Loras College British Petroleum (BP) Financial Ratio Analysis



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Loras College

British Petroleum (BP) Financial Ratio Analysis



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Amber Benko & Nick Donato

11/28/2011


Introduction:
For seven years of life in harsh heat and extreme illness, an explorer, George Reynolds was ordered to search for oil in Persia by William D’Arcy who had put all his fortune into drilling for oil. In these seven years, both were set on finding this oil and many geologists did not believe they could find such a thing beneath the sands of Persia. Although it was an uncertain finding, a finding that caused many people stress, frustration and was costly, May 26th, 1908 is was the day that changed everyone’s lives, the Anglo-Persian Oil Company, later to be known as British Petroleum (BP) discovered the first sight of oil. Little did they know they would become a global leader in the Integrated Oil Industry?

210 kilometers from the mouth of the Persian Gulf a refinery was built to turn the flow of thick crude oil into a useable product. A pipeline needed to be built, so pipe arrived from the United States, which started the slow process that took two years to complete. The refinery that was called Abadan would be the largest workforce that many people put their faith into. The only problem after its completion would be that they spent too much money to produce such a product, that they had no one to sell the oil too; by 1914 they were nearly bankrupt for the second time.

Cars were still too expensive and many companies and more established companies in Europe had the market for oil covered. People needed oil for heating houses, something the refining could not help people with because of its’ horrible smell. Winston Churchill took over later in time as First Lord of the Admiralty and believed that Britain need a reliable oil supply that people needed to invest into. He was right and the UK government became a great shareholder in the company; this was the end of the cash crisis.

Over the next decade, gas and electricity would largely replace kerosene for home heating and gasoline-fuelled vehicles would challenge the railways for freight; the age of cars would truly begin. Many changes and challenges appeared during the Post War for the next fifty years, where there were no new extreme findings. Back in the United Kingdom, offshore exploration had moved from the English Channel into the North Sea, although no one, even within BP, believed oil would be found. Six months later crews found the Forties field, which could produce 400,000 barrels of crude oil a day

Anglo-Persian Oil Company went public when the British government sold the last of its’ shares in BP in 1987, allowing the company to finally be completely privatized for the first time in 73 years after the oil was first found in 1908; this would boost share values for the company. The name BP was given on May 1st, 2001 after the previous name change in 1998 from BP Amoco p.I.c, when Amoco and BP merged. BP does business internationally across six continents and their products and services are available in more than 80 countries. Because they do business internationally, some of their top cliental is located in the United Kingdom, United States, and many other countries. Chevron Corporation and Exxon Mobil Corporation are some of BP’s top competitors. Both are in the Integrated Oil Industry as well with BP. The ticker symbol for BP is “BP” and they are on the New York Stock Exchange.

Today, the current CEO of BP is Robert (Bob) Dudley who has been part of the firm since October 1st, 2010. Robert started his career with BP when he was appointed as an executive director of the BP board on April 6th, 2009 becoming an executive vice president and a member of the executive management team in the United States and Asia. Between June 23rd and September 30th, 2010 he served as the President and CEO of BP’s Gulf Coast Restoration Organization in the United States and then was promoted to CEO of BP.



Liquidity Ratios

Current Ratio

Looking at British Petroleum’s ratio in 2008 was .951 % with a steady increase in 2009 of 1.14%. They jumped only a little bit more to 1.15% the following year of 2010. This ratio could have been higher in 2010 had it not been for the Gulf of Mexico Oil Crisis.






2010

2009

2008

BP

1.15%

1.14%

0.95%

Exxon

0.94%

1.06%

1.47%

Industry

0.99%

0.99%

0.99%

The competition that we analyzed was Exxon in 2008 with 1.47% a much higher competitor than the following year of 2009 and 1.06%. In 2010 the BP oil spill occurred but for some reason Exxon took a hit with their ratio dropping dramatically to .941%. The industry actually held constant with their ratio of 99% across all three years of 2008 through 2010. This was most likely due to the demand of gasoline which is pretty consistent. Some Recommendations we would have for BP at the time would be to invest even more in their marketing to present their company in a positive light after the oil spill. This could have been a way to try and keep sales rising rather than taking such a major hit. Also if they would invest their extra income in bonds to generate more revenue to cover the loss from the spill. You might conclude that there will be a dip in industry ratios due to the increase in hybrid cars in years to come.

Quick

The quick ratio for BP in 2008 was .71%, with an increase to .75% in 2009. They had a ratio of .84% in 2010. These ratios were around the same levels of the competition and the industry as a whole. Exxon had 1.23% in 2008, .83% in 2009 and finally only .73% in 2010.






2010

2009

2008

BP

0.84%

0.75%

0.71%

Exxon

0.73%

0.83%

1.23%

Industry

0.75%

0.69%

0.71%

These ratios are pretty close with the industry as a whole with .71% in 2008, .69% in 2009, and 75% in 2010. These can be seen as good for BP because they were even and above the rest of the industry. They were bringing in more revenue than the competition and if they were ahead of the industry than it shows how much of a role they were playing. We recommend investing more of your revenue in marketing to increase your sales and decrease your left over inventory for the year causing your ratio to increase.

Asset Management Ratios

Inventory Turnover

The Inventory turnover rate for 2008 was 21.82% this means they had about 22 days from the time of inventory to be sold and replaced over their sales period. In 2009 it took 10, 58% for the inventory turnover rate. In 2010 the ratio was 11.33%, saying that it took 11 days for the inventory to be sold and replaced. Exxon had a much higher inventory turnover rate of 40% in 2008, 26% in 2009, and 29% in 2010. From this we can surmise that BP was out selling the competition at this time even with the oil spill in 2010. The industry average was 45% in 2008, 48% in 2009, and 52% in 2010. It is good for BP to be above the industry average.






2010

2009

2008

BP

11.33%

10.58%

21.82%

Exxon

29.53%

26.88%

40.98%

Industry

52.34%

48.92%

45.87%

With BP turnover ratio being lower than the competition they are doing a great job in their sales, and seem to have a major leg up on the competition. Recommendations would be to maintain the efforts they are currently using because it is proving to be very successful to them. They are selling their product at a faster pace.

Days Sales Outstanding

The DSO or days sales outstanding are the average amount of time BP and their competition wait to receive cash for their sales. The time has been increasing for both BP and Exxon over the last few years being more generous with their cliental. In 2008, BP waited 29 days in 2009, 45 days and in 2010 almost 46 days.






2010

2009

2008

BP

45.75%

45.36%

29.47%

Exxon

30.74%

32.48%

18.88%

Industry

22%

12%

34%

Exxon in 2008 18 days was the amount of time waited to collect. In 2009, 32 was the allotted time and in 2010 almost 31 days were allowed for time of collection. This shows that both companies were waiting longer in order to receive their profit. The industry was 34 in 2008, 12 in 2009, and 22 in 2010. These days were the competition as a whole and so both BP and Exxon waiting longer to collect than the industry average. My suggestion would be for BP to collect sooner thus bringing in their revenue sooner and being able to allocate that profit to other resources faster.

Fixed Asset Turnover




2010

2009

2008

BP

2.69%

2.20%

3.55%

Exxon

1.92%

2.23%

3.93%

Industry

1.98%

1.89%

1.73%

BP fixed asset turnover for 2008 is 3.55%, 2009 was 2.20% and 2010 2.69% this shows a drastic drop in investing in some of their plants and so forth from 2008 to 2010. However, in 2010 there was an obvious increase when dealing with the oil spill in the gulf and containing that mess. There is chance of this increasing if they build other refining centers in the near future. Exxon went from almost 4% in 2008 to 2.23% in 2009 and 1.92% in 2010 this means that their investment in fixed capital dropped from the years this could be due to less investment in their depreciation and such. All of the investments from both BP and Exxon are well above the industry average of investment except for 2010 and Exxon. We would improve these standings by making sure the equipment and facilities are up to code to spend less on our company fixed assets and focus more on the improvement of our product. Spend more money on the oil rig earlier on to prevent another crisis and loss of revenue and product.

Total Asset Turnover

The total asset turnover ratio for BP in 2008 is 1.60%, 2009 is 1.01% and increased to 1.09% in 2010. The higher the number the better for the company, so by decreasing in 2008 to 2009 it reflects bad on

The company was decreasing in the ability to generate revenue using its assets from 2008 to 2009 but increased again in 2010. Over the course of 2008 to 2010 Exxon efficiency decreased in their ability to use assets. Overall both the competition and BP were below the industry average of using assets efficiently.




2010

2009

2008

BP

1.09%

1.01%

1.60%

Exxon

1.26%

1.33%

2.09%

Industry

1.50%

1.42%

1.68%

We recommend trying and boosting the asset turnover by using different promotional strategies and making sure the equipment and capital are helping you generate more revenue than to spend on repairs.

Debt Management Ratios

Total Debt to Total Assets




2010

2009

2008

BP

23%

18%

22%

Exxon

5%

4%

4%

Industry

12%

18%

15%

This ratio measures the different companies financial risks where you can determine how much of the assets were financed out of pocket upfront or through debt such as loans. From 2008 to 2010, BP is growing more in revenue than debt. 2010’s total debt to assets percentage increased, because of the oil spill in 2010, when they had to pay for the cleanup. Less debt, more profit. As compared to Exxon’s 2010 that is at 5%, concluding that over half of their assets were taken out by long term or short term loans. They might be paying back everything periodically, but it shows that Exxon is not able to pay upfront for certain assets, like BP is. The overall industry was closer in their debt in 2009, but due to the oil spill in 2010, BP’s debt was much higher than the industry average. Our recommendation would be to pay close attention to the debt percent of the industry before investing. You would not want to invest into a company that has a higher debt then the overall industry, but situation is different because of the oil crisis in 2010.



TIE





2010

2009

2008

BP

N/A

24%

23%

Exxon

205%

64%

122%

Industry

93%

77%

94%

This ratio explains how many times a company can cover its interest charges on a pretax basis. At times, failing to cover its interest can force companies into bankruptcy. Sometimes when you have a high ratio, as Exxon has in 2010 with 205 percent; it can indicate that the company is paying down too much debt at once when they could be using the profits for another project. At this time, a recommendation would not be applicable to invest in BP due to the oil spill, and their interest owed being in the negative range.



Profitability Ratios

Operating Margin

The operating margin of BP in 2008 was about 9.76 cents per dollar before interest and taxes. 2009 BP made about 20 cents for every dollar sold and in 2010 due most likely to the oil spill BP made only a cent per every dollar made.






2010

2009

2008

BP

1.23%

19.96%

9.76%

Exxon

13.87%

11.37%

17.26%

Industry

22%

43%

37%

Exxon earnings were drastically higher than BP. They made 17 cents in 2008, 11 cents in 2009, 13 cents in 2010 which was a lot more than BP was able to muster up. The overall industry was generating 37 cents in 2008, 43 cents in 2009 and only 22 cents in 2010. We recommend that BP allocates some funds to improve their image in the next couple years to generate more sales.

Profit Margin

BP has a much lower profit margin in 2008 than Exxon which means that Exxon was beating them in sales and revenue. In 2009 the tides turn and BP is higher just a little over the competition. In 2010 with the oil spill BP is far below profit compared to both the industry and Exxon. The industry average was above both BP and Exxon for the course of these three years. It is going to take time to get back to where they were before the crisis, but it can be done.






2010

2009

2008

BP

1%

7%

5.9%

Exxon

7%

6%

9%

Industry

10%

12%

11%

We recommend that BP tries to take more control of their costs in order to raise their profit margin and be up with the industry average, but to also not be lower than their competition.

ROA

BP return on assets is lower across the board with both their competition of Exxon and the industry. This means they don’t do as well of a job of turning investment into profit. They are investing in their company such as capital and so forth but don’t do such a great job of actually generating a profit with this investment. Exxon also is below the industry average which means they are generating less as well in profits and investments.






2010

2009

2008

BP

1.00%

.70%

.90%

Exxon

1.02%

.80%

1.09%

Industry

1.13%

1.08%

1.10%

Recommendation would be to re-invest your profits back into the company to try and get rid of your liabilities and increase your income by having to pay out less from the profits.

BEP

Basic earning power of BP is close to the industry average for 2008 but decreases to 11% in 2009 before dropping lower in 2010. This shows how they are far below the competition of Exxon on the three years from 2008-2010.






2010

2009

2008

BP

1.3%

11%

15%

Exxon

17%

15%

36%

Industry

19%

22%

16%

The industry is higher than BP for the most part which means that they are not generating as great of a profit and their earning power has decreased. We recommend trying different strategies such as BP offering more options to investors to try and generate more revenue such as bond options and possibly selling more shares of the company.

ROE

BP over the course of the three years has been generating a higher return on the stock holder’s equity than their competition of Exxon over the course of the last couple years. They have managed to be well above the industry average except for 2010 when the oil crisis occurred and they lost a large profit.






2010

2009

2008

BP

2.76%

3.23%

4.18%

Exxon

1.75%

1.51%

3.61%

Industry

2.43%

2.68%

2.78%

Exxon is actually far below the industry earnings as well on equity and they are not generating the same level of equity return. This means that for the years 2008-2009 BP was a leader for their stock holders until the spill occurred. Our recommendation would be to go back to the same format as before the oil spill in order to try and generate more return on equity for their stock holders. Based on the DuPont analysis of return on equity, BP could be classified as a high turnover industry. This is due to how their business relies on the performance of sales. They have a higher ROE then Exxon and the overall industry.

Price Earnings

BP is doing a great job with their 2008 to 2009 in growth of earnings per shares of stock. However, they did take quite the hit in 2009 to 2010 because of the oil spill crisis. They lost a lot of the price share of the earnings.






2010

2009

2008

BP

53.36%

70.23%

59.64%

Exxon

167.47%

181.66%

209.1%

The competition of Exxon dropped over the course of the last three years from 209 per share to 167 per share in 2010. This makes the value of each of the share to decrease which is bad for generating revenue from stock sales. Our recommendation is to try and promote more bonds and decrease the amount of stocks out there on the market to increase the price earnings of each share.

Market Value/Book Value

BP stock in 2008 through 2010 can be classified as overvalued. If the number is above 1 than it is overvalued and if it is below 1 than it is undervalued. The stock is overvalued it is very high above the book value. This could be good for the company because it generates larger amounts of income for the company.






2010

2009

2008

BP

105%

109%

1.23%

Exxon

162.34%

154.42%

185.52%

Exxon is much overvalued for the years of 2008 through 2010. They are well above the limit of 1 which leads us to believe that they are selling their stock for much more of the market value bringing in more revenue. Recommendations would be for BP to decrease the amount of stock available in the market to increase the value of the current stock out there in the public.

Recommendation Overall

As an analyst we feel like we would put a hold rating on this company due to its fluctuation within the last three years, especially during the oil spill in 2010. From 2008 to 2009, the company saw increases within its ratios, but from 2009 to 2010 we saw a gradual decrease in numbers, once again due to customers lost, which was equal to revenue, along with the decrease in price earnings and the increase in debt. It would be very interesting to see the numbers of this year’s final financial report to see if the numbers went up and if BP was able to recover out of its large fall.



Summary of Findings

The big picture for BP is that they are constantly growing each year because of the high demand of oil. From 2008 to 2009 all across the board with BP, Exxon Mobil and the Industry everything for the most part remained constant too, which we thought we would see happen. When there was the huge oil spill crisis, we saw a large decrease for BP in the areas of producing revenue. All their profits went towards the cleanup and to make matters worse, many customers boycotted BP oil, selling stock and getting out because of the risk of their stock plunging even more than it did.

We feel that BP has recovered well from the oil spill of 2010, although many did not want to invest into a company that killed thousands of animals and polluted the waters which we use as a resource. BP has a great opportunity for expansion within the market, if they continue to generate their profits while keeping their debt and expenses at a reasonable level. This is because BP has shown consistent growth and performance within their industry and constantly looking for new ways to improve their services, such as improving the atmosphere from hurtful toxins and being more low-carbon effective.

The Integrated Oil Industry is going to be competitive, especially if companies are international. BP before the oil spill was one of the top sellers for revenue, but after, customers turned towards one of BP’s top competitors, Exxon Mobil.



The industry as a whole is growing because refined oil is becoming more depended on to live. We would be interested in investing with BP because of the increased profits since the oil spill, although, when looking at the numbers, Exxon Mobil has been more stable. When BP’s price earnings went down, Exxon’s went up and vice versa. Investors needed to see that they did not have to lose faith in BP, it might take time to get back to where they were in 2009 and previous years, but as long as there is growth there is hope.

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