Sustainability reporting and cash flow return on investment of oil and gas companies

Sustainability reporting and cash flow return on investment of oil and gas companies

Abstract

This study was on Sustainability reporting and cash flow return on investment of oil and gas  companies. The total population for the study is 200 staffs of NNPC, Lagos. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made directors, administrative staffs, senior staffs and junior staffs were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies.

Chapter one

Introduction

1.1Background of the study

Oil and gas companies develop competitive strategies to realize their visions and fulfill their missions. Past performance and future ambition are connected by a robust corporate strategy (Grant 2002), which allocates investment to the right project options at the right time to meet the strategic goals. Individual companies engage in strategy planning that is based on economic analyses, peer-group benchmarks, internal audits, portfolio-management techniques, and a decision-making protocol for assessing corporate and project risks and opportunities (Willigers and Majou 2010). A survey of mission statements by stock-listed oil and gas companies reveals that such companies universally pursue the following three principal goals: (1) use wealth of resources and knowledge of employees, (2) create shareholder value by realizing profitable engagement, and (3) act responsibly and ethically in operations and communities. Mission statements commonly highlight what oil companies are currently doing, while their vision statements direct and visualize where they want to go and what they strive to become in the medium-term future. For example, most major oil companies formulate a vision in their company reports that expresses a wish to provide sustainable energy and to continually innovate while promoting energy efficiency and furthering digital technology. In short, the commonly stated mission of oil and gas companies (based upon the 24 companies reviewed here) is to use material and human resources to create profits and shareholder value in ethical harmony with communities; their vision is to do this in a sustainable fashion, using innovation, efficiency, and advancing digital technology

Given the current dynamics to date, the oil and gas industry is characterized by the following relevant risks of key importance for investment such as unstable price situation, growth of the stocks extraction cost or development of alternative energy sources, improvement of energy technologies. Accounting for these risks plays a key role in determining the return on investment and making investment decisions. However, for potential investors, along with the yield and payback period, there is an undated question: how sustainable is a particular oil and gas company, what are its development outlooks, and what specific risks the investment project may run into.

Oil and gas companies must create shareholder value by efficient production of demand-driven fossil energy resources. Success is certainly not guaranteed for oil companies because of a real risk of operational setbacks (e.g., dry holes, unplanned production interruptions and declines caused by water breakthrough, reservoir damage, platform failures), which may adversely impact a company’s return on investment (Maugeri 2007). Oil and gas companies must invest heavily in exploration to locate new reserves because current reserves deplete rapidly (Dahl 2004). The cost of developing new wells to produce from the newly discovered reserves continues to rise (Energy Information Administration 2010) because the remaining oil and gas fields are more complex to develop than earlier discoveries. Consequently, the oil and gas business is capital intensive, and companies must generate sufficient free cash flow from current income to fuel growth and prevent life-cycle decline of current assets (Hannesson 1998)

 

Statement of the study

Therefore, there is an emerging complicated problem consisting not only in the study into latent risks run by an oil and gas company, but also in the analysis of the company’s long term financial sustainability in the realisation of multidirectional investment projects, taking into account the probability of default and volatility of mineral commodity markets. The objective of the presented paper is to study the impact of the risk’s level and profitability of investment projects in the oil and gas sector on the long-term sustainability of the industry company and optimization of these processes.

Objective of the study

The objectives of the study are;

1. To ascertain the relationship between sustainability reporting and cash flow on oil and gas companies
2. To ascertain the effect of cash flow return investment on Nigeria economy
3. To ascertain whether oil and gas prices affect cash flow return on investment

Research hypotheses

For the successful completion of the study, the following research hypotheses were formulated by the researcher;

H₀:  there is no relationship between sustainability reporting and cash flow on oil and gas companies

H₁:  there is relationship between sustainability reporting and cash flow on oil and gas companies

H₀²:  there is no effect of cash flow return investment on Nigeria economy

 H₂:  there is effect of cash flow return investment on Nigeria economy

Significance of the study

The study will be very significant to students and the oil companies. The study will give a clear insight on the Sustainability reporting and cash flow return on investment of oil and gas  companies. The study will also serve as a reference to other researcher that will embark on the related topic

Scope and limitation of the study

The scope of the study covers Sustainability reporting and cash flow return on investment of oil and gas  companies. The researcher encounters some constrain which limited the scope of the study;

1. a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study
2. b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

1.7 DEFINITION OF TERMS

Sustainability: Sustainability is the ability of a system to exist constantly at a cost, in a universe that evolves towards thermodynamic equilibrium, the state with maximum entropy. In the 21st century, it refers generally to the capacity for the biosphere and human civilization to coexist.

Cash flow return on investment: Cash-flow return on investment is a valuation model that assumes the stock market sets prices based on cash flow, not on corporate performance and earnings. For the corporation, it is essentially internal rate of return. CFROI is compared to a hurdle rate to determine if investment/product is performing adequately.

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