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, in part, by acquiring Amoco and Arco.
Significant problems over the last few years have tarnished BP's reputation. Tragically, an explosion killed 15 workers at their Texas City refinery in 2005. This calamity was followed by a major leak and pipeline corrosion in Alaska, where BP operates the Prudhoe Bay field. These events led to allegations BP was not adequately maintaining its properties and equipment. The bad news also did much damage to the green image the company has been cultivating in its marketing.
BP is trying to put these and other problems behind it by acknowledging errors, settling lawsuits, and improving safety. It agreed to pay $373 million to settle charges related to market manipulation, the refinery explosion, and the pipeline leak. Sadly, another fatal accident recently occurred at the Texas City refinery. This tragedy has led to new concerns about the effectiveness of BP's actions.
Investors seem to be worried that the economy will slow in industrial nations, which would lower the demand for energy products and cause prices for crude oil and natural gas to decline. BP investors, in particular, have been concerned by reduced production and lower refining margins. Perhaps a signal of a turnaround can be seen in news of a new gas discovery in Egypt and more oil found in Angola.
In 2006, BP began reporting its results in accordance with International Financial Reporting Standards (IFRS) as adopted for use by the European Union. Previous financial 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 during the last few years.
When we analyzed BP after the September quarter, the Overall score was a dismal 19 points. Of the four individual gauges that fed into this composite result, Cash Management was the strongest at 10 points. Growth was weakest at 0 points. [The BP score for the September quarter was bumped up a couple points by a recent change in our scoring algorithm.]
Now, with the available data from the December 2007 quarter, our gauges display the following scores:
- Cash Management: 10 of 25
- Growth: 1 of 25
- Profitability: 4 of 25
- Value: 3 of 25
- Overall: 17 of 100
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) | | Dec 2007 (actual) | Dec 2006 (actual) |
| Revenue (1) | | 79852 | 61946 |
| Op expenses | | | |
| | CGS (2) | (65421) | (51563) |
| | Depreciation (3) | (3020) | (2441) |
| | Exploration | (201) | (408) |
| | SG&A (4) | (4212) | (4205) |
| | Other (5) | (1331) | 236 |
| Operating Income | | 5667 | 3565 |
| Other income | | | |
| | Investments (6) | 1149 | 409 |
| | Asset sales (7) | 270 | 300 |
| | Interest, etc. (8) | (21) | 28 |
| Pretax income | | 7065 | 4302 |
| Income tax | | (2561) | (1347) |
| Net Income | | 4504 | 2955 |
| | | $1.42/ADS | $0.90/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 29 percent more than in the year-earlier quarter. This broke a string of five consecutive quarters of weak Revenue Growth. The Cost of Goods Sold (CGS) was 81.9 percent of Revenue, which is consistent with most recent quarters. There were increased costs due, among other things, to greater refinery outages and repairs. CGS/Revenue was unusually high at 83.2 percent in the December 2006 quarter.
Depreciation was 3.8 percent of Revenue, compared to 3.9 percent last year. Exploration costs were 0.3 percent of Revenue, up/down from 0.7 percent in the December 2006 quarter. Sales, General, and Administrative (SG&A) expenses were 5.3 percent of Revenue, compared to 6.8 percent last year.
The recent quarter included two other charges that totaled a massive $1.33 billion. The first charge, $872 million, was for "impairment and losses on sale of businesses and fixed assets." It appears that the lion's share of this charge can be attributed to the company's decision to sell convenience stores in the U.S. The second charge, $459 million, reflects a "fair value ... loss on embedded derivatives" related to North Sea gas contracts.
The higher Revenue won out over the higher costs, resulting in Operating Income 59 percent above last year's value.
Earnings from joint ventures and associates, which we label as gains on investments, were $740 million higher than in the December 2006 quarter. As a result, pre-tax income was up 64 percent, and Net Income grew by 52 percent. The tax rate for the quarter increased from 31.3 percent to 36.2 percent.
Cash Management. This gauge didn't change from 10 points in September.
The measures that helped the gauge were:
- LTD/Equity = 16.7 percent; quite manageable, but up from 13.1 percent in December 2006
- Debt/CFO = 1.3 years; also easily affordable, but an increase from 0.9 years the previous December
- Days of Sales Outstanding (DSO) = 49.2 days, nicely below the 54.6-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 for BP.
- Working Capital/Market Capitalization = +0.6 percent, down from -0.4 percent.
- Cash Conversion Cycle Time (CCCT) = 19.8 days, up from 15.5 days, for this measure of efficiency.
Growth. This gauge increased by one point from 0 in September.
None of these measures helped this gauge:
- Revenue growth = 6.9 percent year-over-year, down from 10.9 percent
- Revenue/Assets = 120.5 percent year-over-year, down from 122.2 percent; sales efficiency is worsening
- Net Income growth = -5.1 percent year-over-year, down from -0.6 percent
- CFO growth = -12.3 percent year-over-year, down from 5.4 percent.
The quarter showed signs of Revenue acceleration, but it wasn't enough to pump up the year-over-year growth rate to an acceptable level.
Profitability. This gauge remained unchanged from 4 points in September.
The one measure that helped the gauge was:
- ROIC = 14.9 percent, decent but down from 16.2 percent in the last year.
- FCF/Equity = 7.3 percent, less than half of 15.4 percent in December 2006
- Accrual Ratio = +6.1 percent, up from +4.3 percent in a year
- Operating Expenses/Revenue = 90.5 percent, up from 90.0 percent in the last year
Value. The price of BP ADRs rose over the course of the quarter from $69.35 to $73.17. The Value gauge, based on the latter price, decreased from 4 points to 3 points.
The only measure that helped the gauge was:
- Price/Revenue ratio = 0.8, unchanged from a year ago
- Enterprise Value/Cash Flow = 10.5, up from 8.5 in December 2006
- P/E = 10.9, up from 9.8
- P/E to S&P 500 average P/E = 36 percent discount, essentially unchanged from recent levels
The average P/E for the Integrated Oil and Gas industry is 11.8. The average Price/Revenue for the industry is currently 1.1.
Now at 17 out of 100 possible points, the Overall gauge is dreadfully weak. Revenue Growth is lower than one might expect in an era of high energy prices. The recent quarter showed the initial signs of increased production. We will be looking to see if it continues. Net income perked up significantly in the last quarter, but it was still down on a year-over-year basis. BP attributes the disappointing performance to U.S. refining performance. The company is investing significantly to improve safety. Capital Expenditures were so high in the fourth quarter that it pushed Free Cash Flow (FCF) into the red. To be specific, Cash Flow from Operations (CFO) of $4.3 billion was overshadowed by $5.5 billion in Capital Expenditures.
Posts
No comments:
Post a Comment