Petroleum Industry & Factor Analysis

Introduction
In this paper, we are going to analyze the performance of listed petroleum organization in Pakistan through Factor Analysis. Factor Analysis is a statistical tool which we select to understand that what the key things arewhich affects the performance of any organization in current economy.

Introduction of Petroleum & Petroleum & Industry

The word petroleum generally refers to crude oil or the refined products obtained from the processing of crude oil (gasoline, diesel fuel, heating oil, etc.)Petroleum is a fossil fuel. It is called a fossil fuel because it was molded from the remains of tiny sea plants and animals that expired millions of years ago. When the plants and animals deceased, they sank to the bottom of the oceans. They were buried by thousands of feet of sediment and sand that turned into rock. Petrol is a complex mixture of chemicals andis manufactured by mixing different products obtained from the distillation ofcrude oil with performanceenhancingchemicals.The term Petrol is anabbreviation of petroleum, derived from theGreek words petros (meaning rock orstone) and oleum (oil). Petrol has also been sold as motor spirit, petroleum spirit, and gasoline (often shortened togas). The world's top five crude oil-producingcountries are: Saudi Arabia, Russia, United States, Iran, and China. Over one-fourth of thecrude oil produced in the United States isproduced offshore in the Gulf of Mexico. The top crude oil-producing states are: Texas,Alaska, California, Louisiana, and New Mexico. The global economy has found itself in the center of an all time oil price peak which has also exceededthe peaks experienced during the Iranian Revolution in 1970s. This flow is having a compounding effecton the existing macroeconomic challenges for countries whose domestic economy is consequentiallylinked with the international oil market and other product prices.

Most of the world moves on petroleum gasoline for cars, jet fuel for planes, and diesel fuel for trucks. Then there are the petroleum products needed to run factories and manufacture goods. Thats why the price of oil is so important. In 1998, the average price of a barrel of oil dropped as low as $8 a barrel; in the spring of 2008, the price shot up to over $130 a barrel, the highest price in history. Consumers and Economies are happy to enjoy low prices of oil. The oil industry, on the other hand, does not flourish during periods of low oil prices. Oil industry workers lose their jobs, many small wells are permanently sealed, and the exploration for new oil sources drops off. Low oil prices have another side effect. People use more petroleum products when crude oil is cheap. They start to purchase rare cars and drive more miles. World oil average prices during 2003-04 were over 11% higher than the average prices during 2002-03.End of the 2004-05 experienced a sharp upward swing in prices, with an increase of over 41% comparedto the average price/barrel in the preceding year. Newer peaks were reported in price/barrel during2007-08 when a 53.4% increase in prices was witnessed, compared to 2006-07. Overall, there has beena 360% increase in price/barrel of oil since the first quarter of 2002-03 to the end of 2007-08, with the first quarter of 2008-09 opening into even higher average prices and etching newer records with pricesover $140/barrel on a given day. Domestically Prices rose by only 7.4%, 16.2%, and 5.28% during 2003-04, 2004-05, and 2006-07, respectively. Prices rose sharply only during 2005-06 by 38.15% and during the last quarter of 2007-08 by 22%.

Introduction to Factor Analysis

In this paper, our objective is to determine the performance of petroleum industry through factor analysis. So in our research factor analysis is vital variable. So the definition is: A set of techniques for studying interrelationship among variables. A very large variables can be reduced to a smaller set of new variables (factors) that are more basic in meaning but contain most of the information in the original set.

The essential purpose of factor analysis is to describe, if possible, the covariance relations among many variables in terms of a few underlying, but unobservable, random activities called factors. Each group of variable represent a single underlying construct, or factor, that is responsible for the observed correlations. A second group of variable, representing physical fitness scores, if a variable might correspond to another factor.

Introduction of evaluation and analysis indicators

In order to save the sufficient time and the effort of the analyzer, we have to select some variable which narrow our research. So these financial key indicators help to understand the financial situation and explain the financial activities. The financial indicators which we choose are Solvency, Business Efficiency, Profitability and Growth. All these indicators have some sub indicators in it. Solvency is an important factor in our analysis of companys financial stamen. Solvency refers to a companys long run financial viability and its ability to cover long term obligations. All business activities of a company financing, investing and operating affect a companys solvency Creditors are interested in solvency. The ability of the business to pay its debts as they come due. Business concern that are able to pay their debts promptly are said to be Solvent. In constraint, a company that finds itself unable to meets its obligations as they fall due called insolvent. Solvency is critical to the very survival of a business organization. A business that becomes insolvent may be forced into bankruptcy by its creditors. Once bankrupt, a business may be forced by the court to stop its operations sell its assets for the purpose of paying its creditors and end its existence. Investors also are interested in the solvency of a business organization, but often they are even more interested in its profitability. Profitable operations increase the value of the owners equity in the business. A company that continually operates unprofitably will eventually exhaust its resources and be forced out of existence.

 Current ratio is measure of solvency. Current ratio expresses the relationship between current asset and current liabilities. A strong current ratio provide evidence that a company will be able to meet its obligations coning due in the near future Quick ration is another measure of solvency. The quick ratio compares the most liquid current asset like cash, marketable securities 7 receivables with current liabilities. Profitability indicator is imperative aspect of our research. Profitability analysis is important in analyzing financial statement and complements the return analysis. Profitability analysis goes beyond the accounting measure such as sales, cost of sales and operating and no operating to assess. Their sources persistence, measurement and key economic relations. Profitability analysis also allows us to distinguish between performance primary attribute to management operation decision and those result less tied to management decision. Profitability also describe break even Analysis and its relevance for assessing profitability. Business efficiency is the third indicator which we will analyze in this research. We can analyze business efficiency by measuring turnover rate of asset, inventory turnover and account payable turnover rate. The faster the turnover of asset is, the higher the efficiency is, and the greater the profits are. Inventory turnover rate is a measure equal to the cost of good sold divided by the average amount of inventory. It tells us that how many times in the course of year the company is able to sell the amount of its average inventory. If the rate is higher than the company sells it inventory rapidly or swiftly. It is useful in evaluating the liquidity of the companys inventory.

To analyze the growth of listed companies is to monitor the business development in certain period. The base for the growth of stock limited companies is the profitability. The fundamental goal is to maximize the value of shareholders. For growth indicators,

the variable which we use are Growth rate of shareholders equity, Main business increasing rate of income and Growth rate of net profit. From last decade, the whole industry of petroleum in Pakistan is performing well. Economic instability in Pakistan affecting the every sector in Pakistan. Due to political instability, the listed companies in Pakistan take different turn. So in petroleum industry, especially large enterprise, listed companies, hold strong position in the economy of Pakistan. So the performance of these companies are very important. So in this paper we use the factor analysis techniques to analyze the performance of 5 listed petroleum companies according to the financial indicators.

Literature Review
Mehran and Izah (2012) examined the performance of fourteen manufacturing companies in Pakistan using financial accounting ratios. The variable that had been used are Total Asset, Expense, Sales, ROA, PBT for the period 2006-2010 by using Mean, SD, Coffient Varation and resulted that the higher expenses incurred in highlighted companies are as a result of Expense Preference financial performance Behavior Theory and low productivity growth.

Ahmed (2011) attempted the study to measure the financial performance of some selected Jordanian commercial banks for the period 2005-2009. Simple regression and ANOVA are statistical tool which has been use to evaluate The Bank Size, Asset Management, Operational Efficiency and ROA. It was realized that banks with higher total deposits, credits, assets, and shareholders equity does not always mean that has better profitability performance. It was also found that there exists a positive correlation between financial performance and asset size, asset utilization and operational efficiency, which was also confirmed with regression analysis that financial performance is greatly influenced by these independent factors

Amir et al (2010) conducted a study to find out the Ability to predict which bank is vulnerable to financial distress is of critical importance to investors accountholders and many other stakeholders. An effort has been made to develop and evaluate a new model called Bankometer. To measure the reliability of Bankometer, it is tested on available information of different banks for the period 1999-2002. CAMEL and CLSAstress test are used for the comparison of results.

W. Wen (2010) had tried to develop a performance evaluation model to assess business performance in the Taiwan electronic industry. For this purpose author used Taiwan electronic industry to evaluate 16 indicators for the year 1997-2001. Factor Analysis, AHP Method, Principal component analysis had been used to evaluate Profitability Ability, Efficiency Ability and Liquidity.

Feng and Xiaoling (2011) figure out the evaluation of the financial competitiveness of the sporting goods listed enterprises in China for the period 2007-2009 for the Development of INTEGRATED INDEX COMPETITIVENESS EVALUATION SYSTEM (IICE) using PCA method. this study has involved profitability capability, debt paying capability and operation capability aspects. In order to promote and enhance the overall competitiveness of the sporting goods listed enterprises, IICE offers a theoretical basis for proposing appropriate business strategies.

Noppanon and Rapeeparn (2012) used 3 year financial ratio from financial statement since 2007-2009 of 22 listed companies in food and beverage industry for efficiency evaluation model. Grey Principal Component Analysis Model has been used on Current Ratio, Quick Ratio, Debt to Equity Ratio, Gross Profit Margin, Receivable Turnover and Return of Equity and resulted that Financial ratios wasn't the factor which cause the change of effectiveness ranking.

Anupam et al (2011) had done an effort for the reduction and categorization of the financial ratios. For this purpose the select cement companies of India for a period of 10 years from 1999-2009 using Correlation, Multiple Regression Analysis, Factor Analysis, Cluster Analysis & VARIMAX. The variable which had been selected was earnings and profitability, liquidity, cash flow, cash balance, long-term solvency, assets management and operating efficiency and the outcome was that two original categories (Liquidity, Cash Balance) of financial ratios held their place in the final results.

Mohammad and Ali (2007) used 82 Jordan companies listed on Amman stock exchange and monitor the monthly return on these firms for the period 1996-2004 for the empirical evaluation of common stock performance. The variable and the statistical that had been used were Security Market Line, Common shares, performance Evaluation, Portfolio Management and OLS, ARMA, ADF, SML. And the outcome was that publically available information is instantaneously impounded in security prices There seems to be lags and frictions in and the adjustment process making the prices away from being fair and helping the capital market dealers to obtain abnormal profit.

Sung and Gregory (1996) used Multivariate Regression Analysis, Stepwise Regression Results and multi-index CAPMs to explore the relationships of U.S. aerospace company stock returns to selected market and industry variables. Explored variables are Consumer Price Index, market return, risk-free rates of return, Industrial Production Index, S&P 500 index and DOD expenditures for the period 1982-1991 and the result was that S&P market index returns and DOD expenditures are both significantly positively related to aerospace stock returns, but the other variables have insignificant influence on aerospace stock returns. Chien-Ta (2002) evaluated the performance of 59 listed corporations of the electronics industry in Taiwan for the year 1999. Author used Correlation Coefficient and Data envelopment analysis (DEA) as statistical tools to explore the variables like Data envelopment analysis, efficiency, effectiveness, Total Assets Turnover, Profit ratio and Return on Assets. The empirical result of this paper is that a company with better efficiency doesnt always mean that it has better effectiveness. There is no apparent correlation between these two indicators. This reason of the paper is to assemble a conceptual framework, based on the return on assets, a ratio frequently discussed in financial analysis, to define the meanings of performance.

FAN et al (2011) construct a model of EVA and OPE, ROI, ROE by using the regression analysis method firstly and the second phase consist of the struggle to find out the relationship between EVA and traditional performance evaluation indexes by combining with the annual report three of telecom operators published from 2003-2008.authors used regression analysis to estimate Economic Value Added, Operating profit ratio, Return On Investment, Return On Equity and EVA rate. Authors took the help of SPSS11.5 for the calculation of EVA rate. The exploration of this research is that OPE, ROI, OPE and EVA are insignificantly interrelated for telecom operators. The limitations of this paper are that can not identify the fake hided in the report of listed companies and exists complexity in the index calculation for the adjustment of accounting.

Sinan (2009) worked hard to build up a financial failure prediction model that can be utilized by all actors in the economy. This study consists of 53 financial ratios gathered from financial statements fro the period 2000-2001. These companies are listed on Istanbul Stock Exchange. This study has four stages the first step is ANOVA test which define how financial ratios differentiate between distressed and non-distressed firms. Discriminant analysis and logistic regression analysis are applied to those selected ratios in second phase and in the third step factor analysis is conducted to find out if the models measure different corporate characteristics and the fourth and last step which is conclusion consist of the contraction of Early Warning System. And the extracted result is that combining multivariate statistical analyses and models and bearing in mind them as a whole, it is possible to construct a multidimensional and objective early warning system.

Wen at al (2005) attempts an effort to construct an proficient evaluation for a shipping industry with financial indicators because sometimes it become very difficult to obtain non financial indicators. to measure the operating efficiency of a shipping industry and to highlight the status of operation performance is the basic objective of this research. This paper employs data envelopment analysis to calculate the relative efficiency of 14 shipping companies in Taiwan. Considered variables and statistical tools are performance evaluation (Asset, stockholder equity, net profit) and DEA, CCR Model, Regression, Sensitivity Analysis and BCG matrix. The empirical results show that performance evaluation for a shipping industry can be more comprehensive if financial ratios are considered. The inefficient firms can effectively promote resource utilization efficiency by better handling labor and capital operating efficiency. The study also state that the comparison of data envelopment analysis results to the financial ratios of traditional financial statement analysis show that there is an inconsistent result. The limitation of the study is that quality variables arent discuss

Chien-Ta (2006) is heading towards a new approach of performance evaluation Grey Relation Analysis (GRA), which is a concept borrowed from the study of industry and increasingly applied to commerce. Under considered variable and statistical tools are profitability, liquidity, efficiency, growth and GRA, FSA, SD, TOPSIS method. The data is used from 1992-2000 of five commercial banks. The result of the study indicates that although the sample size is small and the distribution of data is unknown, GRA can still be successfully used in evaluating bank performance. On the other hand, this paper compares the GRA results with the Financial Statement Analysis (FSA) and shows that the same result can be obtained.

References
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