24 October 2007

BP: Financial Analysis through September 2007

We have analyzed BP p.l.c's (BP) financial results for the quarter that ended on 30 September 2007.

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 few 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.

There is recent news that BP is taking action to settle its legal problems.

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 June quarter, the Overall score was a poor 15 points. Of the four individual gauges that fed into this composite result, Cash Management was the strongest at 5 points. Growth was weakest at 0 points.

Now, with the available data from the September 2007 quarter, our gauges display the following scores:
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.]

Sept 2007
Sept 2006
Revenue (1)
71334 68540
Op expenses

CGS (2) (59028) (55908)

Depreciation (3) (2505) (2194)

Exploration (244) (351)

SG&A (4) (4137) (3630)

Other (5) (115) 106
Operating Income
5305 6563
Other income

Investments (6) 1104 1966

Asset sales (7) 228 2276

Interest, etc. (8) (1) 103
Pretax income
6636 10908
Income tax
Net Income
4478 6294

$1.41/ADS $1.91/ADS

1. Sales and other operating revenues
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 4.1 percent more than in the year-earlier quarter (with high oil prices!). The Cost of Goods Sold (CGS) was 82.8 percent of Revenue, compared to 81.6 percent last year. The 1.2 percent increase in costs was a consequence of lower refining margins. Depreciation was 3.5 percent of Revenue, compared to 3.2 percent last year. Sales, General, and Administrative (SG&A) expenses were 5.8 percent of Revenue, compared to 5.3 percent last year

The higher Revenue was more than offset by the higher costs, resulting in Operating Income 19.2 percent below last year's value.

Non-operating income, especially gains due to asset sales, were especially hard hit: $3 billion less than in the year-earlier quarter. As a result, pre-tax income was down 39 percent, and Net Income was down 29 percent. A lower tax rate softened the drop in income somewhat.

Cash Management. This gauge increased from 5 points in June to 7 points now.

The measures that helped the gauge were:
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:

Growth. This gauge didn't budge from 0 points from June.

None of these measures helped this gauge:
  • Revenue growth = 0 percent year-over-year, down from 16.6 percent
  • Revenue/Assets = 118 percent year-over-year, down from 125 percent; sales efficiency is worsening
  • Net Income growth = -7.5 percent year-over-year, down from -0.7 percent
  • CFO growth = -16 percent year-over-year, down from -1.2 percent
Net income was aided by a change in the income tax rate from 36 to 32 percent

Profitability. This gauge held steady at 4 points.

The measures that helped the gauge were:
  • ROIC = 14.0 percent, decent but down from 18.2 percent in the last year
  • FCF/Equity = 9.5 percent, down from 15.8 percent in Sept 2006
The measures that hurt the gauge were:

The increase in operating expenses were due to higher maintenance costs and outages. Gross Margin declined correspondingly.

Value. Despite increasing oil prices, BP's stock dropped over the course of the quarter from $72.14 to $69.35. The Value gauge, based on the latter price, stemmed recent declines to held at 4 points.

The only measure that helped the gauge was:
  • Price/Revenue ratio = 0.8, a little below its three-year median

The measures that hurt the gauge were:
The average P/E for the Integrated Oil and Gas industry is 12. The average Price/Revenue for the industry is currently 1.2.

Now at 17 out of 100 possible points, the Overall gauge is weak. Revenue is flat, even though oil prices are high. Income and cash flow have declined. The Growth gauge is at 0, and it would be negative if we allowed that possibility. On the other hand, if the company can overcome the problems that have cause profitability to drop, the relatively low valuation metric suggest the stock price would enjoy a nice recovery.

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