BP, the former British Petroleum, is the Integrated Oil and Gas company with the third-most sales and the fourth largest market capitalization in the world. BP became a behemoth by acquiring Amoco, Arco, and other companies. Significant problems over the last two years have cast a negative light on the company. A fatal explosion in 2005 at a BP refinery in Texas was followed by a major leak and pipeline corrosion in Alaska, where BP operates the Prudhoe Bay field. These events led to fears BP was not safely maintaining its properties and equipment. The bad news also did much damage to the green image the company has been cultivating in its marketing.
In 2006, BP began reporting its results in accordance with International Financial Reporting Standards (IFRS) as adopted for use by the European Union. Previous finance statements complied with UK Generally Accepted Accounting Principles. The differences between these two approaches makes it difficult to identify historic norms to which current results can reasonably be contrasted. Comparability is also complicated by significant corporate acquisitions and divestitures, such as the $9 billion sale in December 2005 of a chemical business. However, we have to give credit to BP for making a three-year set of consistent financial data available on their web site.
When we analyzed BP after the March quarter, the Overall score was 26 points. Of the four individual gauges that fed into this composite result, Value was the strongest at 8 points. Growth was weakest at 2 points. [Note that recent algorithm tweaks led to minor changes in the previously reported scores.]
Now, with the available data from the June 2007 quarter, our gauges display the following scores:
- Cash Management: 5 of 25
- Growth: 0 of 25
- Profitability: 4 of 25
- Value: 4 of 25
- Overall: 15 of 100
Before we examine the factors that affected each gauge, let's look at the latest quarterly Income Statement. [Note: we had not made any predictions for BP in this quarter.]
| ($M) | | June 2007 (actual) | June 2006 (actual) |
| Revenue (1) | | 71872 | 72132 |
| Op expenses | | | |
| | CGS (2) | (57086) | (57158) |
| | Depreciation (3) | (2535) | (2309) |
| Exploration | (155) | (97) | |
| | SG&A (4) | (3565) | (3516) |
| | Other (5) | (172) | 182 |
| Operating Income | | 8359 | 9234 |
| Other income | | | |
| | Investments (6) | 1083 | 932 |
| Asset sales (7) | 1309 | 541 | |
| | Interest, etc. (8) | (27) | (1) |
| Pretax income | | 10734 | 10706 |
| Income tax | | (3283) | (3441) |
| Net Income | | 7441 | 7265 |
| | | 2.33/ADS | 2.16/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
Revenue was 0.4 percent less than in the year-earlier quarter (with high oil prices!). The Cost of Goods Sold (CGS) was 79.4 percent of Revenue, compared to 79.2 percent last year. Depreciation was 3.5 percent of Revenue, compared to 3.2 percent last year. Sales, General, and Administrative (SG&A) expenses were 5.0 percent of Revenue, compared to 4.9 percent last year
The net effect of slightly lower Revenue and higher costs was Operating Income 9.5 percent below last year's value.
The lower Operating Income was balanced by higher non-operating income, especially gains due to asset sales. As a result, pre-tax income in the two quarters was essentially the same. With a lower Income Tax Rate, Net Income actually exceeded last year's value by 2.4 percent. We think it is noteworthy, however, that the increase was driven by investment income, asset sales, and a lower tax rate.
Cash Management. This gauge decreased from 7 points in March to 5 points.
The measures that helped the gauge were:
- LTD/Equity = 13.8%; insignificant, but up a couple points from last year
- Days of Sales Outstanding (DSO) = 54.3 days, less than the 58.6-day level one year earlier
Note that the DSO change indicates the company is having more success getting its customers to pay their bills; rapid collection is a sign of efficiency because the payments received can be re-invested sooner.
The measures that hurt the gauge were:
- Current Ratio =1.0; weaker than we like, but typical
- Debt/CFO = 1.0 year, up from 0.7 years 12 months ago
- Inventory/CGS = 35.3 days, compared to 33.0 and 33.8 days 3 and 12 months ago, respectively
- Working Capital/Market Capitalization = 0.4 percent, down from 1.5 percent
- Cash Conversion Cycle Time (CCCT) = 16.2 days, up from 10.6 days, for this measure of efficiency.
Growth. This gauge decreased from 2 points in March to 0 points.
None of these measures helped this gauge:
- Revenue growth = -0.3 percent, down from 29 percent in a year
- Revenue/Assets = 119 percent, down from 125 percent in a year; sales efficiency is worsening
- Net Income growth = -9 percent, down from 15 percent in a year
- CFO growth = -16 percent, down from 5 percent in a year
Net income was slowed by a change in the income tax rate from 32 to 35 percent
Profitability. This gauge decreased from 6 points in March to 4 points.
The measures that helped the gauge were:
- ROIC = 14.4 percent, decent but down from 22.3 percent in a year
- FCF/Equity = 9 percent, down from 19 percent in a year
- Accrual Ratio = 6 percent, up from 4 percent in a year
- Operating Expenses/Revenue = 91 percent, up from 88 percent in a year
The increase in operating expenses was primarily the result of a decrease in Gross Margin.
The increasing Accrual Ratio tells us that less of the company's Net Income is due to CFO, and, therefore, more is due to changes in non-operational Balance Sheet accruals.
Value. Despite the less-than-thrilling performance, BP's stock price followed the price of oil and rose over the course of the quarter from $64.75 to $72.14. The Value gauge, based on the latter price, was sliced in half from 8 points in March to 4 points now.
The only measure that helped the gauge was:
- Price/Revenue ratio = 0.9, about the same as its three-year median
The measures that hurt the gauge were:
- Enterprise Value/Cash Flow = 10.4, up from 8.7 in June 2006
- P/E = 10.8, up from 9.9
- P/E to S&P 500 average P/E = 35 percent discount, about the same as its thee-year median
The average P/E for the Integrated Oil and Gas industry is 12. The average Price/Revenue for the industry is currently 1.2.
These results warrant some explanation. The value measures in other circumstances could be interpreted as indicative of an inexpensive, even cheap, stock. The problem is that the measures have inflated somewhat, yet there hasn't been any signs of better operational performance.
Now at a disappointing 15 out of 100 possible points, the Overall gauge has been weakening. Revenue is down, even though the company can charge higher amounts for its output. Income gains have been due to non-operational factors. The Growth gauge is at 0, and it would be negative if we allowed that possibility. And, yet, the stock price is up. If the company could turn around its operational performance, there is plenty of upside potential. But, there aren't signs of this turnaround in the recent results.
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