What So-what[1] New CEO appointed on 1 June 2014New approach: identify and bring new oil and gas fields into operation at a faster rate

․ May conflict with previous approach․ May provoke shareholders’ conflicts․ Share price may fluctuate

[2] Equity funding is inadequate to finance YJ’s future plansYJ has attempted to secure funding from loans in order to bring all three newly oil and gas fields into production

․ High level of risk․ Identifying leverage and solvency

[3] YJ prepares its accounts in US Dollars, as is usual in the oil and gas industry

․ Would be exposed to the impact of currency

[4] Potential oil and gas field, DDD, was fail to take into production, and was written off in the Profit or Loss Statement in 2011/12 (The only one failure)

․ The failure is considered to be an acceptable risk and investors’ expectations still remain positive.

[5] Following some international terrorist incidents in early 2013, Lee Wang persuaded the board to appoint an international security company

․ More complete security systems and reduce risks

․ Increase costs

[6] YJ outsources all of its drilling work to specialized companies

․ Loss of managerial control․ Hidden cost․ Threat to security and confidentiality․ Tied to the financial well-being of

another company․ Quality problems․ Overdependence on outsourcer

[7] The world was horrified by the extent of the oil disaster following the explosion and sinking of the Deepwater Horizon oil and gas drilling rig in April 2010

․ Minor safety incidents can panic investors

․ More strict policies on oil and gas industry will be implemented

Generic Strategies

Cost Leadership

․Not much difference in the price in the oil industry․Crude oil price is determined in oil market /rich oil countries

Differentiation ․Different products and services

Focus ․Technology development․Deep waters oil exploration․More oil fields discovered in Africa and Asia․Create a better brand image

Existing Product New Product

Existing Markets

Market Penetration:• Farm in / out• Upgrade IT Systems

(eg. Off-the-shelf IT packages)

• Licences and exploration for new fields

• Effective Production

Product Development:• Discover new resources instead of oil

and gas

New Markets

Market Development:• Looking for sustainable

relationships with existing customers,

eg. Gas companies

Diversification:Upstream• Drilling companies• Major Contractors (Oil rig maintenance)• FPSO• Service companies (test drilling, divers

and even catering services)Basic Midstream• Oil transportation and refining service

Low Interest High Interest

Low Power

Minimal interest:• Customers• Employees of Suppliers

Keep informed:• Outsources• Minor boarders and Employees

High Power

Keep satisfied:• Shareholders• Potential creditors, e.g. Banks• Governments (Licences issuer)

• Green organizations, e.g. Greenbies Party• Industry regulators/ Policies (eg. DECC in the UK, OPEC)

Key Players (Keep close): • CEO and Chairman• Major contractors and outsourcers (e.g. Drilling companies - DrillIT)

Internal Development

Introduce new technology such as fracking Farm-in Continue surveying and exploring new wells Attract more young talents by special programs Launched an innovate portal that hosts innovation

challenges and also accepts free-form ideas

Acquisition Buy assets

Joint Venture

Joint projects with oil majors, oil field service operators and strategic partners, suppliers or universities

Collaborating more with venture capital firms and conferences and special events

Investing in small start-ups in order to hedge their bets and increase their exposure to a wide range of technologies, across industries

With competitors in order to develop larger fields and gain funding for production

Divest

Sell oil assets Sell poorly performing divisions Farm-out

LicencesApplications

• Technical ability to bring oil and gas field into production• Aware and track on environmental record• Financial capacity to bring oil and gas fields into production

Innovation

• Develop horizontal drilling and hydraulic fracturing technologies• Maintain good relationships with suppliers and outsources and

management skills• Sustain a good relationship with governments (renewal

licences)

Ratios 2015 2014 2013 Industry Average

Gross Profit Margin (GPM) 47.98% 45.75% 44.17% 33.03%

Net Profit Margin (NPM) 21.67% 23.56% 16.89% 6.78%

Return on Assets (ROA) 14.90% 17.51% 10.38% 8.87%

Return on Equity (ROE) 45.02% 66.45% 96.62% 18.70%

Ratios 2015 2014 2013 Industry Average

Cash Ratio 1.39 0.42 0.006 0.47

Current Ratio 1.85 1.39 0.84 1.20

Quick Ratio 1.56 0.62 0.40 0.32

Ratios 2015 2014 2013 Industry Average

Debt-to-equity Ratio 2.02 2.79 8.31 0.29

Interest coverage 3.62 2.69 1.3 1.05

Equity Ratio 0.33 0.26 0.11 0.67

Debt Ratio 0.67 0.74 0.89 0.65

Ratios 2015 2014 2013 Industry Average

Inventory Turnover 6.78 3.78 4.72 0.67

Asset Turnover 0.69 0.74 0.61 0.92

Net Working Capital Turnover 4.55 13.7 -23.22  

Ethical system ApplicationUtilitarian BenefitsAct to generate the greatest benefits for the largest number of people.

Oil exploration and production can cause air pollution like CO2 that leads to global warming. These will cause long-term environmental effects to the public. On the other hand, oil and gas industry is providing major energy source for daily uses nowadays.

Distributive JusticeAct to ensure a more equitable distribution of benefits, for this promotes individual self- respect.

Once again, the oil exploration and production by YJ will cause environmental problems while provide major energy for human’s daily life. YJ may have to strike a balance between them.

Ethics of CareMaintain relationships by contextualizing and promoting the well-being of caregivers and care-receivers in a network of social relations

The issue will cause displeasure by environmental groups and environmentalists. YJ has to respect the views of those groups and try to build good relationship with them. On the other hand, YJ has to satisfy the shareholders by maintaining a profitable business.

Order of Priority

ProblemsDecision of Short term

Long term Recommendations

1

Licenses Application

Results(Lack of Liquidity)

Rights issue and new loan finance

YJ should seek a listing on the full stock exchange in AIM in order to raise money

2

Outsourcer – DrillIT

(Safety Problem &

Reputation Problem)

YJ should strongly suggest DrillIT to enhance safety awareness

i) Longer relationship with DrillIT, building with trustii) YJ should promote safety awareness in working environment

Order of Priority

Proposals Details(if any) Accept/ Reject

3LG Farm Out

Offer- Accept

4YJ’s Long Time

Future

i) YJ should exits the E&P market

Reject

ii) YJ should transform into energy industry

Reject

Ethical system ApplicationUtilitarian BenefitsAct to generate the greatest benefits for the largest number of people.

Oil exploration and production can cause air pollution like CO2 that leads to global warming. These will cause long-term environmental effects to the public. On the other hand, oil and gas industry is providing major energy source for daily uses nowadays.

Distributive JusticeAct to ensure a more equitable distribution of benefits, for this promotes individual self- respect.

Once again, the oil exploration and production by YJ will cause environmental problems while provide major energy for human’s daily life. YJ may have to strike a balance between them.

Ethics of CareMaintain relationships by contextualizing and promoting the well-being of caregivers and care-receivers in a network of social relations

The issue will cause displeasure by environmental groups and environmentalists. YJ has to respect the views of those groups and try to build good relationship with them. On the other hand, YJ has to satisfy the shareholders by maintaining a profitable business.

Buyerpower

․ Considerable power from leading players․ Lack of product differentiation․ Massive buyers and individual customers․ High importance of gas and oil to buyers

Supplier power

․ Governments own significant monopoly power over licensing costs and deals

․ High bargaining power due to limited number of oil and gas equipment and services companies

․ Larger power for highly diversified and skilled suppliers

  

Competitors․ Massive number of large scale international companies with

enormous funding available․ Competition within the pool of smaller companies is still fierce

 

Newentrants

․ Great sales and tend to be wealthy due to high importance of oil and gas products

․ Substantial capital outlay and expenditures․ A burden in developing scale economies and strong research

and development (R&D) capabilities․ Higher and higher requirement of skills and technologies

  

Substitutes

․ Increase in speed of consumption of oil and gas cut the life of global oil and reserves

․ Emerging renewable energy industry such as nuclear, solar or wind power

․ Petrol and diesel are still the most important fuel for transport․ Gas is still as a key fuel for the power generation․ Shifting is time-consuming and expensive

  

  US$ (m) US$ (m)Cost    Drill testing cost 18.0  Production cost 30.0 (48.0)Revenue    Farm out payment in total 10.0  LG payment for buying proven reserves 83.2 89.2Net income   35.2

US$2mon successful signing of GGG test drilling licence with the government.

US$6mon commencement of actual test drilling and 100m below sea bed drilling depth has been achieved.

US$2monce test drilling is completed and the extent of any reserves is established.

Use of oil in transport market

would no longer in monopoly position

․ Some other industries have been seeking alternativesDue to - progressively upturn of oil prices

- government regulation of carbon emissions

․ Slow down the growth of oil industry․ Companies may find more difficult seeking for investors

for future projects

High uncertainty to seek more potential

gas reserves

․ Only practicable with widely price differences in some particular regions

․ Market depends on government policies- Would influence investors’ intention about the cost-

competitiveness of new plan 

Attention diversion of oil security

problem

․ Geopolitics of oil are changing- Asian markets is now incorporated more oil than Middle

East can supply․ Some Asian countries are not currently part of the

OECD / IEA emergency response system- Fluctuation to world oil price if there is any disruption

from their supplies

Political / Legal Geographical / Regional:․Trade agreement between countries․The austerity programs of EU/ EU membership

- Reduce the need for fuels- Many territorial disputes reappear / boundary conflicts

․ Oil rich countries have greater influences on oil industry, such as oil pricePolitical power of the National:․Political parties, green organization, authority of the state․ Licences Application․Health, Safety and Environmental (HSE) issuesReasons:․ World energy markets are more volatile due to the threat of geopolitical

instability․ The Kyoto Protocol (Carbon Emission) / Greater climate destabilization are

leading governments to encourage more sustainable forms of energy․ The global energy market is becoming more elastic due to continued oil

demands from the thirds worlds countries

Economic․ Oil prices are headed down at least $20 a barrel from 2013 to 2014 which will

reduce revenue․ Many countries are developing more sustainable and efficient transport system

which decreases demand of oil․ The UK remained the third largest producer of gas, and second largest producer

of oil in Europe․ Invest in new technologies can boost profitability by reducing operating costs․ Oil prices are greatly driven and pressured by market demand․ Larger burden on debt financing when high interest rates

Social / Environment․ Increasing awareness and focus on sustainability and safety․ Increasing focus on other renewable energies (wind, solar energy, etc.)․ Natural gas considered as cleanest fossil fuels․ Rising consumption on fossil fuels in the future

Technology

Upstream (Hydraulic fracturing)․ Extract bigger volumes․ Improve the recovery of oil and gas․ Extract maintaining reserves in some proceeded fields․ Using a ‘pad’ to drill multiple wells from one site are contributing to increased

productivity and reducing the sector’s geographic footprint

Midstream․ For underwater oil-transporting pipelines at significant depths and pressure

Alternative․ Enhancing technology transfer and encouraging resource development in

politically-difficult regions, such as Central Asia․ Major driver of change in the global energy markets, other ways of alternative

energy․ Invent new methods of cleaning up an oil spill, Mexican oil Spill