Crude Oil is one of the most important sources of energy for a country. The prices of crude oil depend on many factors like Supply restrictions by Oil producing nations, demand for oil, uncertainties like war in the middle east and also the stability of US Dollar, in which crude oil is priced. The price fluctuations of crude oil affect the cost structure of the companies in the whole value chain of the crude oil. Some companies might be highly sensitive to these changes while others can withstand the same. The sensitivity here means the effect of the crude oil price fluctuations on the companies cost structure and in turn on its profitability. This project is about doing the sensitivity analysis of the industry selected, to crude oil price fluctuations. The Industry selected for analysis is "Fertilizer Industry".
Objectives:
-The basic understanding of Crude Oil.
-Basic knowledge of the crude oil industry financials for both the world and India.
-The basic understanding of the futures and options contract.
-Study of Fertilizer Industry.
-Financial analysis of fertilizer industry.
-Sensitivity analysis of fertilizer industry to crude oil.
Energy is the ability to do work. Stored energy becomes working energy when we use it. Energy has several forms, some of which are easily convertible and can be changed to another form useful for work.
Oil is the world's predominant energy source, accounting for about 40 percent of primary energy consumption. Coal and natural gas each account for about a quarter of global energy use, followed by hydroelectric, nuclear and renewable sources such as wind and geothermal.
[...] The former Soviet States are major producers of Crude Oil making that political climate a major effect on the supply of oil and its price. Technological advancement and limitations. Advancement of technology accelerates large-scale development of unconventional sources of crude such as tar sands and very heavy oils. Production from some of the Canadian tar sands and Venezuelan heavy oil deposits is already economic and growing. Advancement in technology may lead to new discoveries in terms of oil reserves and the estimated size of many known fields may be increased. [...]
[...] Error of Square the Estimate a Predictors: (Constant), REGR factor score 4 for analysis REGR factor score 3 for analysis REGR factor score 2 for analysis REGR factor score 1 for analysis 1 ANOVA(b) Model Sum of Squares df Mean F Square B Note: As per the Fertilizer Control Order (FCO) 'fertilizer' means any substance used or intended to be used as a fertilizers of the soil and/ or crop and specified in part A of Schedule I and includes a mixture of fertilizers and special mixture of fertilizers. [...]
[...] Financial Analysis of the Fertilizer Industry COMPANIES UNDERTAKEN FOR ANALYSIS 1. Chambal Fertilizers & Chemicals Ltd Gujarat State Fertilizers & Chemicals Ltd Mangalore Chemicals & Fertilizers Ltd National Fertilizers Ltd Fertilizers & Chemicals, Travancore Ltd Madras Fertilizers Ltd Nagarjuna Fertilizers & Chemicals Ltd. RATIOS FORMULA Profitability Ratios Return On Equity (net income ) / avg shareholders' equity Return On Assets income from operations / average total assets Return on Invested Capital (net income-dividends)/average capital Profit Margin net profit/ net sales Gross Margin gross profit/net sales Turnover-Control Ratios Asset Turnover net sales / average assets Fixed Turnover net sales / average net fixed assets Inventory Turnover cost of goods sold / average inventory Collection Period (Days) (days in the period * average accounts receivable) / net credit sales Days' Sales In Cash (Days) sales / 360 Payable Period (Days) ( days in the period * average accounts payable ) / purchases on credit Leverage And Liquidity Ratios Asset To Equity net asset/ equity Debt To Assets total liabilities(long term debt current lib+provisions) / assets Debt To Equity total liabilities(long term debt+current lib+provisions) /equity Times Intrest Earned (net income - interest) / interest Times Burden Covered PBIT /(Int on term loan+repayment of loans) Current Ratio current assets / current liabilities Acid Test Ratio (current assets-inventories) / current liabilities Net working capital (current assets-current liabilities) growth in working capital net working cap to sales ratio Raw Material Storage Period average stock of raw material/average daily consumption of raw material WIP Period average stock of WIP/average daily cost of production Finished Goods Period average stock of finished goods/average daily cost of sales Working Cycle Period RM storage period+WIP period+FG period + Collection period- Payable period CURRENT RATIO As we see from the table and the chart, current ratio of Chambal has always been above or approximately equal to industry average. [...]
[...] Now we will start the historical analysis of Gold and Crude Oil. OBSERVATIONS 1. Pre 1971 stable period without any variation 2.1971 Abolish of gold standard of dollar 3. Correlation of gold and crude oil prices from 1946—1994 is 0.92 The correlation is highly logical, as gold and crude have almost always both performed extremely well in periods of inflation, as they are both REAL assets that always appreciate in fiat currency terms over the long run 4. Correlation of gold and crude oil prices from 1994—2000 is - 0.133 Negative correlation between Gold and Crude oil was because of the Strong Dollar Policy adopted by the treasury secretary Mr. [...]
[...] RETENTION PRICING SCHEME The Indian Fertilizer Industry has had its share of glory. It has, however, flourished in the past two decades under the protective umbrella of the Retention Pricing Scheme, a unit-wise cost-plus scheme that assured a fixed rate of return on the net worth for each unit. The Retention Pricing Scheme (RPS) is the backbone of the fertilizer industry. It was introduced in November 1977 in the wake of the increase in crude oil prices in the early seventies when the prices of both imported fertilizers as well as fertilizer feedstock (naphtha) increased substantially. [...]
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