Petrobank Energy and Resources Ltd.

94% Drop in Quarterly Net Income

Summary:

Petrobank Energy and Resources Ltd. (TSX:PBG) has reported in the March of 2011 lower than expected earnings for the fourth quarter. Net income experienced a 94% drop from the same quarter the previous year. Income figures from continuing operations fell from $20.7 million to $1.3 million. Profits of 22 cents per share last year have plummeted to a miniscule cent per. Recall that net income is the result of subtracting the expenses from the revenue. Petrobank’s quarterly revenue fell from $276.2 million to $258.4 million. During this quarter; Petrobank, owner of 59% of PetroBakken Energy Ltd. (TSX:PBN), which focuses on oil pools in Saskatchewan and Alberta, stated that they increased their spending on their Western oil projects. Capital expenditures were up to $300.0 million from $192.8 million. These investments would be displayed under the investment portion of a cash flow statement. The major drop in net income this quarter can be credited to the major increase in investing activities.  

Connections:

My article relates to Chapter 5 in the text as it connects to the concept of cash flow. Cash flow problems arise when a company does not have enough cash to meet its daily needs. There are many reasons as to why cash flow problems occur with the main ones being a lack of start-up capitalization, a long cash conversion cycle, or it can be the result of a large portion of the company’s cash being tied up in inventory and assets. Depending on their cause, there are various ways in which cash flow problems can be resolved. Petrobank may be at a increased risk to run into cash flow problems in the near future seeing as their revenue has dropped (reduced cash inflow) while at the same time expenses have risen (increased cash outflow).

Reflection:

The sharp drop in quarterly net income is more than likely a short-term phenomenon. As I have said before, net income is calculated by subtracting expenses from revenue. The reason behind this drop is the fact that Petrobank experienced a slight revenue drop of approximately 7% but more importantly expenditures have gone up nearly 60%. The increase in expenses is the result of increased investment in the company’s western Canadian oil projects. The income statement and net income figure can be quite deceptive as they merely provide a “snapshot” of the performance of a company. Over the years, many companies with positive net income figures have gone bankrupt because they did not have enough money to go around. The cash flow statement helps paint a more complete picture of the “health” of a company. The reason why net income is going down for Petrobank is because they are increasing their investment in the company’s oil projects in Alberta and Saskatchewan. These projects will bring in increased revenue in the future. Stockholders need not worry; you have to spend money to make money.