Investments in Securities Decision-Making at BP and Dragon Oil PLC - Case Study Example

Title: Investments in Securities Decision Making Name: Student No: University Name: Unit Code Tutor Date of Submission: 1. Introduction Oil and natural gas sector is an area of investment that has the potential of resulting into high turnover based on high demand for oil products for automotive and other industrial purposes. This is based on the fact that the use of renewable sources of fuel such as hydro-electricity or solar energy is limited to particular areas. In addition, there has been increased creation of oil exploration companies and most companies have been successful in this investment (Tarbell, Ida 2009). This has attracted a number of investors to invest their incomes in the purchase of shares in these companies. However, in order to make a decision whether to invest in a particular oil exploration company, it is important to compare various options by analyzing the financial performance of the company over a particular duration of time. This enables ascertaining the feasibility of getting high returns from investments. The analysis can be achieved by obtaining financial performance of an oil marketing company over a particular period of time and getting an evaluation of the most suitable company in which to invest (Piper 2006). This is aimed at helping the investors understand financial information they need to know before making the decision to invest in a particular company. This paper provides an investigation of financial performance of British Petroleum (BP) and Dragon Oil Public Limited Companies with the focus on finding the best option of investing an income of £10000 for an interested investor in shares. Dragon Oil PLC is a company involved in exploration of oil and gas, its development and production and the sale of these products to consumers and retailers (Peel 2011). The company operates in a market that is dominated by other world exploration companies in the UK. An example of another oil exploration and production company in the UK is British Petroleum (BP). This company is among the leading integrated oil and gas companies and has aimed at ensuring its shareholders get long-term value through creation of high demand as well as ensuring safety and responsibility. This paper provides an analysis of financial status of these companies so that the most successful company can be ascertained to enable decision making with respect to investment. 2. Findings A financial analysis was carried out at BP and Dragon Oil PLC and the following results were obtained. 2.1. Financial Press and Movement of Shares for the Last month Figure 1. Share performance of BP from May to August 2014 (Tarbell 2009) Figure 2. Share performance of Dragon Oil PLC from May to August 2014 According to the figures above, it is found that the share price per share was 505 for Bp while that of Dragon Oil PLC was 580. In June, the share price for BP was 500 while that of Dragon Oil PLC was 600, in July the share price per share was 500 for BP and 550 for Dragon Oil PLC (Piper 2006). Finally in august the share price per share was 465 for BP and 590 for Dragon Oil PLC. In terms of percentage change, it is found that there was an increase in performance for BP share index by 1.74% within a period of 1 week and an increase of 0.6% within a period of 1 month. In terms of years, there was a general decrease in shares by 3.94% within a period of 1 year, a decrease of 2.5% within a period of 2 years, an increase of 24.47% within a period of 3 years and 72.06% within a period of 5 years (Peel 2011). In the case of BP, there was a decrease in the number of shares bought between May and June by 2% followed by a sharp increase from June to July by 4%. This was followed by a sharp decrease by 9.8% in August. 2.2. Dividend History in the last two years and movement of dividends The tables below show a comparison of dividends of BP and Dragon Oil PLC. The tables show dividends that have been cleared but not paid out. The data also excludes special dividends and an allowance is made for the adjustment of historical dividends to reflect possible rights issues that may come up. Past dividends are not an offer of the condition of future dividends. Payment Amount Ex-Dividend Date Qualified Dividend? $0.5850 06-08-2014 Not Known $0.5850 07-05-2014 Not Known $0.5700 13-07-2014 Not Known $0.5700 09-05-2014 Not Known $0.5400 09-08-2014 Not Known Table 1. Dividends History For BP in the previous four months (Peel 2011) Payment amount Month of Declaration Qualified Dividend $0,33 April No $0.30 June No $0.20 July No $0.14 August No Table 2. Dividends History For Dragon Oil PLC in the previous four months When table 1 and table 2 are compared, it is found that dividends per share are higher in BP than in Dragon Oil PLC in all the months investigated. This shows tat it is more beneficial to invest in Dragon Oil PLC when the amounts of dividends if accounted for, 2.3. Investment ratios in the two companies A number of investment ratios can be used to understand the nature of the businesses in these organizations. This is aimed at establishing the possibility of selecting the best company that will ensure the investment is used well so that profitability ifs retained. Some of the financial ratios investigated include the following. Some of the ratios to that will be used to compare the two companies include current ratio which is the ratio of current assets to current liabilities. This will give liquidity of the two companies so that the most liquidated company can be established. The financial information of the two companies is summarized in the table s below: Description 2011 2012 2013 2014 Fixed Assets 16580.99 1524.16 1353.98 1176.36 Current Assets 2751.04 2313.47 1997.34 1481.91 Current Liabilities 980.54 840.70 646.33 482.10 Current Ratio 2.805 2.751 3.09 3.073 Non-Current Liabilities 176.16 143.08 116 83 Table 3. Financial information for Dragon Oil PLC Description 2011 2012 2013 2014 Fixed Assets 208850 189082 195484 178050 Current Assets 96840 111384 97584 94212 Current Liabilities 72812 77175 84318 83879 Current Ratio 1.33 1.44 1.157 1.1231 Non-Current Liabilities 102471 103539 96268 92492 Table 3. Financial information for BP Company 2.4. Other items that are of significance to economic climate and investment decision making Other economic items that will be of significance when making a decision of whether to invest in either BP or Dragon Oil PLC include the policies that govern investments with little restriction to investments in the companies (Piper 2006). It will involve investing in a company that requires few regulations to invest in. another economic decision to be made will be to select a company that has experienced high profitability in the previous years. This will create an assurance of high dividends when investments are made in it. Another factor that may influence the decision to invest in either BP or Dragon Oil PLC is the reputation of their boards of directors. If one of the companies has a board of directors who have a bad reputation such as making policies that do not favor investors, there is a high possibility of that company being sidelined in favor of its competitor (Bichlbaum, Mike and Bo. 2004). In addition, the factor of loyalty to a company’s products is likely to affect investment in shares of that company. For instance, if a company’s products are not well sold in the market, investors will associate this with low profitability which will result into negative attitude towards investing in that company. However, in this case the companies involved are oil producing and distribution companies that have better reputation as a result of high demand for oil products. Consequently, there will be a high demand for investors to invest in the companies. 3. Conclusion Based on the above analyses of financial position of the two companies, I would recommend that a person who needs to invest an amount of £10000 on stocks should choose BP instead of Dragon Oil PLC. This is because BP has a constant stock price compared with that of Dragon Oil PLC. The share price for BP is also low enough so that investors are able to buy large number of shares. Another reason why I would recommend investment in BP rather than Dragon Oil PLC is that the dividend payment for an investor who invests in BP is higher than those who invest in Dragon Oil PLC. This implies that a person who invests in BP is likely to get higher dividends than another person who invests a similar amount of money in Dragon Oil. Furthermore, the analysis of investment rations in the two companies shows that BP has more assets than Dragon Oil. In addition, the current ration for BP is between 1 and 3 which is suitable for operation of a business. The positive value of current ratio shows that BP is in a position to pay its short terms debts. Thus, an investor who intends to invest in shares will become more comfortable about the safety of his investments. References Bichlbaum, A. Mike B. and Bo. 2004. The yes men: the true story of the end of the World Trade Organization. New York: Disinformation Co. Peel, M. 2011. A swamp full of dollars: pipelines and paramilitaries at Nigeria's oil frontier. London: I.B. Tauris. Piper, J. 2006. The way to trade discover your successful trading personality. Hampshire: Harriman House Ltd. Tarbell, Ida M. 2009. The history of the Standard oil company. New York: Cosimo, Inc. Read More