BP: Financial Analysis through March 2009

BP earned a profit of $0.81/ADR, down from $2.25, during the three months that ended 31 March 2009.  This post provides the GCFR analysis of the result, which wasn't nearly as bad as our $0.53 estimate.


First, we present some background information.

BP p.l.c. (NYSE: BP) is the third-largest Major Integrated Oil & Gas company when assessed by Revenue, and it ranks fifth by Market Capitalization.  Other majors include Exxon Mobil (NYSE: XOM), Chevron Corp. (NYSE: CVX), and ConocoPhillips (NYSE: COP).

Energy prices (and, therefore, sales by energy producers) surged in 2007 and the first half of 2008.  The price of crude oil exceeded $140 per barrel at its peak.  The global economy then began to slow, and speculators exited the market.  Crude oil plunged below $40 by the end of the year.  Oil now sells for about $50 per barrel.

The situation was similar with natural gas prices, but the current price remains near a multi-year low.


The former British Petroleum became a behemoth by acquiring both Amoco and Arco.  These transactions also made BP a significant operator of Alaskan oil fields and pipelines.  More recently, in 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 energy price roller coaster has not been the only challenge BP has faced in the last few years.  The company has suffered through tragedies, maintenance problems, market manipulation allegations, and an ignominious leadership change.  The U.S. recently sued BP for two oil spills in 2006 into Prudhoe Bay.  In this case, BP is accused of failing to take spill-prevention measures mandated by the Clean Water Act.

A more recent tragedy occurred in April 2009 when a helicopter operated on behalf of BP crashed while returning to Scotland from an offshore oil field.  Sixteen lives were lost.

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.  However, TNK-BP is still operating without a new CEO.  One candidate appeared to be on track, but his appointment was halted.  The Russian partners might not be in a big rush for a new CEO to be seated.

Conditions in the energy market, including lower refining margins hurt BP more than we anticipated in late 2008.  Revenue in last year's fourth quarter was 40 percent less than in the third quarter, and it was 23 percent less than in the fourth quarter of 2007.  Production in the December 2008 quarter was only 1 percent higher than in December 2007 period. 

The fourth quarter of 2008 included $1.62 billion in charges for "Impairment and losses on sale of businesses and fixed assets."  In addition, TNK-BP was responsible for a $682 million loss.  The loss, according to BP, "reflected the impact of the calculation lag on Russian export duties in the falling price environment and several asset impairments."  And, BP wrote-down its investment in Rosneft (MCX: ROSN) by $517 million, to reflect market value.

These results in late 2008 cut the Growth gauge by 7 points and the Value gauge by 3 points.  The GCFR Overall Gauge slipped from 76 to 65 points of the 100 possible points. 


Now, with the available data from the March 2009 quarter, our gauges display the following scores:

• Cash Management: 12 of 25 (unchanged from December)
  
• Growth: 9 of 25 (down from 18)
  
• Profitability: 7 of 25 (down from 11)
  
• Value: 20 of 25 (up/down from 22)
  

• Overall: 53 of 100 (up/down from 65)
  

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-2009q1?mode=html

First-quarter Revenue (i.e., Sales and Other Operating Revenues) was 23 percent less than in the immediately preceding quarter and 46 percent less than in the year-earlier period.  Our Revenue estimate was too low by 4.9 percent (not bad).
 
Reported production in the quarter was 2 percent higher than in the first quarter of 2008.  BP claims that certain (incomprehensible) adjustments bring the growth rate to 4 percent

BP's Cost of Goods Sold (CGS) -- which we define to be Purchases, Production and Manufacturing Expenses, and Production and Similar Taxes -- was 79 percent of Revenue.  This equates to a Gross Margin of 21 percent, which is significantly more profitable than our 18 percent prediction.  The Gross Margin in the year-earlier quarter was 19.3 percent.

Depreciation was 6.0 percent of Revenue.  This percentage matched our forecast, but our Revenue prediction was too low. 

Exploration costs in the first quarter were 40 percent less than our $200 million estimate.

We did better with Sales, General, and Administrative (SG&A) expenses, which BP calls Distribution and Administration Expenses.  These expenses were 7.1 percent of Revenue, and we expected them to be 7.8 percent.

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 first quarter, the Other category consisted of a $186 million gain that we didn't forecast.

Operating Income, as we define it, was $3.8 billion, almost 60 percent less than last year's $9.8 billion gain.  However, Operating Income was more than double our pessimistic prediction.  Better-than-expected Revenue and Gross Margin explained why the actual results exceeded our prediction.

Non-operating items, such as asset sales and interest, combined to a net loss.  We had expected a net gain.  The income tax rate was 42.3 percent. Our estimate was 40 percent. 

After-tax earnings from jointly controlled entities and associates added $470 million.  We expected $500 million.

The bottom-line result was Net Income of $2.6 billion ($0.81/ADR), which was 64 percent less than earnings in the year-earlier quarter.  Our estimate was 35 percent too pessimistic.


Now for the gauges:

Cash Management	March 2009	3 months prior	12 months prior
Current Ratio	1.0	1.0	1.1
LTD/Equity	21%	19%	16%
Debt/CFO	1.1 years	0.9 years	1.1 years
Inventory/CGS	N/A	N/A	N/A
Finished Goods/Inventory	N/A	N/A	N/A
Days of Sales Outstanding (DSO)	39.8 days	34.0 days	48.5 days
Working Capital/Invested Capital	-2.4%	-2.9%	4.5%
Cash Conversion Cycle Time (CCCT)	12.7 days	12.3 days	18.0 days
Gauge Score (0 to 25)	12	12	9

BP has taken on more Long-Term Debt, and this is seen in LTD/Equity ratio.  However, the increase in Debt in balanced by a proportionate increase in Cash Flow to service the Debt.   The efficiency indicators have improved quite a bit in the last year, although we can't say we're pleased to see a negative Working Capital value.

Growth	March 2009	3 months prior	12 months prior
Revenue growth	3.2%	27.0%	17.8%
Revenue/Assets	135%	156%	132%
CFO growth	18.6%	54.2%	1.5%
Net Income growth	-27.1%	2.9%	9.4%
Gauge Score (0 to 25)	9	18	18

Growth rates are trailing four quarters compared to four previous quarters.

Although Revenue and Net Income have weakened substantially, the rise in Cash Flow from Operations is appealing.

Profitability	March 2009	3 months prior	12 months prior
Operating Expenses/Revenue	92.2%	91.4%	90.0%
ROIC	12.3%	15.8%	15.3%
Free Cash Flow/Invested Capital	8.3%	13.3%	7.3%
Accrual Ratio	3.0%	2.6%	4.4%
Gauge Score (0 to 25)	7	11	8

The greatest concern here is in the increase in Operating Expenses as percentage of Revenue.  ROIC and FCF have softened.
 

Value	March 2009	3 months prior	12 months prior
P/E	7.6	6.9	8.2
P/E vs. S&P 500 P/E	43%	38%	48%
PEG	0.21	0.16	0.18
Price/Revenue	0.4	0.4	0.6
Enterprise Value/Cash Flow (EV/CFO)	4.7	4.5	7.8
Gauge Score (0 to 25)	20	22	15

BP's valuation ratios are attractive and can be compared with other companies in the Major Integrated Oil & Gas industry.

Overall	March 2009	3 months prior	12 months prior
Gauge Score (0 to 100)	53	65	48

With the fall in energy prices, BP's growth and profitability metrics have declined.  A couple points were also trimmed from the Value gauge, but it remains at a very strong 20 points.

Although Revenue, Operating Income, and Net Income all dropped significantly, they all did better than we had thought likely.  The Gross Margin was the highest it has been since early 2006.   This indicates that BP is (at long last) getting some control over the costs to produce Revenue.