An Analysis of the Financial Situation of Bp P.L.C

For this research and analysis project, Topic 8 “An Analysis of the Financial Situation of BP P. L. C. (BP)” has been chosen as the topic. To assist the study, the Royal Dutch Shell P. L. C. (Shell) is been chosen for a comparison. One of my friends, an employee of BP, was given a chance to enter the company’s share option saving scheme. He asked me should he take this option or not. After a roughly study I found that BP is the second-largest global oil group of Europe.

During the last decade, the company has performed well and turned from a local company to a global company. But over the past two years, BP has suffered a series of safety and operational problems, led to increasing public scrutiny and had an effect on BP’s reputation. With this background, the company’s investment value is worth to be reviewed. Most investors have shown the interest in whether the outstanding performance will be kept up after a new CEO take over in May 2007, and how soon can the critical difficult situation of the company will be turned around. This report would bring an answer for above questions by a financial study.

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The Royal Dutch Shell (Shell) operates in the same industry sector with similar comparable size and will be mentioned as the comparative company for assisting the research?

Position Analysis

The persition analysis is a review on the operating environment, both inernal and external, of the business. Two analysis models, SWOT alongside SLEPT can be used as a basis for the analysis of business and environmental factors. (Armstrong, 2006) SWOT Analysis Under this model, the company’s strengths (S) weaknesses (W), opportunities (O) and threats (T) will be reviewed. The work involved draws on the data obtained about operating objectives, current position, extrapolated position, gaps and environmental forecast, and corporate appraisal.

The SWOT analysis is a critical assessment of the internal appraisal of BP’s strengths and weaknesses, and an external appraisal of the opportunities and threats open to the competitive oil and gas industry. (ibid) Strategic Analysis & Major Features Review (SLEPT) Morden organisations must respond to a variety of internal and external pressures, which can be termed by total environment of organisation . The strategic analysis gives an examination on BP’s strategy according to Johnson and Scholes’ criteria, suitability, feasibility and acceptability.

The major features review is to identify the environment of the industry that BP is operating in by using the SLEPT analysis, Social, Legal, Economic, Political and Technological.

To form an opinion on if the company is applying its assets in an efficient and profitable manner and able to meet its financial obligations, the financial ratios can be used to evaluate several aspects of operating performance and financial condition: Profitability Analysis of profitability ratios, gross profit margin (GPM) and net profit margin (NPM) help to gauge how well the company is managing its expenses.

These profitability ratios give us an idea of which factors make up a company’s income and are usually expressed as a portion of each money unit of sales. Liquidity Liquidity reflects the ability of a firm to meet its short-term obligations using those assets that are most readily converted into cash. Liquidity ratios, current ratio and quick ratio, tell about the company’s ability to meet its immediate obligations. (Foster, 1986) Finance Gearing Financial gearing ratios are used to assess how much financial risk the company has taken on.

Component percentages, debt-to-equity ratio and debt ratio, compare a company’s debt with either its equity capital or its total liabilities. Coverage ratios, like interest cover, reflect a firm’s ability to satisfy fixed financing obligations. (Blandon, 2007) Operating efficiency In addition to achieving profitability and maintaining liquidity, management is responsible for using company’s assets efficiently. There are three popular efficiency measures (stock turnover, fixed assets turnover and debtor collection period) to assess the company’s success in using total assets, fixed assets and inventory and in collecting receivables promptly. ibid) Returns To evaluate how well the company uses its assets in its operations, the return on capital employed (ROCE), return on assets and return on equity ratios will be calculated to help to illustrate the return of the company earned for every money unit invested in assets and the net income shareholders receive to their equity in the stock in money terms. (Fabozzi, 2003)

Trend Analysis

Trend analysis track changes in financial statement line items over year to year. This analysis technique helps to assess the direction and extent of the company’s development tendency in near future. Foster, 1986)  There are many sources for information collection to support both knowledge and technical basis of this report. The annual reports provide detailed annual results on which the key financial ratios are formed. And the financial ratios are crucial in analysing the financial situation of the company. Past 5 years accounts are helpful in analysing the progress trend and the financial position of the company over a period of time.

The annual reports from the comparative company are also important to this report. The key financial ratios calculated of using Shell’s reports help in assistance of assessing the performance of BP. Because they are operating in the same industry sector and in the similar size, Shell’s reports can work as a yardstick.

Analysts’ reports provide an insight about the growth and future prospects of a company. These reports are prepared by skilled professionals who can critically analyse decisions made by the company and draw conclusions, which can be a great source of information for the shareholders.

Newspaper commentaries can have a significant impact on the share price of a company. Newspaper clips provide up-to-date information about a company along with expert analysis and outlook of the company. Such clips have contributed vital information to this report project.  The in-house brokers and financial advisors of BP are more likely to have first-hand information about the company.

Being at such a position they would be fully aware of both the internal environment and the external environment that the company faces. Hence, the position makes their reports indispensable. But such reports should be used with selection as there could be favourable commendation towards the company. Financial Statement Analysis by George Foster, Interpreting Company Reports and Accounts by Geoffrey Holmes, Financial Management & Analysis by Frank J. Fabozzi, London College of Accountancy (LCA) tutorial notes for the research and analysis project, ACCA professional paper manuals were part of the sources for my general background reading. Such reading supplemented my existing knowledge about analysing reports.


The Business BP is one of the world’s largest integrated oil companies of the world, which provides customers with fuel for transportation, energy for heat and light, also offers retail services and petrochemicals products for daily items. In the last decade, BP has transformed from a British oil company to a global energy group. BP has estimated 3% global market share of oil & gas production, 4% of refining capacity and over 10% retail sales of refined oil products. (BP, 2006)

The SWOT analysis can identify the key internal and external factors that are important to achieving the objective and assist in narrowing the gap between BP’s predicted and desired performance. (Armstrong, 2006)

BP is one of the biggest energy companies in the world and operating globally. In the past decade, it has obtained steady growth in both operating and wealth accumulating. BP maintains a strong and valuable brand in the industry it is operating in, and takes as high as 10% market share in the retail sales of refined oil products of the world.

Also, BP has established a competitive group structure to become a giant in the industry. The three separate segments of BP are Exploration and production, Refining and marketing, and Gas, power and renewables. The segments have different strategies but for achieving a same long term objective of the group. BP has good assets in different places such as Angola and Azerbaijan and with the resolution of the dispute over the Kovykta gas field in eastern Siberia (Crooks, 2007). These activities prove appears that BP has stabilised its position in Russia and Africa. In addition, the potentially significant exploration deal signed with Libya has also strengthened the BP’s future expedition.

The organisational structure of BP is decentralised in operation, centralised in financial performance (Crooks, 2007). The culture of cost-cutting to achieve the high demand of financial performance has brought less awareness of safety issue. The problems came up consequently, such as metallurgical failure at the Thunder Horse platform in the Gulf of Mexico, and the explosion in 2005 at the company’s Texas City refinery which is still under the investigation of US Chemical Safety and Hazard Investigation Board (BP, 2006).

BP’s Exploration and Production (E&P) segment accounts for a major share of the group’s revenue. For 2006, the segment’s share of BP’s total revenue was 81. 66%. In this context, the performance of the segment could have a greater impact on the group.

This weighted position indicated that the group’s performance relies heavily on the performance of Exploration and Production segment, and therefore relies on the exploring and producing environment. Decentralised operations have inhibited BP’s capability to share best practice around the group, which can be vital when investing in challenging and high-value projects, such as the notoriously troubled Thunder Horse platform in the Gulf of Mexico. ibid) Opportunities  World energy demand is projected to grow by more than 50% by 2030, with the developing world accounting for two-thirds of that growth (BP, 2006).

Therefore, BP has the chance to take the share when the consuming market extending as long as the exploration activities supporting this trend. BP was very well configured for the low oil price environment; it could outsource and slash costs very effectively, while the main challenge is to get projects executed and completed on time and on budget (FT, 2007).

Threats BP is experiencing a hard time at the moment. The exposures of the above mentioned events and other issues have led to increased public scrutiny and brought a considerable damage on the reputation of the group, which could amortize the goodwill of BP. To this sense, the wealth of investors might be shrunk.

The oil, gas and petrochemicals industries are highly competitive. There is strong competition, both within the exploration industry and refinery and retail industries, in supplying the fuel needs of commerce. The product prices triggered by the competition ressure, which affects oil products marketing and requires continuous management focusing on reducing unit costs and improving efficiency (FT, 2007).

Strategic Analysis BP has quoted its strategy aims to balance two priorities, investing for the future and generating returns for the shareholders today (BP 2006). By setting annual and five-year plans the company is executing the strategy in the context to achieve three targets, long-term growth, increase the dividend per share and return to shareholders.

From long term developing point of view, the strategy is suitable for the energy group and BP has the achievability for both mid term and short term targets. BP has adopted less centralised approach to operational decision-making which with many strengths such as encouraging entrepreneurialism and initiative, smoothing the rapid integration of the companies that BP acquired in late 90’s, and helping drive down costs to deliver outstanding financial performance.

But the group still need to strengthen the base for long term growth and focus on the day to day operating process, especially after the negative influence brought from the events happened in last 2 years (Crooks, 2007). Major Features Review (SLEPT) SLEPT analysis is a part of the external analysis for the business and gives a certain overview of the different macroenvironmental factors that the company has to take into consideration (Wikipedia). Social Factor Enterprises should have an increasingly recognized role in helping to improve the social and economic environments of the countries in which they are operating.

Due to operating in the oil industry in many countries, BP should make a valuable contribution in many ways, paying tax generated from operating revenues, investing in education and training and improving employment opportunities, promoting revenue transparency in the extractive industries, and providing affordable energy products to rural communities (BP 2006). Legal Factor New research was published that highlighted the increasing future risks of climate change and the growing acceptance that how much of the observed warming and its associated impacts result from human activity (Shell, 2006).

There were some other significant legislative activities, especially in Europe and the US (e. g. California introducing legislation to reduce CO2 emissions to 1990 levels by 2020 and to 80% below 1990 levels by 2050). In this respect, BP should make continuingly effort to produce environment friendly products to follow the requirement of the law, and protect the climate from being damaged further effectively. Economic Factor All international oil companies are facing more difficult situation than before.

The vital difficulties for the oil companies would be, rapidly rising costs, generally sluggish production growth, intensifying competition from national oil companies in emerging economies such as China, Brazil and India, and greater resource nationalism among the countries that hold oil and gas reserves (Cygnus Business Consulting & Research, 2004). More and more, big oil companies are changing their reporting habits and only publish their output and financial results combining oil and gas. This obscures the change in the production portfolio namely a declining oil business and a growing share of the gas business (Zittel, Schindler, 2003).

However, the trading environment is getting stronger, with higher oil and gas realizations and higher refining and olefins margins but lower retail marketing margins. Crude oil prices reached record highs in 2006 in nominal terms, driven by continued oil demand growth and low surplus oil production capacity (BP, 2006). Political Factor There were still many debates over relations between national governments and international oil companies. For example, during the year 2006, Bolivia nationalized its oil and gas industry and Venezuela increased taxes on energy companies.

Transparency over the revenues that governments received from energy companies and the way they spend them continued to receive scrutiny. The Extractive Industries Transparency Initiative (EITI), which promotes such transparency, continued to develop, holding its first board meeting in New York in December 2006. BP continued to invest in many energy-rich countries, seeking to maintain positive and transparent relationships with governments and often working side-by-side with national oil companies (BP 2006).

Technological Factor Technology application in the oil industry is to develop the techniques that can reduce the exploration cost and improve the production, and produce the clean and renewable energy to introduce to the market. BP had the power to offer expertise in areas such as deep-water exploration and production, and set up to double its investement (was stands at between $150million and $200 million a year in 2005) in alternative and renewable energy, which aims to bring clean and low emission energy to the market.

Therefore, when the competitor Shell’s effort is going into “second generation” biofuels, a diesel fuel made from wood chips, and ethanol made from straw; BP is researching this second generation as well; Athough the work of BP seems less advanced, but none of its peer has yet made a commercial breakthrough. The first company that does, could transform biofuels from a marginal, subsidy-dependent and volatile activity into a hugely successful business.

As mentioned above, BP is organised into three different business segments: Exploration and production, Refining and marketing and Gas, power and renewable. Exploration and Production (E) The segment’s profit before interest and tax (PBIT) of BP was $29,647 million, a record high, representing an increase of 16% over 2005. This high record could be explained by higher oil realizations, and partially offset by lower reported volumes and lower gas realizations (BP, 2006). Refining and Marketing (R) The PBIT for the R was $5,283 million; compared with $4,394 million in 2005 the increase is 20. 2%.

The result reflects a number of improvements on a year ago, including the progressive recommission of the Texas City refinery and improvements resulting from the efficiency programmes that began in 2005, lower associated rationalization costs and a positive impact from fair value accounting. Although refining volumes were lower in 2006 owing to the impact of reduced availability, the retail marketing margins were stronger, grew through distinctive brand offers such as Ultimate fuels, Castrol Edge and the Marks & Spencer, etc (BP, 2006). Gas, Power and Renewable (GP) The PBIT of GP was $1,376 million in 2006, increased 27. % compared with $1,077 million in 2005.

The result includes a net gain of $181 million (2005 $20 million charge) and also reflected higher contributions from the operating businesses, partially offset by higher IFRS fair value accounting charges. There was still an increase on volumes of gas supplied into liquefaction plants. BP Alternative Energy has continuing investment and development in LNG (liquefied natural gas), NGLs (natural gas liquids) (BP, 2006).

The Total Revenues of BP in 2006 was $270,602 million, has increased 6. 7% compared to year 2005 where the increase rate was 0. % in 2002, 13. 3% in 2003, 18. 3% in 2004, 25. 1% in 2005 compared with the previous year respectively. The growth is slightly lower than Shell’s result but has been kept steadily. The chart below is used to give a clearly review on the revenue growth of both companies. [pic] To understand better, the analysis is needed to give a close review on the growth in Profit before Taxation (PBT) and Dividends Distributed to the Shareholders. Profit before Taxation (PBT) The PBT of BP in 2006 was $34,642 million, has increased 8. 5% compared to year 2005, 38. 8% to year 2004, 95. 4% to year 2003 and 209. % to year 2002.

Additionally, the 5-Year Average NPM of BP is also lower than it of Shell In the review of the growth differences between above two margin ratios, the GPMs of both companies in 2004 were the turning points. The GPM of BP was turning from the peak, while the GPM of the peer was turning from the trough. However, for the NPM ratios, BP has obtained a steady increasing tendency at lower level compare to its peer.

From the table above, in short term running context, BP has remained a safety level of keeping the balance between current assets and current liabilities although the Quick Ratio is slightly lower in 5-year average term comparing with Shell. The three ratios in the above table are return ratios of the two companies and also can be looked as profitability ratios, hence the higher the better. On the whole, BP has a better result on the return of shareholder’s funds than Shell. And relevant lower return on Assets occupied.

The fair value of the assets has been taken into account to assure the validity of the comparison. EPS [pic] The chart above illustrated the trend of the Diluted EPS of BP and Shell in curves and shareholder’s funds occupied in columns. Both companies have rising curves of Diluted EPS. The curve of Shell is steeper and starts at higher level; the curve of BP is flatter and starts at a lower level. PE ratio [pic] The figure above gives the roughly trends of the PE ratios of the two company that provided by the FT in LSE (London Stock Exchange). PE ratios vary over time with rage between 8 and 20 times, and mean around 14. times (Cambell, 1998).

We can see the PE ratio line of BP has fallen into the range mentioned above, and shapes similar as the line of Shell. But there are factors need to be drawn attention on: the day to day PE ratios of a company should not form a curve, the curve above only describes a trend for understanding purpose; further more the dividend payout, EPS growth and other factors can also have affect on the PE ratio. 2. 4. 3 Investment BP’s investment focus is to develop businesses with the potential to succeed in the long term beyond the energy sector.

The investments had been made in the projects in the west and in Asia, such as Russia, Angola and Azerbaijan etc. The approach helps local enterprises to develop capability, while local people benefit through employment and by developing skills to support sustainable economic growth. Investments also bring benefits, enterprise development can often shorten and stabilize our supply chains – in some cases reducing costs. A local supplier base also helps company to build constructive relationships with local communities, linking to the needs of our different businesses and driven by the individual features of local markets.

BP plans to invest $8bn (? 4. 64bn) over 10 years in solar power, wind, hydrogen and combined cycle gas turbines (CCGT), an efficient type of gas-fired power station. The first phase of investment will total $1. 8bn over three years, expected to be evenly split between the four sectors.


Strong strategic position with reputation challenge on safety issue Bp has the strengths to support its future development in the industry, and remain its market share as one of the largest oil and gas group in the world.

Therefore the investors should feel confident to keep the investment made in BP. From a mid-term and long-term point of view, the company is to bring future benefit at extremely high possibility. BP’s upstream portfolio would address the power of access to the fast growing energy market. The operationg failures happened in the past two years have given the warnings to the dirctors of BP. They must be aware that safe operation is more important than persuing high financial performance. After Tony Hayward took over as chief executive in May, investors had been given hope of new start. The initial reviews have been largely favourable, particularly the goodwill has gained on the promise made for concentrating on “safe and reliable operations”. (FT, 2007)

General financial healthy, challenge the market leader The outlook of financial analysis of BP is optismistic. There is potensial growing space, the financial ratios has indicated the steady growth position in the past five years. However, under the comparison with Shell, also a long time established global oil and gas company, the performance of BP was slightly lower.

The main points I can put to explain the lower financial performance are:

  • Different business culture gives different management style, and focus on different key success factors.
  • Different phases of business life that the companies stepped in can cause the different strategic plan for that special stage.
  • The time that the companies become listed in the stock market are different hence the level of attention they draw from the investors are different.

The Share Option Saving Scheme was designed to mature in 3 years or 5 years. It will be a middle or long term investment to take this option. And BP is such a company that it is suitable to make middle to long term investment. Therefore, my suggestion to the investor is to take the offer since there will be nothing to lose even if the investment will not bring 20% return, which hardly happens.

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