An Assessment of Petroleum Price Regulations on the Financial Performance of Oil Marketing Companies in Ghana, Part II

A Case Study of Star Oil Company Limited


Master's Thesis, 2020

14 Pages, Grade: 3.11


Excerpt

Inhalt

Abstract

Introduction

Financial Performance and Price Regulation

Empirical Review/Evaluation

Research Methodology
Design of the Study
Data Collection
Data Analysis

Results and Data Analysis
Petroleum Price Regulation and its Effect on Return–On–Equity (ROE)
Petroleum Price Regulation and its Effect on Gross Sales

Descriptive Statistics
Descriptive Analysis of the Co-factors
Test for Normality
Regression Analysis

Conclusion and Recommendations

Reference

Abstract

Petroleum price regulation was implemented in Ghana with the ratification of the National Petroleum Authority Act, 2005 [Act 691] that further established the National Petroleum Authority (NPA) as the regulator for the downstream petroleum industry whose key directive is to control, supervise and oversee the operations of the industry and to create a Unified Petroleum Price Fund (UPPF) for price unification in the industry.This transpired against the context of a timeframe in which petroleum products were imported, marketed and priced under state control. The study’s findings showed that the financial performance of the OMCs which was measured using ROE was higher during the period of price regulation between 2013 and mid–2015 (June 2015) compared to the deregulation periods (i.e. mid–2015 to 2019). However, the OMCs’ gross sales have dramatically appreciated relative to the regulatory era during the deregulation phase. The study recommends refinement of the pricing methods to ensure that it accommodates and addresses the issues posed by major downstream industry stakeholders in order to ensure the sustainability of the margins of the sector and thereby improve the financial and overall operational efficiency of which is expected to have a trickle-down effect on the economy.

Keywords: Petroleum price regulation, Petroleum price deregulation, Oil marketing companies, Return-on-Equity, Star Oil Company Limited, Trend analysis, Ghana

Introduction

According to Kilian et al. (2006), supply and demand of oil and gas are only part of the factors or elements in the complex function of price comprising of environmental, socio-economic, and geopolitical factors.

Diverse economies or states have regulations for pricing petroleum products. The petroleum sector is oligopolistic with very few dominant companies. Given the market formation of the petroleum industry, price regulation has become necessary to protect consumers, especially in developing economies. Porter (2011) posits that price regulation ensures uniformity of prices across a given country. Given the considerable instability associated with global oil prices, price regulation minimises the impact of the same on local prices of goods and services. According to scholars (Fullerton Jr et al., 2015; Tornye, 2015), consumer price for petroleum product can vary considerably or tellingly from the ex–refinery price due to excise duty and value-added taxes (VAT), which in several states amounts to a considerable percentage of the price.

However, Rockoff (2008) also stipulated or argued that price regulation does not achieve its intended purpose in most cases. Sowell (2008) also argued that price regulation using price ceilings could create an artificial demand which leads to a shortage of supply. A study by Akosa and Ahmad (2019) also evaluated the ramification of price deregulation of petroleum prices in Ghana. They established that it had both favourable and adverse effects on the economy. The favourable facet involves the increased inventory of petroleum products while on the other side (i.e. adverse) the unpredictability of prices was a significant concern.

In their report, Holditch and Chianelli (2008) estimated that global energy requirements would rise by 50%–60% by 2030, and these requirements would be precipitated by crude oil, natural gas, coal, nuclear energy and derivations of renewable sources of energy. Universally, price subsidies and petroleum products tax rebates are mostly the two frequently used techniques of partly nullifying outrageous oil prices on the world commodity market (Kojima et al. 2010; Aress 2011). Also, most of the governments in developing economies face increased exposure to volatility in petroleum prices, either on the import or export side and sometimes, both according to a report by UNCTAD (2005). And Ghana is a peculiar example, as we are net importers of petroleum products.

Ghana experienced extreme price volatility in the industry before the implementation of regulatory policies in 2005, including the enactment of the National Petroleum Authority Act, 2005 [Act 691] which established the National Petroleum Authority (NPA) as the regulator of the downstream petroleum sector. These policies have been revised and updated to accommodate various changes in the economic landscape. Overall, the pricing frameworks of petroleum products in Ghana are anchored on Import Parity of Prices (IPP), which is to ensure uniformity of prices nationwide. The distribution and transportation charges associated with petroleum products are also regulated to certify or establish that transporters and distributors charge reasonable profit margins. This study will seek to examine how regulation of petroleum prices in Ghana’s downstream oil and gas industry impacted the Return–On–Equity (ROE) of oil marketing companies (OMCs). The study seeks to ascertain the effect of petroleum price regulations on the Return–On–Equity (ROE) of oil marketing companies (OMCs) in Ghana and further ascertain the impact of petroleum price regulations on the trend of the gross sales of the oil marketing companies (OMCs) in Ghana.

Financial Performance and Price Regulation

Financial performance denotes a firm’s overall efficiency in employing its resources to generate revenue. Financial performance is highly subjective as it offers insight into the current and future account of a company as accordingly stated by Richard et al. (2009). Measuring financial performance of a firm gives insight into the efficiency of its operations, innovation, and growth (Al–Matari et al. 2014). There are numerous approaches to measuring financial performance which is widely categorised into either market based or accounting-based measures. Accounting–based estimates are extracted from financial statements such as income statements, balance sheets and cash–flow statements. The market–based measures are derived from the shareholder’s future expectations of the organisation (Al–Matari et al. 2014). Some examples of the market–based measures include market–to–book estimates, price-earnings ratio and Tobin–Q. The study will employ accounting-based measures to ascertain or verify the financial performance of SOC. The regulation of prices in any sector has a direct impact on the gross revenue and thus is expected to affect the overall organisational performance. Price regulation of oil prices is employed as a shield against shocks resulting from the volatility of international prices (Bumpass et al. 2015).

Empirical Review/Evaluation

According to Wabobwa (2011), who assessed the effect of oil price regulation on the financial performance of the National Oil Corporation of Kenya (NOCK) from July 2010 to June 2011. The study concluded that the gross profit margins for the six months before the establishment of price regulation suggested growth in profitability of the corporation and a decrease after the institution of the regulations. The scholar also found that the price cap had a major impact on the generated revenues of the firm.

In a study by Dalen et al. (2006) conducted on pharmaceutical companies in Norway by evaluating the correlation existing between the introduction of price regulations and competition within the manufacturing industry. It was found that there was an improvement in market share in the pharmaceutical sector, and this led to increased profit margins. It was also established that the institution or introduction of pricing regulations had a favourable influence on the profit growth of the pharmaceutical companies.

In another study by Carranza et al. (2009), where they used the descriptive approach to evaluate the effect of price cap policies on the financial performance of petroleum marketing companies in Canada. The primary goal was to determine how price cap creates a critical unintended influence on market prices as well as the profitability or productivity of the companies in the long term through changing the shape of the market’s structure. From their regression analysis, the scholars noticed that pricing regulation impacted the profit growth of a company that is involved in the industry. Their findings were attributed to the changes in the structure of the market.

A report by Kigunda (2012) and Wanjogu (2015), also evaluated the relationship existing between price caps and profit growth of the oil marketing companies in Kenya. It was established that there was a significant decline in the profit margin, and these were attributed to the introduction of the price caps. The decrease in the profit margin was assigned to the rise in competition in the industry that increased after the institution of the price cap.

Research Methodology

Design of the Study

The researcher adopts the event study design in this research. According to Kothari (2003), the event study investigates the influence of a particular event within a sector, industry or the general market. In this research, the researcher seeks to evaluate the financial performance of oil market companies (OMCs) in Ghana during price regulation and deregulation regimes.

Data Collection

The focal point of the study will be Star Oil Company (SOC) Limited, and make use of the company’s financial statements for the period between 2013 and 2019 inclusive, for both the regulated and deregulated periods as secondary data. The study will also employ data and reports from the National Petroleum Authority (NPA) for that same period.

Data Analysis

The study will make use of the Chi-square (χ2) test of differences and trend analysis to test the differences in financial performance with during price regulation and deregulation. The null hypothesis of the research is that there is no considerable difference in the financial performance of a company with or without price regulation. A test of 5% significance level will be assumed for the data analysis.

ReturnOnEquity (ROE): The Return–on–equity is a financial performance benchmark measured by dividing the net income by the shareholders’ equity. Since the capital of the shareholders is equal to the assets of a company less its debts, the Return on net assets is known as the ROE. In general, the higher the ROE, the higher the profit of the investment. The formula for calculating ROE is as follows:

Abbildung in dieser Leseprobe nicht enthalten

Sales–to–Equity Ratio (SER): Sales–to–Equity Ratio is an indicator of how well capital was being used for revenue generation. The improvement in this ratio over time speaks favourably of the effectiveness of management in producing income by using the equity of the shareholders, which implies resource productivity. It is estimated as follows:

Abbildung in dieser Leseprobe nicht enthalten

Results and Data Analysis

Petroleum Price Regulation and its Effect on Return–On–Equity (ROE)

In this section, the research determines the relationship existing between the regulation of petroleum prices and the oil marketing company’s Return on equity from the period of 2013 to 2019. The findings for this analysis are presented below:

One of the objectives of the study was to ascertain how price regulation impacts the Return on equity of oil marketing companies in Ghana, with a focus on Star Oil Company (SOC) Limited. The study establishes the relationship existing between petroleum price regulation and Return–On–Equity (ROE) from 2013 to 2019. Data to this finding is illustrated as follows in table–1 and figure–1:

Table–1: Trend analysis of Return–On–Equity (ROE)

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Source: Research Findings (Author’s construct, 2020)

Figure–4.1: Graph of trend analysis on Return–On–Equity (ROE)

Abbildung in dieser Leseprobe nicht enthalten

Source: Research findings (Author’s construction, 2020).

[...]

Excerpt out of 14 pages

Details

Title
An Assessment of Petroleum Price Regulations on the Financial Performance of Oil Marketing Companies in Ghana, Part II
Subtitle
A Case Study of Star Oil Company Limited
College
Coventry University  (Faculty of Engineering, Environment and Computing)
Course
Master of Science in Oil and Gas Management
Grade
3.11
Authors
Year
2020
Pages
14
Catalog Number
V979620
ISBN (eBook)
9783346341785
ISBN (Book)
9783346341792
Language
English
Notes
I will like to include my supervisor Dr Riverson Oppong, Adjunct Lecturer at Coventry University and Commercial Manager at Ghana National Gas Company Limited (Ghana Gas) as a coauthor of the thesis summary.
Tags
assessment, petroleum, price, regulations, financial, performance, marketing, companies, ghana, part, case, study, star, company, limited
Quote paper
Mohammed Issah (Author)Dr. Riverson Oppong (Author), 2020, An Assessment of Petroleum Price Regulations on the Financial Performance of Oil Marketing Companies in Ghana, Part II, Munich, GRIN Verlag, https://www.grin.com/document/979620

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