13 March 2011

BP: Financial Gauge Analysis for the December 2010 Quarter

We have updated the various financial metrics we use to analyze BP's (NYSE: BP) Cash Management, Growth, Profitability and Value.  This post reports on the metrics and the associated financial gauge scores. 

The metrics were calculated using data from BP's current and historical financial statements, including those in the latest Form 20-F Annual Report.

A previous article examined in some detail BP's Income Statement for the December-ending fourth quarter of 2010.  The company earned $1.76 per diluted ADS, up 29 percent from $1.36 in the same three months of 2009.

Before getting into the details, we will take a step back to introduce the subject of today's analysis.

Headquartered in London, BP p.l.c. is a major Integrated Oil and Gas firm with worldwide interests, including Alaskan oil fields and pipelines.  The former British Petroleum became a behemoth by merging with Amoco in 1998 and acquiring Arco and Burmah Castrol soon thereafter.

BP operated the Deepwater Horizon drilling rig that failed with tragic results in April 2010 in the Macondo area of the Gulf of Mexico.  An estimated 5 million barrels of crude oil flowed from Mississippi Canyon 252 well into the Gulf of Mexico, where BP had been a large producer, before the well was permanently sealed in September 2010.

To cover the disaster's costs, including a $20 billion compensation claims fund, BP recorded pre-tax charges totaling $40.858 billion ($28 billion after taxes, $12.89 per share) in 2010.

These charges caused BP to end 2010 with a loss of $3.7 billion on revenue of $309 billion.  In 2009, BP achieved profits of $16.6 billion on sales and other operating revenues of $239 billion.

As a consequence of the events in the Gulf of Mexico, before and after the disaster, BP's board ousted CEO Tony Haywood and replaced him with a safety-conscious Bob Dudley.  It didn't help Mr. Haywood that the Gulf disaster followed a string of other BP difficulties, including tragedies, maintenance problems, and market manipulation allegations.  Haywood himself had risen to the top job after an earlier ignominious leadership change.

Early in 2011, BP announced a new joint venture with Rosneft, including an $8 billion swap of equity shares, to develop energy resources in Russia's north.  This deal did not please BP's TNK-BP partners.

The share price plunged as a result of the Gulf oil spill, causing the company's market value to fall from $190 billion in April to $90 billion in June 2010.  The market value has since recovered to about $150 billion.
BP indicated it would sell as much as $40 billion of assets to raise cash.  In one deal, Apache (NYSE: APA) agreed to spend $7 billion to purchase assets in Canada, Egypt, and the Permian Basin of West Texas and New Mexico.

Dividend payments to shareholders will resume in 2011.  The first payment will be $0.42 per ADS.

Now we turn to the financial gauges.  The latest quarterly results produced the following changes to the scores:
  • Overall: 49 of 100 (down from 33)

The current and historical values for the financial metrics that determine the gauge scores are listed below, with some brief commentary.  Readers are encouraged to verify these figures and calculate others as they see fit using the filings available at the SEC's web site and elsewhere.

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 Dec 201030 Sep 201031 Dec 20095-Yr Avg
Current Ratio1.
LTD to Equity32.3%29.0%25.1%18.5%
Debt/CFO (years)
Inventory/CGS (days)N/AN/AN/AN/A
Finished Goods/InventoryN/AN/AN/AN/A
Days of Sales Outstanding (days)41.040.343.647.6
Working Capital/Revenue1.3%1.5%1.2%1.1%
Cash Conversion Cycle Time (days)
Gauge Score (0 to 25)1414711

The Cash Management gauge was not moved by BP's results in the fourth quarter.  Fourteen points is a moderate score.

In 2010, BP's Long-term Debt increased from $25.5 billion (25 percent of Shareholder's Equity) to $30.7 billion (32 percent of Equity).  Although up sharply, the amount of Long-term Debt does not seem excessive.  The company may have issued more debt securities to provide additional liquidity to absorb th Gulf spill expenses.

Short-term and maturing debt has also risen, but the amount is about the same as it was a couple years earlier. 

Total debt (short- and long-term) is now a record-high $45 billion, which is 3.3 times the company's Cash Flow from Operations last year.  However, BP also has about $20 billion in Cash, Cash Equivalents, and Short-term Investments.

The Days of Sales Outstanding and the Cash Conversion Cycle Time have been falling, which is a sign of more efficient use of cash.

Growth31 Dec 201030 Sep 201031 Dec 20095-Yr Avg
Revenue Growth24.2%25.5%-33.7%1.8%
Operating Profit Growth4.6%2.5%-20.8%-1.3%
CFO Growth-50.9%-19.1%-27.2%-39.0%
Net Income GrowthN/AN/A-27.7%N/A
Gauge Score (0 to 25)121219
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 Growth gauge held steady as good Revenue news balanced weakness in Cash Flow and Net Income.

BP's Revenue increased to $297 billion in 2010, up from $239 billion in 2009.   Higher energy prices outweighed the production lost in the Gulf of Mexico.

The charges related to the oil spill resulted in BP recording a loss for the year, $3.7 billion.  The company was profitable in three of the four quarters of 2010, but the second quarter included mammoth charges.

Although Cash Flow from Operations was positive for the year, $13.6 billion, Cash Flow was negative in the second half of 2010.

Cash Flow was not enough to cover Capital Spending (i.e., Free Cash Flow was negative for year).

Profitability31 Dec 201030 Sep 201031 Dec 20095-Yr Avg
Operating Expense/Revenue90.8%90.7%91.1%90.8%
Free Cash Flow/Invested Capital-3.9%1.8%5.8%6.8%
Accrual Ratio-2.1%-3.0%3.0%1.9%
Gauge Score (0 to 25)91248

The Profitability gauge score lost 3 points because Free Cash Flow became negative and Operating Expenses stopping coming down as a percentage of Revenue.

The Return on Invested Capital, which excludes special charges, improved as a result of a lower effective tax rate and a smaller denominator.

Free Cash Flow, as mentioned above, was negative in 2010. 

Value31 Dec 201030 Sep 201031 Dec 20095-Yr Avg
P/E vs. S&P 500 P/E N/AN/A0.60.6
Enterprise Value/Cash Flow (EV/CFO)
Gauge Score (0 to 25)5739
Share Price ($)$44.17$41.17$57.97-

With negative earnings, there isn't much for the Value gauge to process.  The Price/Earnings multiple isn't meaningful in this case.

The steep drop in the share price during 2010, caused by the Gulf of Mexico disaster, would normally provide some lift to the Value gauge.  However, the effect is muted by the lack of earnings.

The lower Price/Sales ratio is the reason the score isn't zero. 

Overall31 Dec 201030 Sep 201031 Dec 20095-Yr Avg
Gauge Score (0 to 100)34411637

BP's finances were on an upswing early in 2010, and the company's prospects for they year appeared favorable.  After 20 April, events in the Gulf of Mexico overshadowed all else. 

The company recorded pre-tax charges of nearly $41 billion to cover the additional costs.  The share price plunged.

However, BP has shown it has the wherewithal to survive, and higher energy prices are boosting the company's Revenue.  When costs stabilize, profits should recover.

Full disclosure:  Long BP at time of writing

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