BP p.l.c. (BP), the former British Petroleum, is the Oil and Gas Refiner and Marketer with, by far, the most sales and the largest market capitalization. BP became a behemoth, in part, by acquiring Amoco and Arco. As a result of these purchases and other investments, BP became the operator of 13 oil fields and four pipelines on Alaska's North Slope.
The last few years have been, to say the least, trying ones for BP. The company has faced tragedies, maintenance problems, market manipulation allegations, and an ignominious leadership change. Reduced production and lower refining margins haven't helped. A chart showing the price of BP ADRs versus the S&P 500 and Exxon Mobil (XOM) says volumes about BP's performance.
The current crisis involves a dispute with its Russian partners in the TNK-BP joint venture.
Since 2006, BP has prepared their statements in accordance with International Financial Reporting Standards (IFRS), as adopted for use by the European Union. Earlier financial statements complied with UK Generally Accepted Accounting Principles.
The GCFR Overall Gauge score shot up to 47, of the 100 possible, points in April, when we analyzed BP's first-quarter financial statements. This score was a mere 17 points three months earlier. The Growth and Value gauges showed the greatest improvements. High energy prices led to impressive Revenue growth, in spite of flat production levels and compressed refining margins. Enough of the powerful Revenue surge reached the bottom line to yield strong Net Income growth.
Now, with the available data from the June 2008 quarter, our gauges display the following scores:
- Cash Management: 13 of 25 (down from 14 in March)
- Growth: 22 of 25 (up from 12!)
- Profitability: 8 of 25 (up from 5)
- Value: 13 of 25 (down from 15)
- Overall: 50 of 100 (up from 47)
Before we examine the factors that affected each gauge, we will compare the latest quarterly Income Statement with our previously communicated expectations. 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) || ||June 2008|
| June 2008 |
| June 2007 |
| Revenue (1) || ||108,847|| 91,000 ||71,872|
| Op expenses || || || |
| ||CGS (2)||(87,024)|| (73,710) || (57,086) |
| || Depreciation (3) ||(2,850)|| (2,912) || (2,535) |
| || Exploration ||(118)|| (300) || (155) |
| || SG&A (4) ||(3,977)|| (4,323) || (3,565) |
| ||Other (5)||(2,104)|| (400) || (172) |
|Operating Income|| ||12,674||9,355||8,359|
| Other income || || || |
| || Investments (6) ||2,003|| 1,000 || 1,083 |
| || Asset sales (7) ||79|| 734 || 1,309 |
| || Interest, etc. (8) ||(68)||240||(27)|
| Pretax income || ||14,688||11,113||10,724|
| Income tax || ||(5,100)|| (3,778) || (3,283) |
|Net Income|| ||9,588||7,334||7,441|
| || ||$3.06/ADS||$2.33/ADS ||$2.33/ADS |
| Shares outstanding || ||3,137|| 3,150 || 3,198 |
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
High energy prices led to second-quarter 2008 Revenue 51 percent greater than in the June 2007 quarter. We thought we were being cautiously optimistic by setting our growth rate target at 27 percent.
The surging Revenue also helped the profitability and cost figures that we track as a percentage of Sales. We had expected BP to attain a Gross Margin of 19 percent of Revenue in the second quarter, and they actually reached 20 percent. This figure translates into a Cost of Goods Sold (CGS) -- which we define for BP to be Purchases, Production and Manufacturing Expenses, and Production and Similar Taxes -- of 80 percent of Revenue.
Exploration costs in the second quarter were $182 million less than our forecast of $300. Depreciation was 2.6 percent of Revenue, compared to our expectation of 3.2 percent. Sales, General, and Administrative (SG&A) expenses, what BP calls Distribution and Administration Expenses, were 3.7 percent of Revenue, which compares very favorably to our prediction of 4.75 percent of Revenue.
The one potential exception to this positive story was Other Operating Expenses of $2.1 billion. We lump losses on derivatives and asset impairment charges into this category. Items of this sort are erratic and, as far as we can tell, unpredictable from quarter to quarter. In the second quarter, these other costs, mostly losses on embedded derivatives, were significantly over their average value, which was the basis for our forecast. We suspect, however, that energy price gains reflected elsewhere on the Income Statement offset the derivative losses included here.
Nevertheless, the higher Revenue and controlled operating expenses easily won out over the unexpected special costs, resulting in Operating Income, as we define it, 51.6 percent above last year's value. We had expected a far more modest 11.9 percent increase.
Non-operating income, such as gains on investments, gains on asset sales, and net interest income, was $40 million more than our $1.76 billion forecast. The June 2007 quarter benefited from an extra-large $1.3 billion in gains on asset sales. Pre-tax income turned out to be 32 percent above the $11.1 billion forecast. A sliver of this increase was eaten up by higher taxes. The income tax rate for the quarter was 34 percent, whereas we had expected 34 percent. Net Income still exceeded our forecast by 30.7 percent.
Cash Management. This gauge decreased from 14 points in March to 13 points now.
|Debt/CFO || 1.1 yrs||1.1 yrs||1.0 yrs|
|Finished Goods/Inventory ||N/A||N/A||N/A|
|Days of Sales Outstanding (DSO)||46.4 days||48.5 days||54.3 days|
|Working Capital/Market Capitalization||2.7%||2.5%||0.4%|
|Cash Conversion Cycle Time (CCCT)||23.0 days||17.9 days||16.2 days|
Debt as a percentage of Equity came back down to normal levels, after a temporary surge. Higher profits increased Working Capital, but a CCCT increase suggests lower efficiency.
Growth. This gauge increased from 12 points in March to 22 points now.
Growth rates are trailing four quarters compared to four previous quarters.
|Net Income growth||22.8%||13.7%||-9.1%|
Revenue, Net Income, and Cash Flow grew at accelerated rates.
Profitability. This gauge increased from 5 points in March to 8 points now.
The increase in ROIC was the most favorable Profitability change. However, the increase in the Accrual Ratio suggests lower quality earnings, in the sense that a smaller proportion of earnings is due to Cash Flow.
Value. The price of BP ADRs bounced back in the second quarter from $60.65 to $69.57. The Value gauge, based on the latter price, decreased from 15 points to 13 points.
BP's valuation ratios can be compared with other companies in the Major Integrated Oil & Gas industry.
|P/E to S&P 500 average P/E||49%||46%||66%|
|Enterprise Value/Cash Flow (EV/CFO)||8.7||7.8||10.4|
We first saw some positive signs for BP in the fourth quarter of 2007, but the company is really rolling now. The improvements are mostly due to the effects higher oil prices have had on Revenue. Production levels are, more or less, flat, and refining margins remain compressed. Now at 50 out of 100 possible points, the Overall gauge is inching into attractive territory.