28 October 2009

BP: Financial Gauge Analysis through the September 2009 Quarter

In a previous article, we examined BP's (NYSE: BP and LON:BP) Income Statement for the September quarter and compared the figures on each line to our "look-ahead" estimates.  Earnings in the third quarter fell from $2.58 per ADR to $1.69.

Using the financial statements in BP's earnings announcement, we have now updated a set of Cash Management, Growth, Profitability and Value metrics.  This post reports on the metrics and the associated financial gauge scores.

Some background information about BP and the business environment in which it is currently operating can be found in the beginning of our look-ahead.  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 quarterly results has produced the following changes to the gauge scores:

  • Overall: 16 of 100 (down from 31)

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

Cash ManagementSep 2009Jun 2009Sep 20085-Yr Avg
Current Ratio1.
Debt/CFO (years)
Inventory/CGS (days)N/AN/AN/AN/A
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)
Working Capital/Invested Capital6.6%3.3%3.9%2.1%
Cash Conversion Cycle Time (days)20.819.116.613.6
Gauge Score (0 to 25)610159

BP has been converting short-term paper (i.e., Current Finance Debt) into long-term obligations (i.e., Non-current Finance Debt).  In the last 4 quarters, short-term debt was sliced from $14.3 billion to $9.5 billion, long-term debt increased 93 percent from $14.0 billion to $27.1 billion.  However, total debt rose during the last year from $28.3 billion to $36.6 billion.

Some of the additional debt appears to have been used to shore up Working Capital.

During this period, Shareholder's Equity fell about 5 percent, from $105.7 billion to $100.2 billion.

Accounts Receivables was not reduced as much, proportionately, as Revenue.  As a result, the Days of Sales Outstanding has returned to the high levels of several years ago.  This increase has also pushed up the Cash Conversion Cycle time, which indicates less efficiency at cash management

GrowthSep 2009Jun 2009Sep 20085-Yr Avg
Revenue growth-39.5%-23.3%42.4%4.5%
Operating Profit growth-3.3%-3.0%16.7%-4.4%
CFO growth-29.2%16.1%44.8%5.9%
Net Income growth-70.1%-51.4%43.4%-4.3%
Gauge Score (0 to 25)032510
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 trailing-year Revenue, Net Income, and Cash Flow have wiped out the Growth gauge.  These declines were all magnified by the rise and fall in the price of oil from one year to the next.

Revenue as a percentage of Assets has also buckled under the pressure.

ProfitabilitySep 2009Jun 2009Sep 20085-Yr Avg
Operating Expenses/Revenue94.8%94.1%89.1%90.3%
Free Cash Flow/Invested Capital4.1%7.3%11.9%10.5%
Accrual Ratio1.0%0.6%5.6%2.1%
Gauge Score (0 to 25)45129

Each dollar of shrinking Revenue is now supporting a greater proportion of the company's fixed Operating Expenses.

The resulting inefficiencies and the weak refining margins have cut into the Return on Invested Capital.

The lower Free Cash Flow figures show why BP has decided to trim Capital Spending.

ValueSep 2009Jun 2009Sep 20085-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)410259

BP's ADR price increased 11.6 percent in the third quarter, from $47.68 to $53.23.  Since Revenue and earnings tumbled during this period of share price rises, the Value gauge had a stern reaction.

Nevertheless, the Price-to-Revenue and Enterprise Value-to-Cash Flow ratios are not unattractive compared to historical results.

OverallSep 2009Jun 2009Sep 20085-Yr Avg
Gauge Score (0 to 100)16317736

For the second quarter in a row, BP's results were not as bad as expected and production increased. 

Nevertheless, the cumulative weakness of the last four quarters led to another decline in all gauge scores.  The recent rise in BP's share price, which shows that investors anticipate better times to come, weighed on the contrarian Value gauge and steepened the fall in the Overall gauge.

However, we suspect the scores will start to rise in the fourth quarter.  Comparisons with past periods are going to become more favorable, and the increasing price of crude oil should lead to higher Revenue and profits.

Full disclosure:  Long BP at time of writing

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