Example of

Business

Operations AnalysisBY BOJAN MITROVIC, JUNE 2016

OverviewI I have created the following analysis and presentation to demonstrate a

comprehensive approach I have used in the past to monitor and analyze

business performance. In general, a processing plant’s business performance

depends on:

The external environment/ market conditions in which it operates;

Its internal efficiencies, such as the availability of its processing units;

The sales of its products or services.

In this presentation I demonstrate one way of analyzing a business`

performance that can serve as a basis for management discussions, be used

to manage business operations and planning business activities and aim for

continuous improvements.

I have used this analysis in downstream oil & gas, however, as we shall see it

can be applied in a wide range of process oriented industries.

FINANCIAL PERFORMANCE I have used a publicly available income statement of Chevron

Corporation to demonstrate a technique using which an income

statement can be analyzed. I have created a common-sized income statement in column C and column E by dividing every

revenue item and every expense item by the total revenue. I`ve

added a horizontal analysis in column F.

Please see the next slide

FINANCIAL PERFORMANCEIncome Statement

Annual Financials for Chevron Corp.

Row# A B C D E (Item / Revenue) F (D/B)

1 Fiscal year is January-December. All values USD (rounded to million). 2014 2014 Common-sized 2015 2015 Common-sized Horizontal Analysis (D/B)

2 Sales/Revenue 199,940,000,000 100% 129,650,000,000 100% -35%

3 Cost of Goods Sold (COGS) incl. D&A 16,372,000,000 8% 11,697,000,000 9% -29%

4 COGS excluding D&A 14,605,000,000 7% 9,363,000,000 7% -36%

5 Depreciation & Amortization Expense 1,767,000,000 1% 2,335,000,000 2% 32%

6 Depreciation 1,767,000,000 1% 2,335,000,000 2% 32%

7 Amortization of Intangibles - -

8 Gross Income 183,568,000,000 92% 117,953,000,000 91% -36%

9 2014 2015 2015/2014

10 SG&A Expense 4,490,000,000 2% 4,310,000,000 3% -4%

11 Research & Development 707,000,000 0% 601,000,000 0% -15%

12 Other SG&A 3,790,000,000 2% 3,710,000,000 3% -2%

13 Other Operating Expense 12,540,000,000 6% 12,030,000,000 9% -4%

14 Unusual Expense -504,000,000 0% 49,000,000 0%

15 EBIT after Unusual Expense -504,000,000 0% 49,000,000 0%

16 Non Operating Income/Expense 4,270,000,000 2% 3,750,000,000 3% -12%

17 Non-Operating Interest Income 145,000,000 0% 119,000,000 0% -18%

18 Equity in Affiliates (Pretax) 7,100,000,000 4% 4,680,000,000 4% -34%

19 Interest Expense - -

20 Gross Interest Expense 358,000,000 0% 495,000,000 0% 38%

21 Interest Capitalized 358,000,000 0% 495,000,000 0% 38%

22 Pretax Income 31,200,000,000 16% 4,840,000,000 4% -84%

23 Income Tax 11,890,000,000 6% 132,000,000 0% -99%

24 Income Tax - Current Domestic 1,080,000,000 1% 1,000,000,000 1% -7%

25 Income Tax - Current Foreign 9,240,000,000 5% 3,000,000,000 2% -68%

26 Income Tax - Deferred Domestic 1,370,000,000 1% -689,000,000 -1% -150%

27 Income Tax - Deferred Foreign 207,000,000 0% 1,170,000,000 1% 465%

28 Income Tax Credits - -

29 Equity in Affiliates - -

30 Other After Tax Income (Expense) - -

31 Consolidated Net Income 19,310,000,000 10% 4,710,000,000 4% -76%

32 Minority Interest Expense 69,000,000 0% 123,000,000 0% 78%

33 Net Income 19,240,000,000 10% 4,590,000,000 4% -76%

34 Extraordinaries & Discontinued Operations -

35 Extra Items & Gain/Loss Sale Of Assets -

36 Cumulative Effect - Accounting Chg -

37 Discontinued Operations -

38 Net Income After Extraordinaries 19,240,000,000 10% 4,590,000,000 4% -76%

39 Preferred Dividends -

40 Net Income Available to Common 19,240,000,000 10% 4,590,000,000 4% -76%

41 EPS (Basic) 10 0% 2 0% -76%

42 Basic Shares Outstanding 1,880,000,000 1% 1,870,000,000 1% -1%

43 EPS (Diluted) 10 0% 2 0% -76%

44 Diluted Shares Outstanding 1,900,000,000 1% 1,880,000,000 1% -1%

45 EBITDA 36,860,000,000 18% 19,680,000,000 15% -47%

If we look at row 45, we see that the total EBITDA fell 47% (2015/2014), however, in terms of

profitability 18% of the revenue found its way into EBITDA in 2014 and 15% in 2015 (see row 45).

Market Analysis

Fuel oil margin (-)

Gasoline margin (+)

FCC gasoline production unit margin (Gasoline – Fuel oil)

The graphs above help illustrate how forces in the market impact profitability. The graph on the left shows the

gasoline gross margins (spread) based exclusively on the market environment (trading quotations are available

on Platt’s or, in this case, the CME Group’s website). The graph on the right shows that the margin / value added

of a processing unit increases as the (market) value gap between its output and inputs increases. This explains

why internal operations should be aligned with current market conditions.

Gross Production Margin (per unit

of measure)

The gross refining or production margin is the difference between the market prices of

finished products and market prices of feedstock needed to produce them. When the

process yields more than one finished product, production yields of individual products

based on total throughput have to be considered. Own consumption and losses must

also be deducted from the margin. Quotations, not market prices, must be used to

isolate commercial contribution and analyze only production.

Please see an example of gross refining or production margin for a plant that produces

products A, B, C and D on the next slide.

Gross Production Margin (per unit

of measure)

Goss Production Margin

Jan. $1.09

Feb. $1.13

Mar. $1.40

Apl. $0.94

Product Amount produced Yields to total processing

A 652 29%

B 550 25%

C 450 20%

D 360 16%

Total Production 2,012 91%

Own consumption & Loss 200 9%

Total Throughput 2,212 100%

FOB (Benchmark) Prices (per unit of measure)

Product A B C D Raw Mat. Price

Jan. 4 3 2.5 2 1

Feb. 4.4 3.1 2.3 2.1 1.1

Mar. 4.2 3.2 2.7 1.9 0.8

Apl. 3.8 3.4 2.6 2 1.2

Goss Production Margin

Jan. $1.09

Feb. $1.13

Mar. $1.40

Apl. $0.94

Gross margin = ((product A

yield * product A

Price)+(product B yield *

product B price) + … + (%

own consumption & loss *

0)) – raw material price

Internal Operational Performance

Plant operating capacity and availability has a major impact on the overall business performance.

We can determine the percentage of time a unit was on-stream (running as opposed to being

shutdown). This is called the on-stream factor. The on-stream factor can be used to explain output.

Every unit can be either on-stream, shutdown (according to plan), shutdown (unplanned, due to

mechanical failure), Shutdown (unplanned, due to problems with a related unit that either feeds

into or out of it). Obviously, unplanned shutdowns have a negative impact on performance.

Managers may ask why were there unplanned shutdowns in Septembers when there was a

turnaround (planned shutdown for maintenance) only a month earlier, the answer to this is that

the unplanned shutdown in September occurred due to start-up problems (not uncommon).

Internal Operational Performance

We can explain the reasons for a low on-stream factor , which is a result of operating at a less than

full capacity, by graphically displaying the operational mode and adding explanations for

shutdowns or slowdowns, as in the graph above. The graph above is a monthly graph but we may

create a daily graph. Occasionally, processing may appear to be below minimum or above

maximum capacity, this is because minimum and maximum capacities aren`t always definite

because they also depend on changes in feedstock, densities, temperatures etc.

Pump failure, May 13

Scheduled

maintenance

/ turnaround

Commercial (Sales) Performance

The most straight-forward way of measuring sales performance is comparing actual sales with the

plan and with previous periods (ex. January 2016 with January 2015). A graph such as the one

above, allows us to quickly see how well or company`s sales are doing in each of the provinces.

For example, note that sales in Alberta were around m$45, which is 10% less than planned.

Commercial (Sales) Performance

Regardless of how much we sold in a given period, we may be interested in how well we did in comparison to our

peers/competitors. If sales were higher than usual (or expected) in a given month, how much can we thank our

awesome sales people for this and to what extend we just happened to have joined the ride in a good market?

The analysis above can help answer this question. In March (see graph) sales dropped but it was a bad market and

we held on to our market share, so we did O.K. In April and May we were awesome and in September we messed up

because our sales dropped more than the sales of our rivals, which is why we lost market share. In December we did

a great job because we increased our sales more than our competitors.

Commercial (Sales) Performance

We should be measuring our own sales performance against market performance. A sales spread is a gross sales

margin (our selling price – FOB market price). Multiply the sales spread by the quantity sold to get the sales spread

revenue or the total sales margin (in $$). In March, we sold 137 units of stuff at a price of $19 when the market price

was $20, thereby losing $1 per unit sold relative to the market price (sales spread = -$1). We sold 137 units at this

price and in total lost $137 (sales spread revenue = -$137)

Sales Margin & Sales Margin Revenues

A B C D (B-A) E (CxD)

FOB (Benchmak Price) Selling Price Quantity Sold Sales Spread (Margin) Sales Spread Revenue

Jan $10.00 $12.00 130 $2.00 $260

Feb $15.00 $17.00 125 $2.00 $250

Mar $20.00 $19.00 137 -$1.00 -$137

Production, Sales & Inventory

Inventory management has a very big impact on business performance. We all know that inventory levels should be

kept low to decrease carrying costs yet high enough to sustain discontinuous business operations even in case of

unexpected events. The graph above explains how inventory management can be illustrated graphically and

analyzed. In the example illustrated above, the company had increased production in June and July to build up

sufficient inventory to last during the scheduled maintenance in August.

Unplanned shutdown on unit A due to

electrical circuit failure

Scheduled

maintenance

Planned

production hike to

meet year-end

sales

Year-end sales

Still here?

Thank you for your interest.

Please feel free to contact me if you have any further questions about what I do as an analyst or how I can help

you analyze your business performance.

Kind regards,

Bojan Mitrovic