BÀI TẬP LỚN PHÂN TÍCH HOẠT ĐỘNG KINH DOANH 9,6 ĐIỂM. 1. How many major sectors in the oil and gas industry? What is a ''''LNG’? Use PESTEL/ FIVE FORCE or any technical models to analyze the and explain why YJ share price could immediately rose after got four license applications? There are three major sectors in the oil and gas industry. These are: Upstream – this involves the exploration, drilling of exploratory wells, subsequent drilling and production of crude oil and natural gas; Midstream – this involves the transportation of oil by tankers (Liquefied Natural Gas – called LNG) around the world and the refining of crude oil; Downstream – The by-products include gasoline, diesel and a variety of other products. Liquefied natural gas (LNG) is natural gas that has been converted to a liquid form for the ease and safety of natural gas transport. Natural gas is cooled to approximately -260 F, creating a clear, colorless, and non-toxic liquid that can be transported from areas with a large supply of natural gas to areas that demand more natural gas. In its liquid state, natural gas takes up 1/600th of the space, meaning that natural gas is shrunk 600 times, making it much easier to ship and store when pipeline transport is not feasible. As world energy consumption increases, experts anticipate that the LNG trade will grow in importance.
How many major sectors in the oil and gas industry? What is a 'LNG’?
There are three major sectors in the oil and gas industry These are:
The oil and gas industry encompasses three primary segments: upstream, midstream, and downstream Upstream operations involve the exploration and drilling for crude oil and natural gas Midstream processes include transporting oil via tankers (LNG) and refining crude oil Downstream activities result in the production of byproducts such as gasoline, diesel, and various other products.
Figure 1 Major sectors in oil and gas industry
Liquefied natural gas (LNG) is natural gas that has been converted to a liquid form for the ease and safety of natural gas transport Natural gas is cooled to approximately -260 F, creating a clear, colorless, and non-toxic liquid that can be transported from areas with a large supply of natural gas to areas that demand more natural gas In its liquid state, natural gas takes up 1/600th of the space, meaning that natural gas is shrunk 600 times, making it much easier to ship and store when pipeline transport is not feasible As world energy consumption increases, experts anticipate that the LNG trade will grow in importance.
According to the information in the article, the author will use PESTEL to analyze and monitor the macro-environmental (external marketing environment) factors that have an impact on YJ Ltd It examines the Political, Economic, Social, Technological, Environmental, and Legal factors in the external environment.
The political environment of a country affects the way an organization operates in that region It also carries implications for the strategic direction adopted by the management as the external forces exert pressure on the company to respond in an effective manner One of the main components that are a part of the political domain is the stability of the government, as a stable government creates a positive business environment with minimum economic uncertainty for organizations.
- As an exploration and production (E&P) business, YJ is required to obtain a "Product Sharing Agreement" (PSA) license Currently, YJ has PSA licenses from the respective governments for three oil and gas fields AAA, BBB and CCC, whereby governments receive part of the profit after deducting royalties and production costs.
- YJ has three oil and gas fields in Asia and Africa, each region has its own set of regulations and management policies for the oil and gas industry. Therefore, changes in the regulations in that region will affect YJ's business and profits.
- Each country where YJ operates may not be immune to political turmoil. For example, violence, war This may disrupt YJ Ltd's operations and supply chain.
- The international entities that regulate transactions between different countries also have an impact on the market access of YJ Ltd.
The economic conditions of a country affect the way businesses perform in that particular region
- Even though YJ is listed in the UK, it prepares its accounts in US Dollars, as is usual in the oil and gas industry All revenues from the sale of oil and gas are priced in US Dollars Its operating expenses are incurred in a range of European, African and Asian currencies, and therefore it is exposed to the impact of currency fluctuations In addition, exchange rate fluctuations can affect its financial results when converting revenues and costs.
- Following the identification of YJ’s first two oil and gas fields in 2011, it secured loans totaling US$ 140 million to help to finance production drilling These loans are repayable in 2021 and are at an interest rate of11% per year Therefore, changes in interest rates are also a notable economic factor for the company.
- Moreover, fluctuations in global oil prices can directly impact YJ's revenue and profitability.
- YJ has three oil and gas fields in Asia and Africa; as a result, economic downturns or growth in regions where YJ operates can impact demand for oil and gas.
- The social factors such as demographic variables as well as consumer likes and preferences direct the business decisions as organizations try to align the consumer needs and their products to maintain steady sales and revenue For example, consumers are now more inclined to use electric vehicles to protect the environment, so switching to fuel-free vehicles could lead to lower oil sales.
- Currently, the YJ share price immediately rose on the news to a new record level after it is rumored that the license was awarded to an independent E&P business with a very relaxed attitude to “facilitation payments” This helps to increase YJ's good reputation and increase trust from customers.
- According to the topic information, the author does not mention the technological elements of YJ If the company does not apply advanced technologies, it will be slow to develop and lag behind other companies in the same industry.
- Some solutions that YJ can apply are innovations in drilling technology, data analysis, and remote sensing that can impact YJ's efficiency in discovering and extracting oil and gas reserves Besides, adoption of environmentally-friendly practices and technologies can influence its image, regulatory compliance, and operational costs.
- The legal factors for the oil and gas sector are related to the Acts,licensing requirements and permits that govern all the activities of oil and gas companies YJ and other oil companies are bound by the Petroleum Act which defines the areas where oil production processes can be carried out after obtaining the relevant licenses YJ is required to obtain an individual oil and gas field operating license, a drilling license, and a
"Product Sharing Agreement" (PSA) license In 2011, YJ obtained the license after successful test drilling and independent reporting of proven oil and gas reserves at these two sites.
- The concern about the environmental implications of coal based energy sources has fueled the shift towards more eco - friendly energy sources.
YJ can gain benefits from this trend as the company is producing oil and gas, which are likely to be 50% higher in demand by 2050.
- In the article, the author did not mention much about environmental factors However, YJ should invest in developing sustainable solutions that can help reduce carbon emissions, reduce waste and improve water resource management One initiative is the advanced recycling unit for the treatment of plastic waste.
The reason why YJ share price could immediately rose after got four license applications is that:
- Firstly, YJ has obtained PSA licenses issued by respective governments for its operations in the three oil and gas fields This significant achievement underscores YJ's pivotal role within the oil exploration and production industry The company boasts an extensive reservoir of industry knowledge, complemented by a proficient workforce equipped with the necessary expertise to meticulously research and identify promising oil and gas prospects Furthermore, their adeptness in transitioning these prospects into active production solidifies their credibility As a result, investor confidence in YJ is likely to soar, leading to heightened share purchases and subsequently driving an upswing in YJ's stock price.
- Secondly, it is rumored that the license was awarded to an independent
Which competitive strategy does the YJ’s applied (cost leadership,
Figure 4 Porter's generic strategies Porter’s Generic Strategies establish approaches for gaining a competitive advantage While businesses can choose to explore any number of these processes, by employing all three of them simultaneously, the organization makes best use of their time and resources The power of Porter’s Generic Strategies is the focus they lend to your business-level strategy They ensure that your activities and goals are aligned with the realities of the marketplace.
- Cost Leadership Strategy: striving to be the lowest-cost producer in the industry while maintaining the same level of quality.
- Differentiation Strategy: creating a unique product or service that is perceived as being better than those offered by competitors.
- Focus Strategy: targeting a specific market segment or niche and tailoring the product or service to meet the needs of that segment.
The competitive strategy that YJ has applied is Differentiation
First and foremost, the company's strategy focuses on customer safety and responsibility when exploiting oil and gas fields Unlike some other companies in the industry that may solely focus on maximizing quantity and profit, YJ places a strong emphasis on maintaining the highest quality standards in all aspects of its operations YJ's customer- centric, quality-focused strategy has not only earned the company a strong reputation within the industry but also cultivated a loyal customer base. Clients often choose YJ as their preferred energy partner due to the company's unwavering dedication to safety, environmental stewardship, and consistent delivery of high-quality products and services.
Next, in the oil and gas industry, the classification of oil and gas fields is typically based on the purpose of drilling and the type of wells drilled YJ, as a forward-thinking company, recognizes the significance of both exploratory wells and production wells in its overall strategy.
While some other companies might solely focus on drilling production wells to expedite the commercialization of oil and gas reserves, YJ understands the value of exploratory wells in gathering crucial information and ensuring responsible resource management Exploratory wells serve a vital role in the early stages of oil and gas field development YJ invests in exploratory wells to assess the geological characteristics of potential reserves, estimate the quantity and quality of hydrocarbons, and identify potential risks and challenges associated with extraction These wells are exploratory in nature, and their primary objective is to gather valuable data and insights to inform the company's future decision-making processes By conducting exploratory drilling, YJ demonstrates its commitment to a comprehensive and well-informed approach to resource exploration Even though exploratory wells may not immediately yield commercial quantities of oil and gas, they play a crucial role in reducing uncertainty and mitigating the risks associated with large-scale production YJ's dedication to information gathering through exploratory drilling showcases its long-term vision and responsible resource management practices.
In contrast, some other companies may prioritize quicker returns on investment and opt to drill only production wells These companies are more inclined to focus on rapidly bringing oil and gas to market for immediate commercialization and financial gain While this approach may yield quicker profits in the short term, it may also lead to an inadequate understanding of the subsurface reservoirs, which can result in inefficiencies and potential environmental consequences in the long run. YJ's integrated approach, combining exploratory wells with production wells, allows the company to strike a balance between short-term financial gains and long-term sustainable growth By investing in exploratory wells, YJ ensures that it makes informed decisions, maximizes resource recovery, and adopts environmentally responsible practices throughout the entire lifecycle of its oil and gas fields.
Finally, although YJ is listed in the UK, it prepares its accounts in US Dollars This decision underscores the company's ambitious vision to compete on a global scale and demonstrates its determination to establish itself as a prominent player in the international oil and gas industry By adopting the US Dollar as its reporting currency, YJ aims to enhance its competitive edge and facilitate seamless financial comparisons with other global companies operating in the sector The choice of the US Dollar as the reporting currency aligns with YJ's overarching goal of expanding its presence and influence across diverse regions of the world As a multinational corporation with operations spanning various continents, YJ recognizes the importance of presenting its financial information in a universally recognized currency The US Dollar, being one of the world's primary reserve currencies and widely used in international trade and finance, allows YJ to transcend geographical boundaries and connect with stakeholders worldwide in a coherent and standardized manner.
Despite adopting the US Dollar as the reporting currency, YJ's operational costs are incurred in a diverse array of currencies, including those from European, African, and Asian countries This reflects the truly global nature of the company's operations and highlights its courage in navigating the currency risks and complexities associated with conducting business in multiple regions YJ's ability to manage and mitigate currency-related challenges showcases its determination to operate efficiently and sustainably on a worldwide scale.
Base on your analyses above, please choosing the method of growth YJ’s should apply in the case? Explain?
To analyze the method of growth of YJ Ltd, the author will use the
Ansoff Matrix to develop effective strategies for the growth of the company and should consider two strategic avenues: Product development and
YJ Ltd currently operates three oil and gas fields offshore in Africa and Asia The company's strong financial performance further attests to its positive market development, with a significant 47% revenue growth to US$174 million in 2015/16 compared to US$118.4 million in the previous fiscal year This impressive financial achievement is complemented by a record after-tax profit ofUS$41 million, signaling the company's proficiency in optimizing its operations and capitalizing on market opportunities.
To sustain and accelerate its growth trajectory, YJ should consider two strategic avenues: Product Development and Diversification.
In terms of Product Development, YJ should explore investment opportunities in renewable and sustainable energy sources One compelling avenue is to establish a strategic partnership with a company engaged in the research and development of bioethanol Bioethanol, a fuel derived from corn stalks, hay, and agricultural waste, offers significant potential as an environmentally friendly alternative to traditional fossil fuels By aligning with a research partner, YJ can expedite the commercialization of bioethanol, capitalizing on a growing customer base seeking eco-friendly fuel options This move not only addresses the lack of distribution networks for alternative fuels but also positions YJ at the forefront of fuel source control for the future, paving the way for a competitive advantage in the evolving energy landscape.
Forecasts indicate that renewable energy will account for 50% of global energy demand by 2050, making YJ's green fuel technology endeavor a promising pathway for long-term growth and sustainability By successfully embracing renewable energy options, YJ can position itself as an environmentally responsible company, meeting the evolving demands of environmentally conscious customers and investors.
In addition to product development, Diversification offers YJ an opportunity to broaden its core business beyond oil, gas, and chemicals. Exploring alternative energy resources such as solar power, wind power, hydrogen, or forestry presents potential avenues for diversification For instance, venturing into solar power projects would not only harness clean and renewable energy but also contribute to reducing the carbon footprint associated with traditional energy sources Additionally, YJ could explore opportunities in hydrogen product development, tapping into the growing interest in hydrogen as a clean and versatile energy carrier.
Diversification mitigates the risks associated with over-reliance on a single sector and positions YJ to leverage its expertise and market presence in new and emerging industries By proactively embracing innovative and sustainable technologies, YJ can proactively adapt to changing market dynamics and regulatory environments, thereby ensuring continued economic growth and resilience.
Based on the GAAP accounting concept, how is YJ’ oil and gas
Based on GAAP accounting concept, YJ’ oil and gas exploration costs are presented in Consolidated Statement of Income In detail, they are presented in the “Costs and Other Deductions” section because they are considered operational expenses directly associated with the company's core business activity, which is the exploration and production of oil and gas reserves.
The "Costs and Other Deductions" section includes various expenses that directly impact the company's revenue generation and profitability These expenses are subtracted from the company's total revenue to calculate its operating income or earnings before interest and taxes (EBIT) Some of the common items included in this section are:
- Purchased crude oil and products: This represents the cost of purchasing crude oil and other products that the company may need for its operations, such as refining or resale.
- Operating expenses: These are day-to-day operational costs incurred to maintain and run the company's facilities and assets It includes costs related to labor, maintenance, transportation, and other operational aspects.
- Selling, general, and administrative expenses (SG&A): This category includes various non-production expenses necessary for the company's overall operation and management It covers items like marketing, administrative salaries, office expenses, and other overhead costs.
- Exploration expenses: This is where oil and gas exploration costs are accounted for These expenses are associated with searching for and evaluating potential oil and gas reserves, including the costs of drilling exploratory wells, conducting geological and geophysical surveys, and other exploration activities.
By presenting oil and gas exploration costs in the "Costs and OtherDeductions" section, the financial statements provide a clear representation of the total expenses incurred in the process of extracting and producing oil and gas This information allows investors, analysts, and other stakeholders to understand the company's cost structure, profitability, and efficiency in its core business activities It also helps in assessing the risks and potential returns associated with exploration activities, which can significantly impact a company's future reserves and production levels.
Cost management plays an important role in the implementation of
Expenses ratio analysis
Table 1 Expenses ratio analysis in 2016
Source: Annual report of Chevron, ExxonMobil
Table 2 Expenses ratio analysis in 2015
Source: Annual report of Chevron, ExxonMobil
Looking at the indicators between 2015 and 2016, it is immediately obvious that:
Higher COGS Margin for YJ Ltd:
YJ Ltd exhibits the highest cost of goods sold (COGS) margin among the three companies, indicating that a relatively larger proportion of its generated revenue is channeled towards covering the direct expenses associated with producing its goods or services This discrepancy could be attributed to various underlying factors Potential contributors might include elevated input costs, less streamlined production processes, or specific challenges inherent to its industry
YJ Ltd's cost of goods sold (COGS) margin surpassing the industry average signifies that the company might be facing underlying difficulties in effectively managing its production costs This is understandable because YJ is a newly established company, and Chevron and Exxonmobil are 2 large and established companies, so the management of production costs will be better than YJ In addition, YJ is also operating three oil and gas fields and had to borrow US$140 million to finance production drilling in 2011 In addition, YJ has to bear the costs of machinery, materials, and technology to operate 3 oil and gas fields and for offshore drilling and shallow water The cost of drilling per well that produces shallow water can exceed US$30 million; which costs a lot for a new company to enter the market like YJ.
Elevated SG&A Margin for YJ Ltd:
YJ Ltd has a considerably higher Selling, General, and Administrative (SG&A) margin compared to Chevron and ExxonMobil, indicating that YJ Ltd allocates a larger portion of its revenue towards SG&A expenses This may be influenced by factors such as higher advertising costs, administrative overheads, or operational inefficiencies.
Furthermore, YJ Ltd's selling, general, and administrative (SG&A) margin standing significantly higher than both the industry average and its peer companies implies potential inefficiencies within its selling, marketing, and administrative functions Currently, YJ is a much smaller company thanChevron and Exxonmobil - the leading oil and gas companies in the US Since it was just established, YJ had to spend a lot of money on its plans At the beginning of October 2015, YJ had to pay royalties and PSA license fees to the government to be legalized to operate the oil and gas field In addition, YJ also has to pay other costs such as advertising costs, space rental costs, staff costs and so on to help the company develop more in the future.
Expense analysis
Cost structure of YJ Ltd includes costs associated with the production and sale of its oil and gas products, commonly referred to as the "cost of sales”.Secondly, there are distribution costs incurred by YJ Ltd It includes transportation expenses, storage costs, and other related logistical expenditures. Thirdly, the company also bears administrative expenses, which include various overhead costs related to managing the day-to-day operations of the business. Moreover, YJ Ltd incurs finance expenses, which relate to the interest and other financial charges incurred due to the company's borrowings or financing activities Lastly, like any other business, YJ Ltd is subject to tax expenses This involves payments made to various government authorities as per the prevailing tax laws and regulations.
Based on YJ Ltd's 2015 and 2016 financial statements, it can be seen that
YJ invested the most in selling expenses (US$174 million in 2016 and US$118.4 million in 2016) 2015) YJ also spent the most money on administrative expenses (US$22.1 million and US$16.3 million in 2016 and
2015, respectively) In 2016, YJ set aside $24 million for depreciation and E&P drilling expense allocation.
Cost structure of YJ Ltd
Table 3 Cost structure of YJ Ltd
Overall, the cost structure analysis suggests that YJ Ltd experienced considerable growth in its cost of sales and administrative expenses between
2015 and 2016 This is extremely understandable because, currently, YJ is exploiting three oil and gas fields and this costs a lot such as: drilling, geological research, seismic surveys, infrastructure development for oil and gas production, and other expenses like royalty and license costs As a complex organization, YJ incurs administrative expenses to manage its day-to-day operations These expenses include salaries and benefits for administrative staff, office expenses, legal and accounting fees, and other general administrative costs Furthermore, since it takes a lot of capital to get oil and gas into production and sale, equity capital alone is not enough to finance YJ's plan In 2011, YJ had loans totaling US$140 million to finance its drilling operations These loans are repaid in 2021 and have an interest rate of 11% per annum As a result, finance expenses also increased from 2015 to 2016.
Cost structure of Chevron (CVX)
Chevron Corporation is a multinational energy corporation headquartered in San Ramon, California and operating in more than 180 countries Chevron's activities include the exploration, production and transportation of crude oil and natural gas, refining, marketing and distributing transportation fuels and other energy products,and manufacturing and trading in petroleum products petrochemical products,electricity generation and geothermal energy, providing energy saving solutions and developing energy sources for the future such as biogas and other forms of renewable energy.
Table 4 Cost structure of Chevron
Total Revenues and Other Income
Purchased crude oil and products
Selling, general and administrative expenses
Taxes other than on income
Source: Annual report of Chevron
Compare the cost structures of YJ Ltd and Chevron:
Looking at the table, we can see YJ Ltd had a higher cost of sales compared to Chevron in both years In 2016, YJ Ltd's cost of sales was US$94.4 million, while in 2015, it was US$66.1 million In 2016, Chevron's purchased crude oil and products cost was US$59.3 million, and in 2015, it was higher atUS$69.8 million When YJ Ltd has a higher cost of sales than Chevron, it suggests that YJ Ltd incurs more expenses directly related to the production and sale of its oil and gas products compared to Chevron This is understandable since YJ is a start-up company and has a small scale Currently the company has to borrow capital from banks and related parties to secure the funding this after successful test drilling and obtaining a permit, and obtaining an independent report on oil reserves proven in Asia and Africa Moreover, YJ Ltd is a smaller company compared to its competitors, it might not benefit from the same economies of scale, which could result in higher production costs Moreover, YJ Ltd could be a smaller company compared to Chevron, which means it might not benefit from economies of scale Larger companies like Chevron can often negotiate better deals with suppliers and reduce the per-unit costs of raw materials.
YJ Ltd had significantly higher administrative expenses than Chevron in both two years In 2016, YJ Ltd's administrative expenses were US$22.1 million, and in 2015, they were US$16.3 million In 2016, Chevron's selling, general, and administrative expenses were US$4.7 million, and in 2015, they were US$4.4 million When YJ Ltd has higher administrative expenses than Chevron, it suggests that YJ Ltd incurs more overhead costs associated with managing the day-to-day operations of the company compared to Chevron The complexity of YJ Ltd's business operations could be higher, leading to increased administrative expenses This complexity might arise from managing multiple projects, operations in various locations, or dealing with intricate regulatory requirements Currently, YJ is managing all three offshore oil and gas fields with shallow water wells One of YJ's oil and gas fields is located off the coast of Africa, the AAA field Two mines are located offshore Asia, BBB and CCC fields Therefore, management costs will probably increase more than Chevron.Furthermore, YJ Ltd might be actively investing in expansion, research, or new projects, which could lead to higher administrative expenses related to project management and planning In detail, YJ geologists and survey team are currently investigating 12 more potential oil and gas fields.
Overall, Chevron had substantially higher finance expenses than YJ Ltd in
2016, primarily due to its interest and debt expenses In 2016, YJ Ltd's finance expense was US$15.6 million, and in 2015, it was US$15.8 million In 2016, Chevron's interest and debt expense were US$201 million, and in 2015, it was US$0 million This is because YJ is a small company, after identifying the first two oil and gas fields of YJ in 2011, YJ had loans totaling 140 million USD to finance drilling activities export These loans are repaid in 2021 and have an interest rate of 11% per annum These loans are relatively small compared to a large company like Chevron Furthermore, there may be differences in financial risk management practices, such as the fact that YJ is exposed to currency fluctuations as its operating costs are incurred in multiple European currencies, Africa and Asia So there can be different impacts on financial costs for each company Moreover, Chevron's capital and investment projects may be more and more costly than YJ's, which will result in higher financing costs.
Both companies had relatively low tax expenses, with Chevron incurring higher tax expenses than YJ Ltd in both years In 2016, YJ Ltd's tax expense was US$0.5 million, and in 2015, it was US$0 million In 2016, Chevron's taxes other than on income were US$11.7 million, and in 2015, they were US$12.0 million This is because of the fact that YJ has made operating losses in each year through to and including 2013/14 due to the high exploration costs that precede the revenue streams Its first profitable year was the year ended 30 September 2015 and all of its previous tax losses resulted in no tax being payable for the 2014/15 financial year The level of profits in the year ended 30 September 2016 were sufficiently high for the remaining tax losses to be used up, resulting in a small tax liability in the last financial year.
Cost structure of ExxonMobil (XOM)
Exxonmobil was established in 1999 by the two brands of Socony -
Vacuum Oil and Jersey Standard The main products of this group are oil, natural gas and electricity.
The head office of the group is located in Irving,
Texas, USA, the total number of employees as of 2011 is 82,100 people and this number has increased to about 106,000 people at the present time.
Table 5 Cost structure of ExxonMobil
Total Revenues and Other Income
Crude oil and product purchases (cost of sale)
Selling, general and administrative expenses
Exploration expenses, including dry holes
Source: Annual report of ExxonMobil
Compare the cost structures of YJ Ltd and Exxonmobil:
Looking at the table, it is immediately obvious that ExxonMobil had a higher cost of sales compared to YJ Ltd in both years In 2016, YJ Ltd's cost of sales was US$94.4 million, and in 2015, it was US$66.1 million In 2016,ExxonMobil's crude oil and product purchases (cost of sale) were US$104.2 million, and in 2015, it was US$130.0 million ExxonMobil had a higher cost of sales compared to YJ Ltd primarily because of the differences in the scale and scope of their respective operations and business models About production volume, ExxonMobil is one of the largest and most prominent multinational oil and gas companies in the world, with extensive global operations As such, it produces and sells a significantly larger volume of crude oil and petroleum products compared to YJ Ltd, which is likely a smaller and less geographically diverse company Furthermore, ExxonMobil engages in various aspects of the oil and gas industry, including exploration, production, refining, and marketing of petroleum products Each segment comes with its own set of costs, which can impact the overall cost of sales Meanwhile, YJ's main activities are just exploration and exploitation of oil and gas fields
YJ Ltd had higher administrative expenses compared to ExxonMobil in both years In 2016, YJ Ltd's administrative expenses were US$22.1 million,and in 2015, they were US$16.3 million In 2016, ExxonMobil's selling, general,and administrative expenses were US$10.8 million, and in 2015, they wereUS$11.5 million The reason YJ Ltd had higher administrative expenses compared to ExxonMobil in both years could be attributed to several factors.Firstly, YJ Ltd may be a smaller company in terms of revenue and workforce compared to ExxonMobil Smaller companies generally have higher administrative expenses as a percentage of revenue because they might have less ability to spread fixed administrative costs over a larger revenue base Secondly,ExxonMobil is a massive multinational corporation with diverse operations across the entire oil and gas value chain Its global reach and extensive business activities could allow it to achieve economies of scale and operational efficiencies in administrative functions, leading to relatively lower administrative expenses compared to YJ Ltd, which may have a simpler or more localized business model Finally, ExxonMobil's investment in advanced technologies and systems might enable it to automate and optimize administrative processes, reducing administrative expenses compared to YJ Ltd,which might rely more on manual or less efficient systems.
ExxonMobil had significantly higher finance expenses than YJ Ltd in both years, primarily due to its substantial interest expenses In 2016, YJ Ltd's finance expense was US$15.6 million, and in 2015, it was US$15.8 million In
2016, ExxonMobil's interest expense was US$453 million, and in 2015, it was US$311 million ExxonMobil had significantly higher finance expenses than YJ Ltd in both years primarily due to the differences in the scale of their operations, capital structure, and financial activities ExxonMobil, being a large multinational corporation with extensive global operations, might have a higher level of debt compared to YJ Ltd The capital structure of ExxonMobil might include a more significant proportion of debt financing, which leads to higher interest expenses on its borrowings Furthermore, the interest rates on ExxonMobil's debt could be higher than those of YJ Ltd due to factors such as its credit rating, prevailing market conditions, and the maturity of its debt instruments Companies with higher credit risks typically face higher interest rates Meanwhile, in 2011, YJ secured loans totaling 140 million USD to finance drilling activities These loans are repaid in 2021 and have an interest rate of 11% per annum Finally, ExxonMobil might have engaged in more financial activities, such as issuing bonds, commercial paper, or other financial instruments, which could lead to increased finance expenses Meanwhile, YJ has
10 million shares outstanding, each with a par value of US$1 Par value is the book value of each share of bonds, it is rarely market value Shares are offered at the IPO at the price of 6 USD/share The company has not issued any additional shares since its IPO in 2010.
Both companies had tax expenses, but the tax expenses of ExxonMobil were much higher than YJ Ltd's In 2016, YJ Ltd's tax expense was US$0.5 million, and in 2015, it was US$0 million In 2016, ExxonMobil's other taxes and duties were US$25.9 million, and in 2015, they were US$27.3 million It is because of the fact that YJ has made operating losses in each year through to and including 2013/14 due to the high exploration costs that precede the revenue streams Its first profitable year was the year ended 30 September 2015 and all of its previous tax losses resulted in no tax being payable for the 2014/15 financial year The level of profits in the year ended 30 September 2016 were sufficiently high for the remaining tax losses to be used up, resulting in a small tax liability in the last financial year.
Evaluate the cost control of YJ Ltd
YJ Ltd's cost of sales increase is substantial compared to Chevron and ExxonMobil, which both experienced cost decreases in this area It is more challenging for YJ Ltd to remain competitive in the market If competitors have lower cost structures, they may be able to offer more competitive prices, which could lead to a loss of market share for the company facing increased costs. Currently, YJ geologists and survey teams are investigating 12 more potential oil and gas fields Therefore, an increase in selling expenses may limit a company's ability to invest in new projects, exploration and expansion Higher costs can reduce funds available for capital expenditure and research and development, potentially slowing growth opportunities Moreover, if the cost of sales increases significantly and impacts profitability, it may negatively affect the company's stock price and shareholder value.
- YJ Ltd should reevaluate their exploration and production decisions They should focus on higher-margin projects and prioritize cost reduction measures to maintain profitability.
- Currently the company has three oil and gas fields in Asia and Africa In order to reduce costs, the company should focus on specific market segments or geographies where they have a competitive advantage They may also explore mergers or acquisitions to gain synergies and improve their cost structure.
- In addition, they can implement cost-saving measures, improve processes, and adopt new technology to minimize the impact of increased costs For example, the company could partner with Chevron Lummus Global - a leading supplier of patents on oil refining, hydrogen treatment and alternative fuel sources, and a leading supplier of catalysts in the world. gender Experts from Lummus presented an overview of the advanced petrochemical refining and carbon emission technologies of Lummus and its partners.
YJ Ltd's administrative expenses increased significantly compared to Chevron's minor increase and ExxonMobil's decrease Increased administrative expenses may result in a higher proportion of operating costs relative to revenue. This can negatively impact the company's cost structure and overall cost efficiency This is because YJ operates three separate oil and gas fields, each situated in different locations In addition, YJ has to obtain a PSA license from each respective government for these 3 oil and gas fields To effectively manage their multi-location operations, YJ Ltd incurs various costs related to the administrative infrastructure These expenses encompass a wide range of critical aspects, including office space rentals for regional headquarters, utility expenses for facilities and operational centers, and insurance premiums to safeguard assets and personnel Furthermore, attracting and retaining skilled executives to oversee operations in multiple locations entails offering competitive wages and benefits packages.
Moreover, as a consequence of conducting business in multiple jurisdictions, YJ Ltd must engage legal counsel and accounting professionals to navigate the intricacies of local laws, regulations, and taxation systems These experts play a crucial role in ensuring compliance and mitigating potential risks associated with cross-border operations Additionally, YJ Ltd employs a dedicated administrative staff responsible for overseeing the day-to-day operations at each location The salaries and benefits of these employees contribute to the overall administrative cost structure As a result, administrative costs will increase.
- YJ Ltd should conduct a thorough review of its administrative expenses to identify areas of inefficiency and consider implementing cost-saving measures, such as streamlining processes and optimizing resource allocation.
- Embrace remote work arrangements and flexible working hours for non- essential staff This can lead to cost savings on office space, utilities, and other associated expenses.
- Consider outsourcing non-core administrative functions, such as accounting, legal counsel, and payroll processing, to specialized service providers Outsourcing can often be more cost-effective than maintaining in-house departments.
YJ's financial expenses increased slightly from 2015 to 2016 This is because YJ is a small company After identifying the first two oil and gas fields in 2011, YJ had loans totaling 140 million USD to finance drilling activities export These loans are repaid in 2021 and have an interest rate of 11% per annum In my opinion, this is reasonable due to the specific nature of the oil and gas industry YJ is a small newly established company, so equity capital for oil and gas exploration and exploitation is not enough Therefore, YJ needs to borrow from banks or related parties to be able to secure its plans If these grants are secured, YJ will receive permits and independent reporting of proven oil and gas reserves at these two sites Which is going to positively affect YJ's reputation.
- Work on improving the company's credit rating by maintaining a strong financial track record and meeting debt obligations on time A higher credit rating can help negotiate better terms on future loans.
- Engage in negotiations with lenders to secure lower interest rates or favorable repayment terms Building good relationships with lenders can be beneficial in obtaining more favorable financing options.
- If YJ has variable-rate debt, consider hedging strategies to protect against potential interest rate fluctuations that could lead to higher finance costs.
- Regularly analyze financial statements and reports to identify areas where finance expenses can be reduced or optimized.
YJ's tax expense tended to decrease from 2015 to 2016, while Chevron and Exxonmobil tended to increase This is because of the fact that YJ has made operating losses in each year through to and including 2013/14 due to the high exploration costs that precede the revenue streams Its first profitable year was the year ended 30 September 2015 and all of its previous tax losses resulted in no tax being payable for the 2014/15 financial year The level of profits in the year ended 30 September 2016 were sufficiently high for the remaining tax losses to be used up, resulting in a small tax liability in the last financial year. Consequently, any further profits will be fully taxable at 24%.
- If YJ operates internationally, consider structuring transactions and operations in a way that minimizes tax liabilities, taking into account tax treaties and regulations in each country.
- Explore investment in tax-favored sectors or regions that offer tax incentives, which can reduce the overall tax burden.
- Engage with tax professionals or consultants who are well-versed in tax laws and regulations to devise a tax strategy tailored to YJ's specific circumstances.
In the cost structure of YJ Ltd, except for the information about cost of sales, administrative expenses, finance expenses, and tax expenses, it is necessary to add other expenses such as: operating expenses, depreciation, depletion and amortization to have a more specific and clear cost structure.