An assessment of factors influencing the valuation of retail petroleum companies

Abstract

The valuation of a firm differs from stakeholder to stakeholder. The valuation method and outcome of an economist, accountant, investor and owner will differ. Valuations are based on either historical data or forecasts made from historical data and do not contain a comprehensive set of elements other than financial factors to evaluate a company. The current climate in which the retail petroleum companies operate is highly competitive and is regulated by certain laws and regulatory organisations. As this sector is so competitive retail companies change hands quite a lot either through buy and sell transactions, registering of new sites by franchising or white sites. Because of this the need arose to do an evaluation on the valuation factors of these companies. Retail petroleum companies are very specialised and therefore other non-financial factors may have just as much influence on the valuation as financial factors. This paper sets a framework to incorporate non-financial factors such as strategic and operational factors into the valuation of retail petroleum companies to deliver a more compressive valuation outcome. Numerous studies were done on either the petroleum industry or specific companies within the industry and their valuations, but a gap in the literature existed on the crucial factors influencing retail petroleum companies. A similar framework was developed by Cassone in 2005 but for production companies in the United States. This study provides a step by step framework to managers and valuators of retail petroleum companies to include non-financial factors into the valuation process. This study consists of 5 chapters. Chapter 1 provides the nature and the scope of the study as well as the research problem and objectives. Chapters 2 and 3 provide a literature review on the retail petroleum industry in South Africa, valuation and lastly assess both financial and non-financial factors that may influence the valuation outcome. Chapter 4 entails a content analysis and provides steps to the new framework for valuations based on the discounted cash flow model and lastly Chapter 5 includes a summary of the study and recommendations for future research.