BP p.l.c. is the Major Integrated Oil & Gas firm with the third-most sales and fifth-highest market value. Other majors include Exxon Mobil (NYSE: XOM) and Chevron Corp. (NYSE: CVX).
The company became a behemoth, in part, by acquiring Amoco and Arco. These transactions made BP a significant operator of Alaskan oil fields and pipelines. The growth-through-acquisition strategy continues on a smaller scale. For example, in two separate transactions totaling $3.65 billion, BP paid Chesapeake Energy (NYSE: CHK) for a stake in Arkansas's Fayetteville Shale field and an interest in Oklahoma's gas-producing shale properties.
The last few years have been, to say the least, trying ones for BP. The company has faced tragedies, maintenance problems, market manipulation allegations, and an ignominious leadership change. Reduced production and lower refining margins haven't helped.
BP and its Russian partners in the TNK-BP joint venture agreed, after much wrangling, to settle their dispute by appointing a new board and new BP-nominated, Russian-approved CEO. One CEO candidate appeared to be on track, but his appointment was halted, perhaps due to compensation issues. The Russian partners might not be in a big rush for new CEO to be seated.
Three months ago, the GCFR Overall Gauge of BP soared from 51 to 77 of the 100 possible points. Our analysis report on the third quarter explained this result in some detail.
High energy prices earlier in this year pushed the Growth gauge to the 25-point maximum score, while the 28-percent dive in BP's ADR price during the third quarter enabled the contrary Value gauge to achieve the same perfect result.
Now, with the available data from the December 2008 quarter, our gauges display the following scores:
- Cash Management: 16 of 25 (down from 19 in September)
- Growth: 19 of 25 (down from 25)
- Profitability: 10 of 25 (unchanged)
- Value: 20 of 25 (down from 25)
- Overall: 65 of 100 (down from 77)
Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement with our previously communicated expectations.
BP prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), as adopted for use by the European Union. Reports prior to 2006 complied with UK Generally Accepted Accounting Principles.
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.
http://sheet.zoho.com/public/ncarvin/bp-income-statement?mode=html
In the four quarters of 2008, Revenue increased by 27 percent compared to 2007.
BP's Cost of Goods Sold (CGS) -- which we define to be Purchases, Production and Manufacturing Expenses, and Production and Similar Taxes -- was 94.4 percent of Revenue. This equates to a Gross Margin of only 5.6 percent, which is far less profitable than our 18 percent prediction. The Gross Margin in the year-earlier quarter was 18.1 percent.
Depreciation was 4.4 percent of Revenue. Our forecast was 3.5 percent.
Exploration costs in the fourth quarter were 19.5 percent more than our $200 million estimate.
Sales, General, and Administrative (SG&A) expenses, what BP calls Distribution and Administration Expenses, were 6.1 percent of Revenue. We had expected these costs to be 4.5 percent of Revenue.
Other Operating income and expenses is our catchall category for items such as gains/losses on derivatives. Items of this sort are erratic and, as far as we can tell, unpredictable from quarter to quarter. In the fourth quarter, the Other category consisted of a $1.56 million gain. Our projection was a $360 million expense.
Operating Income, as we define it, was a $1.66 billion loss, compared to a $6.54 billion gain in the December 2007 quarter. We had, we're sorry to say, expected a gain of $6.44 billion. The substantial shortfall in the Gross Margin, relative to our projection, was the prime culprit.
The dominant Non-operating item was a $1.62 billion "Impairment and losses on sale of businesses and fixed assets." BP wrote-down its investment in Rosneft (MCX: ROSN) by $517 million in the quarter, to reflect market value. As a result, pre-tax income was $3.2 billion.
A $712 million tax benefit cut the net loss to $3.34 billion. We had (foolishly) expected Net Income to grow by 17 percent.
| Cash Management | December 2008 | 3 months ago | 12 months ago |
| Current Ratio | 1.0 | 1.1 | 1.0 |
| LTD/Equity | 19.2% | 13.3% | 16.7% |
| Debt/CFO | 0.9 yrs | 0.8 yrs | 1.3 yrs |
| Inventory/CGS | N/A | N/A | N/A |
| Finished Goods/Inventory | N/A | N/A | N/A |
| Days of Sales Outstanding (DSO) | 34.0 days | 37.8 days | 49.2 days |
| Working Capital/Market Capitalization | -1.9% | 2.7% | 0.6% |
| Cash Conversion Cycle Time (CCCT) | 12.2 days | 16.6 days | 19.8 days |
| Gauge Score (0 to 25) | 16 | 19 | 10 |
The increase in long-term debt was balanced by the decrease in DSO and the lower CCCT. Working Capital going negative is what cut a few points off the score. We would like to see the cushion of a higher Current Ratio, but these are lesser concerns for a company of BP's gravitas.
| Growth | December 2008 | 3 months ago | 12 months ago |
| Revenue growth | 27.0% | 42.4% | 6.9% |
| Revenue/Assets | 156% | 158% | 125% |
| CFO growth | 54.2% | 44.8% | -12.3% |
| Net Income growth | 5.1% | 45.6% | -5.3% |
| Gauge Score (0 to 25) | 19 | 25 | 1 |
The growth metrics, which are based on four-quarter values, obscure the weakness in the fourth quarter.
| Profitability | December 2008 | 3 months ago | 12 months ago |
| Operating Expenses/Revenue | 91.2% | 89.5% | 90.5% |
| ROIC | 16.0% | 18.7% | 13.9% |
| FCF/Equity | 16.7% | 14.6% | 7.7% |
| Accrual Ratio | 2.7% | 5.8% | 4.6% |
| Gauge Score (0 to 25) | 10 | 10 | 4 |
The greatest concern here is in the increase in Operating Expenses as percentage of Revenue. It's clear that the company wasn't able to shed costs as fast as energy prices declines were cutting sales. ROIC and FCF will be adversely effected in the next few quarters if this situation isn't rectified.
| Value | December 2008 | 3 months ago | 12 months ago |
| P/E | 6.8 | 5.4 | 11.1 |
| P/E to S&P 500 average P/E | 50% | 30% | 62% |
| Price/Revenue | 0.4 | 0.4 | 0.8 |
| Enterprise Value/Cash Flow (EV/CFO) | 4.5 | 4.9 | 10.5 |
| Gauge Score (0 to 25) | 20 | 25 | 3 |
The price of BP ADRs fell only modestly, compared to some other companies, in the fourth quarter. It dropped from $50.17 to $46.74. The Value gauge is calculated using the quarter-end price.
BP's valuation ratios can be compared with other companies in the Major Integrated Oil & Gas industry.
| Overall | September 2008 | 3 months ago | 12 months ago |
| Gauge Score (0 to 100) | 65 | 77 | 18 |
An Overall score in the 60's is usually very good, but not when it's the result of a 12-point decline in one quarter.
After the third quarter, we asked why the shares of money-making BP had fallen so steeply. The answer came in the fourth quarter, when profits were replaced with a huge drop in Revenue, a minuscule Gross Margin, and a Net Loss over $3 billion.
The slow (stopped?) economy has reduced worldwide demand for energy products. This has caused prices for energy commodities to tumble.
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