Micro And Macro Economic Analysis Of Origin Energy And Caltex Australia

Background Information

In this report micro and macro economic analysis and financial analysis of the companies Origin Energy Limited and Caltex Australia Limited in the energy and gas industry in Australia will be conducted. The companies under the energy sector of Australia which are listed in the Australian Stock Exchange mainly involved in the growth and development and exploration of oil, coal, gas, uranium and renewable energy resources. There is largest contribution of the energy sector in generating revenue and in enhancing the rate of Gross Domestic Product and the growth and development of economy of Australia (Bahadori, et al., 2013). Natural resources and energy generating resources are available in large quantity in Australia. Australia is largest provider of uranium and LNG and one of the biggest exporters of coal in the whole world and particularly in the regions of Asia. Energy sector also provides largest contribution in boosting capital market of the country and known by largest developed and growing market in the economy.

Origin Energy is one of the biggest and leading companies in the Oil and Energy Industry of Australia headquartered in Australian Square, Sydney. The company mainly involves in the buying, generating, selling, exploration and delivery of natural gas and energy in Australia and worldwide (Origin, 2017). Origin Energy Company was found in 2000 because of the separation from another company Boral Ltd. for the purpose of forming a new and single company in energy sector. From the year 2002 to 2015 Origin Company was involved in merger and acquisition and conducted deals with various companies in energy sector worldwide such as Victorian electricity, Kupe Gas Field, Contact Energy of New Zealand, Sun Retail Private Limited and Eraring Energy. The major products and services of the Origin Energy Company are natural gas, electric vehicle charging services, electricity, solar panels, cooling and heating, LPG, and hot water (Origin, 2017). It is also one of the largest suppliers of products of less carbon which includes Green Gas and electricity of Green Power for the purpose of reducing pollution in the environment.

Origin is the biggest retailer in energy sector in Australia having 4500 million consumers worldwide which includes residential customers and small and big market customers with 9000 employees working currently (Origin, 2017). Origin is also provider of renewable energy with the use of upgraded technology like solar cell technology, wind and geothermal power plant. Natural gas and coal are considered as natural sources of energy which are utilized by company for generating the electricity. Mission statement of the company is to offer reliable, secure and affordable energy services to customers and communities and provide better opportunities for shareholders, communities, customers and business partners.

Analysis of Origin Energy Limited

Caltex was found in 1936 known as California Texas Oil Company as a result of merger between the Standard Oil in California and Texas Company headquartered in Sydney. In the year 1968, it was received the name Caltex Petroleum Corporations. Caltex is the biggest retail company in the sector of oil and fuel industry having approximately 1850 service outlets in Australia (Caltex, 2017). Major products offered by the company are Petrol, Autogas, Motor oil, Diesel, Lubricants and different retail stores such as Star Mart, Woolworths and Star Shop. This company is providing its products and services in Australia as well as worldwide such as New Zealand, China, Malaysia, Hong Kong, Philippines, South Africa, India, Taiwan and South Korea.

As the leading company in Australia in the oil, gas and fuel sector it is fulfilling the needs of one third customers in Australia of fuel requirement for transport. With the help of exclusive supply chain management it is supplying reliable, affordable, safe and best quality of fuel for different categories of customers such as small enterprises, retailers, aviation, marine, agriculture, transport, automobile industries, big enterprises, mining and to the government institutions (Caltex, 2017). Mission statement of the company is to offer best quality of fuel with reliable supply and to generate job opportunities and help in growth and development of economy by increasing productivity of country in the sector of oil and fuel. It is also known as biggest franchisor and exclusive retailer as more than 80% of the outlets controlled by franchisees.

Top down analysis can be defined as the process of analyzing whole economy at global level and then evaluating its impact on the local economy, industry and on the overall performance of company in that industry. If any investor wants to invest into stock market then firstly, he will overlooked the impact of running trends in economy such as GDP, inflation, interest rate on the capital market. After analyzing factors with respect to industry, investor will make wisely decision related to how much to invest in which company and in which sector. 

Gross domestic product can be defined as the value of total production of commodities and services produced by companies and manufacturing organization and people in the national territory of a country for a particular time period. In Australia, economy is extended at the rate of 0.8 percent in the II quarter of June with comparison to the very slow growth rate in March which was 0.3 percent in the financial year 2017. In 2016, the rate of GDP on annual basis was 1.8 percent. The main reasons behind the increasing growth rate in June month are increase in the rate of consumption of government and domestic and positive expansion in the total exports of country (Global Finance, 2017). If GDP is increasing in Australia, it will bring positive impact on the industry of energy, oil and gas as overall economy will boost up then performances of both the companies Origin Energy Limited and Caltex Australia Limited will also be favorable.

Analysis of Caltex Australia Limited

Interest rate can be defined as the rate which is charged by the lender of money against the amount borrowed by the borrower of that money (Salgado, 2017). It is normally decided by the Reserve Bank of Australia. In 2017, interest rate is 1.5 percent with compared to same interest rate 1.5 percent in the year 2016 in Australia which is seen unchanged. In 2015 the rate of interest was 2 percent, it can be analyzed that rate is decreasing in the year 2016 and 2017. Origin Energy Limited and Caltex Australia Limited both the companies have favorable situation in economy from the decreasing interest rate as companies can easily take finance from different financial institutions at low rate.

Value of currency is also known as exchange rate which can be defined as the rate at which currency of one country can be converted in the currency of another country (OECD, 2017). The present exchange rate of one AUD is equal to 0.8034 US $ in 2017. Energy sector in Australia mainly deals in the export of oil, electricity and gas worldwide. If the value of one AUD will increase in future in comparison to other countries it will bring favorable outcome for the performances of both the companies in Energy sector and help in generating more revenue.   

Inflation is the situation in a country when all the prices of commodities will be rising and demand of goods and services will be increased (Baker, et al., 2016). As a result of increase in per capita income, demand will rise and supply of products will reduces which leads to growing in the prices of products and services. Inflation rate in Australia in the year 2017 is 1.5 percent which is more in comparison to 1.3 percent in 2016 (OECD, 2017). As increase in inflation rate is beneficial for the companies Origin Energy Limited and Caltex Australia Limited because increase in demand and prices will help in generating more revenue and but will be less favorable for country because supply will reduce.

Unemployment rate is the rate which shows how many persons are not having any source of earning and looking for the employment opportunities for earning money. Australian government conducts various programmes which aware people about different employment opportunities and help in incorporation of new companies which can create new job opportunities for local people. Current rate of unemployment is decreasing in Australia as 5.61% in the month of August from 5.699 % in the month of June in 2017 as approximately 26000 more jobs was created in the month of July (Fieger, et al., 2017). As more persons get employment the per capita income will increase which tends to increase in consumption level of people which is favorable situation for energy sector in Australia.

Top-Down Analysis

Name of the ratio	Formula	Caltex Australia 2017 (30/6) (In$)	Origin Energy 2017  (30/6) (In$)	Industry average
Current ratio		=1.43	=1.30	1.34
	Current assets	2170.86	5011
	Current liabilities	1521.15	3854
Acid Test ratio		=.62	=1.26	1.05
	Current assets	2170.86	5011
	Inventory	1212.8	138
Cash Ratio		=.045	=.052
	Cash+ marketable securities	69.8	203
	Current liabilities	1521.15	3854

Name of the ratio	Formula	Caltex Australia 2017 (30/6) (In$)	Origin Energy 2017  (30/6) (In$)	Industry average
Net profit margin		=2.60%	= -15.03%	-198.84%
	Net Profit	264.53	-2052
	Sales Revenue	10141.68	13646
Gross Profit Mark up		=10.77%	=22.95%
	Gross Profit	986.42	2547
	Cost of sales	9155.26	11099
Gross profit margin		=9.72%	=18.66%	30.94%
	Gross profit	986.42	2547
	Sales Revenue	10141.68	13646
Operating profit margin		=4.37%	= -0.52%	-189.82%
	Operating profit	407.85	-71
	Sales revenue	10141.68	13646
Return on assets		=7.58%	= -0.26%	-2.12%
	EBIT	407.85	-71
	Average assets	(5446.81+5302.73)/2	(25199+28905)/2
Return on shareholder Fund		=9.12%	= -4.86%
	Net income	264.3	-554
	SHF	2897.46	11396

Name of the ratio	Formula	Caltex Australia 2017 (30/6) (In$)	Origin Energy  2017 (30/6) (In$)
Inventory turnover ratio		=45days	=5 days
	Average inventory	(1212.82+1080.92)/2	(138+187)/2
	Cost of sales	9155.26	11099
Sales revenue to Capital employed		=6.67	=.64
	Sales Revenue	10141.68	13646
	Capital employed	3925.66

Name of the ratio	Formula	Caltex Australia 2017 (30/6) (In$)	Origin Energy 2017 (30/6) (In$)	Industry average
Debt to equity ratio		=87.98%	=121.12%	44.05%
	Total liabilities	2549.35	13803
	Total equity	2897.45	11396
Equity ratio		=53.19%	=45.22%
	Total equity	2897.45	11396
	Total assets	5446.81	25199
Gearing ratio		=17.81%	=39.26%
	Long term debt	699.2	8382
	Capital employed	3925.66	21345

Name of the ratio	Formula	Caltex Australia 2017 (30/6) (In$)	Origin Energy 2017  (30/6) (In$)	Industry average
Earnings per share		=2.32	= -1.17	-0.28
Price earnings ratio	*100	=14.8	Not available	397.95
Price to sales ratio		=0.42	=0.93	64.16
Price to cash Flow		=28.62	=16.08	32.46

Liquidity ratio is helpful in identification of the financial strength of the organization. This will help in making an analysis that the organization will be able to meet its short term liabilities on time or not. Current ratio depicts the current liabilities in terms with the current assets as stated in the balance sheet of the organization. This ratio helps in making an analysis of the current solvency and liquidity of the organization in order to meet their current obligation in regard to its belonging companies indulge in same business. Acid test ratio depicts about current assets less stock in terms of the current liabilities of organization. The current ratio of Caltex Australia is 1.43 and Origin Energy is 1.30 for the year 2017 (Fridson and Alvarez, 2011).

Caltex Australia and Origin Energy has quick ratio of .62 and 1.26 correspondingly. It can be analysed that the quick ratio is ideally 1:1 and it can be depicted that Caltex Australia has higher solvency as it does not block much of its funds in inventories as compared to Origin Energy. Energy industry in Australia has current ratio of 1.34 and quick ratio of 1.05 (McTaggart et. al., 2012). Therefore it can be analysed that Caltex Australia has more solvency and liquidity in comparison to Origin Energy.

These ratios are quite helpful in making an estimation of effectiveness in regards to profit of the company. Profitability ratios are calculated on the basis of revenue made by the organization. These ratios are helpful in making a detailed analysis of the revenue generated by the organization in regard to the sales of the organization. The ratio of net profit shows the efficiency of the organization by making a reduction in the expenses in order to increase the net profit of the organization. Organization can earn huge profits by making a reduction in the expenses and also through increasing of sales.  Caltex Australia and Origin Energy has net profit ratio of 2.60% and -15.03% correspondingly in the year 2017. Origin Energy has incurred a loss in the year 2017 which shows that the organization has to increase its sale and should decrease its expenses. Energy Industry in Australia has a net loss of -198.84% (Investing, 2017). From this analysis, it can be estimated that Caltex Australia is quite profitable in terms of Origin which is facing huge losses.

Impact of GDP on Energy Industry in Australia

The ratio of return on assets depicts earnings before interest and tax generated by the company in regard to assets of the organization. The organization can made huge profits by managing the assets in a proper way. This ratio depicts that how effectively the organization is converting its stock into income. More the net profit ration and more is the profitability. Return on asset ratio is 7.58% and -0.26% of Caltex Australia and Origin Energy respectively. Return on assets of the energy industry is -2.12% which shows that Caltex Australia is more profitable (Brand et. al., 2014). The profitability of Caltex Australia can also be identified from various profitability ratios which have been calculated.

The funds of the organization are employed in various things in order to generate sales and profit. Efficiency ratio helps in analyzing that how efficiently assets are being managed by the company in order to derive the profit of the organization. Efficiency ratios depict that how much time has been taken by organization in conversion of assets into sales and revenue. Efficiency ratio helps in analyzing that how good the organization is making in sales (Huston, 2010). Caltex Australia has inventory turnover ratio of 45 days and Origin has inventory turnover ratio of 5 days.

This ratio helps in identification for the investor’s that if the organization bear losses in an particular accounting period than how many losses the investors have to face. This will also help in making an analysis of the role of creditors in the capital structure of the organization. Higher the debt ratio higher is the debt financing in comparison to equity. The equity ratio of Caltex Australia and Origin is 53.19% and 45.22% respectively. Caltex Australia has higher equity ratio which shows a sound financial position of the organization in the market (Aebi, 2012). This also states that there are various investors who are desire to invest in the organization. Debt to equity ratio of Caltex Australia and Origin is 87.98% and 121.12 respectively which shows Caltex Australia is more effective and efficient.

Earnings per share is also known by the name net income per share to shareholder and thus helps in making an analysing of the net income incurred in respect to the shares. This describes the sound financial health of organizations and also shows the satisfaction of shareholders in terms of the organization. The earnings per share of Caltex Australia and Origin for 2017 are 2.32 and -1.17 respectively. From the above analysis it can be analysed that the efficiency of Caltex Australia is quite good in comparison to Origin as EPS of Origin is negative as it incurred losses in the year 2017 (Surroca et. al., 2010).

Impact of Interest Rate on Energy Industry in Australia

Conclusion

From the above study it can be analysed that economic and political factors of the country always play an important role in profitability of the organization. If there is increase in the rate of interests than the profitability of the organization will decrease and vice versa. When there is increase in the personal disposable income than the profitability of the organization will also increase. Therefore an organization always makes consideration of various factors in order to make an increase in the profitability of the organization. It can also be analysed that on the basis of liquidity and efficiency and market ratio Caltex Australia is much more efficient and effective when compared to Origin Energy. Caltex Australia also has stability in its capital structure.

Origin Energy should make a deduction in its expenses in order to cover up the losses and maintain stability and liquidity. This will help Origin Energy in maintaining the liquidity of the organization. The capital structure shows more debts when a comparison is made to equity. So, the organization should acquire funds from equity in order to make reduction in debts in the capital structure and thus profitability can also be enhanced. This will make Origin Energy to maintain stability and a reduction in losses which are company facing in the year 2017 in comparison to Caltex Australia. Caltex Australia should enhance its profitability by adopting of new strategies like expansion.

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