Essay: The liquidity and Working Capital structure of Oil and Gas Industries

ABSTRACT
Oil and Gas Industry plays a vital role in the socio-economic progress of India. This study is intended to make obvious the liquidity and Working Capital structure of Oil and Gas Industries, this study is mainly based on secondary data and the statistical tools like Mean, Standard Deviation, Coefficient Of Variance and Analysis Of Variance(ANOVA) have been used to the study. The study revealed that the liquidity of this industry is not satisfactory.
KEY WORDS: Anova, Liquidity, Working Capital.
INTRODUCTION
Working capital may be regarded as the blood circulatory system of any business unit. Its effective management can do much more for the success of the business, while ineffective management lead to letdown of organization. Working capital is defined as the amount of funds necessary to run day to day business operations of the firm. It is that part of the total funds of business which is embarked for making custom obligations like payment of wages, raw materials etc. the word ‘working capital’ may be understood in different ways by different people to suit their convenience. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A positive working capital cycle balances incoming and outgoing payments to minimize net working capital and maximize free cash flow.
LITERATURE REVIEW
Despite innumerable number of studies on working capital management, the researchers screened and reviewed the most noticeable studies. It has been generally established that the performance / liquidity of a firm largely depends upon the manner of its working capital management. If a firm is inefficient in managing working capital, it will not only reduce profitability but may also lead to financial crisis.
Jain(1993) conducted a study among seven paper companies in India to analyze the basic components of working capital. The study revealed that the current ratio in public sector undertakings registered continuous decrease. As far as the inventory was concerned, the study revealed that it was highly unplanned in public sector undertaking units as compared to private sector units. The study contributed much in terms of realizing the importance of effective management of working capital.
Sinha, sinha and singh(1985) conducted a study on the analysis of working capital management corporation of India and Gujarat state fertilizer corporation. The analysis revealed that a huge proportion funds was tied up as working capital, especially in inventories and receivables. The study revealed that the sample companies failed to manage working capital efficiently by the usage of latest techniques, the funds were locked up at various levels during the course of business management.
OBJECTIVES OF THE STUDY
As stated above, many researchers have depicted that working capital plays an important role in the economic success of the business. The business needs to scrutinize the management of working capital constantly if it wants to maximize the profits.
Thus, keeping the importance of working capital management in view, the present study aims to analyze:
‘ The working capital structure of oil and gas industry
‘ The liquidity position of oil and gas industry
‘ The working capital turnover position of oil and gas industry
HYPOTHESES OF THE STUDY
The present study tests the following hypotheses:
‘ H01: The average current ratios of sample companies do not differ significantly.
‘ H02: The average quick ratios of sample companies do not differ significantly.
‘ H03: The average ratios of current assets to total assets of sample companies do not differ significantly.
‘ H04: The average ratios of current assets to sales of sample companies do not differ significantly.
‘ Ho5: The average current assets turnovers of sample companies do not differ significantly.
‘ H06:: The average working capital turnover of sample companies do not differ significantly.
METHODOLOGY OF THE STUDY
The present study was conducted among five oil and gas industry in India. The companies taken for the study purpose are: Bharat Petroleum Corporation Limited (BPCL), Hindustan Petroleum Corporation Limited (HPCL), Indian Oil Corporation Limited (IOCL), GAS Authority of India Limited (GAIL) and Reliance. The data of five years (from 2009-2010 to 20013-2014) required for the analysis part was collected from the Money control which is leading source of financial information. The analysis part was carried out with the help of the variables: current ratio (current assets/current liabilities), quick ratio (quick assets/current liabilities), ratio of current assets to total assets(current assets /total assets *100), current assets turnover ratio (sales /current assets) and working capital turnover ratio (sales/working capital) which measure the efficiency of working capital management. Apart from these ratios, the study also uses statistical tools like averages and one-way ANOVA. Ms excel software were used to derive the results.
ANALYSIS AND DISCUSSION OF RESULTS
The analysis and interpretation part of study is carried on in a sequential order of the parameters mentioned in the methodology of the study. Thus, the discussions in terms of cross sectional comparison are as follows:
‘ Working capital structure:
The working capital structure of oil and gas industry is presented in table1. Of all current assets across oil industry, as it can be observed in the Table 1, loans and advances alone constituted the highest percentage of 38.87%, followed by inventories (36.87%), sundry debtors (13.12%) and cash & bank balances (11.56%). In the case of GAIL, the average of loans and advances were more than the industry aggregate; whereas, in the case of BPCL, HPCL, IOCL and Reliance, it was below the industry aggregate. The inventories constitution in all companies was higher than the aggregate percentage except in the case of GAIL the inventories were less than the industry aggregate. As far as sundry debtors are concerned, GAIL had more percentage of sundry debtors than the industry aggregate. The average composition of cash & bank balances was more than the industry aggregate in case of Reliance and GAIL industry, while all other companies was below the industry aggregate.
The current liabilities average composition for Reliance industry is higher than the industry aggregate and all other companies’ percentage is lesser than the industry aggregate. However, IOCL and GAIL had more percentage of than the industry average.
TABLE:1 WORKING CAPITAL COMPOSITION OF OIL AND GAS INDUSTRY(in crs)
Particulars BPCL HPCL IOCL GAIL RELIANCE MEAN
CUURENT ASSETS
sundry debtors 3869.53 4366.70 9972.76 2079.17 12375.78 6532.79
% of TCA 8.39 9.03 7.15 30.41 10.60 13.12
inventory 19200.51 19808.78 59757.66 1339.33 46040.66 29229.39
% of TCA 41.61 40.90 42.85 19.60 39.41 36.87
loan and advances 11431.94 11131.69 41184.06 6852.46 19918.38 18103.71
% of TCA 24.78 23.00 29.53 100.00 17.05 38.87
cash & bank balances 1556.91 962.07 1516.11 1638.67 31994.88 7533.73
% of TCL 3.37 2.00 1.09 23.97 27.39 11.56
Total current assets 46140.08 48350.95 139460.85 6837.00 116832.90 71524.36
CURRENT LIABILITIES
current liabilities 26092.07 28173.98 64077.52 8723.46 72669.09 39947.22
% of TCL 89.84 92.93 360.70 256.60 1559.49 471.91
provisions 2952.05 2144.99 17764.99 3399.59 4659.80 6184.28
% of TCL 10.16 7.07 21.71 28.04 6.03 14.60
Total current liabilities 29044.12 30318.97 81842.52 12123.04 77328.89 46131.51
NETWORKING CAPITAL 17095.96 18031.98 57618.33 -5286.04 39504.01 25392.85
Source: computed from the Annual reports of all five oil & gas industry from 2009-2010 to 2013-2014.
‘ Current Ratio:
The current ratio of oil and gas industry of India is depicted in Table 2. The data in Table 2 reveals that except GAIL and Reliance all other companies could not maintain its current ratio above the industry average in any year. The five years average current ratio of BPCL, HPCL, IOCL were lower than the five years industry average of 0.91 times. The distribution of industry average current ratio reveals that both GAIL and Reliance had the healthiest current ratio throughout the study period compared to other companies. However, the average current ratio of all sample companies was less than the set standard of current ratio i.e 2, indicating that there is no sound liquidity position of oil and gas industry. The average current ratio of sample companies were compared using one-way ANOVA and were tested by the following hypothesis (H01). The results are shown in table 3.
TABLE 2: CURRENT RATIO OF OIL INDUSTRY(IN TIMES)
YEAR BPCL HPCL IOCL GAIL RELIANCE MEAN
2010 0.58 0.74 0.80 1.17 1.14 0.89
2011 0.71 0.79 0.81 1.07 1.23 0.92
2012 0.74 0.66 0.83 0.95 1.30 0.90
2013 0.79 0.67 0.84 0.97 1.25 0.90
2014 0.91 0.72 0.81 1.17 0.98 0.92
MEAN 0.75 0.72 0.82 1.07 1.18 0.91
SD 0.12 0.05 0.02 0.11 0.13 0.08
CV 0.16 0.07 0.02 0.10 0.11 0.09
Source: computed from the Annual reports of all five oil & gas industry
from 2009-2010 to 2013-2014.
TABLE 3: ANOVA Results for The Average Current Ratio Of Sample Companies
Source of Variation SS df MS F P-value F crit
Between Groups 0.0206 5 0.00412 0.0582052 0.99741121 2.772853153
Within Groups 1.274112 18 0.070784
Total 1.294712 23
‘ H01: The average current ratios of all five companies do not differ significantly.
‘ Inference: Fcal < Fcrit. We accept H01 and conclude that the average current ratios of sample companies do not differ significantly
‘ Quick ratio:
The quick ratio of oil and gas industry is depicted in the Table 4. As presented in the Table 4, the mean quick ratio of oil and gas industry varied between the highest of 0.80 times in 2013 and the lowest of 0.66 times in 2010, with an average of 0.72 times. The mean quick ratio of GAIL (1.10 times) was the best among all five companies. It was more than the industries mean (0.72 times). The average quick ratio of Reliance (0.87 times) was also more than the industry mean. Both HPCL and BPCL could not maintain the quick ratio above the industry yearly average in any year during the study period. The average quick ratio of sample companies was compared by using one-way ANOVA and was tested by the following hypothesis (H02). The results are shown in the Table 5.
TABLE 4: QUICK RATIO OF OIL&GAS INDUSTRY(IN TIMES)
YEAR BPCL HPCL IOCL GAIL RELIANCE MEAN
2010 0.52 0.44 0.56 1.09 0.71 0.66
2011 0.45 0.47 0.50 0.93 0.92 0.65
2012 0.59 0.51 0.70 0.94 0.98 0.74
2013 0.69 0.64 0.78 0.99 0.90 0.80
2014 0.61 0.59 0.62 1.08 0.82 0.74
MEAN 0.57 0.53 0.63 1.01 0.87 0.72
SD 0.09 0.08 0.11 0.08 0.10 0.09
CV 0.16 0.16 0.18 0.08 0.12 0.14
Source: computed from the Annual reports of all five oil & gas industry
From 2009-2010 to 2013-2014.
TABLE 5: ANOVA Results for The Average Quick Ratio Of Sample Companies
Source of Variation SS df MS F P-value F crit
Between Groups 1.211309 4 0.3028272 22.930337 4.6688E-08 2.75871047
Within Groups 0.33016 25 0.0132064
Total 1.541469 29
‘ H02: the average quick ratios of all five companies do not differ significantly.
‘ Inference: fcal > fcrit. We reject H02 and conclude that the average quick ratios of sample companies differ significantly.
‘ Ratio Of Current Assets To Total Assets:
The ratio of current assets to total assets of oil and gas industry is presented in the Table 6. The current assets of oil and gas industry in India constituted the highest percentage of total assets by 48.80 % in 2012 and the lowest of 34.01% in 2010 with an average of 44.60 percent. The Table 6 shows that, of all the companies, BPCL blocked more funds in current assets by an average of 67.66 % of total assets, followed by IOCL (52.98%) and HPCL(49.75%), whereas GAIL and Reliance invested the least amount of funds in current assets as compared to the industry average.
TABLE 6: RATIO OF CURRENT ASSETS TO TOAL ASSETS (IN %)
YEAR BPCL HPCL IOCL GAIL RELIANCE MEAN
2010 47.00 43.94 46.01 11.21 21.89 34.01
2011 71.24 47.82 53.96 22.71 35.91 46.33
2012 76.39 54.63 55.67 16.05 41.27 48.80
2013 67.56 47.92 53.19 19.77 42.16 46.12
2014 76.11 54.44 56.07 21.09 31.01 47.74
MEAN 67.66 49.75 52.98 18.16 34.45 44.60
SD 12.12 4.65 4.07 4.60 8.33 6.76
CV 0.18 0.09 0.08 0.25 0.24 0.17
Source: computed from the Annual reports of all five oil & gas industry
from 2009-2010 to 2013-2014.
The average ratios of current assets to total assets of sample companies have been compared by using one-way ANOVA and were tested by the following hypothesis(H03). The results are shown in Table 7.
TABLE 7: ANOVA For Average Ratios Of Current Assets To Total Assets
Source of Variation SS df MS F P-value F crit
Between Groups 8582.864 4 2145.716 48.65611 1.93E-11 2.75871
Within Groups 1102.491 25 44.09962
Total 9685.354 29
‘ H03: the average ratios of current assets to total assets of all five sample companies do not differ significantly.
‘ Inference: Fcal > Fcrit. We reject H03 and conclude that theaverage ratios of current assets to total assets of sample companies differ significantly.
‘ Ratio Of Current Assets To Sales:
The ratio current asset to sales of oil and gas industry is depicted in the Table 8. As it is shown in the Table 8, in the case of Reliance and IOCL the current assets as percentage of sales were higher than the industry average in every year, whereas in the case of BPCL, HPCL and GAIL were lower than the industry average. The current assets constituted the highest percentage of sales by 19.09 percent in 2011, and the lowest of 15.25 Percent in 2010, with an average of 16.93 percent. On an aggregate basis, Reliance and IOCL were two companies to have invested more in current assets as percentage of sales by 27.15% and 18.18% respectively. Among the five sample companies Reliance and GAIL were highly deviated in five years. The average ratios of current assets to sales of sample companies were compared by using one-way ANOVA and were tested by the following hypothesis (H04). The results are shown in the Table 9.
TABLE 8: RATIO OF CURRENT ASSETS TO SALES OF OIL&GAS INDUSTRY (IN %)
YEAR BPCL HPCL IOCL GAIL RELIANCE MEAN
2010 13.65 14.48 17.72 8.20 22.20 15.25
2011 14.41 15.36 19.13 14.81 31.73 19.09
2012 13.34 14.96 17.37 10.53 29.11 17.06
2013 11.47 12.59 17.97 13.56 28.91 16.90
2014 11.64 14.25 18.72 13.42 23.80 16.37
MEAN 12.90 14.33 18.18 12.10 27.15 16.93
SD 1.29 1.06 0.73 2.69 3.99 1.95
CV 0.10 0.07 0.04 0.22 0.15 0.12
Source: computed from the Annual reports of all five oil & gas industry
from 2009-2010 to 2013-2014.
TABLE 9: ANOVA Results for The Average Ratios Of Current Assets To Sales Of Sample Companies
Source of Variation SS df MS F P-value F crit
Between Groups 913.9276 4 228.48191 53.9057 6.2221E-12 2.7587104
Within Groups 105.9636 25 4.2385427
Total 1019.891 29
‘ H04: The average ratios of current assets to sales of all five sample companies do not differ significantly.
‘ Inference: Fcal >Fcrit. We reject H04 and conclude that the average ratios of current assets to sales of sample companies differ significantly.
‘ Current Assets Turnover Ratio:
The current assets turnover ratio of oil and gas industry depicted in the Table 10. The data in Table 10 reveals that the current asset turnover ratio of oil and gas industry varied between the highest of 7.45 times in 2010 and lowest of 5.77 times in 2011while the mean ratio was 6.66 times. The average current assets turnover ratio of GAIL (9.37 times), BPCL (7.82 times) and HPCL (7.01 times) were greater than industry average (6.66 times). GAIL had the greatest average of current assets turnover ratio among all five companies, while the current assets turnover ratio of IOCL and Reliance was below the industry average in all years. On the whole, GAIL was highly efficient in achieving higher sales with lower investment in current assets, followed by BPCL and HPCL.
TABLE 10: CURRENT ASSETS TURNOVER RATIO OF OIL INDUSTRY(IN TIMES)
YEAR BPCL HPCL IOCL GAIL RELIANCE MEAN
2010 7.33 6.91 5.31 13.20 4.51 7.45
2011 6.94 6.51 4.93 7.30 3.15 5.77
2012 7.50 6.69 5.36 10.38 3.44 6.67
2013 8.72 7.94 5.75 7.93 3.46 6.76
2014 8.59 7.02 5.51 8.02 4.20 6.67
MEAN 7.82 7.01 5.37 9.37 3.75 6.66
SD 0.79 0.56 0.30 2.44 0.57 0.93
CV 0.10 0.08 0.06 0.26 0.15 0.13
Source: computed from the Annual reports of all five oil & gas industry
from 2009-2010 to 2013-2014.
The average current assets turnover ratio of sample companies was compared by using one-way ANOVA and was tested by the following hypothesis (HO5). The results are shown in the Table 11.
TABLE 11: ANOVA Results For Average Current Assets Turnover Ratio Of Sample Companies
Source of Variation SS df MS F P-value F crit
Between Groups 113.4051 4 28.3512631 24.222239 2.7451E-08 2.75871047
Within Groups 29.2616 25 1.17046417
Total 142.6667 29
‘ H05: The average current assets turnovers of all five sample companies do not differ significantly.
‘ Inference: fcal>Fcrit. We reject H05 and conclude that the average ratio of current assets turnover ratio of sample companies differ significantly.
‘ Working capital turnover ratio:
The working capital turnover ratio of oil and gas industry is presented in the Table 12. The working capital turnover ratio of oil and gas industry, as depicted in the Table 12, ranged between the highest 67.71 times in 2013,and the lowest 4.61 times , with an average of 33.63 times. GAIL suffered a deficit of working finance and hence, the turnover was -52.90 times in 2012. HPCL had the fluctuation between the highest of 60.51 times in 2010 and the lowest of 22.31 times in 2014, with an average of 35.16 times. Working capital turnover of IOCL varied between the highest of 18.05 times in 2010 and the lowest of 9.70 times in 2013, with an average of 13.60 times. On an aggregate basis, BPCL and HPCL was found to be the most efficient company by achieving the average working capital turnover ratio of 36.01 times and 35.16 times respectively which was above the industry average.
TABLE 12: WORKING CAPITAL TURNOVER RATIO OF OIL INDUSTRY(IN TIMES)
YEAR BPCL HPCL IOCL GAIL RELIANCE MEAN
2010 25.27 60.51 18.05 13.90 10.26 25.60
2011 78.63 34.69 14.34 89.30 9.84 45.36
2012 26.89 31.48 10.41 -52.90 7.15 4.61
2013 21.71 26.83 9.70 271.71 8.62 67.71
2014 27.53 22.31 15.50 47.96 11.08 24.87
MEAN 36.01 35.16 13.60 73.99 9.39 33.63
SD 23.94 14.93 3.51 122.18 1.53 33.22
CV 0.66 0.42 0.26 1.65 0.16 0.63
Source: computed from the Annual reports of all five oil & gas industry
from 2009-2010 to 2013-2014.
The average working capital turnover ratios of sample companies were compared by using one-way ANOVA and were tested by the following hypothesis (H06). The results are shown in the Table 13.
TABLE 13 : ANOVA Results for working capital turnover ratio Of Sample Companies
Source of Variation SS df MS F P-value F crit
Between Groups 13746.14 5 2749.22793 0.7901003 0.57042864 2.772853153
Within Groups 62632.69 18 3479.59367
Total 76378.83 23
‘ H06: The average working capital turnover ratios of all five sample companies do not differ significantly.
‘ Inference: Fcal< Fcrit. We accept H06 and conclude that the average ratios of working capital turnover ratio of sample companies do not differ significantly.
CONCLUSION
The structure of working capital was analyzed through the construction of tables highlighting the percentage of masterpiece of individual current assets and current liabilities during the years from 2009-2010 to 2013-2014. The study discovered that of all current assets across industry, loans and advances formed the maximum percentage followed by inventories; whereas sundry debtors and cash and bank balances formed a small part. The study also indicated that the variation between current assets turnover and working capital turnover was quite high across the industry. However, the sample companies does not had good current ratios (not more than the prescribed standard of current ratio, i.e 2), which implies that there is no sound liquidity position among the oil and gas industry.
REFERENCES:
1) Jain Praveen K.(1993).’Management of Working Capital.’ RBSA publishers, Jaipur, pp. 3-35.
2) Khandelwal N.M.(1985).’Working capital management in SSIs.’ Ashish publication House, New Delhi,pp.1-6
3) Sinha K.P,Sinha A.K and singh S.C(1998).’Management of working capital in India.’Janaki Prakasan, New Delhi, pp 1-33.