Financial Management Project Report

Oil and Gas industry

Under Guidance of

Submitted By Group -7

Group 7 Name Roll No. Oil & Gas Industry

7
OIL and Gas Industry Overview
Firms selected under this study are observed few common characteristics:
1. It has very low debt on its balance sheet.
2. Very few are financial leveraged companies.

Industry summary:
Nifty Energy index is a good representative of oil and Gas sub section. The Nifty Energy beta is calculated
respective beta of different companies are plotted against it to understand the riskier/ sensitivity of
individual firms. Details are given in the last.

Comparative information for firms

Present Debt/
Firms Regression Beta values
Equity Ratio

NIFTY ENERGY 1.05

IOCL 0.82 0.71
BPCL 0.85 0.65
Reliance
1.14 0.42
Industries
CARIN 1.56 0.05
ONGC 1.19 0.096
HPCL 1.14 1.06
 Oil & Gas Industry

1.80
1.56
1.60
1.40 1.19
1.14 1.14
1.20 1.05 0.82
1.00 0.85
0.80
0.60
0.40
0.20
0.00
NIFTY IOCL BPCL Reliance CARIN ONGC HPCL
ENERGY Industries

Series1

Cost structure comparison of selected firms:

Oil & Gas Industry

1.2 1.06
1
0.8 0.71
0.65
0.6
0.42
0.4 0.096
0.2 0.05
0
IOCL BPCL Reliance CARIN ONGC HPCL
Industries

E/D ratio Linear (E/D ratio)

Remarks for individual Firms:

BPCL
1. The Cost of capital is minimum at a debt-equity ratio of 67% for the company.
2. The present debt-equity ratio of the company is 0.65 which is pretty close to optimum ratio.
3. Hence ideal capital structure based upon S&P rating.
4. Interest coverage ratio shows that debt ratio can be leveraged.
5. Comparing with NIFTY energy regression beta (1.04), BPCL Beta is the stocks relative
contribution to the risk of the market portfolio (Nifty Energy).
6. Beta as 1 is an average risk which is with NIFTY energy.
IOCL
1. The Cost of capital is minimum at a debt-equity ratio of 100% for the company.
2. The present debt-equity ratio of the company is 0.71 which is near to the optimum ratio.
3. Slight reduction in cost of capital can be achieved by increasing the debt-equity ratio.
4. However, in this case both cost of debt as well as cost of equity will increase.
5. The reduction in total cost of capital will only due to the change in capital structure.

Reliance Industries:
1. The Cost of capital is minimum at a debt-equity ratio of 100% for the company.
2. The present debt-equity ratio of the company is 0.42.
3. Reduction in cost of capital can be achieved by increasing the debt-equity ratio

HPCL
1. The Cost of capital is minimum at a debt-equity ratio of 100% for the company.
2. The present debt-equity ratio of the company is 0.71 which is near to the optimum ratio.
3. Slight reduction in cost of capital can be achieved by increasing the debt-equity ratio
4. However, in this case both cost of debt as well as cost of equity will increase.
5. The reduction in total cost of capital will only due to the change in capital structure.

Cairn
Cairn is an upstream company in Oil and Gas Sector ,It mainly deals in OIl & Natural gas Drilling from its
onshore and offshore platforms. The Beta of Cairn Energy is calculated to be 1.55. It has very low debt
on its balance sheet.The Capital Structure of company is mainly Equity driven.

ONGC

WACC of ONGC is high due to low debt to equity ratio.Debt should be taken to increase D/E ratio , can
go upto 30%, hence reduction in cost of capital.If compared with similar industries like BPCL, ONGC has
low D/E ratio.There are not enough NPV projects in line, so dividend payout ratio can be
increased.ONGC has Zero long term borrowing, making it self financed company.High interestcoverage
ratio, ONGC can take loans at comparatively low interest rate from the market.High Beta-1.19, its
amplifying market risk

Nifty Energy Index

Energy sector is universally recognized as one of the most significant inputs for economic growth. The
growth of a nation, encompassing all sectors of the economy and all sections of society, is contingent on
meeting its energy requirements adequately.

As a fast-growing economy, India has become one of the largest energy intensive countries in the World.
Energy is a crucial input for India's development process. The need of the hour, therefore, is to meet the
energy needs of all segments of India's population in the most efficient and cost-effective manner while
ensuring long-term sustainability. IISL has developed Nifty Energy Index to capture the performance of
the companies in this sector.

Nifty Energy Index will include companies belonging to Petroleum, Gas and Power sub sectors.

Methodology
Effective October, 11, 2010, Nifty Energy Index is computed using free float market capitalization
weighted method, wherein the level of the index reflects the total free float market value of all the
stocks in the index relative to a particular base period. The method also takes into account constituent
changes in the index and importantly corporate actions such as stock splits, rights, etc without affecting
the index value. The Nifty Energy Index has a base date of Jan 1, 2001 and a base value of 1000.

Market Representation
The Nifty Energy Index represents about 8.6% of the free float market capitalization of the stocks listed
on NSE and 83.8% of the free float market capitalization of the stocks forming part of the Energy sector
universe as on March 31, 2016.

The total traded value for the last six months ending March 2016 of all index constituents is
approximately 5.8% of the traded value of all stocks on NSE and 64% of the traded value of the stocks
forming part of the Energy sector universe.