Financial Analysis
Origin Energy (ORG) is an energy company headquartered in Sydney, Australia. It is a publicly-traded company listed on the Australian Stock Exchange. In 2000, Boral limited demerged to separate its building and construction and energy divisions; this was the birth of Origin (About Origin, n.d.). The company’s core business activities are natural gas production and exploration, retailing energy, and electricity generation. Origin also has electricity distribution licenses from CitiPower and Powercor. The company also owns a 50% stake in Kupe Gas Field and a 51.4% in Contact Energy, a New Zealand Company (About Origin, n.d.). Origin also acquired Energex and retail arms of Country Power and Integral Energy.
Worley
WorleyParsons Limited, which goes by Worley, is an Australian engineering company providing consultancy in project delivery in the energy and resources sectors. It was founded in the 1970s by John Grill and has since grown into a global conglomerate. In 2018, Worley had revenue of A$4749 million and had approximately 57600 employees (What we do, n.d.). The company was listed on the Australian Stock Exchange in 2002, after which it acquired many companies including in other countries such as China, Canada, and Oman (What we do, n.d.). Some companies that Worley acquired include Parsons E&C in 2004, Komex in 2004, power company DRPL in 2005, Watkins & Godwin in the infrastructure sector, and HG Engineering, Jones & Jones, and Gas Cleaning Technologies.
Factors that Could Affect Financial Positions of the Companies
Economy-wide factors that could affect both companies’ financial performance include the COVID-19 pandemic. The pandemic has affected the entire global economy reducing demand for almost all commodities. Another factor is geopolitics; Australia is in the middle of a conflict with China, which could impact its stability outlook since China is a global superpower (Inshakov et al., 2019). Industry-wide factors that could affect the companies include OPEC production; the global oil price plunge experienced during the pandemic was caused by a price war between Saudi Arabia and Russia, leaving others as spectators while also incurring losses. Another factor that could affect the oil industry is the rise in electric vehicles and renewable energy. Most countries are targeting zero emissions by a particular year.
Origin is an oil exploration company based in Australia. One factor that could specifically affect its operations is its ambitious hydrogen projects; hydrogen is yet to be adopted as a source of energy, and companies that are only engaging in the industry can only be termed as a gamble. Another factor for Origin is the success of its exploration projects such as the Betaloo. For Worley, it is not domiciled in Australia and is likely to be more sensitive to the whims of other economies (Inshakov et al., 2019). Worley is also involved in exploration activities and did win a contract in India for the Krishna Godavari basin. Successes in these projects will affect its financial results.
Lending Decision
From an analysis of Origin Energy’s solvency ratio, the company had debt-to-assets ratios of 0.52, 0.489, and 0.494 in the years 2018, 2019, and 2020 respectively (Annual Report, 2020). This shows that the company’s liabilities are a fraction of the company’s assets, and they, therefore, have enough assets that could be converted to cash if they were in distress. The ratios also indicate stability in that they did not change dramatically over three years. Origin had interest coverage ratios of 1.404, 4.292, and 1.566 for the years 2018, 2019, and 2020 respectively (Annual Report, 2020). The interest coverage ratio indicates a company’s ability to meet its financial obligations based on current income. This case shows that the company had a fair TIE for 2018 at 1.404; the same skyrocketed to 4.292 for 2019, meaning their earnings were over four times their interest rates (Annual Report – Origin Energy, 2020). The ratio did fall back to 1.566, but this is despite the COVID-19 year.
From liquidity ratios, Origin had current ratios of 0.846, 1.21, and 1.006 in the years 2018, 2019, and 2020. The current ratio of one would indicate that Origin would be able to meet its short-term debt obligations from current assets, including inventory. It is evident that Origin had enough current assets to meet their current liabilities; even in 2018, when the ratio was below 1, they still managed to jump back to above 1 for subsequent years. Quick ratios for the same period were 0.802, 1.178, and 0.971(Annual Report – Origin Energy, 2020). Quick ratio excludes inventories in its calculations for an even more dire hypothetical scenario. The worst quick ratio is 0.802, indicating that for every dollar of debt, they had 80 cents of assets to pay. The recommendation is to lend Origin the money.
Analysis of Cash Flow Statement
In the financial years 2018, 2019, and 2020, Origin Energy reported net cash flow from investing activities to be 1352, 589, and 862 million A$ (Origin Energy Limited, n.d.). From financing activities, the figures were -2647, -520, and 2118 million A$. the net change in cash for the three years were -2000, 1394, and -305 million A$ (Origin Energy Limited, n.d.). Free cash flow at the end of each financial year was 968, 1117, and 451 million A$. The results indicate that the company had decent investing activities and was doing many financing activities. From the bottom line of free cash flow, it is evident that the company could invest heavily(outflow) and finance heavily(outflow) but still be left with cash in their accounts.
Limitations of Financial Statements
Financial ratios are a proven way of testing a company’s financial health, but they also have many limitations. One limitation is the fact that they are historical. A company could announce rosy results at a certain period just before a global catastrophe occurs; the ratios are attractive but should not be used in isolation (Alexander, 2018). Another weakness of financial ratios is that they depend on the industry; some industries, such as banks, are allowed to have higher debt ratios than others. One could be tempted to think that because a particular bank reported a good ratio, they can offer the same interpretation to a company in the oil industry which is not advisable.
Profitability
For the years 2018, 2019, and 2020, Origin had Gross profits ratios of 0.190, 0.168, and 0.184, respectively, while Worley’s were 0.078, 0.068, and 0.061. This analysis indicates that Origin was outperforming Worley. Origin had asset turnover ratios of 0.591, 0.589, and 0.581, while Worley’s were 1.108, 0.872, and 1.161 (Annual Report, 2020). It may seem like Origin is underperforming, but the two companies have different types of assets. However, on Return on Equity, Origin had ratios of 0.19, 0.168, and 0.184, respectively (Annual Report, 2020). Worley’s were 0.037, 0.04 and 0.031. This indicates that on all aspects of profitability, Origin is outperforming Worley.
Investment Decision
From the above analysis, Origin Energy seems like the more attractive investment based on the ratios. Blue Origin is a critical player in the Australian energy sector that is almost indispensable. The company is a majority shareholder n the Australian pacific LNG project in partnership with major international players such as Chinese giant Sinopec and American titan ConocoPhillips. The company’s activities traverse every energy subsector from exploration, retailing, and generation. Origin has even ventured into the futuristic hydrogen industry, which could insulate it if the future goes fully renewable. Worley, on the other hand, is a consulting company whose primary asset is people. The company had revenue of A$4,749 million while having 57000 employees compared to Origin’s A$14427 million revenue on just 5360 employees (What we do, n.d.). Since St Lucia is an investor of capital, it is better to invest in the company with better ratios and more capital-intensive; that is Origin Energy.
EPS and PER
EPS or earnings per share is the ratio of a company’s profit to its outstanding common shares. The higher a company’s EPS, the higher its profitability. Price to Earnings ratio (PER) is a ratio used to measure a company’s current share price against its earnings per share (EPS) (Alexander, 2018). EPS enables investors to standardize different companies in different industries. Origin had EPS of 0.124, 0.688, and 0.076 for 2018, 2019, and 2020 respectively. This shows a decreasing trend for the company, which is not ideal. PER for the same period was 80.89, 10.63, and 124.55. Origin’s 2020 ratio is conspicuously high, indicating that investors are expecting future growth. Worley’s EPS for the same period were 0.226, 0.364, and 0.328. it shows that Worley had a relatively good 2020 despite the pandemic. Worley’s PE for the period was 78, 40.5, and 26.74. This shows a decreasing trend meaning investors are increasingly less willing to pay a premium price for Worley’s stock.
Reference List
About Origin – Origin Energy (n.d.). Web.
Alexander, J. (2018) Financial planning & analysis and performance management. Hoboken, New Jersey: John Wiley & Sons, Inc (Wiley finance series).
Annual Report – Origin Energy. (2020). Web.
Inshakov, O. V., Inshakova, A. O. and Popkova, E. G. (eds) (2019) Energy Sector: A Systemic Analysis of Economy, Foreign Trade and Legal Regulations. 1st ed. 2019, Cham: Springer International Publishing : Imprint: Springer (Lecture Notes in Networks and Systems, 44).
Origin Energy Limited. (n.d.). Web.
What we do. (n.d.). Web.