BP p.l.c. (BP), the former British Petroleum, is the Oil and Gas Refiner and Marketer with, by far, the most sales and the largest market capitalization. (If Reuters, our source for industry data, categorized BP as an Integrated Oil and Gas company, BP would rank third by sales and fourth by market capitalization.) BP became a behemoth, in part, by acquiring Amoco and Arco. As a result of these purchases and other investments, BP became the operator of 13 oil fields and four pipelines on Alaska's North Slope.
Despite high prices for energy products, the last few years have been trying ones for BP. The company has attempted, with varying degrees of success, to put tragedies, inadequate maintenance, and market manipulation allegations behind it by acknowledging errors, settling criminal and civil charges, and improving safety. Reduced production and lower refining margins haven't helped.
When we analyzed BP after the results from 2007's fourth quarter became available, the Overall gauge score was a dismal 17 out of 100 possible points. The Growth, Profitability, and Value gauges all registered scores below 5 of 25 possible points. Revenue Growth, at only 6.9 percent, seemed surprisingly low given the high energy prices with which we are all familiar. However, there were also possible signs of a turnaround in the fourth-quarter results. Revenue and production were up, and Net income perked up significantly in the quarter. Alas, it was still down on a year-over-year basis.
Now, with the available data from the March 2008 quarter, our gauges display the following scores:
- Cash Management: 14 of 25 (up from 10 in December)
- Growth: 12 of 25 (up from 1!!!)
- Profitability: 5 of 25 (up from 4)
- Value: 15 of 25 (up from 3!!!)
- Overall: 47 of 100 (up from 17!!!)
Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement with our previously communicated expectations.
Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.
| ($M) | | March 2008 (actual) | March 2008 (predicted) | March 2007 (actual) |
| Revenue (1) | | 87745 | 80000 | 61307 |
| Operating expenses | | | | |
| | CGS (2) | (69941) | (64800) | (49159) |
| | Depreciation (3) | (2782) | (3200) | (2519) |
| | Exploration | (293) | (240) | (156) |
| | SG&A (4) | (3896) | (4400) | (3457) |
| | Other (5) | (730) | (250) | (67) |
| Operating Income | | 10103 | 7110 | 5949 |
| Other income | | | | |
| | Investments (6) | 1200 | 1000 | 496 |
| | Asset sales (7) | 925 | 500 | 680 |
| | Interest, etc. (8) | 32 | 0 | 62 |
| Pretax income | | 12260 | 8610 | 7187 |
| Income tax | | (4509) | (2927) | (2440) |
| Net Income | | 7751 | 5683 | 4747 |
| | | $2.46/ADS | $1.80/ADS | $1.47/ADS |
| | | | |
2. Purchases + Production and manufacturing expenses + Production and similar taxes
3. Depreciation, depletion and amortization
4. Distribution and administration expenses
5. Impairment and losses on sale of businesses and fixed assets + Fair value (gain) loss on embedded derivatives
6. Earnings from jointly controlled entities + Earnings from associates
7. Gain on sale of businesses and fixed assets
8. Interest and other revenues - Finance costs + Other finance income
High energy prices led to impressive Revenue growth. First-quarter Revenue was 9.9 percent greater than in the fourth quarter of 2007, and it was a dramatic 43.1 percent greater than depressed levels in the March 2007 quarter. We had expected 0.2 percent and 30.5 percent, respectively.
The surging Revenue also helped the profitability and cost figures that we track as a percentage of Sales. We had expected the Gross Margin to be 19 percent of Revenue in the first quarter, and the actual value was 20.3 percent. This figure translates into a Cost of Goods Sold (CGS) -- which we define to be Purchases, Production and Manufacturing Expenses, and Production and Similar Taxes -- of 79.7 percent of Revenue.
Exploration costs in the first quarter were $53 million (22 percent) greater than our forecast of $240 million. Depreciation was 3.2 percent of Revenue, compared to our expectation of 4.0 percent. Sales, General, and Administrative (SG&A) expenses, what BP calls Distribution and Administration Expenses, were 4.4 percent of Revenue, which compares very favorably to our prediction of 5.5 percent of Revenue.
The one potential exception to this positive story was Other Operating Expenses, in which we lump losses on derivatives and asset impairment charges. Items of this sort are erratic and, as far as we can tell, unpredictable from quarter to quarter. In the first quarter, these other costs, mostly losses on embedded derivatives, were significantly over their average value, which was the basis for our forecast. We suspect, however, that energy price gains reflected elsewhere on the Income Statement offset the derivative losses included here.
Nevertheless, the higher Revenue easily won out over the unexpected special costs, resulting in Operating Income, as we define it, 69.8 percent above last year's value. We had expected a far more modest 19.5 percent increase.
Non-operating income, such as gains on investments, gains on asset sales, and net interest income, was $657 million more than our $1.5 billion forecast. This resulted helped raise pre-tax income 42.4 percent above the $8.6 billion forecast. Some of this increase was eaten up by higher taxes. The income tax rate for the quarter was 36.8 percent, whereas we had expected 35 percent. Net Income still exceeded our forecast by 36.4 percent.
Cash Management. This gauge increased from 10 points in December to 14 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Current Ratio | 1.1 | 1.0 | 1.0 |
| LTD/Equity | 16.3% | 16.7% | 14.3% |
| Debt/CFO | 1.1 yrs | 1.3 yrs | 0.9 yrs |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 48.5 days | 49.2 days | 54.3 days |
| Working Capital/Market Capitalization | 2.5 % | 0.6% | -0.7% |
| Cash Conversion Cycle Time | 17.9 days | 19.8 days | 13.9 days |
The changes to the Cash Management metrics were minor. Higher profits increased Working Capital and reduced the debt measures.
Growth. This gauge soared from only 1 point in December to 12 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Revenue growth | 17.8% | 6.9% | 5.3% |
| Revenue/Assets | 123% | 121% | 122% |
| CFO growth | 1.5% | -12.3% | 3.6% |
| Net Income growth | 13.7% | -5.1% | -2.9% |
Revenue and Net Income grew at accelerated rates. Much higher Cash Flow in the first quarter turned the year-over-year figure positive: no small feat.
Profitability. This gauge increased from 4 points in December to 5 points now.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| Operating Expenses/Revenue | 89.8% | 90.5% | 90.6% |
| ROIC | 16.9% | 14.9% | 15.0% |
| FCF/Equity | 9.1% | 7.3% | 13.8% |
| Accrual Ratio | 4.7% | 4.8% | 2.1% |
Profitability clearly improved in the first quarter, but not dramatically. A lower Accrual Ratio would attest to higher quality earnings, but at least the 2007 increase in this parameter was finally stemmed.
Value. The price of BP ADRs dropped precipitously over the course of the first quarter from $73.17 to $60.65. The Value gauge, based on the latter price, increased from 3 points to 15 points.
| March 2008 | 3 mos. ago | 12 mos. ago | |
| P/E | 7.9 | 10.9 | 9.8 |
| P/E to S&P 500 average P/E | 48% | 61% | 62% |
| Price/Revenue | 0.6 | 0.8 | 0.8 |
| Enterprise Value/Cash Flow (EV/CFO) | 7.8 | 10.5 | 8.5 |
We first saw some positive signs for BP in the fourth quarter of 2007, but the party began in earnest in the latest quarter. The improvements are mostly due to the effects higher oil prices have had on Revenue. Production levels are, more or less, flat, and refining margins remain compressed. Now at 47 out of 100 possible points, the Overall gauge is finally back to a respectable, if still modest, level. We'll need to see to improved Profitability to get the gauge to the next level (unless a surging stock price interrupts the Value Gauge's recovery).
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