable 1	4.295659411	2.449642863	1.753585992	0.094087	-0.798651802	9.3899706	-0.798651802	9.38997062

1. Calculating required rate of return using CAPM

E(R) =

 = 4%

β = 4.30

= 6%

E(R) = 4% + (4.30*6%)

         = 29.77%

1. The investment which has low return and low risk is known as conservative investment. A company is considered to be a conservative investment when it S.D is low and its ROE is also low. The standard deviation of Abilene is 0.29 and it also has negative ROE in past two years. Looking at the S.D. it can be a conservative investment but it has giving negative returns from the past two years. So, it can be said that, it will be better to avoid making investment in this company (Huffman, 2016).

1. WACC = cost of equity + cost of debt (after tax)

Cost of equity = 29.77%

Cost of debt = 8 (1-30%)

                      = 5.6%

WACC= 29.77% + 5.6%

            =35.37%

Cost of debt is calculated by taking the interest rate of 8% applied on the long term borrowings of the company. The tax rate is 30%.

A higher weighted average cost of capital can impact the evaluation decision of management regarding investment project. Increase in beta will increase in WACC that results in high financial risk. Such rise in risk will require the investors to demand high return. If WACC continues to rise, the risk will be at that level, where management decides not to invest in particular project. Hence, increase in WACC do impact the decision of management regarding evaluation (Pratt and Grabowski, 2010).

1. The debt ratio of the company has increased in the past two years. In 2017, it was 84% and in 2016 it was 47%. The lowest ratio of 6% was in 2015. This shows that company does not have a stable debt ratio and especially in 2017, its debt has increased to $5,123,677 whereas its assets has reduced to $6,085,976. This boost up the ratio and indicates that most of the operations of the company re financed through debt (Demmel, 2012.).
2. Generally, gearing ratio comprises of long term borrowings. Abilene’s borrowings has reduced in 2017 from $554,748 to $3,101,180. This means company has paid off its long term debt in order to adjust its gearing ratio.

The amount which is paid to the shareholders out of retained earnings by the company is known as dividend. Generally, there are four dividend policies named as regular, irregular, stable and no dividend policy (Gitman, Juchau and Flanagan, 2015). Abilene limited follows no dividend policy as it has not declared any dividend in the past years. The reason can be the losses occurred due to the inefficiency in the operations. Company does not have enough earnings to pay dividends to its shareholders.

After conducting the above analysis, it will be advisable not to include this company in an investment portfolio because of its poor financial performance in past years, which can be judged from its key ratios, its dividend policy and trend in its share prices. The ROE and ROA both were negative, debt ratio increased and the falling trend was there in share prices. Along with these, the company does not pay any dividend to its stockholders. Looking at all these aspects, it will be better not to put this company on an investment portfolio.

References 

Abilene.com.au. (2018). Abilene Oil and Gas Limited | Development and Exploration. [online] Available at: https://www.abilene.com.au/ [Accessed 30 Jan. 2018].

ASX. (2017). https://www.asx.com.au/asxpdf/20170921/pdf/43mjcdw3238m6q.pdf. [online] Available at: https://www.asx.com.au/asxpdf/20170921/pdf/43mjcdw3238m6q.pdfhttps://www.asx.com.au/asxpdf/20170921/pdf/43mjcdw3238m6q.pdf [Accessed 30 Jan. 2018].

Asx.com.au. (2017). https://www.asx.com.au/asxpdf/20170822/pdf/43llr6f9gr1sd1.pdf. [online] Available at: https://www.asx.com.au/asxpdf/20170822/pdf/43llr6f9gr1sd1.pdf [Accessed 30 Jan. 2018].

Au.finance.yahoo.com. (2018). ^AXJO Historical prices | S&P/ASX 200 Stock – Yahoo Finance. [online] Available at: https://au.finance.yahoo.com/quote/%5EAXJO/history?period1=1454092200&period2=1517250600&interval=1mo&filter=history&frequency=1mo [Accessed 30 Jan. 2018].

Demmel, R., 2012. Fiscal policy, public debt and the term structure of interest rates (Vol. 476). Springer Science & Business Media.

Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.

Huffman, B., 2016. Assessing the Risk of Conservative Investments. Journal of Applied Financial Research, 1, p.42.

Leach, J.C. and Melicher, R.W., 2011. Entrepreneurial finance. Cengage Learning.

Pratt, S.P. and Grabowski, R.J., 2010. Cost of capital in litigation: applications and examples (Vol. 647). John Wiley & Sons.

Sg.finance.yahoo.com. (2018). ABL.AX Key statistics | ABILENEOIL FPO Stock – Yahoo Finance. [Online] Available at: https://sg.finance.yahoo.com/quote/ABL.AX/key-statistics?p=ABL.AX [Accessed 30 Jan. 2018].

Wright, M., Siegel, D.S., Keasey, K. and Filatotchev, I. eds., 2013. The Oxford handbook of corporate governance (Vol. 28). Oxford University Press.