British Petroleum Description of the Company Essay Example Pdf

British Petroleum is one of the five major energy companies in the world engaged in the business of oil and natural gas exploration and marketing as well as development of renewable energy devices across 80 countries of the world. The company with around 80300 staff members on its payroll in 2009 made an annual turn of US $ 239 Billion that made the BP the fourth largest global production house (BP, 2010, pp. 46-49). The company also has a large market share in store and sale of petrochemicals. British Petroleum has four major operations in energy business, namely; (a) exploration; (b) refining, production and marketing; (c)Petrochemicals and (d) Power, Gas and Renewable (Article 13, 2004). British Petroleum that started its operation as a joint venture called Anglo Persian Oil Company (APOC) in 1909 made a remarkable journey from a modest start in oil exploration to become one of the largest players in the energy sector currently engaged in business of (a) Crude Petroleum & Natural Gas; (b) Natural Gas Liquids; (c ) Petroleum Refining; (d) Lubricating Oils & Greases; (e) Natural Gas Transmission; (f) Crude Petroleum Pipelines; (g) Refined Petroleum Pipelines; (h) Petroleum Bulk Stations & Terminals; (.i) Chemicals & Allied Products, and (j) Offices of Holding Companies and so on (Anonymous). After its privatisation in several tranches in the 1980s (Poole, 2008), it has eventually become the largest private corporation in the United Kingdom as per the Forbes list for the year 2000 (Times, 2009). In its attempt to portray its image as a responsible and sustainable business enterprise in the energy sector, the company also ventured into solar energy and other forms of non conventional energy sources that brought it a fame termed in many circles as 'Beyond Petroleum' although such claims of being responsible has been under threat due to some accidents that occurred in recent times that brought the company under heavy criticism (Hayes, 2010]. However, our present purpose here is not to get into these details but to get into an analysis of company finance after presenting a brief overview of the company, its profile and its role in the sector. The physical and financial performance of the British Petroleum is provided in Table-1 and Table-2. The information in the table is reproduced in Chart-3 and Chart-4 in the form of indexes taking year 2005 as the base. Chart-1 Source: https://www.wikinvest.com/stock/BP_%28BP%29/Data/Market_Capitalization Chart-2 Source: https://www.wikinvest.com/stock/BP_%28BP%29/Data/Market_Capitalization As can be seen from Chart-1 and Chart-2, both in terms of Market Capitalization by its own as well as in comparison with other players in the sector, the BP has shown weaknesses in the recent years in comparison to its earlier performance. This can largely be contributed to the recent oil spill incident highlighted in the media caused by the negligence of BP in ensuring adequate safety measures in its operations. Table-1 Performance in Physical Output of British Petroleum Year >>> 2005 2006 2007 2008 2009 Crude Oil Production for Subsidiaries ('000 barrels per day) 1423 1351 1304 1263 1400 Crude Oil Production for Equity Accounted Entities ('000 barrels per day) 1139 1124 1110 1138 1135 Natural Gas Production for Subsidiaries (Million Cubic Feet per day) 7512 7412 7222 7277 7450 Natural gas production for Equity Accounted Entities (Million Cubic Feet per day) 912 1005 921 1057 1035 Source: BP, 2010, 13 Table-2 Financial Performance of British Petroleum over Recent Years Year >>> 2005 2006 2007 2008 2009 Sales and other operating revenues from continuing operations* 239792 265906 284365 361143 239272 Profit before interest and taxation from continuing operations* 32182 35658 32352 35239 26426 Profit from continuing operations* 22133 22626 21169 21666 16759 Profit for the year 22317 22601 21169 21666 16759 Profit for the year attributable to BP shareholders 22026 22315 20845 21157 16579 Capital expenditure and acquisitions# 14149 17231 20641 30700 20309 Source: BP, 2010, 12 As can be seen from Table-1 and Table-2, although the output level of BP has not undergone significant changes except for some marginal decline in the most recent years, in most of its financial indicators, it has shown significant decline between 2008 and 2009. In terms of profit, it is has performed miserably even compared to its 2005 levels as can be clearly noticed from the index lines presented in Chart-4 Chart-3 Source: Drawn on the basis of information in Table-1 Chart-4 Source: Drawn on the basis of information in Table-2 With this broad overview, let us now focus on the financial structure of the BP Plc. Financing Structure of British Petroleum: A Comparative Perspective As we are aware, financial structure is a framework of various types of financing employed by a firm to organise resources required for its operations. Usually, it consists of equity capital, loan capital, over draft and some short term liabilities. Table-3 provides the major financial trends for the British petroleum in the last five years. As can be seen from the table-3, the debt to equity ratio for the British Petroleum has gone up from 24 percent to 34 percent between 2005 and 2009. The debt equity ratio is calculated to measure the company's financial leverage or risk. Although it is a problematic measure of leverage, it is one of the most used financial ratio to calculate the risk of business. An increase in the debt equity ratio holds that the risks associated with the financial aspects of British Petroleum have increased over last few years. Table-3 Major Financial Trends in British Petroleum 2005 2006 2007 2008 2009 Total Assets 206914 217601 236076 228238 235968 Net Assets 80450 85465 94652 92109 102113 Share Capital 5185 5385 5237 5176 5179 BP Shareholder's Equity 79661 84624 93690 91303 101613 Finance Debt Due after more than one year 10230 11086 15651 17464 25518 Net debt 16,373 21,122 26,817 25,041

26,161

Equity 80,765 85,465 94,652 92,109

1,02,113

Select Financial Ratios

Debt to debt-plus-equity ratio 19% 22% 24% 27%

25%

Debt to equity ratio 24% 28% 32% 36%

34%

Net debt to net debt-plus-equity ratio 17% 20% 22% 21%

20%

Net debt to equity ratio 20% 25% 28% 27%

26%

Source: BP 2010 -a, 27 It is very difficult to draw conclusions on the basis of financial information for a single company unless we compare it with others in the same industry. This is particularly so because, the level of risks that can be comfortably undertaken, the amount of profit that can be considered as adequate etc can be misleading as they are very specific to the industry under review. Therefore, in order to analyse the financial situation of the BP Plc, we have undertaken a comparison of it with the Exxon Mobil, another major in the sector that is also a world leader and even larger in terms of its coverage and business compared to the BP Plc. Table-4 provides a comparison between BP plc and Exxon Mobil on the basis of several select indicators over last five years. However, before we make such a comparison, it might be useful to take into account the concepts used in these comparisons. Return on equity is the ratio of the sum of net income from the total operations of the last five years (2005-2009) and the sum of common equity over the last five years. The ratio exhibits the level of business strength a company commands in terms of its income or revenue. Return on assets is the ratio of the sum of income for last five years to the sum of total assets. This indicates the productivity of the assets held by the company. Return on invested capital is the ratio income and invested capital, which shows the productivity of the capital. Gross profit margin is the ratio of gross profit (income minus cost) to the total income over the last five years. The different between pre -tax and post tax profit margin indicate the comfort a company enjoys in terms of its consistency with the acceptable level of rules and regulations in the area it operates. SG&A indicate the ratio of summation of selling, general and administrative expenses to overall revenue of the company. Total debt equity ratio takes into account both short term and long term debts in calculating debt equity ratio. Table-4 A Comparison Between Selected Financial five year averages of BP Plc and Exxon Mobil. BP Plc Exxon Mobil Return on Equity 22.8% 31.7% Return on Assets 9.2% 16.0% Return on Invested Capital 19.4% 29.9% Gross Profit Margin 20.0% 34.7% Pre-Tax Profit Margin 11.3% 17.9% Post-Tax Profit Margin 7.4% 10.2% Net Profit Margin (Total Operations) 7.4% 10.2% SG&A as a % of Sales 5.2% 4.2% Debt/Equity Ratio 0.18 0.06 Total Debt/Equity Ratio 0.32 0.08 Source: For BP Plc, https://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=bp For Exxon Mobil, https://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=XOM As can be noticed from the comparison between Exxon and BP Plc, in most of the cases indicating the strength factors, Exxon has performed much better than the British petroleum. On the other hand, a lower SG & A for Exxon indicates that BP Plc spends a lot of money in advertising its brand and other non productive expenses compared to the total revenue of the company, This also indicate that on account of returns from advertising and other non-output related expenses, BP lags behind the Exxon. Finally, on account of risk factors associated, the figures for BP are alarmingly higher than the Exxon Mobil. While the average debt equity ratio indicating the leverage or risk of the company is around 18 percent for BP, it is only 6 percent for the Exxon Mobil. If one takes into account the short term debts also, the proportion of debt equity ratio almost doubles the longer term debt equity ratio to reach around 32 percent for BP plc compared to only 8 percent in terms of Exxon. From the analysis, it is clear that the financial structure is not appropriate in case of BP Plc when compared to other market players in the industry. The lower differences in the post tax and pre tax profit margin for British petroleum might indicate that the company enjoys tax benefits as well as other privileges compared to others. A deeper analysis is required for the same. Chart -4 gives a visual comparison of the information provided in Table-4. Chart-5 Source: As per information in Table-4 Cost of Capital in British Petroleum For any production centre, cost of capital is a significant factor for consideration, as it measures to cost a company incurs towards its funds. As we are aware, funds of a company consists of both debt and equity and the cost of such funding would require a consideration of both the cost of debt as well as the cost of the equity or the required rate of return to ensure investment in a company. Cost of debt includes the risk free rate of bonds, credit risk rates and tax rate. On the other hand, the cost of equity is a function of dividend yields and the growth rate of dividends. In other words, the required return on any equity, as per the Capital Asset Price Modelling, is the risk free rate plus beta times expected market risk premium (Megginson, 336). Or E(RS ) = Rf + AŽA²s (Rm -Rf) Where, E(RS) is the expected return, Rf is the expected risk free return in the market or the government bond yield rate, AŽA²s is the sensitivity to market risk for the security, and Rm is the historical return of the stock market. On the other hand the weighted average cost of capital is represented by the formula; WACC = {D/(D+E)}rd + {E/(D+E)}re, Where, D and E are the market value of the firm's debt and equity, .rd and re are the rates of return expected by investors on debt and equity (Megginson, 343). In the Table -5 We have provided a WACC calculation for both BP Plc and Exxon Mobil. As the information shows, the value of WACC for BP Plc is at 9 percent compared to a lesser value of 7 percent for Exxon. This indicates that the capital risk level of British petroleum is higher compared to its competitor. Table-5 Weighted Average Cost of Capital for BP Plc and Exxon Mobil Indicators BP Plc Exxon Mobil Price of the Stock ($) 27 59 Beta Levered 0.72 0.42 Debt (Million $) 35127 14428 Shares (Million $) 3131 4698 Equity(Million $) 85719 279108 Capital (Million $) 120846 293536 Debt equity (%) 40.98 5.17 Debt Capital (%) 29.07 4.92 Tax (%) 31.9 43.4

WACC Calculation

9.00%

7.00%

Cost of Debt 7.00% 7.00% Cost of Equity 10.00% 9.00% Risk Free Rate 4.40% 4.40% Sources: For BP Plc. https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-BP?savebar=0HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-BP?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616934&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"&HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-BP?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616934&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"show=tb%2Cfb%2Crh%2Cch%2Cmb%2Csl%2CHYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-BP?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616934&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"&HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-BP?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616934&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"bookid=3616934HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-BP?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616934&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"&HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-BP?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616934&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"version=2HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-BP?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616934&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"&HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-BP?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616934&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"frame_style=border%3A9px%20solid%20%23666%3Bheight%3A380px%3Bwidth%3A100%25HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-BP?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616934&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"&HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-BP?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616934&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"edit=1 For Exxon Mobil: https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-XOM?savebar=0HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-XOM?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616948&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"&HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-XOM?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616948&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"show=tb%2Cfb%2Crh%2Cch%2Cmb%2Csl%2CHYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-XOM?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616948&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"&HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-XOM?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616948&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"bookid=3616948HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-XOM?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616948&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"&HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-XOM?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616948&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"version=2HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-XOM?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616948&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"&HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-XOM?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616948&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"frame_style=border%3A9px%20solid%20%23666%3Bheight%3A380px%3Bwidth%3A100%25HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-XOM?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616948&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"&HYPERLINK "https://www.editgrid.com//publish/calc/user/wikiwealth/Stock-Research-Summary-XOM?savebar=0&show=tb,fb,rh,ch,mb,sl,&bookid=3616948&version=2&frame_style=border:9px solid #666;height:380px;width:100%&edit=1"edit=1 PART-II A Preliminary Report on the new Venture of the British Petroleum site in Cambodia Background: In last fifty years, there has been several efforts in vain for economic exploration and production of petroleum products in Cambodia. The French tried it initially in late 1969 and stopped their efforts in 1975 after the fall of the Khmer Republic(Library of Congress, 2009). However, by 1998, three out of nine exploration wells drilled by UK, French Australian and Japanese companies bore successful results. The initiative by UK's Enterprise Oil at two test sites in Angkor -1 well and Khao Tang-1 well have capacity to produce 6 million cubic feet of gas and 1500 barrels of oil per day. While it is possible to make these efforts economically profitable through negotiations with the present government there which has a open attitude for international trade and FDI, the strategic and locational advantages of initiating a business venture in Cambodia are many. However, in this report, there has been an attempt to focus on the economic aspects of the effort only. It might also be useful to mention some other players interested in the offshore oil ventures in the gulf of Thailand under the jurisdiction of Cambodia. They are Chevron Overseas Petroleum (Cambodia) Ltd, Moeco Cambodia Company (a subsidiary of Mitsui Oil Exploration Company Ltd.), Singapore Petroleum Company Ltd, PTTEP International Ltd, Resourceful Petroleum Ltd and Cooper Energy Ltd. (Janes 2009). Given the overall condition there, a new LPG production plant can be established by BP in Cambodia. Table-A World Natural Gas Reserves, Production and Consumption Proven Reserves As on January 2008 Production in (2007) Consumption (2007) (Tcm) share (%) (Bcm) share (%) (Bcm) share (%) North America 8 4.5 767.3 26.3 791.5 27.1 Latin America 7.4 4.1 147 5 128.7 4.4 Europe 6.2 3.5 288.8 9.9 544.4 18.6 Former Soviet Union 53.8 30.1 790.7 27.1 629.7 21.6 Africa 14.6 8.1 191.5 6.6 85.3 2.9 Middle East 73.9 41.3 353.9 12.1 298.3 10.2 Asia and Oceania 15.1 8.4 381.2 13.1 442.3 15.1 Total 178.9 100 2920.4 100 2920.4 100 Source: Kobayashi, (2010) As can be seen from Table-A, the consumption in the Asia Pacific region is much higher than the production level and this can form the basis of the rationale behind having a fully owned subsidiary in the region. On the other hand, the rise in the international price of natural gas in the form of liquefied petroleum gas (LPG) has increased from $ 194 per metric tonne in 2002 to around $ 802 in October 2008. This indicates that the business will have adequate potential for profit in the region (See Chart-A). Chart-A Trends in International Price of LPG ($/MT) Source: GOI (2008) Table-B provides a business plan for a small scale LPG production unit in Cambodia. As we can see from the Table, Table-B Plant Features Estimated Plant cost ($ Million) 25 Annual Gas Input (Quantity in Billion SCF) 20 Annual Gas Input Cost ($ per SCF) 0.25 Annual Gas Input Total Cost ($ Million) 5 Products LPG (12.17%) Dry Gas (85.10%) Condensate (1.61%) Quantity 142930 17 million 300400 Unit tonnes 000 SCF bbls Product Unit Cost ($) 150 per tonne 0.5 20 Product Value ($ Million) 21.44 8.5 6.01 Plant Depreciation @ 10 % ($ Million) 2.5 Expected surplus over production material cost (Excluding labour and other costs) (in $ Million) 13.94 8.5 6.01 Based on the Calculations provided by TATA MESSIRI Chart-B Wholesale Price Index of LPG in the Region Note: In the absence of information on Cambodian data, Indian figures have been take as indicative figures: Source: GOI 2010 As can be seen from the Table, the rough calculations would indicate a huge return from operations in the locality. Given that the the country can provide cheap labour, the final costs would not be much higher. The plant construction and production would not take more than two years given its small size and by that time, while the output cost will increase significantly, wages being sticky, the input cost would not increase that much. So from this preliminary analysis, this can be considered as an economically viable project. What follows is a brief projections about the operation of the plant. In order to present the NPV, we need to calculate the free cash flow statement and the cost of capital. The cost of capital for BP is assumed to be at 9 percent. Table-C gives the calculations for NPV for the new project. As per the formula, NPV=AŽA£0t FCF t / (1+WACC) t - FCF0 Where, Expected Quantity in MT =14293 WACC for BP assumed to be fixed at 9% =0.09 Table-C NPV Calculation for the New Project Price per MT Expected Revenue Unit Cost of production Total Cost of production FCF t (1+r)t FCFt/(1+r)t Nt 2008 851 Nil 2009 1030 Nil 2010 1246 0 700 10005100 -10005100 0 1.0 -10005100 -20010200 2011 1508 0 847 12107018 -12107018 1 1.1 -11107356 -21112456 2012 1824 26073206 1025 14648467 11424739 2 1.2 9615974 -389126 2013 2207 31550786 1240 17725885 13824901 3 1.3 10675360 670260 2014 2671 38179122 1501 21449821 16729301 4 1.4 11851459 1846359 2015 3232 46199970 1816 25956100 20243870 5 1.5 13157127 3152027 2016 3910 55905874 2197 31409077 24496796 6 1.7 14606639 4601539 2017 4731 67650839 2658 38007642 29643197 7 1.8 16215844 6210744 2018 5725 81863240 3216 45992463 35870777 8 2.0 18002333 7997233 2019 6927 99061448 3892 55654772 43406676 9 2.2 19985639 9980539 2020 8382 119872734 4709 67346984 52525750 10 2.4 22187445 12182345 NPV 5129264 Notes: Price per MT (extrapolated as per annual average growth rate in WPI of LPG at 21% as given in Chart A) Cost of production @ 700 per MT as per local Calculations available from Secondary sources as in 2010 and with a growth rate similar to the price of LPG FCF = Free Cash Flow Statement (=Net Revenue-Net Cost) t is the time period in years As can be seen from the table, the NPV calculated shows the viability of the project.

Appendix (Charts)

Chart 1 Market Capitalisation...........................................................................................................................4 Chart 2 Market Capitalisation of BP and its competitors..................................................................................4 Chart 3 Trend of output performance of BP......................................................................................................6 Chart 4 Financial Report of BP in recent years.................................................................................................6 Chart 5 Comparison between BP and Exxon....................................................................................................9 Chart A Trends in International Price of LPG..................................................................................................13 Chart B Wholesale Price Index of LPG in the Region....................................................................................14

Appendix (Tables)

Table-1 Performance in Physical Output of British Petroleum.........................................................................5 Table-2 Financial Performance of British Petroleum over Recent Years..........................................................5 Table-3 Major Financial Trends in British Petroleum.......................................................................................7 Table-4 A Comparison Between Selected Financial five year averages of BP Plc and Exxon Mobil..............8 Table-5 Weighted Average Cost of Capital for BP Plc and Exxon Mobil.......................................................11 Table-A World Natural Gas Reserves, Production and Consumption........................................................12-13 Table-B Plant Features.....................................................................................................................................14 Table-C NPV Calculation for the New Project ..............................................................................................15

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