BPs Financial Analysis - Assignment Example

Introduction BP is one of the well established companies in the oil and exploration industry. BP has grown from a humble beginning as Anglo-Persian Oil Company, when it first discovered oil on the 26th of May 1908 in Persia (modern Iran) to a multinational corporation. The company was founded by William Knox D'Arcy. From that first, uncertain search for oil in Persia, BP has grown to become a global energy company. BP not only provides large quantities of oil but is also making strides along a promising path towards oil’s alternatives. The company’s headquarters is located in London, U.K. It has subsidiaries all over the globe with main concentration in the U.S.A, Russia, Azerbaijan, Angola, the U.K, North Africa, Canada, the Middle East and Asia. It is involved in the exploration, production, refining and distribution of natural gas, petroleum and other related products (BP 2012). This report outlines the BP’s Financial Analysis, Global Economy Outlook, Major Ventures, and Business Diversification: Alternative Energy, Competition plus Future of Oil Industry. These topics are crucial for any party interested in having a deeper insight of the company’s operations and their impacts in addition to the manner in which the company is able to respond to disasters that may occur in the oil and exploration industry. Needless to say, there are other areas that are of great significance to a company that also need to be addressed. However, this report may not capture all the details. Therefore, issues such as corporate governance and structure, remuneration, regulatory requirements, controls and procedures as well as use of technology have not been captured. This information is available in the company’s reports as well as from electronic sources. Financial Analysis Table 1: Key Performance Indicators Key Fundamentals 31-Dec-12 31-Dec-11 Percentage Change Revenue (£ m)   231055.06 241629.88 -4.38% Pre-Tax Profit (£ m)   11571.21 24988.10 -53.69% Earnings per Share (EPS)  37.44p 87.47p -57.20% Price-Earnings  11.35 5.26 115.78% Dividend Cover  1.80 5.03 -64.21% Dividend Yield  5.00% 4.00% 25.00% Operating Margin  3.81% 8.52% -55.28% ROCE  10.52% 21.90% -51.96% Net Gearing  24.70% 27.05% -8.69% Source: London Stock Exchange: Prices and Markets, BP PLC; Fundamentals BP revenue for the year ending 31 December 2012 went down by 4.38 percent from the previous year to 231055.06 million Euros. The pre-tax profit followed the same path shedding off 53.69 percent to settle at 11571.21 million Euros in 2012. Earnings per Share also lost a massive 57.2 percent and settled at 37.44p in 2012 down from 87.47p in 2011. However, against all odds, the price-earnings ratio gained 115.78 percent to settle at 11.35 in 2012 up from 5.26 in 2011. Dividend cover was slashed by 64.21 percent to settle at 1.8 in 2012. On the other hand, the dividend yield surged up by 25 percent up to 5 percent. The operating margin, a measure of profitability, shed off 55.28 percent from 2011 to settle at 3.81 percent in 2012. Further, Return on Capital Employed (ROCE), declined by 51.96 percent from the previous year to 10.52 percent in 2012. Net gearing ratio shed off 8.69 percent to 24.7 percent in 2012. 2012 BP results were severely affected by the legal settlement fee settled on with the US administration following the Gulf of Mexico oil spill, and by inferior results in the company’s operating divisions (BP, 2012). Operating cash flow is disposable cash flow provided by operating activities, as of the group’s cash flow statement. Operating activities are the main income-generating activities of the group in addition to other activities that are not investing or financing activities. Inferior operating cash flow in 2012 replicated the cash flow effect of lower profits, which was partially mitigated by a lower cash outflow linking to the Gulf of Mexico oil spill. Gearing permits investors to notice how significant net debt is in relation to equity from shareholders. The year ended with gearing within our desired 10-20% range and we will continue to target this range while uncertainties remain (Edmonds et al, 2006; BP, 2012). Global Economy Outlook World economic growth was slow in 2012 – below its usual trend. The passive global growth is expected to carry on in 2013. Emerging economies with stronger yield and growing populations, led by China and India, are set to propel growth. Global demand for energy, including oil, continued to inflate moderately in 2012, with a fragile financial system along with soaring oil prices weighing on demand. Consequently, the growth in global oil utilization remained feeble in 2012, with unrelenting growth in China plus other non-OECD countries making up for yet an extra turn down in OECD countries. With oil markets matching poorer production from certain countries alongside frail utilization and soaring OPEC production, typical crude oil prices in 2012 were alike to the prior year, averaging $111.67 per barrel. Natural gas prices continued to wander internationally in 2012, with lower prices in the US along with increases in Europe and the Far East (Angus, 2007; IEA, 2011). Major Ventures BP concluded a milestone deal with Russian oil monster Rosneft that will see it acquire a stake of almost 20 percent in what is at the moment the globe’s leading publicly traded oil corporation. Rosneft is realizing its fresh level in the course of purchasing BP's 50 percent venture in TNK-BP - Russia's third largest oil and gas producer - plus the residual 50 percent previously held by AAR. With the purchase, Rosneft's on hand portfolio of upstream assets across the entire of Russia's key oil and gas producing areas will be improved by the adding up TNK-BP's operations. Russia is by now the globe’s leading producer and reserve holder of oil and gas jointly. Still Rosneft and BP make out the prospective to raise production and reserves even more through the use of new technologies and methods. The arrangement also brings the panorama of efficiencies, as a result of the merger of TNK-BP's assets with those of Rosneft (BP, 2012). Business Diversification: Alternative Energy Worldwide energy requirements are expected to go up by over 50 percent in the upcoming 20 years, motivated by population growth plus speedy industrialization in rising economies. Overall provision of fossil fuels is by now strengthened, with up to 70 percent of the world’s oil currently being supplied from only six countries and 50 percent of its natural gas produced in just three. This info underscores several critical queries that include; the ability to satisfy the mounting demand for power, assurance for safe energy supplies, and aptitude to combat climate change if we rely only on conservative fossil fuels to rally growing demand (BP, 2012). In that regard, BP having been in energy business long enough to make out that there are no straightforward responses is persuaded that using more biofuels in the general ‘energy mix’ can assist global reduction of greenhouse gas levels considerably along with direct impact. Alongside that, BP is the main proprietor as well as operator of wind energy amenities with interests in 13 wind farms across the United States. The company has a total production capacity of 1,955 MW – an adequate amount of electricity to supply more than 586,000 standard American homes. By the end of 2012 the company anticipated to have a gross electrical generating capacity of 2,600 MW, situated across 8 U.S states. Wind energy is secure, unsoiled and progressively more inexpensive since it has the possibility for generation on a much bigger level (BP, 2012; Shell). Competition BP’s group approach is reliant upon nonstop novelty and competence in a greatly competitive market. The oil, gas and petrochemicals industries are very competitive. There is strapping rivalry, both in the oil and gas industry along with other industries, in furnishing the fuel requirements of trade, manufacturing plus the home. Competition exerts strain on the conditions of admission to new openings, license expenses as well as produces prices, influences oil products promotion and calls for incessant organizational focus on dropping unit overheads in addition to improving effectiveness, whilst guaranteeing protection and operational risk is not compromised. BP’s feat can be obstructed if competitors developed or got hold of intellectual property rights to know-how that BP needs, if its innovation delayed the industry, or if the company fails to sufficiently defend the company’s brand names and trademarks. BP’s competitive place in contrast to its peers might be negatively affected if competitors tender better terms for admission rights or licenses, if BP does not succeed to manage its operating expenditure or control its margins, or if it fail to uphold, expand and function competently a high-class collection of assets (BP, 2012a; BP, 2012b; Mark, 2012). Future of Oil Industry Populations along with income growth are the main drivers in the wake of growing demand for energy. By 2030 global population is estimated to get to 8.3 billion people, which translates to an extra 1.3 billion people in need for energy; furthermore global income in 2030 is projected to be more or less twice the 2011 level in actual terms. Global key energy utilization is anticipated to grow up by 1.6 percent yearly starting 2011 to 2030, totaling 36 percent to worldwide utilization by 2030. Low plus non- OECD middle income economies make up more than 90 percent of population growth to 2030. As a result of their fast industrialization, urbanization as well as motorization, they too put in 70 percent of the world’s GDP growth and greater than 90 percent of the international energy demand growth. Just like for energy utilization, growth in manufacturing will be subjugated by countries outside the OECD, which will account for 78 percent of the global surge. These countries will provide 71 percent of total energy production in 2030, up from 69 percent in 2011 as well as 58 percent in 1990 (Ben et al, 2007; BP, 2012a; Christof, 2012). Source: BP Energy Outlook 2030 Figure 1: Chart showing total energy production, OECD production, plus non-OECD production from 1990 through 2030. Source: BP Energy Outlook 2030 Figure 2: Chart showing total energy consumption, OECD consumption, plus non-OECD consumption from 1990 through 2030. Conclusion BP reported a poor performance in 2012. 2012 BP results were severely affected by the legal settlement fee settled on with the US administration following the Gulf of Mexico oil spill, and by inferior results in the company’s operating divisions. Moreover, global economic growth was pathetic in 2012 – below its famous trend. This is expected to carry on in 2013. Emerging economies with stronger yield and growing populations, led by China and India, are set to propel growth in 2013. The company also made a major investment stride by concluding a milestone deal with Russian oil monster Rosneft that will see it acquire a stake of almost 20 percent in what is at the moment the globe’s leading publicly traded oil corporation. BP has also set out to venture into other sources of energy other than fossil fuels including wind energy and solar energy. However, the company is faced with strapping rivalry in the oil and gas industry in furnishing the fuel requirements of trade, manufacturing plus the home. Finally, the future of oil industry seems bright. Populations along with income growth are the main drivers in the wake of growing demand for energy. By 2030 global population is estimated to get to 8.3 billion people, which translates to an extra 1.3 billion people in need for energy; furthermore global income in 2030 is projected to be more or less twice the 2011 level in actual terms. References Angus, M 2007, Contours of the World Economy, 1-2030 AD, Oxford: Oxford University Press. Ben, G, AK, Paolo, M and Mar, R 2007, “North versus South: Energy Transition and Energy Intensity in Europe over 200 Years”, European Review of Economic History, Vol. 11, pp. 219-253 BP (2012), About BP, www.bp.com BP (2012a), Energy Outlook 2030, London: BP plc, retrieved 30 March 2012: BP (2011b), Statistical Review of World Energy 2012, London: BP plc, retrieved 02 April 2013: Christof, R 2012, Economic Development and the Demand for Energy: A Historical Perspective on the Next 20 Years Edmonds, C Edmonds, T Olds, P & Schneider, N 2006, Fundamental Managerial Accounting Concepts, New York, McGraw-Hill Irwin International Energy Agency 2011, “World Energy Outlook 2011”, Paris Mark, F 2012, The Oil Market to 2030—Implications for Investment and Policy, Economics of Energy & Environmental Policy, 1(1) Read More