Analytical Income Statement

Other Income

The other income post may include different forms of income that are not necessarily related to normal operations. For example, a company may recognize gains on sale of assets such as machinery under this post.

Whether or not other income should be included in NOPLAT depends on whether or not the income is related to operating activities and if it can be classified as recurring. In the case of Statoil, the following events have been explicitly mentioned in the annual report.

Figure 18: Statoil, recurring and non-recurring events (Own production, Statoil annual reports)

The events listed as recurring relates to the sale of interests in either a project or exploration and production licenses. As previously discussed, Statoil possesses expertise when it comes to exploration and developing projects in difficult environments, particularly related to subsea projects. We regard Statoil’s gain on sale of interests in projects related to exploring and developing potential as well as proven oil reserves to be operational. The same goes for sale of interests in exploration and production licenses. For example, Statoil may contribute in developing the potential in a project and then divest the project when other parties have more to gain from the forward operations.

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Statoil also includes a number of events in other income that we consider to be recurring and/or non-operating. These are sale of office buildings, an arbitration settlement and the divestment of Statoil Fuel &

Retail ASA. Gain on sale of office buildings is not considered recurring nor is it operating. The arbitration settlement relates to a disagreement on the fulfillment of contractual obligations between Statoil and Sonatrach – the Algerian state oil company. One could argue that this relates to an operating activity as the contractual agreements are related to operations. However, such gains are an anomaly to Statoil and unlike sale of interests, this rarely occurs. The divestment of Statoil Fuel & Retail ASA is also considered to be a non-recurring event. Statoil Fuel & Retail was Statoil ASA’s division for gas stations. Historically this would naturally be considered part of operations. However, this gain comes from Statoil ASA discontinuing their engagement in gas stations altogether.

In our analytical income statement, of other income, only the listed recurring events in figure 18 are removed to find NOPLAT. We consider the remaining part of other income to relate to other operating and/or non-recurring events.

Purchases

Purchases or cost of goods sold are naturally part of operations and these costs are therefore included in NOPLAT. However, it is sometimes necessary to consider write-downs of inventory. Write-downs usually relate to a diminishing book value of the assets which are written down to its fair value (Koller, Goedhart, & Wessels, 2010). To what extent inventory write-downs are considered operating or not depend on how likely it is that they occur. Koller et al. (2010) argues that if a restructuring charge such as inventory write-downs is unlikely to occur, the charge should be treated as non-operating. Inventory write-offs would be likely to occur if the company shows a pattern of continuously restructuring and thereby also make frequent write-downs.

Statoil presents purchases as net of inventory variation. The effect of this is that Statoil’s inventory expenses include the inventory write-offs for each year. The write-down expenses are historically very small and in some years no write-downs are made at all. Our conclusion to this is that write-downs are not a likely event nor are they part of continuous restructuring of Statoil. Therefore we treat these as non-operating and they are not included in the cost of goods sold. Hence, only the cost of goods sold excluding write-downs are included in NOPLAT.

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Implied Interest - Operating Leases

Companies with a sizable portion of operating leases will present an artificially low NOPLAT and invested capital. This is because assets that relate to operating leases are not presented on the balance sheet. Instead the rental expense is embedded within the company’s interest costs in the income statement. To account for this, we make an estimate of the asset value and add this back to the PP&E in the balance. Second, we estimate the rental expense and add this back to EBITDA. The rental expense is estimated using the company’s cost of secured debt multiplied with the previous year’s value of operating leases (Koller, Goedhart, & Wessels, 2010).

Selling, General & Administrative Expenses

Statoil presents expenses related to those identifiable tangible and intangible assets, liabilities and contingent liabilities acquired under selling, general and administrative expenses. In most cases we regard these as operating as those assets and liabilities acquired relate to operations. However, we point out that in 2014 Statoil recognized a curtailment gain related to a change in pension plan under this post. This gain relates to Statoil’s prepaid pension plan. Such pension plans are considered non-operating and we regard a gain derived from this to be non-operating as well (Koller, Goedhart, & Wessels, 2010). Thereby, the gain has been removed in NOPLAT.

Exploration Expenses

Exploration expenses are incurred when oil and gas companies look for new resources. These expenses are recorded as an intangible asset on the balance sheet. However, like inventory, the exploration assets may also lose its value compared to what has been recorded in the balance sheet. The result is that the company will sometimes record impairment losses on this asset, just like inventories.

In Statoil’s case, recorded impairments of exploration expenses are presented along with new exploration expenses in the income statement. However, we treat this the same way as inventories and exclude the effect of the impairments when calculating NOPLAT. Unlike other intangible assets like goodwill, the exploration expenses are not acquired, but developed. As a consequence their expenses are recorded the same way as inventory purchases.

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Depreciation and Amortization

Companies often acquire physical assets that are capitalized on the balance sheet. Because these assets lose economic value over time, the assets need to be depreciated over the course of its lifetime. These depreciation expenses are considered operating and are excluded in NOPLAT.

Intangible assets also lose economic value over the course of its lifetime and are therefore amortized.

However, intangible assets are expensed and not capitalized like capital expenditures. The effect is that investments in intangible assets are penalized twice, first through expenses and thereafter through amortization. In the re-organized balance sheet, this is accounted for by adding back historical cumulated amortization and impairments. Therefore amortization and impairments are not deducted from revenues when determining NOPLAT (Koller, Goedhart, & Wessels, 2010). Further, intangibles also often include both operating and non-operating intangibles, something that needs to be taken into account when calculating NOPLAT. In Statoil’s case, the intangible assets are almost exclusively exploration expenses, acquisition costs related to oil and gas prospects and goodwill. Other intangibles make up a marginal part of Statoil’s intangibles and are considered operational in both the income statement and balance sheet.

Taxes

Income tax as presented in a company’s income statement normally includes the tax of both operating and non-operating items. Consequently, subtracting the reported income tax from EBITA will give a misleading NOPLAT in the end. This needs to be accounted for in the re-organized income statement. However, this can be a difficult exercise as most companies do not explicitly present what taxes come from operating and what taxes come from non-operating activities. Luckily, Statoil presents an overview of how much tax is derived from different sources. When calculating operating taxes we included the following posts; income tax at a statutory rate, petroleum tax, tax uplift, tax effect of permanent differences (excluding effect of currency changes), unrecognized deferred tax assets and change in tax regulations. The remaining taxes or tax benefits were derived from tax effect of currency differences and prior period adjustments.

The income tax at a statutory rate is the normal tax that every company would pay. In Norway the statutory tax rate as of 2015 is 27%, down from 28% in 2014 and earlier. In 2016 the statutory income tax will in fact be reduced to 25%. The petroleum tax is unique for the oil and gas industry. This tax is naturally considered operating due to its direct relation to Statoil’s core business. Tax uplift is an additional tax-free allowance given to oil and gas companies. In Norway the uplift is 5.5% per year on the basis of the original capitalized cost of

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offshore production installations (Statoil ASA, 2016a). We also see this as a direct effect of Statoil’s operating activities. The tax effect of permanent differences regarding divestments is a bit more unclear in regards to operating versus non-operating. However, earlier we argued that Statoil invests in projects on a continuous basis, sometimes followed by a divestment with a gain. These divestments sometimes release tax benefits for Statoil. As we considered the majority of Statoil’s gain from divestments under other income as operating, we see it fit to include the belonging tax benefit as operating as well. The unrecognized deferred tax assets may naturally include non-operating aspects. However, as we will show in the re-organized balance sheet, most of Statoil’s deferred taxes are operating. As a result we have also considered change in unrecognized deferred tax assets to be operating taxes. Finally, the change in tax regulations is according to Statoil an effect of the change in statutory tax rate and is thereby considered operating.

4.3.2 Analytical Balance Sheet