I. Investment Highlights Company Profile

Leaders in Quarterly Revenue Growth (YoY)

CONOCOPHILLIPS [COP]	46.90%
CHEVRON CORP [CVX]	36.00%
BP PLC [BP]	35.60%
EXXON MOBIL CP [XOM]	33.50%
ROYAL DUTCH PET ADR [RD]	26.00%
REPSOL YPF S.A. [REP]	24

This data table from finance.yahoo.com shows the industry’s leaders in quarterly revenue growth. From the high demand that the world is wanting from this industry, especially in China and India, with US not far behind, revenue growth can be this high.

Leaders in Long-Term Growth Rate (5 yr) CHEVRON CORP [CVX] 10.00% BP PLC [BP] 8.70% EXXON MOBIL CP [XOM] 8.10% CONOCOPHILLIPS [COP] 7.50% REPSOL YPF S.A. [REP] 2.00%

In this table, BP is among the leaders in long-term growth rate forecasted with good economic conditions. BP’s goal is not to achieve short term profits but achieve long term profitability with high growth potential, since maximizing shareholder value is their first priority.
Many of the large integrated oil and gas companies are around today because of mergers and acquisitions. Potential possibility for new competition in this industry is virtually zero. The economic crisis in Asia in the late 90s caused most of these companies to consolidate pushing out the small players and leaving only the big companies to thrive. The costs that are associated with this market are high thus proving that the threat of new competition is extremely low. BP being one of the large international integrated oil companies prosper the most in this industry. Local refining companies in the home nation don’t really stand a chance against these leaders like BP and also the foreign state oil producers like Saudi Aramco. BP leads the board with market capitalization across the industry.

Foreign competition, like Saudi Aramco, are hard to value and compare against BP. Since foreign governments don’t require the disclosure of financial information like the US does, comparison among them can seem difficult. BP biggest competitor to compare to would be Exxon Mobil who is the world’s largest integrated oil and gas company.

V. Company Position
Marketing Fundamentals

BP is a global energy business with a family of brands known around the world. They do business in 100 countries, with operations in Europe, North and South America, Asia, and Africa. Since BP is an international company its advertising campaigns must be tailored to fit the culture and region that they are targeting. Obviously, the target market for energy is very broad, but government regulations and shared values of cultures make it a difficult task to campaign globally without offending anyone group.

BP operates in three business segments: Exploration and Production of crude oil and natural gas; Refining, Marketing, and Supply and Transportation of petrochemicals; and manufacturing and marketing of these chemicals. BP offers a wide range of products in the energy sector catering to all people. They are a well established business that is able to reap the benefits of energy demand not just locally, but globally as well.

Their promotion of their products is geared now towards safety and environment issues. For the past decade, these have been the main challenges that BP has had to face. Whether it is air quality control or unfortunate oil spills, the idea of global warming and fossil fuels being a catalyst for global warming puts BP and other integrated oil and gas firms in the spot light for social responsibility and awareness.

BP’s values are built upon responsibility and sustainability. Responsibility for choices that they make that positively or negatively impact society and the environment and sustainability for company growth and group adherence to work as a unit to maximize shareholder value. They base their promotions on their stern business principle of integrity. BP is a large business and it should conduct itself with the up most integrity.

With all of BP’s brands and brand loyalty, BP has distribution outlets in almost every corner of the world. They have catered individual nation advertising campaigns, but stick to their original global campaign. Their global advertising campaign explains how they are acting on the challenges of climate change, energy security, new sources of energy and our ecological footprint.

Research and Development

BP is committed to support all of its businesses with the highest quality research and technology. One of BP’s commitments is to research and find new solutions to the challenges that they face. For example, they are dedicated to reducing carbon emissions in our society. BP was the first major company to publicly acknowledge the need to take steps against global climate change. They are investing $350 million over five years to reduce their internal CO2 emissions by up to one million tones each year. They are one of the world’s biggest investors in low carbon fuels and technologies. BP is also searching for new technologies and solutions for energy like in Solar power. Solar power provides carbon free electricity.

BP supports a number of major international research initiatives seeking solutions to global climate change, including a Clean Energy Research and Education Program at Tsinghua University in China, the Carbon Mitigation Initiative, covering carbon capture and storage and other global technologies at Princeton University in the US and a program to research future technologies for energy use and storage in buildings at Imperial College in the UK.
Demographics, Pricing and Price Stability

The target market for oil and gas, petroleum products is infinite almost. Almost every country uses petroleum products or some form of energy to maintain a civilization. BP is able to cater to its consumers through its family of brands: BP, am/pm, Aral, ARCO, and Castrol. This is why they are an integrated oil and gas company because they have their business down to where they don’t have a middleman. They handle their own supply, logistics, marketing, production, refinery, …, which makes them a global giant in this industry. Along with Brand loyalty that consumers have associated with BP. BP offers its products to the everyday consumer all the way to the government and even nations. They are able to do this because the commodity that they sell is in such demand and is our primary form of energy in the world. This would tend to be the only market that companies can get by with mass marketing. Petroleum products offer few differences when compared to other products. In the end, the demand is so much higher than the supply that it is a lot easier for marketers to sell their product in this industry.

Pricing is competitive among the industry, but is heavily weighted on the consumer demand, supply, interest rates, and the economic state of the country. Analysts on finance.yahoo.com agree that the prices will remain stable through out the rest of the year and should remain stable, without knowing of unfortunate uncertainties like the Hurricanes this year which damage production and refinery facilities across the globe. Even with the oil price dropping, and reserves being replenished, the stock price of BP will remain stable because the demand is so high right now for investors to get into the energy sector. The energy sector and industry is the only industry that has outperformed the S&P consistently.
Threat of Substitution

The threat of substitution for BP, as well as the energy, is virtually (again) zero. Ever since man made automobiles, they have made combustion engines which run off of petroleum. Granted a couple of cars before combustion engines were steam powered, we’ll just disclose them for this argument. Hybrids can be environmentally better and may even begin to increase in sales, but the fact is that most of the cars in production and in operation run off of petroleum. The market for petroleum will most likely never die. There are electric cars and solar powered cars too, but not everybody wants one. There is always going to be a market for automobiles that run on petroleum. Most of the threats of substitution are internal. Most of the largest companies in this sector, mainly BP, are pouring research and technology into finding new sources of energy to cut back on global climate changes. The cost that the world would incur if gasoline was not in production would be devastating to national economic GNP. Though we import a lot more than we export, all the jobs, construction, and drilling sites would cause economic disaster for an economy. BP has nothing to worry about as far as substitutions are concerned, but should be more concerned with their public and environmental image.

Technology

BP is a leader among the industry in technology. They back their research an technology 100% which allows them to search for new sources of energy and ways to reduce the effects of global climate change. In a recent press release on October 21, 2005, BP made their ninth oil discovery in ultra-deepwater Block 31, offshore Angola. Called ‘Hebe-1’, this the ninth successful discovery BP has drilled in Block 31, following Plutao, Saturno, Marte, Venus, Palas, Ceres, Juno, and Astraea. Hebe-1 was drilled by the Jack Ryan drillship, in a water depth of 2,008 meters, and a total depth of 4,823 meters below sea level. The well was tested at 5,956 barrels of oil a day through a mere 2 inch choke. That is pretty good technology. On October 20, 2005, Apex-BP Solar was contracted by Tunisie Telecom for the construction of four telecommunication repeater stations powered solely by photovoltaic solar power in the open desert, where it is still not connected to the electricity grid and where climatic conditions are extreme (Temperatures in excess of 122 degrees Fahrenheit, sandstorms, etc.), the choice of solar power was obvious. They were selected for their expertise in electrification of remote areas.

Technology is all about scientists and engineers making a real difference to BP’s business and the world in which we live. From the discovery of new oil and gas fields to the introduction of innovative processes and new products for our customers, the scientists and engineers help shape BP’s current business performance and future success. It is the focus of their efforts on the technologies that make a real difference to BP’s future business.

BP is the leader in Technology for their industry, and they quote, “Technology is at the heart of everything we do – one of the most powerful means we have to run our business more efficiently and competitively.” Lord Browne.

Production

BP has 21 refineries spread around the world and more than 27,000 service stations for customer convenience. The first refinery established by BP was the Whiting Refinery, built in 1889. They are building two more in the deepwater Gulf of Mexico in 2005. The difference in age is 116 years. In the more recent years, from 1970s on, multiple refinery construction projects were erected. The Whiting Refinery, though the oldest is the second largest refinery that BP has. It is the largest inland refinery and the third largest refinery in the United States. It operates 24 hours a day, 365 days a year, and employs around 1200 people. It makes 16 million gallons of product a day, half of which is gasoline. On an average day the refinery produces enough to fully fill 430,000 automobiles, 10,000 farm tractors, 22,000 semi-trucks, 2,000 commercial jet liners, and fill 350,000 propane cylinders.

The daily production results from BP are approximately 2.5 million barrels of oil and NGL’s; 8.5 billion cubic feet of natural gas. The Refinery capacity is 3.2 million barrels of crude oil per day. There are 5 refineries in the USA and 14 in foreign countries and 2 that are in production. BP has big economies of scale in that it leads the way in market capitalization and research and technology allowing them to utilize even their oldest refineries. They do business in 100 countries, with operations in Europe, North and South America, Asia, and Africa.
Image

BP is very actively involved in the community. BP states that some of the biggest scientific challenges facing the world today relate to our use of energy. BP is working with the world’s leading scientists and engineers in our international university research program. BP’s work with universities is about focusing on the future and working at the frontiers of science and engineering on the issues that will make a real difference to the way people around the world live their lives and the way that BP runs their business. BP spends around $30 million dollars a year in these university programs.

Environment and Safety are two key aspects in their business operations. The road to sustainability begins with our fundamental purpose: to provide better goods and services in the form of light, heat, power and mobility to increasing numbers of people, and thereby to deliver shareholder value on a long-term basis. One achievement that BP is proud of is that they actively participate in community programs in Georgia and Turkey, including school repairs, improvements in agricultural techniques and business development and education. The challenges that BP faces can sometime effect their image. Fatalities from accidents caused 11 deaths in 2004, but more stringent safety standards are in place now. Greenhouse Gas Emissions is an ongoing challenge of managing the growth in our emissions as our productions increases. Oil spills can negatively hurt the company’s image. In 2004, BP had its largest oil spill in four years. Having been filed alleging multiple air quality violations at the Carson Refinery in California, BP in March of 2005, without admitting liability, agreed to settle all outstanding claims including $25 million in cash penalties and approximately $6 million in past emissions fees.
Quality of Management

The quality of management at BP is of the highest standards. All of their board of directors have worked with BP for several years. The group chief executive, Lord John Browne has been with BP for almost 40 years. Please refer to section III for individual qualifications of each of the board of directors of BP. The merger with Amoco in 1998 is when John Browne took over and since then have seen growth and profitability even during the Asian economic downturn crisis which impacted the integrated oil and gas industry. They are committed to providing the world and shareholders with exceptional respect and strive for sustainability of operations while maintaining an environmental and societal good image. John Browne was voted “most admired CEO” by Management Today in 2000, 2001, and 2002. All of the boards of directors are actively involved in external roles which help better the community. The board recognizes that it has a unique roll in representing and promoting the interests of shareholders. It is accountable to its shareholders for the activities and performance of the group. There are also 12 independent non-executive board members which help manage and oversee the company.

VI. Financial Statement Analysis
Accounting Procedures

1. 
   Inventory Valuation: Stocks, other than stock held for trading purposes, are valued at cost to the group using the FIFO method or at net realizable value, whichever is the lower. Stores are valued at cost to the group mainly using the average method or net realizable value, whichever is the lower.
   
2. 
   Depreciation: Oil and gas production assets are depreciated using a unit-of-production method. Cost of producing wells is amortized over proved developed reserves. License acquisition, decommissioning and field development costs are amortized over total proved reserves. The field development costs are subject to amortization are expenditures incurred to date together with sanctioned future development expenditure. Other tangible and intangible assets are depreciated on the straight line method over their estimated useful lives. Average estimated useful lives of refineries is 20 years, chemicals manufacturing plants is 20 years and service stations is 15 years. Other intangibles are amortized over a maximum period of 20 years. The group undertakes a review for impairment of a fixed asset or goodwill if events or changes in circumstances indicate that the carrying amount of the fixed asset or goodwill may not be recoverable.
   
3. 
   Investment Valuation: Derivative financial instruments are used to manage certain exposures to fluctuations in foreign currency exchange rates and interest rates, and to manage some of its margin exposure from changes in oil, natural gas and power prices. Derivatives are also traded in conjunction with these risk management activities. Derivatives are carried on the balance sheet at fair value (market to market) with changes in that value recognized in earnings of the period. This method is used for all derivatives that are held for trading purposes.
   
4. 
   Intangibles: Other tangible and intangible assets are depreciated on the straight line method over their estimated useful lives. Average estimated useful lives of refineries is 20 years, chemicals manufacturing plants is 20 years and service stations is 15 years. Other intangibles are amortized over a maximum period of 20 years.
   
5. 
   Pension Plans: non-contributory pension plans. It provides for you and your family in retirement and also provides financial protection during your career for you and your dependents. You can choose to enhance this benefit by making additional payments. The scheme assets are measured at fair value and scheme liabilities are measured on an actuarial basis using the projected unit method and discounted at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the scheme liabilities. These schemes are charged to the Income statement.
   

BP switched from UK GAAP rules to International Financial Reporting Standards (IFRS) early. They adopted it for the 3^rd quarter and will continue from hear on out using the IFRS format. The main differences between IFRS are that companies can take certain exemptions.

Financial Ratios

Obtained through MSN Money

Growth Rates %	Company	Industry	S&P 500
Sales (Qtr vs year ago qtr)	27.10	34.80	14.00
EPS (YTD vs YTD)	39.90	50.30	19.80
EPS (Qtr vs year ago qtr)	43.50	65.60	27.00
Sales (5-Year Annual Avg.)	18.19	13.71	5.05
EPS (5-Year Annual Avg.)	11.50	20.53	10.28
Dividends (5-Year Annual Avg.)	6.16	14.84	4.44
Price Ratios	Company	Industry	S&P 500
Current P/E Ratio	12.2	9.3	18.6
P/E Ratio 5-Year High	29.6	21.9	64.8
P/E Ratio 5-Year Low	11.0	9.1	17.4
Price/Sales Ratio	0.72	0.85	1.46
Price/Book Value	2.91	2.65	2.80
Price/Cash Flow Ratio	7.40	6.30	12.10
Profit Margins %	Company	Industry	S&P 500
Gross Margin	21.6	28.8	47.1
Pre-Tax Margin	9.1	15.3	12.0
Net Profit Margin	6.1	9.2	8.1
5Yr Gross Margin (5-Year Avg.)	19.1	27.2	47.3
5Yr PreTax Margin (5-Year Avg.)	8.0	12.5	9.3
5Yr Net Profit Margin (5-Year Avg.)	5.2	7.4	5.8
Financial Condition	Company	Industry	S&P 500
Debt/Equity Ratio	0.16	0.15	1.06
Current Ratio	1.0	1.1	1.4
Quick Ratio	0.7	0.8	0.9
Interest Coverage	45.1	24.0	3.5
Leverage Ratio	2.5	2.2	5.7
Book Value/Share	22.26	24.77	13.24
Investment Returns %	Company	Industry	S&P 500
Return On Equity	24.4	28.5	15.5
Return On Assets	9.6	13.0	2.7
Return On Capital	21.0	24.8	7.5
Return On Equity (5-Year Avg.)	14.3	18.7	11.8
Return On Assets (5-Year Avg.)	6.5	8.5	2.0
Return On Capital (5-Year Avg.)	12.1	15.4	5.6
Management Efficiency	Company	Industry	S&P 500
Income/Employee	187,000	139,000	29,000
Revenue/Employee	3 Mil	2 Mil	355,000
Receivable Turnover	7.7	10.4	7.8
Inventory Turnover	16.3	17.6	8.0
Asset Turnover	1.7	1.6	0.4

Trend Analysis of BP vs. S&P 500

• 
  This trend analysis is BP compared to the S&P over the last 5 years. Note that BP has outperformed the S&P almost every year. This graph is from Morningstar.com The high returns in 2004 and increasing to phenomenal returns in 2005 are relevant due to the sky rocket and record setting crude oil prices. August 30, 2005 hit an all time high, a crude barrel for $70.90 thanks to Hurricane Katrina.
  

• 
  1-Year trend also observed hear.
  
• 
  This trend analysis from finance.yahoo.com shows how BP has outperformed the S&P over the past year. Note also that the correlation of movement in the S&P and BP move up and down together. Proving that the integrated oil and gas industry is affected by systematic risk, or regular risk like interest rate fluctuations. However, BP has still outperformed the market as well as the entire energy industry.