03 August 2009

BP: Financial Gauge Analysis for the June 2009 Quarter

In an earlier post, we examined BP's (NYSE: BP and LON:BP) Income Statement for the June quarter and compared the figures to our "look-ahead" estimates.  Second-quarter earnings fell from $2.98 per ADR to $1.39.

We have since mined BP's financial statements to update the metrics we use to assess Cash Management, Growth, Profitability and Value.  This post reports on these metrics and the Financial Gauge scores.

BP prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), as adopted for use by the European Union.  Reports prior to 2006 complied with UK Generally Accepted Accounting Principles

In summary, BP's latest GCFR gauge scores are as follows:
  • Overall: 31 of 100 (down from 51)

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.

Cash Management Jun 2009 Mar 2009 Jun 2008 5-Yr Avg
Current Ratio 1.1 1.0 1.1 1.0
LTD/Equity 25.2% 21.3% 12.9% 15.1%
Debt/CFO (years) 1.1 1.1 1.1 0.9
Inventory/CGS (days) N/A N/A N/A N/A
Finished Goods/Inventory N/A N/A N/A N/A
Days of Sales Outstanding (days) 53.2 39.8 46.4 53.5
Working Capital/Invested Capital 3.3% -2.4% 5.2% 1.7%
Cash Conversion Cycle Time (days) 19.1 12.7 23.0 13.2
Gauge Score (0 to 25) 10 12 9 8

BP's Long-Term Debt has increased 79 percent in the last year, from $13.6 billion to $24.2 billion.  During this period, Shareholder's Equity fell from $105 billion to $96 billion.  About 40 percent of the proceeds from the long-term securities, about $4.6 billion, was used to reduce short-term obligations, so the increase in total debt was softened.

After some good progress at paring Accounts Receivable as a percentage of Revenue (i.e., Days of Sales Outstanding), the value shot back up again in the latest quarter.  However, this increase says more about the Revenue decline than the management of Receivables.  In any event, the rise also pushed up the Cash Conversion Cycle Time, which suggest less efficiency at cash management.

We're pleased to see the return of a positive value for Working Capital.

Growth Jun 2009 Mar 2009 Jun 2008 5-Yr Avg
Revenue growth -23.3% 3.2% 31.9% 10.0%
Revenue/Assets 103.1% 134.8% 137.5% 120.5%
Operating Profit growth -3.0% 3.4% 17.3% 3.0%
CFO growth 16.1% 18.6% 16.9% 9.1%
Net Income growth -51.4% -27.1% 15.6% -0.1%
Gauge Score (0 to 25) 3 8 23 10
Revenue, CFO, and Net Income growth rates compare the last four quarters to the four previous quarters.
The Operating Profit rate is the annualized rate of growth in Operating Profit after Taxes over the last 16 quarters.

The huge drops in Revenue and Net Income have nearly the wiped out the Growth gauge, but the rise in Cash Flow from Operations is an unexpected gem.

Profitability Jun 2009 Mar 2009 Jun 2008 5-Yr Avg
Operating Expenses/Revenue 94.1% 92.2% 89.4% 90.0%
ROIC 7.0% 12.0% 18.1% 15.9%
Free Cash Flow/Invested Capital 7.3% 8.1% 7.7% 10.8%
Accrual Ratio 0.6% 3.0% 5.6% 2.0%
Gauge Score (0 to 25) 5 7 10 9

Weaker operating margins have cut into the Return on Invested Capital.  As we saw with the Growth gauge, the metrics based on Cash Flow are holding up better.  This is also manifested in the lower Accrual Ratio, which suggest improving Earnings Quality.

Value Jun 2009 Mar 2009 Jun 2008 5-Yr Avg
P/E 12.9 7.6 8.6 10.1
P/E vs. S&P 500 P/E 0.6 0.4 0.5 0.6
PEG N/A 2.2 0.5 1.1
Price/Revenue 0.6 0.4 0.6 0.8
Enterprise Value/Cash Flow (EV/CFO) 5.4 4.7 8.7 8.4
Gauge Score (0 to 25) 10 19 13 9

BP's ADR price increased 19 percent in the second quarter, from $40.10 to $47.68.  Since Revenue and earnings tumbled during this period, we should not be surprised to see the Value gauge's compression.

Nevertheless, some of BP's valuation ratios remain attractive. They can easily be compared with other companies in the Major Integrated Oil & Gas industry.

Overall Jun 2009 Mar 2009 Jun 2008 5-Yr Avg
Gauge Score (0 to 100) 31 51 49 36

With the fall in energy prices, each gauge of BP's performance has declined, and the result in reflected in the weak Overall score.

The positive case for BP is that the second quarter's results were not as bad as expected, production was up, and the quarterly Gross Margin had increased.  Cash Flow from Operations is holding up relatively well.  However, the gauges will remain weak until the positive factors translate into higher operating earnings or the shares trade lower.

Full disclosure:  Long BP at time of writing

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