# Presentation: 330212

## Linking Financial Analysis to Data Requirements

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

## The Financial Reporting System (FRS)  Companies

**ORYX**

## EIA’s 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

## Lines of Business

**                          ****Consolidated Company**

## Concept 1: Profitability of U.S. Refining/Marketing

- How Measured:
- ROI= net income/net investment in place

## How Measured (cont.)

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

## Data Requirements

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

## 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

## Concept 2: Corporate Profitability

- How Measured:
- Return on Equity = Net Income /
- Stockholders’ Equity

## Data Requirements

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

- Corporate Net Income

## Data Requirements (cont.)

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

- Stockholders’ Equity

## Concept 3: Capital Expenditures

- How Measured:
- Value of Additions to Net Investment

## 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

## Pollution Abatement Expenditures

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

## 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

## Examples

- Wellhead margin
- Gross refiner margin
- Retail gasoline margin

## Margins in U.S. Petroleum Refining and Marketing

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

- Gross Margin

## Gross Margin (cont.)

## 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

## Net Margin (cont.)

## 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

## Examples

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

## 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

## 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*

## 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

## 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

## 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)

## 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

## 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)

## Synthesis

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

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

## 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

## Conclusion

## Epilog: 1996-1998

## 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