I. Investment Highlights Company Profile



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Craig M. Seidelman

CraigSeidelman@mizzou.edu
Beyond Petroleum plc (BP)
I. Investment Highlights
Company Profile:

BP owes its origin to one man, William Knox D’Arcy, who at the turn of the century invested time, money, and labor in the belief that worthwhile deposits of oil could be found in Persia (now known as Iran). BP has transformed: growing from a local oil company into a global energy group; employing over 100,000 people and operating in over 100 countries worldwide. BP’s main activities are the exploration and production of crude oil and natural gas; refining, marketing, supply and transportation; and the manufacture and marketing of petrochemicals. BP has a growing presence in gas and power and in solar power generation. BP has well-established business operations in Europe, North and South America, Australia, and Africa. They are one of Britain’s biggest companies and one of the world’s largest oil and petrochemicals groups. BP has several brands that are recognized and respected in markets worldwide. They are; BP, am/pm, Aral, ARCO, and Castrol. BP supports all of its businesses with high quality research and technology and are committed to a code of conduct that sets high standards for a business committed to integrity.



Key Statistics:

Investment Rating

BUY
Pricing

Closing Price (as of 11-11-05) $64.72

52-Week High $72.66

52-Week Low $56.60
Valuation

Market Cap (intraday) 1.37T

Trailing P/E (intraday, ttm) 65.17

Forward P/E (fye 31-Dec-06) 9.33

PEG Ration (5-year expected) 1.17

Price/Sales (ttm) 3.94

Price/Book (mrq) 16.65

Current P/E (ltm) 12.20


Profitability & Effectiveness (ttm)

Profit Margin 6.28%

Operating Margin 9.17%

ROA 9.96%

ROE N/A

BETA 0.50


Market Data

Volume 2,031,400

Revenue (ttm) 345.02B

Revenue per Share (ttm) 16.175

Gross Profit (ttm) 35.80B

EPS (ttm) 1.00

Div & Yield 2.14 (3.30%)


Growth Dynamics:

Exploration and production’s third quarter result was up 36% on a year ago reflecting higher realizations in both liquids and gas, partially offset by slightly lower volumes and higher operating costs and revenue investments. Refining and marketing result reflects record margins but significantly lower retail and marketing margins compared with a year ago. In Gas, power and renewables the result increased compared with a year ago primarily due to higher contributions from the gas marketing business. Their net of debt to net of debt plus equity ratio decreased from 20% in 2004 to 19% in 2005. BP repurchased 332 million of its own shares, at a cost of $3.8 billion. It seems as if world economic growth appears to have been sustained at close trend rates, despite the aftermath following the recent hurricane tragedies.



This graph depicts the 5 year performance of BP compared to the S&P 500. It has outperformed the S&P pretty much the entire time. The following are growth rates calculated on advfn.com.



Growth Rates

5-Year Growth

3-Year Growth

Revenue

18.19%

21.11%

Income

11.50%

45.57%

Dividend

6.16%

5.26%

Quarterly Revenue growth is 35.60% and Quarterly Earnings Growth is 39.20%.

Though oil prices are $10 a barrel higher this quarter than from a year ago, hurricanes Rita and Katrina resulted in loss of oil production in the U.S. Gulf of Mexico have also caused consumption levels to weaken and are causing crude oil prices to fall downward. The Paris-based IEA, lowered its estimates for world oil demand to 85.1 million barrels a day in the fourth quarter, down 400,000 barrels a day. The agency is attributing the drop to “unusually warm weather and hurricane related disruptions” that cut demand in September and October. The unseasonably warm weather led to bigger than expected inventories across the nation. Production of oil is down 50% in the Gulf of Mexico due to the Hurricane damages, but rising imports have made up for them keeping the oil and gas prices sustained at where they are at. The tide of oil imports during this time has increased the trade deficit to nearly $66.1 billion. With all of this, consumption is expected to rise 1.5% this year and 2% in 2006. Over the past year, petroleum has risen some 30.9%. It seems as if when the cold weather comes in the fourth quarter, oil and gas prices will rise again despite shortages and consumption levels.

According to AccuWeather predictions there will be a big change in the weather ushering in a cold jetstream hitting the United States. From the oil high on August 30, 2005 of $70.85 a barrel from Hurricane Katrina it has since fallen 20% and with the reported rising inventories from United States and Japan prices are dipping down indicating slowing demands for gasoline. BP’s research and technology department is predicted to spend $5 billion to find, develop, transport and deliver new energy supplies to the US market.

BP has also recently announced a $2.2 billion expansion of Wamsutter Natural Gas Field located in Wyoming. This field encompasses 1,700 square miles and is one of the largest tight gas resources in North America. Being that BP is one of North America’s largest producers and marketers of natural gas this expansion is expected to increase BP’s share of ultimate recovery from the field by 450 million barrels of oil equivalent and increase BP daily net production from 125 to 250 million standard cubic feet per day by the end of the decade. This major investment by BP follows more than two years of focused, accelerated drilling and technical studies which revealed the untapped potential of the Wamsutter resource. This expansion is part of the company’s fundamental strategies to long-term growth and commitment to the world. BP is also investing in the Deepwater Gulf of Mexico. So far, four new fields have started production in the last three years and two more fields are being developed.

Oil product stocks and anticipated recoveries in refining capacity generally are adequate to meet current demand but the situation remains finely balanced and vulnerable to further disruptions or a colder than normal winter. Therefore, refining margins are to remain high during the fourth quarter. During the third quarter, retail margins have been impacted negatively by high and rising product prices. The marketing margin for BP and the industry will remain highly volatile throughout the fourth quarter due to vast uncertainty. The potential growth and expansion of BP looks very positive with increased earnings and revenue over the past years.
II. Executive Summary
BP is in the Major Integrated Oil and Gas Industry and is traded on the NYSE. London-based BP is the second-largest oil company on the planet behind ExxonMobil. Founded by the 1998 merger of British Petroleum and Amoco, BP boasts proven reserves of 18.3 billion oil equivalent barrels. In 2004, BP produced 4.0 million barrels per day. They have a refining capacity of 2.8 million barrels per day, operate petrochemical plants, and sell petroleum through 27,000 service stations around the globe. They have operations in over 100 countries and employ over 100,000 people.

BP’s 5-year forecasted earnings growth is 10.1% which is below the forecasted industry 5-year earnings growth of 15.1%. BP has relatively low volatility (beta) of 0.50. BP is one of the largest energy companies, providing its customers with fuel for transportation, energy for heat and light, retail services and petrochemical products for everyday items. BP has 21 refineries around the globe and is expanding its production to the deepwater Gulf of Mexico, where four new fields have started production in the last three years and two new fields are being developed. BP also has announced a $2.2 billion expansion of Wamsutter Natural Gas field which will increase their production significantly. BP has five core business brands which are; BP, am/pm, ARCO, Aral, and Castrol.

BP is about finding, producing and marketing the natural energy resources on which the modern world depends on. Their business is run on the principles of strong corporate governance, a clear system of delegating accountability and a set of values and policies that guide their behavior. They have a code of conduct which is their commitment to integrity in the corporate world. The code of conduct covers five key areas in business operations: health, safety, security and the environment; employees; business partners; governments and communities; and company assets and financial integrities.

With the recent tragedies of the Hurricanes, and other unforeseeable events in the world, the stock price volatility may fluctuate.


Recommendation: BUY

BP is a good company to invest in if we would like to play it safe. It has outperformed the S&P 500, but it is near its 52 week high and forecasts have projected that prices will not drop or increase. Many investors have been investing into energy to diversify and increase their returns, thereby driving up the price of oil. But as prices fall, they are likely to sell. The “buy” side is said to drive this industry because there are too few sellers in the market.


Pros:

  • Well recognized and respected brand names in the worldwide market.

  • Key Strengths are in oil and gas exploration and production; the refining, marketing, and supply of petroleum products; and the manufacturing and marketing of chemicals.

  • Proven reserves

  • Expansion of Wamsutter Natural Gas Field in Wyoming will increase production of natural gas from 125 to 250 million standard cubit feet per day by the end of the decade.

  • Sales Revenue growth is predicted to increase ~ 18% over the next 5 years

  • Strong Likelihood of future exploration into other resources for energy

  • Low risk

  • Foreign Stock will help diversify our portfolio

Cons:

  • Warming of the Weather and Hurricanes Rita and Katrina have caused damages and production stoppages in the Gulf of Mexico.

  • Possibility of reserve build up due to the “warming of the weather” could drive down the price.

  • Future Growth in sales and earnings is below the industry average.

  • Crude Oil futures correlated with price of stocks.

  • Missed the chance to jump on the energy train before crude oil prices reached all time highs moving stock prices up.

  • World economic growth appears to have been sustained at close to trend rates, despite the disruptions and uncertainties following the hurricanes.

BP’s solid growth throughout its company’s history has allowed them to explore and research more advanced ways to fill the need for energy that our world needs. BP adds diversification to our portfolio being that it is an international stock. BP’s projected growth rates in the future show that it is a sustainable company for earnings and revenues. In the integrated oil and gas industry weather is an important factor to watch in determining the fluctuation of the stock.


III. Company’s Description
From the BP website information was attained:
BP is a holding company of a major petroleum and petrochemicals group. Its main activities are exploration and production of crude oil and natural gas; refining, marketing, supply, and transportation; and manufacturing and marketing of petrochemicals. It is the second largest producer/manufacturer of energy in the world, trailing behind ExxonMobil. BP has been researching and testing a new sector of solar power generation. In 2004, their solar business recorded its first ever profit after restructuring in 2003. Said again, it supports all of its businesses with high quality research and technology.

As one of the world’s leading companies, BP believes that it is their responsibility to set high standards, to be seen to be, a business which is committed to integrity. They applied a code of conduct in their everyday business rituals. The code of conduct includes many examples of how their shared group values should be applied in daily business operations.



BP has five brands for which they are recognized and respected around the world. They are BP, am/pm, ARCO, Aral, and Castrol.

  1. Am/Pm: There are more than 950 am/pm convenient stores throughout the US West Coast, serving nearly 2,200 different products. In the US, it averages around $1 billion gross sales. This is the place to food, drink, and snacks at a competitive price. The brand personality of am/pm is fun, cool, funky, irreverent, and young.

  2. ARCO: First for gasoline retail quality, convenience and value on the US West coast. It provides value for your money. The brand personality of ARCO is smart, convenient, value oriented, familiar, American, and a good corporate citizen.

  3. Aral: Brand that stands for outstanding products and customer service on forecourts across Germany. In a recent survey carried out in 2002, 61% of motorists felt able to identify a difference, chose Aral for best quality petrol.

  4. Castrol: Introducing a leader in automotive and specialist lubricants- renowned in 150 countries worldwide. BP strongly believes that progress is best achieved by working in partnership with our customers to develop our products and services. Dedicated to the development of superior technology, BP prides themselves on meeting customers needs.

  5. BP: The BP brand encompasses all of their people, the products they sell, the technologies they develop and the relationships they build. They have four brand values that underpin everything they do:

    1. Performance: setting global standards

    2. Innovative: delivering breakthrough solutions

    3. Progressive: always looking for a new and better approach

    4. Green: demonstrating environmental leadership

Leadership

John Browne – group chief executive, who joined BP in 1966. John worked his way through BP holding several different positions. Between 1969 and 1983 he held a variety of exploration and production posts in Anchorage, San Francisco, London and Canada. 1984 became group treasurer and chief executive of BP Finance International. He was CFO, managing director and then in 1998 following the merger with Amoco, he was appointed chief executive. He was voted “most admired CEO” by Management Today in 2000, 2001 and in 2002. Lord Browne was knighted in 1998 at the Queen’s Birthday Honors and made a life peer in 2001. He holds a degree in Physics from Cambridge University and a MS in Business from Stanford University, California. He has been awarded several medals and honors for the field of engineering and the field of management leadership. He is given credit for the code of conduct and sustainability of BP today. Lord Browne is also noted as serving many external roles outside of BP, like; non-executive director of the Intel Corporation, non-executive director of Goldman Sachs, Trustee of the British Museum, and many more.

David Allen – group chief of staff and group managing director, who joined BP in 1978. Other group accountabilities that David holds are; corporate communications, planning and performance management, strategy, chief economist, diversity and inclusion, group policy development and leadership education. Obtained a degree in Chemistry from Oxford University where he remained to perform research on gas laser fluorescence, leading to a Doctorate in Chemistry. In 1978 when he started he was in the BP Gas International dealing with Middle East and Far East trading before moving to the New York corporate offices. 1986 he moved to BP’s corporate planning department, following to be appointed as BP’s international crude oil trading activities. 1997 he joined the executive committee as chief executive of Exploration. He worked his way up to join main group BP plc as managing director in 2003.

Byron Grote – chief financial officer, who joined in 1979. Byron’s group regional responsibilities include Asia, the Indian sub continent and Australia. Other group accountabilities Byron holds are Group integrated supply and trading activities. He has a PhD in Quantitative Analysis from Cornell University. His first five years with BP, he had many management responsibilities for a range of activities in international oil supply planning, logistics and crude oil trading. 1986 he was appointed Vice President of retail sales where he was responsible for managing the US companies retail petrol operations. He also worked his way up to be on the executive committee as group chief of staff in 1997, and following the merger of Amoco and BP, he became executive vice president in 1999. In 2000 appointed to BP’s board of directors and less than two years later in November 2002 he became CFO.

Lain Conn – executive director of the BP group, has been with BP for 12 years. Lain has regional responsibility for Europe, including the UK, together with Russia, the Middle East, the Caspian and Africa. He has functional responsibility for Health, Safety and Environment, Human Resource management, Marketing, Technology, Digital Business, Security, and Procurement and Pensions Operations. Studied Chemical Engineering and Management at Imperial College, London. Previously, he was Chief executive of BP’s petrochemicals segment, the third largest petrochemicals plant in the world. Before that he was group vice president responsible for BP’s marketing operations in Europe. His career began in commercial refining and oil trading but in the last 12 years he has spend various roles in Exploration and Production, Manufacturing and Marketing and also in Headquarters. He holds some external roles like non-executive director of the Rolls-Royce Group plc Board.

Tony Hayward – chief executive, exploration and production, who joined the BP group in 1982. Holds a PhD in Geology 1982. 1999 he became part of the executive committee and became group treasurer in 2000. Dr. Hayward became an executive vice president in April of 2002 and was appointed chief operating officer in November 2002 and in January 2003 became chief executive of Exploration and Produciton. External roles he holds are that he is a non-executive on Citigroup’s advisory board.

John Manzoni – chief executive, Refining and Marketing, who joined BP in 1983. He graduated from Imperial College, London in 1983 with a degree in civil engineering and a Masters in Petroleum Engineering. 2000 he was appointed regional vice president of East United States. Then in 2001 became chief executive of Gas, Power and Renewables and held this position until his current one in 2002. He was appointed to the Board of BP plc in January 2003.
IV. Economic and Industry Environment
Industry Relations to the Economy

The price of crude oil is the engine that drives the energy industry. Analysts believe that the industry is at its all time high and will remain that way for a long time. In the late 1990s, in the wake of the Asian economic downturn, oil prices fell to $10 a barrel. This had a profound effect on the industry because many small companies went bankrupt while some larger companies merged. Drilling activities were halted thus causing a snowball effect: Oil service companies had fewer rigs to service, pipeline and storage companies had less oil and gas to transport and store, and refineries produced less gasoline. A greater demand for oil in China and India in conjunction with political turmoil in oil-producing regions have seen oil prices soar. Thanks to Hurricane Katrina a barrel of oil reached more than $70 a barrel in 2005 causing the industry to rebound. The higher prices have reached most of the industry – producers, refiners, pipeline companies, equipment makers, oil field service providers, and gas station operators – which all have enjoyed new profits. Leading the charge are the world’s largest integrated oil companies: Exxon Mobil, BP, and Royal Dutch/Shell.

The increased demand for oil and gas accompanied with the hurricanes and other disasters have caused the US to import more oil increasing the trade deficit to an all time high of $66.1 billion. The rate at which we consume oil is far beyond the supply that is given. If there is more demand than supply then prices will remain high until reserves are met. The industry life cycle is known to be a slow cyclical process. Lately however, we have not seen the bust, but only booms for the energy industry. The major integrated oil and gas industry is one of the few if not the only industry who has outperformed the S&P. Analysts believe that the demand for oil will increase another 1.5% this quarter and by 2% in 2006. In 2006, the IEA (International Energy Agency) has bumped its numbers that demand will increase 400,000 more barrels a day. This would lead that most of the companies in the integrated oil and gas industry are seeing growth and increases in profits. The large companies mainly, as mentioned on finance.yahoo.com, are reaping most of the benefits from this economic dilemma.

There seems to be a positive correlation between the interest rates and the petroleum industry. When interest rates are high and business is peaking, the demands for these companies’ products are increasing. Since supply is not increasing, it proves that the prices of energy products will increase. If the US were to go into a recession or an economic downturn, if supply did not decrease then the demand for this industry would fall along with the prices as seen in the late 90s during the Asian crisis. If perchance the supply does drop too, then prices will remain high and stable. Obviously, with energy prices being high right now, we can infer that interests rates are rising or are stable at a high rate. Businesses in this industry are making more money and are able to expand their operations through stock repurchases and exploration and production. Companies are able allocate more money into research and technology as well for new advanced energy solutions. As seen today by BP and the other large companies in this sector. The fluctuations of the gas prices over the past several months leads us to infer that taxes on energy products do not directly effect the supplier, but rather the “demander” or user the most. Taxes on these industries products in the long or short run seem to have not effected consumer consumption since the demand is forecasted to grow even higher than it is now.

Oil and gas being consumer goods will help signal whether or not the economy is prospering or declining. If demand for oil drops, and supply does not, then prices will fall, which in turn suggest as mentioned earlier an economic recession. In a country where public transportation is not regarded as efficient, it is highly unlikely that the demand will drop anytime soon for the consumption of the products in the major integrated oil and gas industry. Even with new technologies for natural gas, like liquefied natural gas, which emits less carbon than coal and oil, prices will be sustained in the long-run due to our economic infrastructure of our country.
Company’s Relation to the Industry


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