Linking Financial Analysis to Data Requirements

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Linking Financial Analysis to Data Requirements

• Jon A. Rasmussen, Ph.D.
• U.S. Department of Energy
• Energy Information Agency

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The Financial Reporting System (FRS) Companies
ORYX
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EIAs Financial Reporting System

• Proprietary company-level data on U.S. majors
  collected since 1977
• Uniform reporting of line-of-business on company
  worldwide financial and operating details
• Audited by independent CPAs summary data
  consistent with company annual reports and SEC
  disclosures

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Lines of Business

• Consolidated Company

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Concept 1 Profitability of U.S.
Refining/Marketing

• How Measured
• ROI net income/net investment in place

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How Measured (cont.)

• By Line of business
• Historical time frame
• Averaged over a variety of existing operations

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Data Requirements

• Numerator Net Income
• Line-of-business measure
• Comes from the income statement
• Includes equity income
• Excludes nontraceable amounts

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Data Requirements (cont..)

• Denominator Net Investment
• Value of fixed assets
• Net property, plant, and equipment
• Investments and advances
• Depreciation -- allowance for decline in value of
  fixed assets
• Depreciation calculated on a straight-line basis

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Concept 2 Corporate Profitability

• How Measured
• Return on Equity Net Income /
• Stockholders Equity

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Data Requirements
Corporate Net Income

• A consolidated measure
• Includes nontraceables
• A measure least affected by company practices

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Data Requirements (cont.)
Stockholders Equity

• Book value of ownership
• The main components
• Retained earnings
• Paid-in capital
• Stockholders equity and market value of the
  company

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Concept 3 Capital Expenditures

• How Measured
• Value of Additions to Net Investment

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Data Requirements

• Corporate (total) capital expenditures are part
  of the Statement of Cash Flows
• Additions to property, plant, and equipment plus
  additions to investments and advances
• By lines of business

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Pollution Abatement Expenditures

• An example defining data outside of current
  financial reporting standards
• Requires clarity and exactitude
• Requires agreement among stakeholders

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Concept 4 Margins
Margins in General

• Defined as price minus out-of-pocket costs per
  unit
• Measures per-unit pretax cash earnings from some
  activity
• In the short run, output will expand as long as
  the added output adds to cash earnings

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Examples

• Wellhead margin
• Gross refiner margin
• Retail gasoline margin

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Margins in U.S. Petroleum Refining and Marketing
Gross Margin

• Price average revenue
• Costs raw material costs plus product purchases
  for resale per barrel of sales

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Gross Margin (cont.)
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Net margin

• Net margin Gross margin operating costs per
  unit
• Operating costs pollution abatement operating
  costs other operating costs
• Refining/marketing profitability is highly
  correlated with the net margin over time
• Note depreciation is not included in the net
  margin calculation

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Net Margin (cont.)
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Concept 5 Quality-Price Differentials

• How measured
• The price of a high quality commodity
• minus the price of a lower quality
• commodity of the same generic sort

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Examples

• Crude quality-price differentials -- quality
  determined by weight and sulfur content
• Gasoline octane price differentials
• Refined product light-heavy price differentials

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Data Requirements

• Obtained from statistical surveys of oil
  producers, refiners, wholesalers, etc.
• Can be integrated with financial information for
  analysis of quality-price differentials role in
  refining/marketing profitability

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Concept 6 Product Prices and Average Revenues

• How measured
• For both statistical surveys and financial
• reporting, price of any category of product (say,
• product X) is equal to revenues from sale of X
• divided by quantity sold of X

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Data Requirements

• Level of detail varies greatly across EIA
  programs
• Crude oil -- average prices published for
• 7 categories of gravity
• 9 sources of domestic production
• 12 countries of origin of imports

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Data Requirements (cont.)

• Refined products -- average prices are published
  for 10 product categories
• Gasoline -- average prices published for three
  grades of gasoline at four points of sale for 50
  states

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Data Requirements (cont.)

• FRS has a single domestic oil price at the
  wellhead and a single oil price as refinery input
• Separate product prices for gasoline,
  distillate, other
• No grade distinction for gasoline
• Gasoline points of sale wholesale, dealer,
  company stations, fleets

• Public financial disclosures report average
  wellhead
• oil and gas prices (if they report any prices)

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Difficulties

• The level of detail of average price data is
  generally outside of financial reporting
  standards and agreement among stakeholders is
  usually difficult to achieve

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Concept 7 Capital Intensity An Analytic
Construct

• How measured
• Net book value of refinery assets divided
• by crude oil distillation capacity (in barrels
• per day)

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Synthesis

• Synthesis of financial information and operating
  data to approximate an economic measure

• Role of capital intensity in
• refining/marketing profitability.

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Data Requirements

• Net investment in place of domestic refineries

• Refinery capacity
• Crude distillation capacity
• Other types of refinery capacity
• Capacity is operating, not financial, data
• Capacity value should correspond to the assets
  included in net investment

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Conclusion
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Epilog 1996-1998
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Epilog (cont.) - What Happened?

• Gross margin improved
• -- Up 1.62 per barrel between 1995 and 1997
  (28) but fell by 6 in 1998
• Operating costs, though up in 1996 and 1997, were
  cut by 0.40 per barrel between 1995 and 1998
• U.S. refined product demand was up 5.4 between
  1995 and 1998
• Quality-price differentials improved for upgraded
  refineries
• Dogs were sold
• Partly offsetting these favorable developments
  were increased environmental operating costs,
  especially in California