Question

                                               

Summary Financial Information for Phillips Petroleum Corporation: 1986 to 1992 (in Millions of Dollars Except for per Share Figures) 1986 1987 1988 1989 1990 1991 1992 $10,018 $10,917 $11,490 $12,492 $13,975 $13,259 $12,140 270 1.04 2,349 Sales Net income EPS Current assets Total assets Current liabilities Long-term debt otal liabilities Preferred stock Common equity Dividends per share Source: Phillips annual reports for 1986 to 1992 228 0.89 2,802 35 0.06 2,855 650 2.72 3,062 219 0.90 2,876 541 2.18 3,322 98 0.38 2,459 2,2342,402 2,468 2,706 2,910 2,503 2,517 6,418 7,387 10,409 10,2899,855 9,1249,411 8,175 7,887 6,505 6,113 8,716 5,894 8,411 359 270 205 ,724 ,617 2,113 2,132 2,7192,7572,698 0.00 2.02 1.73 1.34 1.03 1.12

Phillips Petroleum is an integrated oil and gas company with headquarters in​ Bartlesville, Oklahoma, where it was founded in 1917. The company engages in petroleum exploration and production worldwide. In​ addition, it engages in natural gas gathering and​ processing, as well as petroleum refining and marketing primarily in the United States. The company has three operating​ groups: Exploration and​ Production, Gas and Gas​ Liquids, and Downstream​ Operations, which encompasses Petroleum Products and Chemicals.

In the​ mid-1980s, Phillips engaged in a major restructuring following two failed takeover​ attempts, one led by T. Boone Pickins and the other by Carl Icahn. The restructuring resulted in a $4.5 billion plan to exchange a package of cash and debt securities for roughly half the​ company's shares and to sell $2.0 billion worth of assets.​ Phillips' long-term debt increased from $3.4 billion in late 1984 to a peak of $8.6 billion in April 1985.

                                               During​ 1992, Phillips was able to strengthen its financial structure dramatically. Its subsidiary Phillips Gas Company completed an offering of $345 million of Series A 9.32% cumulative preferred stock. As a result of this action and prior​ years' debt​ reductions, the company lowered its​ long-term debt-to-capital ratio over the past 5 years from 75 percent to 55percent.

In​ addition, the firm refinanced over a billion dollars of its debt at reduced rates. A company spokesman​ said, "Our​debt-to-capital ratio is still on the high​ side, and​ we'll keep working to bring it down. But the cost of debt is​ manageable, and​ we're beyond the point where debt overshadows everything else we​ do."

                                               Highlights of​ Phillips' financial condition from 1986 to 1992 are found in the accompanying​ table:

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. These data reflect the​ company's financial restructuring following the downsizing and reorganization of​ Phillips' operations begun in the​ mid-1980s.

                                               ​Phillips' managers are currently developing its financial plans for the next 5 years and want to develop a forecast of its financing requirements. As a first​approximation, they have asked you to develop a model that can be used to make​ "ballpark" estimates of the​ firm's financing needs under the proviso that existing relationships found in the​ firm's financial statements remain the same over the period. Of particular interest is whether Phillips will be able to further reduce its reliance on debt financing. You may assume that​ Phillips' projected sales​ (in millions) for 1993 through 1997 are as​ follows:

$13,100​;

$13,700​;

$14,000​;

$14,700​;

and

$15,400.

a. Project net income for 1993 to 1997 using the percent of sales method based on an average of this ratio for 1986 to 1992.

b. Project total assets and current liabilities for 1993 to 1997 using the percent of sales method and your sales projections from part ​(a​).

c. Assuming that common equity increases only as a result of the retention of earnings and holding​ long-term debt and preferred stock equal to its 1992​ balances, project​ Phillips' discretionary financing needs for 1993 to 1997.

​(Hint​: Assume that total assets and current liabilities vary as a percentage of sales as per your answers to part (b​). In​ addition, assume that Phillips plans to continue to pay its dividends of $ 1.12 per share in each of the next 5 years. The number of shares outstanding at the end of 1992 is 259,615,385 shares.)

Answer 1

	Actuals								Forecasted
	1986	1987	1988	1989	1990	1991	1992	Average	1993	1994	1995	1996	1997
Sales	10,018	10,917	11,490	12,492	13,975	13,259	12,140		13,100	13,700	14,000	14,700	15,400
Net Income	228	35	650	219	541	98	270		315	330	337	354	371
EPS	0.89	0.06	2.72	0.90	2.18	0.38	1.04		1.21	1.27	1.30	1.36	1.43
Dividend per share	2.02	1.73	1.34	-	1.03	1.12	1.12		1.12	1.12	1.12	1.12	1.12
Shares outstanding							259,615,385
Net Income/ Sales	2.3%	0.3%	5.7%	1.8%	3.9%	0.7%	2.2%	2.4%
Current Assets	2,234	2,402	2,468	2,706	2,910	2,503	2,517		2,767	2,894	2,958	3,105	3,253
Current Assets	22%	22%	21%	22%	21%	19%	21%	21.1%
Other Assets	10,169	9,709	9,500	8,550	9,220	8,970	8,951		10,273	10,743	10,978	11,527	12,076
Total Assets	12,403	12,111	11,968	11,256	12,130	11,473	11,468		13,040	13,637	13,936	14,633	15,330
Total Assets / Sales	124%	111%	104%	90%	87%	87%	94%	99.5%
Current Liab.	2,234	2,402	2,468	2,706	2,910	2,503	2,517		2,767	2,894	2,958	3,105	3,253
Current liab / Sales	22%	22%	21%	22%	21%	19%	21%	21.1%
Long term debt	8,175	7,887	7,387	6,418	6,505	6,113	5,894		5,894	5,894	5,894	5,894	5,894
Liabilities	10,409	10,289	9,855	9,124	9,415	8,616	8,411		8,661	8,788	8,852	8,999	9,147
Pref. stock	270	205	-	-	-	-	359		359	359	359	359	359
Common equity	1,724	1,617	2,113	2,132	2,179	2,757	2,698		3,013	3,343	3,680	4,033	4,404
Total Liab.	12,403	12,111	11,968	11,256	11,594	11,373	11,468		12,034	12,490	12,890	13,392	13,910
								External financing required	1,007	1,147	1,046	1,241	1,420
Long term Debt to Total Capital	80%	81%	78%	75%	75%	69%	66%		64%	61%	59%	57%	55%

	1993	1994	1995	1996	1997
External financing required	1,007	1,147	1,046	1,241	1,420
Forecasted Long term Debt to Total Capital	64%	61%	59%	57%	55%

In order to keep to the Long term debt to capital ratio below 55% in the next five years, it is advisable to source the external financing from issuing Preferred stock or raising common stock