ESTIMATION OF COMPETITIVENESS OF OIL AND GAS COMPANIES BASED ON THE NORMATIVE MODEL

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1 Proceedings of the IASTED International Conference Modelling, Identification and Control (AsiaMIC 01) April 10-1, 01 Phuket, Thailand ESTIMATION OF COMPETITIVENESS OF OIL AND GAS COMPANIES BASED ON THE NORMATIVE MODEL Nurlan T. Sailaubekov, Shynara G. Jumadilova Kazakh National Technical University Satpayev Str, 0001, Almaty, Republic of Kazakhstan ABSTRACT The article presents a comparison of competitiveness of two oil and gas companies in Kazakhstan: one of them is national, and the other is private. The companies competitiveness has been estimated by a method of rating their financial and economic statuses. Obtained results were compared with results from existing methods, such as Altman's method and a method of condition s digital function. Results of this research showed relatively high competitiveness of the private company in comparison with competitiveness of the national enterprise. This is explained by higher priority of state interests before economic interests of the national company. KEY WORDS Competitiveness of the company, rating, financial and economic status of an oil and gas company, monitoring company s financial status, analysis of company s activity. 1. Introduction The activity of an oil and gas company is one of the most capital-intensive activities. For steady functioning and maintenance, and growth of production volumes, investments into geological exploration and technologies are necessary. With the volatile world prices of oil and exchange rates, and also the decrease in production rates at some functioning fields, it is essential to carry out a continuous monitoring of financial and economic statuses of oil and gas companies. The financial analysis includes, first of all, calculation of values of a large number of financial. In a global practice, standard (or threshold) values of financial, which were identified after extensive and long-term analysis of companies activities, have a wide spread and application. In this paper, there have been used indicators of companies financial and economic sustainability, which were obtained via a normative model. This method does not require taking into account threshold values, and allows carrying out an estimation of the companies financial and economic statuses in dynamics. A complex estimation by rating has been carried out for the oil and gas companies based on the obtained values of companies financial and economic sustainability. This rating estimation allows monitoring the companies statuses in dynamics, their comparison and determining competitiveness of these companies.. Rating method of estimation of companies financial and economic status and economic sustainability of a company is an indispensable condition of the company s economic performance. Presented in the previous work an assessment of financial and economic sustainability of a company was based on the normative model [1]. The model demonstrates a standard ratio of growth rates for various financial and economic indicators []: 1. Profitability. Ratios of assessing the situation on securities market. Liquidity and solvency 4. Business activity. independence 6. Property assessment. After calculating values of these indicators, it is necessary to calculate a quantitative index of the company s general financial and economic sustainability. An expert method helps to determine the priority of the aforesaid blocks of indicators, depending on interests of the company whose status is being assessed. Such information about indicators can be useful to: company s management who needs a reliable information about financial and economic position of the company in order to assess and develop strategies and management tactics; investors for whom the most important is the level of investments security in the given company; shareholders of the company who are interested in results of the company s performance in a reporting period, comparison of these results to results in a previous period, and also comparison of same results to performance results of competing enterprises; banks whose are interested in the company s ability to carry out its obligations on return of debt funds in due time; DOI: 10.16/P

2 other economic third parties, including suppliers and buyers, exchange and insurance companies, etc. to whom the competitiveness and reliability of the company matter. Based on preferences of interested parties, there has been made a ranging of estimates of financial and economic sustainability of the company by blocks of indicators in financial statements, that is K 1 > K > K > K 4 > K > K 6, (1) where К i an estimate of financial and economic sustainability on one of the above-mentioned six blocks of indicators. Indices of value of blocks of indicators are presented in the table 1. The oil and gas industry is characterized by significant capital intensity. Multi-billion investments into geological exploration are necessary in order to sustain the current levels of oil production. Consequently, the given ranging is carried out according to investor s interests. The results were achieved by a questionnaire method, interviewing leadership of investment companies. The sum of ranks of all estimates should equal to one. Table 1 Indices of value of blocks of indicators that demonstrate financial and economic sustainability of the company Index of Blocks of indicators value, μ i 1 Profitability 0.87 situation on the securities market 0.81 Liquidity and solvency Business activity independence Property assessment Total 1 An index of value for a corresponding block of indicators is calculated by a formula: xij j 1 i n n xij i 1 j 1 () For the assessed company, the value of its rating estimation is determined by a formula: R=µ 1 K 1 +µ K +µ K +µ 4 K 4 +µ K +µ 6 K 6, () where R company s rating; n µ i - index of value; K i estimate of sustainability by blocks of indicators.. Rating estimation of financial and economic status of national and private oil and gas companies Now, to compare the financial and economic statuses of two oil and gas companies in Kazakhstan: the national JSC KazMunayGas Exploration and Production (KMG E&P) and a private JSC MangistauMunayGas (MMG), we use a technique of rating each company s financial and economic status. In [1] the following classification of rating estimates (table ) is suggested. Class Table Classification of companies rating estimates Rating estimates А (high) В (medium) Class Rating estimates С (low) We enter values of estimates of financial sustainability by corresponding blocks of indicators in financial statements of the companies: KMG E&P and MMG for the years 010 and 011 into a table, and then we calculate complex rating estimates (tables and 4). Expert estimates of each ratio s influence on the corresponding block of indicators (columns 6 and 7) are calculated by multiplying the indices of value of each block of indicators by their corresponding financial sustainability estimates. Thus, rating estimates of the companies are: JSC KazMunayGas E&P: R 010 =0.40 and R 011 =0.67 JSC MangistauMunayGas: R 010 =0.87 and R 011 =0.7 According to the classification table of rating estimates, KMG E&P upon transition from the basic period (010) to the reporting period (011) improved its rating from "C" to "B" whereas MMG s performance changed from «A -» to «B +». Generally speaking, the financial and economic status of the private company is significantly better than the one of the national company. Mostly, this is due to profitability indicators. The national company delivers one fourth of extracted oil onto domestic market at low prices, which explains its low profitability in comparison with the private company. 61

3 Table Calculation of total rating estimates for KMG E&P Blocks of indicators Index of value, µ i sustainability estimate, K i Complex rating estimates Profitability situation on the securities market Liquidity and solvency Business activity independence Property assessment Total: Source: Consolidated financial statements of KMG E&P for the years 010 and 011[]. Table 4 Calculation of total rating estimates for MMG Blocks of indicators Index of value, µ i sustainability estimate, K i Complex rating estimates Profitability situation on the securities market Liquidity and solvency Business activity independence Property assessment Total: Source: Consolidated financial statements of JSC "MangistauMunayGas" for the years 010 and 011 [4]. To find out estimates of which blocks of indicators in financial statements of the companies in the reporting period made a positive or negative impact on ratings of the companies financial and economic statuses, and also to estimate the extent of such impact, we do a factorial analysis. Calculation results of the factorial analysis are given in tables and 6. 6

4 Table Factorial analysis of rating of the financial and economic status for KMG E&P in the reporting period Index Impact on rating Blocks of sustainability taking into of estimation (in %) indicators estimate account the index value of value Profitability situation on the securities market Liquidity and solvency Business activity independence Property assessment Table 6 Factorial analysis of rating of the financial and economic condition for MMG in the reporting period Index Impact on rating Blocks of sustainability taking into of estimation (in %) indicators estimate account the index value of value Profitability situation on the securities market Liquidity and solvency Business activity independence Property assessment Based on the calculations, the following conclusions can be drawn: 1) Upon transition from basic to reporting period, the financial sustainability of KMG E&P on blocks of indicators considerably improved (0.67 in the reporting year). As it appears from the table, the blocks of profitability and of the company s position in the securities market decreased. The deviation from standard values of these blocks is 8 percent of the total deviation. ) Upon transition from basic to reporting period, the financial sustainability of MMG on blocks of indicators decreased (0.7 in the reporting year). As it appears from the table 6, the block of liquidity and solvency decreased as well as the block of profitability. The deviation from standard value of these blocks is 67 percent from total deviation. 6

5 4. Comparison of expert rating estimation of the company s financial and economic status to existing rating estimations 4.1 Method of forecasting companies bankruptcies The most widespread approach to bankruptcy risk analysis of a company is E Altman's interval approach []. Altman's estimations are performed through the formula: Z=1.K K +.K +0.6K K (4) where К 1 = own current assets/total assets; К = retained earnings /total assets; К = earnings before interest and taxes /total assets; К 4 = own capital / liabilities; К = sales/total assets. Depending on the size of an indicator of "Z-account" the probability of company s bankruptcy is determined as following: to 1.8 very high; the high; the possible; more than.0 very low. Values for the given above are calculated by indicators of financial statements and presented in the table (7). Table 7 Z-account values of KMG E&P and MMG enterprises Ratios KMG E&P MMG К К К К К Z The "Z-account" indicator confirms sufficiently high financial and economic statuses of the companies in the reporting period, along with the fact that the financial and economic status of MMG is significantly better than the financial and economic status of KMG E&P. However, the "Z-account" indicator of MMG does not show a decrease in indicators of liquidity and solvency, and profitability of the company. Here, only a decrease in the ratio of own and invested capital is presented, whereas the method of rating estimation which is based on the normative model allows to do a factorial analysis and determine which indicators affected improvement or deterioration of the company s financial and economic status as a whole. 4. Method of condition s digital function To estimate the level of financial sustainability of a company based on the size of main sources of material formation and production stocks, condition s digital function is used: S = f(x 1, x, x ), () where x 1 an absolute indicator of security of material and production expenses with own current assets; x an absolute indicator of security of material and production expenses with sources for their formation such as own current assets and long-term liabilities; x an absolute indicator of security of material and production expenses with main sources for their formation as general means (own current assets, long-term and short-term liabilities and loans). If a security indicator is more than a zero, then x i =1. If a security indicator is less than a zero, then x i = 0. The following types of company s financial sustainability exist: S= f (1,1,1) absolute financial sustainability; S= f (0,1,1) normal financial sustainability; S= f (0,0,1) unstable financial status; S= f (0,0,0) crisis financial status. To calculate a function of the company s status, we use quarter data of indicators in financial statements. Results of such calculations are given in tables 8 and 9: Indicators Table 8 Indicators of status function for JSC KMG E&P Q1 Q Q Q4 Q1 Q Q Q4 х х х Results 1,1,1 1,1,1 1,1,1 1,1,1 1,1,1 1,1,1 1,1,1 1,1,1 64

6 Indicators Table 9 Indicators of status function for JSC MMG Q1 Q Q Q4 Q1 Q Q Q4 x x x Results 1,1,1 0,1,1 1,1,1 1,1,1 1,1,1 0,1,1 1,1,1 0,0,1 The analysis of quarter data for 010 and 011 of the companies showed that JSC KazMunayGas E&P has absolute financial sustainability. The indicators of JSC MangistauMunayGas decreased in the second quarter of 010 and in the second and fourth quarters of 011. The decrease in indicators of financial independence caused decrease in the general financial and economic sustainability of MMG. This method is focused on definition of level of financial independence of the company.. Conclusion 1. The rating estimation of discussed companies has been performed through analysis of their financial and economic statuses in dynamics. This method allows to fully estimate the financial and economic statuses of the companies because it considers six blocks of indicators: profitability, position in securities market, liquidity and solvency, property assessment, business activity and financial independence. Moreover, estimation of companies competitiveness is not influenced by such factors as in which industrial area the company is specialized, or how large the scope of company s activities is.. The status comparison of two oil and gas companies has been performed through ranking. Results of the comparison revealed that the national company in Kazakhstan in the exploration and production area currently is less attractive in terms of economic interests when compare with large private companies. This results from the fact that the state interests prevail over strategic tasks of the national company. Possible solutions to this problem are: investments into geological exploration and technologies of oil production, low taxation of the national company, innovative development of the company s oil refining branch.. The rating estimation method has been compared to existing assessment methods of company s financial and economic status, i.e. to E. Altman's method and a method of condition s digital estimation. Results of this comparison showed that the method of rating estimation based on the analysis of companies financial and economic statuses with the normative model allows to estimate and adequately compare the statuses of assessed companies, and also to reveal the factors which have affected changes observed. This estimation method of companies competitiveness is complex and universal. However, it requires a careful analysis of obtained estimation results. For full estimation of companies competitiveness, use of several methods is recommended. The main characteristics of the discussed method of rating estimation of financial and economic status are: this method is based on a comprehensive, multidimensional approach when estimating the company s financial performance; the rating estimation is carried out by using data from publicly available sources; References the rating estimation is comparative; in rating estimation, a flexible computing algorithm is applied, which utilizes potentials of the mathematical model of comparative complex estimation of a company s production and economic activity. [1] N.T. Sailaubekov, Method of complex analysis of financial and economic activity of company on the basis of dynamic normative, Herald of Turan University, (9), 008, [] V.V. Kovalev. analysis: capital management. Investment choosing. Report analysis (Мoscow: Finance and Statistic, 1999). [] Consolidated Statements of JSC KazMunayGas Exploration and Production for the years 010 and 011. [4] Consolidated Statements of JSC MangistauMunayGas for the years 010 and 011. [] E.I. Altman, Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy, The Journal of Finance, September 1968,