Master of Business Administration
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028200
029464
0926486
023149
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Module code
SHR036-6
Assignment No.
Module Title
Accounting for Leaders
Module Tutor
Larry Teh
Due Date
7/12/10
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Executive Summary
4
Introduction
5
Section 1 - About BP plc
6 - 12
.1
Company overview
6
.2
History
7 - 8
.3
Key company information
9
.4
Locations
9
.5
Key executives
0
.6
Key products and services
0
.7
BP plc brands
1
.8
Share ownership statistics 2005 - 2009
1
.9
Safety - Workforce facilities over the past 10 years
1
.10
BP's oil production and total replacement cost profit before interest and tax (RCPBIT)
2
i.
Super major oil production performance chart 2001 - 2009
2
ii.
Total replacement cost profit before interest and tax (RCPBIT) chart
2005 - 2009
2
Section 2 - BP plc - SWOT analysis overview
3
Section 3 - Oil industry
4
Section 4 - BP plc - financial performance 2005 - 2009
5 - 28
4.1
Overview
5 - 18
4.2
Profitability
9 - 20
4.3
Liquidity
21
4.4
Efficiency
22 - 25
4.5
Investment
26 - 28
Section 5 - BP plc - financial performance 2005 - 2009 against its competitors
29 - 39
5.1
Overview
29
5.2
Profitability
30 - 32
5.3
Liquidity
33 - 34
5.4
Efficiency
35 - 37
5.5
Investment
38 - 39
Section 6 - Conclusion
40
Section 7 - References
41
Section 8 - Bibliography
42
Section 9 - Appendices
43 - 82
Appendix A
BP plc - SWOT analysis
43
Appendix B
Gulf of Mexico oil spill
43 - 53
Appendix C
BP plc - financial records 2005 - 2009
54 - 64
Appendix D
Exxon Mobil Corporation - financial records 2005 - 2009
65 - 72
Appendix E
Royal Dutch Shell plc - financial records 2005 - 2009
73 - 79
Appendix F
Financial/accounting ratios
80 - 82
Section 10 - Glossary
83 - 84
BP plc (BP) is a major integrated oil and gas company operating in over sixty countries across the world. It is listed on the London Stock Exchange and had a revenue of over USD$ 2 billion in 2009, and a net profit of USD$ 16.5 million. BP's divisions are exploration and production, refining and marketing, and alternative energy.
The oil company's financial records from 2005 to 2009 reveal that oil price has a large impact on the oil companies' financial performance, and an increase in revenues in 2008 reflects this, as it corresponds to high oil prices the same year. This association is also seen in working capital turnover, equity turnover, and asset turnover. The high price of oil gave BP protection from the economic downturn.
Tony Haywood became CEO of BP in 2007, and started an efficiency drive throughout the company, including job reductions and cost cutting, and succeeding in reducing the operating cycle. Oil production increased from 2007 to 2009, related to the newly operational Thunder Horse rig in the Gulf of Mexico, combined with a good hurricane season meaning that production could continue through the year.
BP's liquidity is similar to the industry average and to that of Royal Dutch Shell plc (Shell), but much lower than Exxon Mobil Corporation (Exxon). Its debt to equity ratio is considerable higher than its competitors.
The Gulf of Mexico oil spill (see Appendix B in Section 9) earlier this year is the USA's worse environmental disaster: It has cost BP USD$ 30 billion, and caused a large loss of confidence on the shares market. Not to mention a massive damage to the company's reputation. BP recorded the largest ever loss of a UK company in the 2nd quarter of 2010. By the 3rd quarter it was back in profit, with its share price improving. The company's new CEO is focusing on safety and risk reduction.
In the short term, BP is a secure. It is currently selling assets to finance payouts for the oil spill, but continues to invest in new projects in the North Sea, Azerbaijan and the South China Sea. It has consistently had reserve replacement volumes above 100%, showing that it is finding new oil reserves as quickly as it is using up current ones. However, most new oil fields are within the Middle East, and under the control of OPEC, and therefore inaccessible to BP.
In the longer term, BP will need to adapt to diminishing oil reserves, and will probably increase investment in alternative energies to accomplish this.
Report word count: 3285 (excludes contents and ref etc)
This report gives a critical analysis of the financial performance of BP plc, from
2005 - 2009. It supplies an overview of the company and analyses its accounts over the
five-year period, using year-end financial accounts from the company's reports. BP's (see Appendix C in Section 9) financial performance is critically analysed using key financial data and ratios (see Appendix F in Section 9), and then compared against two main competitors; Exxon Mobil Corporation (see Appendix D in Section 9) and Royal Dutch Shell plc (see Appendix E in Section 9).
It considers the trends within this data, and compares BP against the industry and its main competitors, and offers explanations for these trends. Data and information from 2010, particularly after the Gulf of Mexico oil spill, see Appendix B in Section 9, but is outside of the scope of the main body of the report. This information is drawn together in a conclusion, which offers an outlook on the future of BP.
http://www.bnet.com
1.1 Company overview
BP offers its customers, fuel, energy, retail services and petrochemicals products. BP's main activities include:
Upstream and downstream operations
Exploration and productions - operating in over 30 countries, BP locates, develops and produces oil and gas before transporting it to the market.
Refining and marketing - with major operations in Europe and North America and the rest of the world, BP supplies and trades, refines, manufactures, markets and transports crude oil, petroleum and petrochemicals products and related services.
Alternative energy - currently operating widely in wind and gas fired power and solar photovoltaic, BP are now developing carbon capture, storage and advance biofuels. New areas are also being researched and developed e.g. concentrated solar thermal power.
Founded more than 100 years ago, BP is Britain's largest company and the second largest oil major in the world after Exxon, based on its financial performance in 2009.
.2 History
.2 History
http://www.bp.com
.3 Key company information
.4 Locations
BP currently operates in over 80 countries around the globe.
http://www.bp.com
.5 Key executives
http://www.bp.com
.6 Key products and services
http://www.bp.com
.7 BP plc brands
.8 Share ownership statistics
.9 Safety - Workforce facilities over the past 10 years
See Appendix A in Section 9 for further information on the litigation and safety.
.10 BP's production and total replacement cost profit (RCPBIT)
2009 was a tough year for BP, after oil prices hitting a record high of $147 a barrel in mid 2008 and difficult economic conditions. 2009 Replacement cost profit for the year totalled $14.0 billion, and a replacement ratio of 129%, it was the company's 17th consecutive year of reported reserves replacement over 100%. http://www.bp.com
In 2009, the company recorded a ...
This is a preview of the whole essay
.9 Safety - Workforce facilities over the past 10 years
See Appendix A in Section 9 for further information on the litigation and safety.
.10 BP's production and total replacement cost profit (RCPBIT)
2009 was a tough year for BP, after oil prices hitting a record high of $147 a barrel in mid 2008 and difficult economic conditions. 2009 Replacement cost profit for the year totalled $14.0 billion, and a replacement ratio of 129%, it was the company's 17th consecutive year of reported reserves replacement over 100%. http://www.bp.com
In 2009, the company recorded a decline in its operational margin and liquidity over that in 2008.
Moreover, impact of Gulf of Mexico oil spill (see Appendix B in Section 9), and rising capital costs in the refining sector pose a threat to the company. Nevertheless, exploration agreements and recent development projects may allow it to expand its business. See Appendix A in Section 9, for further analysis.
Industrialised societies are dependent on oil, and over the last 150 years billions of barrels produced and consumed, and billions of dollars in revenue generated. However, the oil industry deals in a finite resource which is also accused of causing environmental damage by releasing carbon dioxide. Furthermore, many of remaining oil fields are in the middle east, and not accessible to BP, Shell and Exxon.
The challenges facing the industry over the next few decades are vast. The industry needs to diversify, and many are investing in alternative energies, but these currently provide a small fraction of world energy.
Oil and natural gas are non-renewable energy sources. They are finite and will run out. Oil production is currently increasing but discovered reserves are not. The US's census bureau has predicted that world population by 2030 would double the population in 1980 and that oil production by 2030 will decline to the levels of 1980, as oil demand will significantly outpace production. http://en.wikipedia.org/wiki/Peak_oil
Oil production - peak oil
http://www.peakoil.net/uhdsg/weo2004/TheUppsalaCode.html
4.1 Overview
A range of factors, only some of which were under BP's control affected BP's financial performance.
The price of oil and gas fluctuates constantly. It was at its peak in 2008, impacting BP's financial performance (see diagram below). The price of oil is determined by many factors; see above table, supply and demand being the main factor. Although, demand does not fluctuate that much, other than during recession, changes in supply occurs for several reasons.
http://www.royaldutchshellplc.com
4.1 Overview
Exploration and Production
For the year 2009, the exploration and production division accounted for revenue of USD$ 57,626 million, reflecting a decrease of 33.1% over revenue 2008. The revenue decreased due to lower prices of oil and gas in 2009 compared to the higher oil and gas prices in 2008. The oil prices were about 37% below due to the economic downturn in 2009, when the gas prices were about 56% below than that in 2008. The company's capital expenditure totalled USD 14,896 million, as compared to USD$ 22,227 million in 2008. The capital expenditure covered USD$ 306 million related to the contract in Iraq; and USD$ 2,805 million exploration and appraisal costs.
Refining and Marketing
For the year 2009, the refining and marketing division accounted for revenue of USD$ 213,050 million, indicating a decrease of 33.4% over revenue in 2008. The revenue decreased due to the declining demand for refining products in 2009. Furthermore, several new refineries came on stream in 2009, which impacted the price. The company's capital expenditure totalled
USD$ 4,114 million, showing a decrease of 37.99% over that in 2008.
Other Businesses and Corporate Segment (inc Alternative energy)
For fiscal year 2009, the other businesses and corporate division accounted for revenue of USD$ 2,843 million, representing a decrease of 38.65% over revenue in 2008. The company's capital expenditure totalled USD$ 1,299 million, as compared to USD$ 1,839 million in 2008.
4.1 Overview
Economic downturn
The time period of this report includes the economic downturn, which was triggered by the housing bubble and sub-prime mortgages in the USA in 2007. Banks realised they were unable to distinguish toxic assets (bad debt) from good debt, causing a reluctance to lend known as the Credit Crunch. Stock markets crashed, and are only now beginning to recover.
Despite USA led bailouts, unprecedented co-ordinated efforts of many central banks, and bank nationalisations the credit crisis continued into 2010.
4.1 Overview
Reserves replacement ratio and exploration, new pipes well etc
It is essential to BP's future that it continues to discover new oil reserves and invest in infrastructure such as pipelines.
BP is growing its operations in the North Sea, China, and Azerbaijan. Some projects that were scheduled for start-up between 2010 and 2015 may be sold to pay for the Gulf of Mexico oil spill (see Appendix B in Section 9).
Reserve replacement ratio %
4.2 Profitability
Revenue
Between 2005 and 2008 BP's total revenue increased as the rising cost of oil guaranteed more money per barrel produced. When oil prices fell in 2009, BP's revenue followed, dragged down by the economic crisis.
Total revenue USD$ millions
Brent crude oil USD$
4.2 Profitability
Net and Operating Profit Margin
BP's net and operating profit margins fell from 2005 to 2008, with an upturn in 2009. This may be attributable to ex CEO Tony Haywood's efficiency, which drove down costs (see Section 4.4). However, in 2009, BP almost equalised with the industry average.
Net profit margin %
Operating profit margin %
4.3 Liquidity
Current ratio
BP has a low current ratio, hovering around 1 in 2005, 2006 and 2007 and falling below it in 2008. BP had more current liabilities than current assets in 2008, and has not appeared to have behaved prudently throughout the period of study. However, the low oil price at the end of 2008 affects this ratio heavily, and by 2009 they were level with the industry average.
Quick ratio
BP's quick ratio is well below 1, and this reflects the large value of its oil stock.
4.4 Efficiency
Haywood's efficiency Drive
Tony Haywood became CEO of BP in 2007, and prioritised cost cutting throughout the company: jobs outside production were cut by a fifth, and costs of suppliers were reduced.
Exploration and production division cut costs by 11%, comparing Q1 2009 to Q1 2008. http://www.FT.com
Number of employees - group
Total hydrocarbons produced (thousand barrels of oil equivalent (mboe) per day)
Oil and gas production increased by 2% in 2008: this is explained by the new Thunder Horse platform in the Gulf of Mexico beginning production, and few storms in the region allowing near continuous operation throughout the hurricane season. This increase in oil production is reflected in BP's income figures.
Efficiency was also improved at refineries, from 87% in Q3 2008 to 93% Q3 2009.
http://www.business.scotsman.com
4.4 Efficiency
BP's total asset turnover ratio is dominated by the cost of oil and gas. BP has performed better than the industry average.
Total asset turnover
Brent crude oil USD$
4.4 Efficiency
Fixed net asset turnover
The fixed net asset turnover ratio is a tool that is used to test management ability to generate income from assets. BP has been outperforming the industry over the last five years.
Working capital turnover
BP's working capital turnover is better than the industry average in 2008 and 2009. This demonstrates that BP is capable of generating more sales from less investment than average in the industry. Once again the price of oil is the key determinant.
4.4 Efficiency
Equity turnover
Oil price and stock market value are the main factors affecting BP's equity turnover, which is a measure of how efficient a company uses its share equity to generate revenue. It peaks in 2008 with the oil price, but falls in 2009 with the general stock market as does the industry.
Operating cycle
BP's operating cycle shows a downward trend. This represents Haywood's efficiency drive, as the operating cycle is a measure of the interval between obtaining an asset and receiving cash from its sale.
4.5 Investment
Share price and dividends
BP's share prices follow the stock market down from 2005 to 2009, but peak within this period in mid 2007 to 2008 secondary to the high oil prices of that time. BP's share price is also highly influenced by the dividends it pays.
http://www.bp.com
4.5 Investment
Despite concerns that the fall in share price in 2009 may necessitate reduced dividends, Tony Haywood was confident this would not be needed:
"Our priorities are clear, Continue to invest...[and] pay the dividend".
(Haywood, in London Evening Standard, 27/2/09)
Following on from this, BP's share price recovered, and dividends increased soon after in 2009.
Price to earnings ratio
The price to earnings ratio is used decide whether to buy, sell or hold a share. It links the market value of a share to the earnings per share and can be thought of as a ratio showing the number of years' earning per share represented by the share price (except that earnings per share vary daily).
A high PER (compared with the industry group) shows either that a company is a leader in its sector or its shares are overvalued, where as a low PEF (compared with industry group) shows a poor company or an undervalued share. The graph is essentially the converse of the share price, and is affected by the same factors.
4.5 Investment
Debt to equity ratio
BP has a healthy level of debt to equity, although this has been rising for the last five years with a small decline in 2009. Debt to equity shows how heavily leveraged a company is. The low levels BP has would potentially enable it to borrow large amounts of money allowing fast expansion in the future if it chose to. This will be heavily influenced by the Gulf of Mexico oil spill in April, 2010 (see Appendix B in Section 9).
5.1 Overview
BP plc - 2005 - 2009
Exxon Mobil Corporation - 2005 - 2009
Royal Dutch Shell plc - 2005 - 2009
5.2 Profitability
Revenue
As with most of the financial ratios total revenue of companies in the oil and gas sector are heavily weighted by the underlying commodity price.
BP has had lower revenue than Exxon and Shell, over the five years covered by this report. This gap has closed significantly in 2009.
Total revenue USD$ millions
5.2 Profitability
Net and operating profit margin
All the companies' operating and net profit margins fell over the time period, associated with the economic downturn. BP have managed to improve their profit margin in the year 2009, leaving BP with a better net profit margin than any of its main competitors.
Net profit margin %
5.2 Profitability
Net and operating profit margin
Operating profit margin %
5.3 Liquidity
BP's current and quick ratios have been below the industry average, and its main competitors. Data from 2009 show that BP's current ratio has converged with its competitors. The difference between these two ratios reflects the critical nature of oil reserves to all these companies.
Current ratio
5.3 Liquidity
Quick ratio
5.4 Efficiency
Total and fixed net asset turnover
With principle assets of gas and oil fields, these ratios are dominated by commodity prices. From 2005 - 2008 BP's asset ratios were worse than its competitors, but its ratios came into line in 2009.
Total asset turnover
Fixed net asset turnover
5.4 Efficiency
Working capital turnover
BP between 2005 and 2008 went from having the worst working capital turnover against Shell and Exxon to having the best. In 2009 the performance dropped significantly leaving it marginally higher than the industry average.
5.4 Efficiency
Operating cycle
Over the five year period BP improved its operating cycle relative to Shell, but still trailed behind Exxon.
5.5 Investment
Price to earnings ratio
It is generally regarded that a lower price to earnings ratio indicates better value for money for an investor. At the beginning of the five year period BP appeared overpriced against it competitors, however the price over the last 12 months has fallen off against Shell and Exxon. BP would appear to be the most attractive share option using this ratio.
5.5 Investment
Debt to equity ratio
The amount of debt to equity that BP hold is considerably higher than its rivals, this trend has been ongoing for the first four years of our study. 2009 showed a slight drop for BP whilst Shell's debt to equity increased closing the gap a little. Exxon has been trading over the five year period with very low levels of debt to equity indicating that it has not been leveraging its assets.
BP is a large global oil and gas company, with a revenue of hundred of billion of USD$ over the period of study. As a vertically integrated company its operations span from the exploration for new crude oil and natural gas fields, through the production, refining, distribution, to the marketing of fuel, energy and other petrochemical products. It also has an alternative energy division.
Analysing the company's financial performance from 2005 - 2009 shows that many aspects, particularly revenue and asset turnover, are influenced by factors outside BP's direct control; the price of crude oil and the economic downturn. However, efficiency across all areas of the company have improved in this period, as demonstrated by a decrease in its operating cycle, and an increased production of crude oil despite a reduction in employee numbers. At the start of this period BP's liquidity was worse that its main competitors, but the quick and current ratios of all three companies had converged by 2009.
The Gulf of Mexico oil spill (see Appendix B in Section 9) led to BP recording the largest ever loss of any UK company. The impact on this disaster on the company could only have been bigger if the BP had actually been pushed into insolvency. As well as payouts of tens of billions of USD$, BP has suffered a crash in share prices and untold damage to its reputation.
However, at the time of writing, BP's share price is rising and it was back in profit last quarter. It's new CEO, Bob Dudley, who is restructuring the organisation, placing a much stronger emphasis on safety and risk reduction. It will become a smaller company, with many assets being sold to finance the oil spill.
In the long term BP faces many challenges. Oil production will become even more concentrated within the Middle East, and OPEC's decisions regarding production affect the price of oil globally. As a non renewable fossil fuel, oil will eventually run out. BP may choose to invest more heavily in alternative energies to ensure a long term future.
However, BP reserve replacement volumes are high, and advancing technology may mean that some oil fields previously dismissed as too difficult become economically and technically feasible. It is the view of the authors that over the next five to ten years BP, even as a smaller company, will generate billions of dollars of profit for its shareholders, and its share price will probably return to near pre-oil spill levels once dividends are restored.
Description
Website
Adi-news
http://www.adi-news.com
ASPO
http://www.peakoil.net/
BBC news
www.bbc.co.uk
BP plc
http://www.bp.com
Business Scotsman
http://www.business.scotsman.com
Exxon Mobil Corporation
http://www.exxonmobil.com/Corporate/
Fast company
http://www.fastcompany.com
Financial Times
http://www.FT.com
Guardian
http://www.guardian.co.uk/
ICIS
http://www.icis.com
OPEC
http://opec.org
Renewable energy world
http://www.renewableenergyworld.com
Reuters
http://www.reuters.com
Royal Dutch Shell plc
http://www.shell.com/
The CBS interactive business network
http://www.bnet.com
The Telegraph
http://www.telegraph.co.uk
Yahoo news
http://news.yahoo.com
Description
Website
Accounting Form Management
http://www.accountingformanagement.com
ADVFN
http://www.advfn.com
Analysis One
http://www.analysis-one.com
ASPO
http://www.peakoil.net/
BBC news
www.bbc.co.uk
Bizwiz Consulting
http://www.bizwiz.ca/
Bloomberg news
http://www.bloomberg.com
BP plc
http://www.bp.com
Exxon Mobil Corporation
http://www.exxonmobil.com/Corporate/
Financial Times
http://www.FT.com
Google finance
http://www.google.com/finance/
Guardian
http://www.guardian.co.uk/
Missouri Business.net
http://www.missouribusiness.net
Net MBA
http://www.netmba.com/
New York Times
http://www.nytimes.com/
OPEC
http://opec.org
Reuters
http://www.reuters.com
Royal Dutch Shell plc
http://www.shell.com/
Yahoo finance
http://uk.finance.yahoo.com/
SWOT analysis overview
Strengths
Vertically integrated major oil company
BP operates a vertically integrated approach across the oil and gas process and this can give BP an advantage. Controlling the end-to-end chain of the process allows BP to operate more efficiently and effectively. A vertically integrated process reduces the dependencies for third party companies, thus allowing the company to manage its business risk and improves their margins.
Market leadership
Despite the recent Gulf of Mexico oil spill (see Appendix B in Section 9), BP remains within the world's top10 oil companies based on their market capitalisation and proven reserves. The company markets its products in over 80 countries across the globe and has 13 million customers worldwide. The company's annual financial report of 2009 revealed the following:
* 22,400 fuel stations worldwide
* exploration operations and oil production operations in 30 countries
* oil production projects in 30 countries
* 16 refineries of interest worldwide
* Hellenic Petroleum, Greece - under BP's brand licensing agreement operate
1,200 fuel stations
* Over 100 years of operation under BP branding worldwide
* Other branding Amoco, Castrol, ARCO and Aral are all trusted and known worldwide
Consistent in maintaining reserve replacement ratios
Upstream companies like BP, favour a steady reserve replacement ratio. The company has been fortunate to maintain their reserve replacement ratio for 17 consecutive years. The reserve replacement ratio measures how well the company is replenishing its supplies and is calculated as follows:
Amount added to reserve
Amount extracted from reserve
Ratio explanation
00% - current production sustainable
over 100% - production growth
below 100% - production decline
Strengths
Global operations
BP is currently operating in over 80 countries, working closely with the US, China and Middle East and other markets. This put BP in a strong position, as it is not dependant on one market to generate its total revenue through. BP's geographical presence reduces the risk of a single economy downturn, as it is it not solely reliant on one market for economic satiability.
Weaknesses
Liquidation limitations
Under the recent current circumstances regarding the Gulf of Mexico oil spill (see Appendix B in Section 9); liquidity is not one of BP's strong points. BP's current ratio as at 31 December 2009 was 1.14 against an industry standard of 1.21. A current ratio's main use is to give an idea on a company's ability to settle its short-term liabilities. The higher a current ratio is above 1, the better the company would be in paying its short-term debts. A current ratio below 1 would suggest that the company was unable to meet its short-term obligations if it was time to do so. Although BP were operating at a current ratio which is not that much different from its competitors, as at 31st December 2009, BP needs to have a good strategy on how it is going to deal with the future lawsuits it will most certainly have against them due to the Gulf of Mexico oil spill (see Appendix B in Section 9). BP is currently selling assets worth $30bn in order to pay for the clean-up and compensation fund. Source: 29th Jul 2010 http://www.reuters.com
Source: Date from BP Annual Report 2009 Company website http://www.bp.com
Weaknesses
Dividend suspension
Prior to the suspension of dividend payments in June 2010, BP was recorded as UK's largest dividend payer. The suspension was as a result of the Gulf of Mexico oil spill, where it is partly committed to a compensation fund of $20bn. Capita registrars predicted that the year's suspension could be costing shareholders £5.4bn. Source: 12 Aug 2010 http://www.telegraph.co.uk
Poor management
BP's management failed to pick up warning signs that could have led to the prevention of the recent Gulf of Mexico oil spill. The failure to carry out risk assessments and safety procedures were clearly ignored during throughout the project, which involved contractors Transocean and Halliburton. It's not the first time BP have been criticized for its management decisions and poor safety, the Texas City refinery disaster saw 15 workers killed and over 170 injured. BP will need to improve their managerial approach both internally and externally to avoid further catastrophes and to rebuild their reputation.
Source: http://www.guardian.co.uk/environment/2010/sep/08/deepwater-horizon-rig-bp-report
http://en.wikipedia.org/wiki/Texas_City_Refinery_explosion
Source: http://www.guardian.co.uk/business/2010/oct/10/bp-us-safety-ombudsman-closure
Texas oïl refinery explosion 2005
Weaknesses
Litigation and safety
The Gulf of Mexico oil spill (see Appendix B in Section 9) has been recorded as the worst oil disaster in its history with over 300 lawsuits already filed against them and 1,000 ready to be filed. BP evidently has the worst safety track record operating in the US of any oil company (see diagram below). In the last five years, to avoid prosecution, BP paid fines of $373 million. BP admitted to the failure to comply with US environmental and safety laws. Source: 27 May 2010 http://abcnews.go.com
Source: http://www.fastcompany.com
Opportunities
Increase demand for unconventional energy sources
Following the decline in conventional energy sources, BP's focus on unconventional energy sources has increased. The increase in price of oil and gas, together with extraction and processing technologies advancing, the interest for unconventional energy sources has renewed. BP has already acquired resources in Indonesia and Brazil earlier in 2010.
Increase demand for renewable energy
BP hopes to benefit from the new US Government initiative to increase the production of renewable energy and move the country closer to a clean energy economy. http://www.renewableenergyworld.com
Potential exploration resources identified
BP is looking ahead to working in new exploration resources, in hope to generate new opportunities. BP have already gained access to new resources in the following countries:
* Egypt
* Gulf of Mexico
* Indonesia
* Iraq
* Jordan
Several new projects in the pipeline
The financial year 2009 saw the start of seven major expansion projects listed below. This will allow them to focus on sustaining growth and increase their profit margin.
* Galapagos - BP working interest: 50%
* Na Kika Phase 3 - BP working interest: 60.5%
* Mad Dog Phase 2 - BP working interest: 50%
* Na Kika Phase 4 - BP working interest: 100%
* Kaskida - BP working interest: 50%
* Horn Mountain Phase 2 - BP working interest: 100%
* Atlantis Phase 3 - BP working interest: 56%
With a strong and growing resource base and global leadership presence, BP plans to engage in around 40 new projects over the next five years with the expectancy to contribute approximately 1 million barrels a day by 2015.
Threats
Refinery sector capital costs rising
The increase in capital costs may result in BP having to make substantial investments in the refinery sector, as refineries worldwide tighten up on the flexibility of companies processing crude.
US Government energy policy
As the US Government move towards renewable energy and shift away from the fossil fuelled economy, the oil and gas industry's revenue and growth could have an impact, as stricter measures could be introduced in the new oil and gas leasing policy. The US Government is currently proposing to increase taxes on the oil and gas industry in view to working towards a renewable energy economy.
Gulf of Mexico oil spill - 'worst US environmental disaster' www.bbc.co.uk
An explosion on a BP operated rig on 20 April 2010, resulted in the death of 11 employees and the rupture of an undersea oil well. An estimate of 172 million gallons of oil poured into the sea between April 20th 2010 and July 15th 2010. http://news.yahoo.com This will have a major impact on the company's finances and its reputation going forward. For further reading, go to section 8.1.
Source: http://www.adi-news.com; http://www.icis.com; http://news.yahoo.com
Overview
On 20th April 201, the Deepwater Horizon oil rig suffered explosions and fires which burnt for 36 hours before the rig sank. Eleven people died. The leaking well was declared sealed on 19th September 2010. This oil spill is the largest environmental disaster in US history: 4.9 million barrels of oil were leaked into the ocean, and only 800 000 barrels were captured during the clean-up operation.
United States Coast Gaurds. Deepwater Horizon Fire
http://cgvi.uscg.mil/media/main.php?g2_itemId=836285
BP has set aside $32.2 billion to cover costs of the Gulf of Mexico oil spill, so far paying out $8 billion. During the three months to June 2010 BP recorded a loss of $17billion, the largest ever loss for a UK company. It plans not to pay any dividends payments for the first three quarters of 2010, and will evaluate whether to make any payments for the fourth quarter.
Market reaction post oil spill
BP has traditionally been popular with investors partly due to its reliable dividends payments, as shown by the phrase:
"There are three certainties in life: death, taxes and BP dividends".
(BBC, The Money Programme, 2010)
Panic about BP's future and liquidity with the suspension of dividend payments, prompted a spectacular fall in its share price.
BBC News website http://www.bbc.co.uk/news/business/market_data/shares/3/87080/twelve_month.stm
The market began responding to the oil spill when early attempts by BP to cap the well failed. There was widespread speculation that BP was closed to bankruptcy, and the ex-CEO Tony Haywood has now confirmed this was true: as banks refused BP loans it was left very near to insolvent (BBC, The money programme, 2010). This cash crisis was only resolved once agreements on compensation were reached and President Obama gave the markets confidence in the company by stating:-
"BP is a strong and viable company, and it is in all of our interests that it remains so".
(President Obama, 2010)
Market reaction post oil spill
Many considered it likely that the company would face a massive restructuring scheme or be taken over by a competitor (Shell or Exxon).
"Fred Lucas, an energy analyst at JP Morgan Cazenove, speculated that Exxon or Shell could swoop on the beleaguered British oil giant for approximately £88bn. Exxon is the most financially strong oil company, he said, adding that it could make a cash and stock offer while spinning off $50bn (£33bn) of refining and marketing assets."
(Daily Telegraph, 29th June 2010)
http://www.bp.com
However, not only have BP's third quarter results (July - September) shown a quick return to profits, in mid July share prices rose by 10% in New York. It continues to outperform financial analysts' forecasts since the well was capped. Helped by strong and rising oil prices most apocalyptic views of BP's future seem very distant memories now.
Market reaction post oil spill
Quotes
An article in the Daily Telegraph on the 29th of June quotes http://www.bbc.co.uk/news/business/market_data/shares/3/87080/twelve_month.stm accessed 03/12/2010
http://www.bbc.co.uk/news/business-10779626 BP to emerge smaller and wiser - graphic profit / loss
BBC (2010) The Money Programme: $30 billion Blow-out. First broadcast November 2010.
Obama, B. (2010) shown in BBC (2010) The Money Programme: $30 billion Blow-out. First broadcast, November 2010.
Financial ratios can be used to:
* Benchmark operational standards against industry averages and its competitors;
* Analyse overall financial and operational health; and
* Predict the results of future operations.
* Liquidity (ability to pay current bills);
* Activity (rates of inventory turnover and accounts receivable collection);
* Leverage (ability to borrow money and pay off debt); and
* Profitability (performance and efficiency at turning a profit).
This analysis uses financial ratios suited to the oil industry. The following tables list the most common financial ratios and their definitions.
Ratio
Definition
Ratio
Definition
Ratio
Definition
Alternative energies
Sources of energy that are not fossil fuels, usually taken to mean environmental or renewable energies, such as wind and solar, sometimes taken to include nuclear energy.
Bailouts
In this report bailouts refer to the large sums of money given or loans to banks to prevent bankruptcy during the global economic crisis.
Brent Oil
A main type of crude oil; it that is produced from the North Sea. Other types include West Texas Intermediate and Oman oil.
Downstream
Refers to oil and gas operations after the production phase and through to the point of sale, whether at the gas pump or the home heating oil truck.
Exxon Mobile Corporation
A major global oil and natural gas producer and the largest non-governmental refiner of oil.
Fossil fuels
Oil, natural gas and coal. These non-renewable sources of energy are normally produced by mining or drilling.
Global economic crisis
Also known as The Financial Crisis, and The Credit Crunch. The recession started in the USA in 2007, and spread to almost all developed economies. 2007 - 2010.
Housing bubble
Housing pricing within the USA were artificially high due to many people buying houses with mortgages that the owner could not afford to repay. This lead to increased house prices until the burst of the bubble in 2007, when many banks realised they could not identify good debts from bad or "toxic assets". This triggered the global economic downturn of 2007 - 2010.
Hydrocarbons
The chemical term for natural gas and oil.
OPEC
Organization of the Petroleum Exporting Countries. Composed of twelve oil producing countries from the Middle East, Africa and South America. It is a cartel, and has a large impact on global oil prices by controlling oil production by its members, which produce 42% of the world's crude oil. BP, Shell and Exxon Mobil are not member of OPEC.
OPEC controls the oil production within twelve countries. OPEC's goal is to keep the price per barrel of oil at around $70 per barrel. OPEC meets and determines the oil demand forecast, causing the price of oil to fluctuate wildly.
Peak oil
This is a theoretical point in time when global production of oil is highest. After this point production will decline. The timing of peak oil is debated.
Royal Dutch Shell plc
A major global oil and natural gas producer, distributer and retailer, commonly known simply as Shell.
Upstream
The grass roots of the oil business, upstream refer to the exploration and production of oil and gas. Many analysts look at upstream expenditures from previous quarters to estimate future industry trends. For example, a decline in upstream expenditures usually trickles down to other areas such as transportation and marketing.
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Accounting for leaders - Assignment 1 - December 2010
