22 February 2010

BP: Financial Gauge Analysis for the December 2009 Quarter

This post provides updated Cash Management, Growth, Profitability and Value metrics and our Financial Gauge scores for BP (NYSE: BP and LON:BP).  The metrics were calculated using data in BP's financial reports, including the earnings announcement for the quarter that ended 31 December 2009.

We have already examined the Income Statement for BP's December quarter, which was the fourth quarter of its fiscal year.  The $1.36-per-ADS profit attributable to shareholders more than reversed the $1.07 loss in the same quarter of 2008.

BP, the former British Petroleum, is a major Integrated Oil and Gas company.  It is a significant operator of Alaskan oil fields and pipelines, and it is currently the "largest leaseholder in the Gulf of Mexico."  BP also owns 50 percent of the Russian TNK-BP joint venture.  Additional background information about BP and the business environment in which it is currently operating can be found in the beginning of the 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

The latest quarterly results produced the following changes to the gauge scores:

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

Cash Management31 Dec 200930 Sep 200931 Dec 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)43.648.540.253.6
Working Capital/Revenue1.2%1.0%0.9%0.8%
Cash Conversion Cycle Time (days)16.515.016.814.0
Gauge Score (0 to 25)715189

Long-term debt rose from $13.6 billion in June 2008 to $27.1 billion in September 2009, but amount was trimmed to $25.5 billion in December 2009.  Short-term Finance debt was also reduced, from $9.5 to $9.1 billion, in the last three months.  These changes are reflected in the latest Debt/Equity and Debt/Cash Flow calculations.

The efficiency metrics are mixed and, as things turned out, had a greater effect on the gauge score than the positive debt-related changes.  For example, the number of Days of Sales Outstanding is sharply lower than in September, but it is up from last year.  The recent increase in Cash Conversion Cycle Time also contributed to the decline in the gauge score.

Growth31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
Revenue growth-33.7%-39.5%27.0%4.4%
Operating Profit growth9.0%-3.3%8.8%2.2%
CFO growth-27.2%-29.2%54.2%8.9%
Net Income growth-27.7%-70.1%2.9%0.5%
Gauge Score (0 to 25)101810
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 stunted Growth gauge score is a result of the major declines in trailing-year Revenue, Net Income, and Cash Flow from Operations.  Lower energy prices and refining margins can be blamed.

An encouraging sign is the modest recovery in Operating Profit after Taxes, which excludes some special charges and credits.

Profitability31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
Operating Expenses/Revenue91.1%94.8%91.4%90.2%
Free Cash Flow/Invested Capital5.8%4.1%13.0%10.5%
Accrual Ratio3.0%1.0%2.6%2.1%
Gauge Score (0 to 25)44119

The reduction in the Operating Expense ratio is an encouraging development, as are the improvements in the ROIC and FCF ratios.  However, neither of the latter two figures increased enough to lift the Profitability gauge score.

The rising Accrual Ratio, which suggests lower earnings quality, also provided a check on the Profitability gauge.

Value31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)34229
Share Price ($)$57.97$53.23$46.74-

When comparing the current Value metrics to those from December 2008, BP ADSs look much more expensive.  However, the current metrics are mostly consistent with their longer-term averages. 

Overall31 Dec 200930 Sep 200931 Dec 20085-Yr Avg
Gauge Score (0 to 100)16236936

BP did much better in the fourth quarter of 2009 than in the same quarter of 2008, but the results were still somewhat disappointing.  To some extent this was due to unexpected charges such as the $1.8 billion erased when the company wrote off goodwill associated with U.S. West Coast refining and marketing assets acquired in 2000.

The rise in BP's ADS price shows that investors anticipate better times to come, but the price rise weighed on the contrarian Value gauge.

It will be interesting to see how things change in 2010.  Comparisons with past periods should become more favorable, and the higher price of crude oil should be beneficial (especially if production gain can be sustained).

Full disclosure:  Long BP at time of writing

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