Fundamental Analysis of a Company

Introduction

Tullow oil plc is a global company that deals in oil and gas production. In addition, it also deals with the production of these commodities. The company is based in London. On the other hand, it is listed on both the London and Irish stock exchange markets. Tullow plc was founded in 1985 to become a gas exploration business with its initial interests in Senegal (Tullow oil plc, 2010, p. 2).

As a matter of fact, it was listed on the stock exchange market in 1985. Later on in 2007, the company made big strides that enabled it to enter into the FTSE100 Index. In advancing its activities, it has been involved in strategic business moves like acquisitions. For instance in 2000, it acquired BPs Gas fields to increase its potential and market positioning. This deal was concluded at ?200 million (Tullow oil plc, 2010, p.4).

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Apart from this, the company was involved in another strategic move in 2004. With increased opportunities in sight it acquired Energy Africa for $ 570 million (Tullow oil plc, 2010, p. 5). In recent years, the company has expanded rapidly and this has been aided by its acquisition of Hardman resources. It started drilling its first well in 2006. This was done in Uganda around the Lake Albert region. In the process it was able to drill 30 wells (Tullow oil plc, 2010, p. 7).

Because of this, it is one of the largest exploration and production companies in Europe. As a matter of fact, it has over 85 production and exploration licenses. In addition, it operates in more than 23 countries (Tullow oil plc, 2010, p. 9). To enhance its operations, the company has laid more focus on four regions that it seeks to advance its operations with.

On the other hand, it has production from eight countries. Its major achievement is the two world class production projects it has in Uganda and Ghana (Tullow oil plc, 2010, p. 11). This is because it has been able to discover massive oil deposits in the said countries. Up to now, the company employs 900 people in all its operations worldwide (Tullow oil plc, 2010, p. 13).

Discussion

Fundamental analysis is a broad analysis that a company has to do. This is because it analyses its health and financial statements (Graham, 2004, p. 7). In doing this, it also looks at its competitive advantages and the management that the company has put in place. Fundamental analysis also looks at the market together with the competitors. It has some specific areas that it mainly focuses on (Graham, 2004, p. 9).

This differs in relation to its applicability. It can focus on interest rates and state of the economy at that given time. In addition, it can also look at the management, production and earnings. Two basic approaches can be used to achieve this process. This includes top down and bottom up analysis (Graham, 2004, p. 15). To perform a good fundamental analysis it is necessary to use the present and historical data.

The long term objective should be to make and come up with good financial estimates. There are many objectives as per to why this is done. It will help to make a good projection on the company’s business performance (Graham, 2004, p. 17). This analysis is supposed to evaluate the management with a broad objective of making good internal business decisions that will move the company forward.

With the right measures in place, it can help the company to make and calculate its credit risks as it undertakes its business goals and objectives. Another objective can be to come up with a good stock valuation that will ultimately predict the company’s expected price evolution.

International and national macroeconomic environment

These environments are important as they have a bearing on the company’s performance.

International environment

The company operates on a global market. This is because it has operations in 23 countries. As a matter of fact it has mainly focused on four regions. These include Europe, Africa, South America and South Asia. The company’s international environment has the following factors in mind.

GDP growth rates

Most markets that the company has focused its activities on are emerging economies which are still growing with a great potential. There has been a problem with the global economic crisis that slowed down economic activities. On the other hand, countries that the company has invested in are witnessing good GDP growth rates and that is why it has had to invest there.

For instance, Africa’s GDP has been growing by 4.3% and this explains why the company has had exploration efforts in Uganda and Ghana (Fratzscher, 2010, p. 14). This growth rate is expected to reach 7% by the end of 2010. On the other, its other markets like Asia have had good GDP projections.

It is estimated and projected that the Asian Pacific countries will experience a GDP growth rate of 7% by the end of 2010 (Fratzscher, 2010, p. 17). This is also expected for the South American market that will have a GDP growth rate of 3 to 4% (Fratzscher, 2010, p. 19).

Inflation and interest rates

Various markets have had different interest and inflation rates. Major central banks have reported different interest rates. In relation to the markets that the company operates in, Africa has had high interest rates meaning that the cost of acquiring capital still remains high.

South American interest rates have shifted from 8 to 9 %( FXStreet, 2010, p. 3). Europe has had the lowest interest rates in the market. They have revolved between 0.25% and 5 %( FXStreet, 2010, p. 4). This represents part of the interest rates that the company has faced in the course of carrying out its activities.

Inflation rates have been changing depending on the country that the company operates in. Developed countries have had an inflation rate of 0 to 4 %( Central investment agencies, 2010, p. 8).Developing countries as a whole have had an inflation rate of between 5 to 20% (Central investment agency, 2010, p. 8). This should be factored in by the company as it will have an impact on the prices that it sets.

Exchange rates

Exchange rates are very important because the company operates in different markets that use distinct currencies. Although the dollar is used as a global business currency, exchange rates vary in relation to different economies (Fratzscher, 2010, p. 21). This therefore means that fluctuating and increasing exchange rates can directly have a bearing on the company’s estimations.

After the US economy experienced some economic shocks, there have been time varying effects on exchange rates. There are various transmission channels towards exchange rates. Since the company deals with various currencies it should have good conversions mechanisms in place.

Global oil and gas prices

Tullow oil plc deals in energy products and commodities. Because global oil energy prices keep on shifting, it is very critical towards the company’s performance. Shifts in prices have been brought about by unexpected factors that the company needs to be prepared for (Rigzone, 2010, p. 5). Because it operates in different markets, it needs to be flexible as far as energy prices are concerned.

Petroleum demand has been increasing every year which has demanded that companies increase production. Stagnation in production can be dangerous and limit supply thereby increasing prices. The world is moving toward full exploitation of gas as an alternative energy (Rigzone, 2010, p. 5). This means that the company needs to continue investing in gas production.

National macroeconomic environment

Regional and industry/company dynamics have always changed as time goes by.

Foreign competition

There is increased competition in oil production and exploration because economies are continuing to grow. Growing economies especially in countries that the company has focused on have brought about an increase in demand for petroleum products (Essar Group, 2010, p. 4). The industry is highly competitive and revolutionized because of increased market awareness. Increased demand for petroleum products has prompted companies to venture in this business thereby increasing competition. This therefore means that the company should continue being strategic on how it carries out its activities. With this in place it can be sure to withstand competition.

Total sales and prices

Sales and prices have been shifting depending on the existing business dynamics. In general, the industry is experiencing an increase in sales because of increased demand (Petroleum economist, 2010, p. 8). Notably an increase in demand has been created by rapidly growing economies that the country has invested in.

An increase in demand has in most occasions led to increased supply. This is driven by the urge to reap highly in terms of sales from this upsurge. On the other hand, this unregulated and unplanned supply has always ended up hurting prices (Berner, 2010, p. 13). We have some oil producing countries that always come up with production quotas. In such occasions, sales have always been compromised in that given period.

Analysis of the industry and the company

The oil industry has been unpredictable in most occasions. Latest results show that the company and industry has continued to make good progress. The company’s exploration and development programs have continued to deliver excellent results. There is a lot of funding in the industry that can help the company advance its operations in new and emerging markets.

There is a strong financial performance from oil industries aided by good marketing strategies. This can be explained from Tullow plc financial performance. The group has recorded an increase in pretax profit by 184% to $89.0 million in its first quarter performance of 2010 (Tullow oil plc, 2010, p. 7). Although this has been achieved there is a drop in production by 6%.Generally the outlook for the company and industry is positive.

The company further explains that its exploration and appraisal has had a success rate of 82%. This trend has also been witnessed by other industry competitors (Energy business review, 2010, p. 16). UK production has been above expectations as a result of excellent performance from the market players. For instance Tullow plc has had a working production of 18,300 boepd (Tullow oil plc, 2010, p. 9).

Iran is a major player in the oil industry (it’s the fifth largest producer) and recently it has been facing sanctions (Webb, 2010, p. 15). This has had an effect on oil production thereby changing the general industry dynamics. In Africa, Nigeria is a major oil producer but it has also been facing problems from insurgents who have reduced its oil production. This means that companies need to be very careful especially those ones that rely on such countries. There is also a major concern that unqualified companies are being awarded contracts that they don’t deserve. This is not a good trend as it might have a negative impact on the industry’s performance.

Conclusion

Investment recommendation

Although the company is experiencing a good performance, it needs to make strategic decisions in relation to investments. Because its acquisitions have been successful, it needs to continue acquiring other companies in a bid to capture a large market share. This venture needs a lot of money and the company will have to look for partners to help it finance these activities.

Because the company’s oil exploration and development has had a success rate of 82%, it needs major capital investments especially in Ghana and Uganda to ensure that they are successful. The company needs to invest heavily in exploration led growth. In addition, as the company makes inroads in other new and emerging markets it will be good if it can list in other stock exchange markets to increase its net worth. This is necessary as it will give it a more strategic position in the market.

Africa is the groups’ largest core area/market and it needs to invest in environmental management to comply with the Kyoto protocol. This will avoid a lot of conflicts that may end up in courts thereby tainting its image and operations. As a matter of fact, it should invest in health, water and hygiene to take care of the communities. Companies operating in this region have been encouraged to do so for enhanced sustainability. It needs to enhance its diversification in the market to increase the shareholders value as an expectation.

Tullow plc also needs to invest in large vessels to increase it capacity and capability. This will have a positive impact on oil production and enable the company to serve its market well. More so, it can help to improve deliveries and meet market targets and expectations. In addition, it should invest in its people for enhanced success. This is necessary because, human resource play an integral role in delivery.

Reference list

Berner, R. 2010. Deleveraging the American Consumer: Faster than Expected [Online]
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http://www.morganstanley.com/views/gef/index.html
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Central investment agency. 2010. Inflation rate (consumer prices). [Online] Available at: https://www.cia.gov/library/publications/the-world-factbook/fields/2092.html
[Accessed 25 August 2010]

Energy business review. 2010. Cairn Energy discovers gas in Baffin Bay offshore Greenland. [Online]
Available at:
http://oilgasexploration.energy-business-review.com/news/cairn_energy_discovers_gas_in_baffin_bay_offshore_greenlan d_100824/
[Accessed 25 August 2010]

Essar Group. 2010. Exploit potential of shale gas: US to India and China. [Online]
Available at:
http://timesofindia.indiatimes.com/business/india-business/Exploit-potential-of-shale-gas-US-to-India-and-China/articleshow/6430345.cms [Accessed 25 August 2010]

Fratzscher, M. 2010. What explains global exchange rate movements during the financial crisis? Germany: Frankfurt.

FXStreet. 2010. World Interest Rates Table. [Online] Available at:
http://www.fxstreet.com/fundamental/interest-rates-table/ [Accessed 25 August 2010]

Graham, B. 2004. Security Analysis. New York: McGraw-Hill.

Petroleum economist. 2010. Refinery sales to re-shape UK business. [Online] Available at:
http://www.petroleum- economist.com/default.asp?Page=14&PUB=46&SID=725903&ISS=25616 [Accessed 25 August 2010]

Rigzone. 2010. Commodity Corner: Crude Continues to Drop on Recovery Fears. [Online] Available at:
http://www.rigzone.com/news/article.asp?a_id=97824 [Accessed 25 August 2010]

Tullow oil plc. 2010. Our business. [Online] Available at:
http://www.tullowoil.com/index.asp?pageid=39 [Accessed 25 August 2010]

Webb, S. 2010. Analysis: Sanctions tighten pressure on Iran’s oil industry. UAE: Dubai.

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