16 May 2010

BP: Financial Gauge Analysis for the (Pre-Disaster) March 2010 Quarter

The drilling rig explosion and oil spill in the Gulf of Mexico on 20 April 2010, which brought tragic loss of life and the potential for horrific environmental damage, overshadows everything else about BP (NYSE: BP). 

The focus for the foreseeable future is going to be stopping the flow of oil, cleaning up the damage it has caused, and mitigating the harmful effects to people and wildlife in the area.

A backward-looking snapshot of BP's financial data ratios might not seem relevant.  And, maybe it isn't.  However, we decided to go ahead and post this article because data on BP's pre-disaster finances might help put the damage costs (once they are better quantified) in context and be a starting point for assessing the value of the company going forward.

In our earlier review of BP's latest Income Statement, we compared the actual results to our "look-ahead" estimates.   BP earned $6.1 billion ($1.92 per diluted ADS) in the first quarter of 2010, which ended 31 March.  The profit attributable to BP's shareholders more than doubled the $2.6 billion ($0.81/ADS) earned in 2009's first quarter.

We have now updated the various financial metrics we use to analyze Cash Management, Growth, Profitability and Value.  This post reports on the metrics for BP and the associated financial gauge scores.  The metrics were calculated using data from BP's financial statements, both recent (but pre-disaster) and historical.

In summary, BP's 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.  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

Cash Management31 Mar 201031 Dec 200931 Mar 20095-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)39.943.642.552.0
Working Capital/Revenue2.0%1.2%0.7%0.9%
Cash Conversion Cycle Time (days)16.616.515.914.7
Gauge Score (0 to 25)771710

BP listed assets of $241 billion on 31 March 2010, and Shareholder's Equity of $105 billion.  The company's debt load had risen at a steady clip for several years, but was never excessive.  Long-term debt peaked at $27 billion (27 percent of Equity) in September 2009, before falling back to $24 billion in March 2010. 

Total debt peaked at about $37 billion (36.5 percent of Equity), a large number but only about 20 percent more than one year's Cash Flow from Operations. 

In March 2010, total debt less Cash and Cash equivalents was $26.7 billion.  Working Capital -- Current Assets minus Current Liabilities -- was $7.9 billion.

Growth31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
Revenue growth-17.4%-33.7%3.2%6.9%
Operating Profit growth22.9%9.0%3.4%10.8%
CFO growth-9.0%-27.2%18.6%11.6%
Net Income growth13.7%-27.7%-27.1%10.1%
Gauge Score (0 to 25)71810
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.

BP's Revenue plunged to $239 billion in 2009, from $361 billion in 2008, because of lower energy prices and refining margins.  The quarterly Revenue nadir occurred in March 2009, when Revenue was $47.3 billion.  Revenue rebounded to $73 billion in the March 2010 quarter.

Although Revenue has been recovering, trailing-year Revenue remains less than it was in the prior four-quarter period.

The situation with Cash Flow from Operations is similar.  CFO was $27.7 billion in 2009, down 27 percent from 2008.  CFO in the March 2010 quarter was $7.7 billion, which easily covered Capital Spending of $4.3 billion. 

Net Income was $16.6 billion in 2009 and $6.1 billion in the first quarter of 2010.  The company has recorded some large special losses in recent years that have caused fluctuations in the Net Income growth rate.

Operating Profit is a longer-term average that excludes many special items.

Profitability31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
Operating Expenses/Revenue90.2%91.1%92.2%90.2%
Free Cash Flow/Invested Capital7.9%5.8%8.1%9.9%
Accrual Ratio3.4%3.0%3.0%2.4%
Gauge Score (0 to 25)8478

The Profitability gauge score improved because the Operating Expense ratio came down, Return on Invested Capital increased, and Free Cash Flow started to recover.

Operating expenses, in the way we categorize them, totaled $239 billion in the last four quarters.

Free Cash Flow, which we compute by subtracting Capital Spending from Cash Flow from Operations, was $1.6 billion in 2009

Cash Flow would have to recover more robustly to get a better Accrual Ratio score.

Value31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
P/E vs. S&P 500 P/E
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)94199
Share Price ($)$57.07$57.97$40.10-

The Value gauge rose because earnings and cash flow improved in the first quarter of 2010, but the share price slipped a notch.

Because of the Gulf of Mexico disaster, the share price now is much lower.  This will temporarily increase the attractiveness of the valuation metrics; the situation will correct itself when clean-up and related costs are tabulated.

Overall31 Mar 201031 Dec 200931 Mar 20095-Yr Avg
Gauge Score (0 to 100)33175536

BP's finances were on an upswing prior to the latest disaster and its prospects for 2010 appeared favorable.  That was then.

When the NYSE closed on 20 April 2010, hours before explosion, BP ADRs traded for $60.48 each.  The price is now around $47, a drop of about 22 percent, for a loss in market value of roughly $42 billion.  During this same time period, shares of Exxon Mobil (NYSE: XOM) fell 7 percent, Chevron Corp. (NYSE: CVX) shares declined 5 percent, and Royal Dutch Shell (NYSE: RDS.A) shares sank 10.5 percent.  

Full disclosure:  Long BP at time of writing

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