HI5001 Accounting for Business Decisions (T2, 2016)

Brisbane :Abilene Oil and Gas Limited

Name
Institution

PART 1:
A) Executive Summary
Abilene Oil and Gas Limited, which was formerly known as World oil resources limited, changed its
name following a takeover. As such, the financial trends of the organization in the 2014-2015 period were
affected by the unique occurrences in the entitys operations. Therefore, the current study seeks to analyze
Abilene oil and gas Limiteds statement of financial position, stockholders equity, statement of profit and
loss, and statement of cash flow to determine the effect of takeovers on the entitys financials. This will
play a vital role in establishing recommendations for the organization, thus ensuring that the entity is able
to overcome risks and operational challenges that negatively affect value generation.
B) Companys Background
Abilene Oil and Gas Limited is an entity that engages in oil and gas exploration ventures in
Australia, and other parts of the globe. In Australia, Bloomberg (2016) points out that the company holds
approximately 49.2 percent working interest in the 320-acre klick east oil field, which is located in
Oklahoma. In addition, the company also owns 50 percent working interest in Welch-Bornholdt Wherry
project, which covers about 15,000 acres and is located in Kansas, and approximately 35 percent working
interest in the 6400-acre Kingsley prospect that is located in Edward County (Bloomberg, 2016). The
company, which was formerly known as World oil resources limited, is based is south Melbourne,
Australia.
In regards to strategy, Abilene Oil and Gas Limited focuses on low risk and high return oil
prospects in the mid-west states of USA. Despite the strategy being affected smaller reserves, higher
water cut and lower production rates among the prospect, the company will get higher returns due to low
costs of drilling, lower tax, low acreage costs and due to high netback and NPV/BBl in discovered
barrels(Bloomberg, 2016). In addition to the previously mentioned strategy, Abilene Oil and Gas Limited
will employ three-pronged approach to enhance its portfolio in the oil exploration sector (Abilene oil and
gas, 2016).The three-pronged strategy will involve production, build-to-sell and exploration. In respect to
production, the company seeks to grow a gross production of 250 to 1000 barrels of oil per day (BOPD).
According to Abilene oil and gas (2016), the previously mentioned approach will enable the company to
raise project cash flows that exceed $155, 000, which will adequately cater for overhead and part of the
exploration costs. However, if the firm achieves the 1000 BOPD, projected cash flows of approximately
$783,000 per month will enable the firm to fund the entire overhead and exploration costs (Abilene oil
and gas, 2016).
Further, Abilene Oil and Gas Limiteds build and resell strategy seeks to profiteer from buying
acerage at low per acre basis and selling at a premium on a per/location, or per/ bodp basis. In line with
the buy and resell strategy, the company has 50 percent working interest in the 13000-Welch Bornholdt

Wherry (Abilene oil and gas, 2016). Given that the locations have attractive economics, based on pre-drill
assessments of drilling costs and production costs, the oil field have the potential to raise considerable
revenues for the organization (Abilene oil and gas, 2016). Moreover, the companys exploration strategy
sought to drill 15 to 17 additional by the year end of 2015.This will play a key role in enabling the
organization to achieve its targeted BOPD.
PART 2:
A) Statement of financial position
2015

2014

a)

Total current assets

104973

343297

b)

Total non-current assets

4995457

5775358

c)

Total current Liabilities

121938

728901

d)

Total non-current liabilities

184252

150500

e)

Total stakeholders equity

4,794,239

5,239,254

Percentage change
-69%
-14%
-83%
22%
-8%

Source ;( Abilene oil and gas, 2016)

In reference to Abilenes total current assets, the companys current assets declined from
$343,297 in 2014 to 104,973 in 2015.This accounted for a 69 percent decline in the companys assets.
According to Meghouar (2016), the 69 percent decline in the companys total current assets may be
attributed to the use of current assets to settle current liabilities. Further, Abilene Oil and Gas Limiteds
non-current assets decreased from $5,775,358 in 2014 to $4,995,457 in 2015( Abilene oil and gas,
2016).This is attributed to the use of some of the non-current assets to settle the liabilities of World Oil
Resources Company during its takeover in the 2014-2015 period.
Additionally, Abilene Oil and Gas Limiteds total current liabilities decreased from$728901 in
2014 to $121938 in 2015(Abilene oil and gas, 2016).Notably, the 83 percent decrease in total current
liabilities can be attributed to the desire to settle short-term debt before the take-over occurs. Further, total
non-current liabilities increased from $150,500 in 2014 to $184,252 in 2015(Abilene oil and gas, 2016).
The 22 percent increase non-current liabilities can be attributed to the acquisition of credit to settle some
of the current liabilities and prevent complications during the takeover process. Lastly, the stakeholders
equity decreased by 8 percent in the period between 2014 and 2015(Abilene oil and gas, 2016).
Damodaran (2011) points out that a decline in equity during the takeover period may be attributed to the
introduction of a leverage recapitalization strategy. More elaborately, leverage recapitalization in an
organization mainly entails borrowing additional debt to repurchase its stocks.
Based on the analysis, it is evident that the organizations financial position has deteriorated in the
2014-2015 period. Therefore, suitable strategies should be implemented to reverse the trend.
B) Stockholders Equity

2015
Stockholders equity
4,608,247
Source ;( Abilene oil and gas, 2016)

2014
4,794,239

Percentage change
-3.879%

Notably, the total stockholders equity decreased from $4,794,239 in 2014 to $4,608,247 in 2015(Abilene
oil and gas, 2016). More elaborately, the stock-holders equity plunged by a margin of 3.879 percent. The
decline in stockholders equity, in a period when a takeover was happening, may be attributed to an
increase in cash dividends to Abilene Oil and Gas Limiteds common and preferred shareholders.
Moreover, Meghouar (2016) points out that a decline in shareholders equity can be attributed to losses
within an organization. In this context, the decline in stockholders equity may have been attributed to the
entitys accumulated losses.
Stockholders' Equity Account Balances

a)

Equity Issued

2015

2014

Percentage change

63,511,367

63,555,507

capital
b)

Reserves

-0.069451%
9,835,111

9,608,146
2.3622%

c)

Accumulated losses

(68,738,231)

(68,369,414)
0.5394%

Source ;( Abilene oil and gas, 2016)

In particular, stockholders equity account balances performed differently in the 2014-2015
financial period. First, equity issued capital decreased from $63,555,507 in 2014 to $63,555,507 in 2015
(Abilene oil and gas, 2016).This marked a 0.069451 percent decrease in equity issued capital. Second, the
reserves account increased from $960814 to $9835111 in the 2014-2015 periods (Abilene oil and gas,
2016). The increase was roughly 2.36 percent. Thirdly, the accumulated losses increased by 0.5394
percent. The increase in losses may be associated with the organizations joint venture.
C) Statement Of Profit And Loss

Total (operating) revenues

Cost of Goods Sold
Total expenses

2015

2014

Percentage change

$236,096.00

$142,201.00

66%

-$604,913.00

-$1,720,444.00

-65%

-$71,122.00

-$25,742.00

176%

Any non-operating (or

extraordinary)
gains and losses
Earnings

-$2,486.00

-$9,944.00

-75%

-$141,852.00

-$633,186.00

-78%

Source ;( Abilene oil and gas, 2016)

The analysis above shows that the 2014-2015 period was characterized by unique changes in the
companys statement of profit loss. Precisely, the companys revenues increased from $142,201 to
$236,096 in the period between 2014 and 2015 (Abilene oil and gas, 2016).The 66 percent increase in
revenues had a considerable impact on the companys Cashflows. Further, the costs of goods sold
decreased from by a margin of 65 percent in the 2014-2015 financial periods. The decline in cost of goods
sold may be attributed to the synergies developed following the takeover of World oil resources limited,
which is currently known as Abilene Oil and Gas Limited. In addition, the 75 decrease in non-operating
losses further improved the companys financial position. However, the companys cash flows were
adversely affected by 175 percent increase in total expenses and 78 percent decrease in earnings.
D) Statement Of Cash Flow
2015
-$747,340.00
$4,834,440.00
-$4,471,991.00
$68,210.00

a)
net cash inflow (outflow) from operating activities
b)
net cash inflow (outflow) from financing activities
c)
net cash inflow (outflow) from investing activities
d)
net increase (decrease) in cash during the year
Source ;( Abilene oil and gas, 2016)
Analysis of cash flows for the past two years
2015

2014

Percentage
change

net cash inflow (outflow) from operating

activities
net cash inflow (outflow) from financing
activities
net cash inflow (outflow) from investing
activities
net increase (decrease) in cash during the
year
Source ;( Abilene oil and gas, 2016)

-$(747,340.00)
$(4,834,440.00)
$(4,471,991.00)
$68,210.00

-$(758,632)
-1%
$2,224,622
117%
-$(1,082,275)
313%
$326,823
-79%

Notably, the companys cash flows in the period between 2014 and 2015 were characterized by
net cash inflows and outflows. Moreover, the abovementioned period was also characterized by increases
and decreases in the companys cash flows. Precisely, net cash outflow from operating activities and net

increases in cash during the year decreased by 1 percent and 79 percent, respectively. The 79 percent
decrease in cash during the year, in the 2014-2015 periods, led to a net increase in cash of $68,210
(Abilene oil and gas, 2016). Further, net cashflows from investing and financing activities increased by
313 and 117 percent in the 2014-2015 period, respectively. The abovementioned developments led to an
improvement of the organizations general cash position. The improvement in cash flows will play a key
role in enhancing the organizations ability to explore and drill oil wells in various areas of interest.
PART 3: CONCLUSION
The takeover of World oil resources limited by Abilene Oil and Gas Limited had significant
effects on the financial statements of the company. Precisely, the takeover had a negative impact on the
companys financial position in the 2014-2015 period. The trend can be associated with the effects of
integration risks between World oil resources limited by Abilene Oil and Gas Limited. Notably,
integrating the two entitys may have introduced complexities in operations. As a consequence, the
combined entity might have faced challenges in enhancing cost-savings, and developing benefits from
resultant synergies and economies of scale. This may have prompted Abilene Oil and Gas Limited to use
current assets, non-current liabilities and non-current assets to fund some of its operations. The resultant
effect was a decline in current assets from $343,297 to 104,973; non-current assets from $5,775,358 to
$4,995,457; and an increase in non-current liabilities from $150,500 to $184,252(Abilene oil and gas,
2016).Moreover, the net assets of the consolidated entity decreased. This is because the consolidated
entity also led to equity raisings of $4,992,089 before the costs. These funds were used to fund the
companys joint venture-Londstones joint venture- during the year. Given that the consolidated entitys
working capital is current assets less current liabilities, the company had a deficit of $16,965. The
previously mentioned deficit is largely attributed to short term loans that were provided to the company
and which were to be paid at the end of the period.
In regards to stockholders equity, Abilene Oil and Gas Limiteds equity decreased by
approximately 3.879 percent. The decline is stockholders equity, according to (Meghouar, 2016), may be
attributed to overpayment due to the unduly bullish view about the prospects of World oil resources
limited. However, after acquiring the company, Abilene Oil and Gas Limited failed to achieve its best
case scenario. As a consequence, the total stockholders equity decreased from $4,794,239 to $4,608,247
in the 2014- 2015 period (ABL,2016).Moreover, the decline in stockholders equity, in a period when a
takeover was happening, may also have been attributed to share consolidation of Abilene Oil and Gas
Limiteds shares. According to Meghouar (2016), stock consolidations of shares whose prices are low
often result to negative wealth effects on incumbent shareholders. This is due to change in market

capitalization of the affected counter over the period 30 days prior to announcement of the effective date
in the reorganization.
Moreover, the decline in shareholders equity can be attributed to losses within an organization
(Damodaran, 2011). In this context, the decline in stockholders equity may have been attributed to the
entitys accumulated losses. To illustrate, the companys accumulated losses increased by 0.5394 percent,
thus negatively affecting equity levels. Further, the purchase of an Australian company increased the
volumes of international transactions in Abilene Company. As such, the companys equity decreased due
to an increase in reserves used to recognize exchange differences arising from the translation of the
financial statements of foreign operations to Australian dollars (Papaioannou,2006), and also used to
realize gains and losses on hedges of the net investments in foreign operations.
PART 4: RECOMMENDATIONS
Given the financial trends of Abilenes company, several recommendations are vital to ensure that
the organization improves its position. The first recommendation is on material uncertainty in the entity.
Given that Abilene oil and gas limited incurred a closing cash balance of $68,210 and net operating cash
outflows of$747,340 as at 30 June 2015, the situation introduces doubt on the entitys ability to realize its
assets and extinguish its liabilities during the course of its business and with amounts stated in its
financial statements. In this context, Abilene should adopt a more flexible supply chain that incorporates
suitable strategies to enhance the organizations ability to respond to flexibility needs. Moreover, Abilene
oil and gas limited should employ strategies such as building up safety stock, its safety buffers to the lead
time, and pursue proactive paths such as redesigning supply chain frameworks and products
(Angkiriwang, 2014). This will enable the company to serve markets in emerging economies, where there
are swings in demand patterns-such as changes in material flows, and increased demand for tailored
products with shorter order to delivery periods. In addition, this will enable the company to enhance its
competitive factors that are associated with speed-to-delivery, customer experience and costs, thus
enhancing the entitys ability to realize its assets and extinguish its liabilities during the course of its
business and with amounts stated in its financial statements.
The second recommendation is on the management of exchange rate risk. Given the negative
effects of foreign currency fluctuation on the companys cash flows, Abilene Company should hedge
tactically to preserve its earnings and cash flows. According to Papaioannou (2006), tactical hedging
enable organizations to hedge their transaction-currency-risks that relate to short-term payables and
receivables. This will play a key role in reducing negative effects related to foreign exchange variations.
In addition, the company should adopt strategies to hedge balance sheet risks on a non-systematically and
an infrequent basis. This will enable the company to avoid negative impacts of unexpected currency

shocks on its assets, and reduce risks associated with the firms valuation of subsidiaries, international
investments and its debt structure (Papaioannou, 2006).
Thirdly, the company should establish a suitable exchange rate risk-management strategy. This
will enable the organization to distinguishing the types of currency risks facing the organization and the
level of exposure of firm (Damodaran, 2011). Furthermore, an elaborately outlined currency hedging
strategy-that stipulates its execution process, hedging instruments and monitoring processes for currency
hedges-should be developed. This will enhance the organizations ability to stem exchange related risks.

REFERENCES

Abilene oil and gas,. (2016). Annual report for Abilene oil and gas limited;. Annual Report. Retrieved 14
October 2016, from http://www.asx.com.au/asxpdf/20141127/pdf/42v208w783jyxb.pdf
ABL,(2016). Annual report 30-june 2015. Abilene oild and Gas limited. Retrieved 14 October 2016, from
http://Abilene Oil and Gas Limited
ABL,. (2016). Abilene. Search.asx.com.au. Retrieved 15 October 2016, from
http://search.asx.com.au/s/search.html?query=ABL&collection=asx-meta&profile=web
Angkiriwang, R., Pujawan, I. N., & Santosa, B. (2014). Managing uncertainty through supply chain
flexibility: reactive vs. proactive approaches. Production & Manufacturing Research, 2(1), 50-70.
Bloomberg, A. (2016). Abilene Oil and Gas Limited: Private Company Information - Businessweek.
Bloomberg.com. Retrieved 13 October 2016, from
http://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=9438613
Damodaran, A. (2011). Applied corporate finance. Hoboken, NJ: John Wiley & Sons.
Meghouar, H. (2016). Corporate takeover targets: Acquisition probability.
Papaioannou, M. G. (2006). Exchange rate risk measurement and management: Issues and approaches for
firms.
APPENDICES
i.

Current assets-cash and cash equivalents (consolidated)

Consolidated

Cash at bank

2015

2016

$68,210

$326,823

ii. Current assets-trade and other receivables

Trade receivables
GST receivables

2015
$21,5558
$3,821
$25379

2014
$1,982
$4,466
$6448