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  • Craig M. Seidelman CraigSeidelman@mizzou.edu Beyond Petroleum plc (BP) I. Investment Highlights Company Profile: BP owes its origin to one man, William Knox D’Arcy, who at the turn of the century invested time, money, and labor in the belief that worthwhile deposits of oil could be found in Persia (now known as Iran). BP has transformed: growing from a local oil company into a global energy group; employing over 100,000 people and operating in over 100 countries worldwide. BP’s main activities are the exploration and production of crude oil and natural gas; refining, marketing, supply and transportation; and the manufacture and marketing of petrochemicals. BP has a growing presence in gas and power and in solar power generation. BP has well-established business operations in Europe, North and South America, Australia, and Africa. They are one of Britain’s biggest companies and one of the world’s largest oil and petrochemicals groups. BP has several brands that are recognized and respected in markets worldwide. They are; BP, am/pm, Aral, ARCO, and Castrol. BP supports all of its businesses with high quality research and technology and are committed to a code of conduct that sets high standards for a business committed to integrity. Key Statistics: Investment Rating BUY Pricing Closing Price (as of 11-11-05) $64.72 52-Week High $72.66 52-Week Low $56.60 Valuation Market Cap (intraday) 1.37T Trailing P/E (intraday, ttm) 65.17 Forward P/E (fye 31-Dec-06) 9.33 PEG Ration (5-year expected) 1.17 Price/Sales (ttm) 3.94 Price/Book (mrq) 16.65 Current P/E (ltm) 12.20 Profitability & Effectiveness (ttm) Profit Margin 6.28% Operating Margin 9.17% ROA 9.96% ROE N/A 1
  • BETA 0.50 Market Data Volume 2,031,400 Revenue (ttm) 345.02B Revenue per Share (ttm) 16.175 Gross Profit (ttm) 35.80B EPS (ttm) 1.00 Div & Yield 2.14 (3.30%) Growth Dynamics: Exploration and production’s third quarter result was up 36% on a year ago reflecting higher realizations in both liquids and gas, partially offset by slightly lower volumes and higher operating costs and revenue investments. Refining and marketing result reflects record margins but significantly lower retail and marketing margins compared with a year ago. In Gas, power and renewables the result increased compared with a year ago primarily due to higher contributions from the gas marketing business. Their net of debt to net of debt plus equity ratio decreased from 20% in 2004 to 19% in 2005. BP repurchased 332 million of its own shares, at a cost of $3.8 billion. It seems as if world economic growth appears to have been sustained at close trend rates, despite the aftermath following the recent hurricane tragedies. This graph depicts the 5 year performance of BP compared to the S&P 500. It has outperformed the S&P pretty much the entire time. The following are growth rates calculated on advfn.com. Growth Rates 5-Year Growth 3-Year Growth Revenue 18.19% 21.11% Income 11.50% 45.57% Dividend 6.16% 5.26% Quarterly Revenue growth is 35.60% and Quarterly Earnings Growth is 39.20%. Though oil prices are $10 a barrel higher this quarter than from a year ago, hurricanes Rita and Katrina resulted in loss of oil production in the U.S. Gulf of Mexico have also caused consumption levels to weaken and are causing crude oil prices to fall downward. 2
  • The Paris-based IEA, lowered its estimates for world oil demand to 85.1 million barrels a day in the fourth quarter, down 400,000 barrels a day. The agency is attributing the drop to “unusually warm weather and hurricane related disruptions” that cut demand in September and October. The unseasonably warm weather led to bigger than expected inventories across the nation. Production of oil is down 50% in the Gulf of Mexico due to the Hurricane damages, but rising imports have made up for them keeping the oil and gas prices sustained at where they are at. The tide of oil imports during this time has increased the trade deficit to nearly $66.1 billion. With all of this, consumption is expected to rise 1.5% this year and 2% in 2006. Over the past year, petroleum has risen some 30.9%. It seems as if when the cold weather comes in the fourth quarter, oil and gas prices will rise again despite shortages and consumption levels. According to AccuWeather predictions there will be a big change in the weather ushering in a cold jetstream hitting the United States. From the oil high on August 30, 2005 of $70.85 a barrel from Hurricane Katrina it has since fallen 20% and with the reported rising inventories from United States and Japan prices are dipping down indicating slowing demands for gasoline. BP’s research and technology department is predicted to spend $5 billion to find, develop, transport and deliver new energy supplies to the US market. BP has also recently announced a $2.2 billion expansion of Wamsutter Natural Gas Field located in Wyoming. This field encompasses 1,700 square miles and is one of the largest tight gas resources in North America. Being that BP is one of North America’s largest producers and marketers of natural gas this expansion is expected to increase BP’s share of ultimate recovery from the field by 450 million barrels of oil equivalent and increase BP daily net production from 125 to 250 million standard cubic feet per day by the end of the decade. This major investment by BP follows more than two years of focused, accelerated drilling and technical studies which revealed the untapped potential of the Wamsutter resource. This expansion is part of the company’s fundamental strategies to long-term growth and commitment to the world. BP is also investing in the Deepwater Gulf of Mexico. So far, four new fields have started production in the last three years and two more fields are being developed. Oil product stocks and anticipated recoveries in refining capacity generally are adequate to meet current demand but the situation remains finely balanced and vulnerable to further disruptions or a colder than normal winter. Therefore, refining margins are to remain high during the fourth quarter. During the third quarter, retail margins have been impacted negatively by high and rising product prices. The marketing margin for BP and the industry will remain highly volatile throughout the fourth quarter due to vast uncertainty. The potential growth and expansion of BP looks very positive with increased earnings and revenue over the past years. II. Executive Summary BP is in the Major Integrated Oil and Gas Industry and is traded on the NYSE. London- based BP is the second-largest oil company on the planet behind ExxonMobil. Founded by the 1998 merger of British Petroleum and Amoco, BP boasts proven reserves of 18.3 billion oil equivalent barrels. In 2004, BP produced 4.0 million barrels per day. They have a refining capacity of 2.8 million barrels per day, operate petrochemical plants, and 3
  • sell petroleum through 27,000 service stations around the globe. They have operations in over 100 countries and employ over 100,000 people. BP’s 5-year forecasted earnings growth is 10.1% which is below the forecasted industry 5-year earnings growth of 15.1%. BP has relatively low volatility (beta) of 0.50. BP is one of the largest energy companies, providing its customers with fuel for transportation, energy for heat and light, retail services and petrochemical products for everyday items. BP has 21 refineries around the globe and is expanding its production to the deepwater Gulf of Mexico, where four new fields have started production in the last three years and two new fields are being developed. BP also has announced a $2.2 billion expansion of Wamsutter Natural Gas field which will increase their production significantly. BP has five core business brands which are; BP, am/pm, ARCO, Aral, and Castrol. BP is about finding, producing and marketing the natural energy resources on which the modern world depends on. Their business is run on the principles of strong corporate governance, a clear system of delegating accountability and a set of values and policies that guide their behavior. They have a code of conduct which is their commitment to integrity in the corporate world. The code of conduct covers five key areas in business operations: health, safety, security and the environment; employees; business partners; governments and communities; and company assets and financial integrities. With the recent tragedies of the Hurricanes, and other unforeseeable events in the world, the stock price volatility may fluctuate. Recommendation: BUY BP is a good company to invest in if we would like to play it safe. It has outperformed the S&P 500, but it is near its 52 week high and forecasts have projected that prices will not drop or increase. Many investors have been investing into energy to diversify and increase their returns, thereby driving up the price of oil. But as prices fall, they are likely to sell. The “buy” side is said to drive this industry because there are too few sellers in the market. Pros: • Well recognized and respected brand names in the worldwide market. • Key Strengths are in oil and gas exploration and production; the refining, marketing, and supply of petroleum products; and the manufacturing and marketing of chemicals. • Proven reserves • Expansion of Wamsutter Natural Gas Field in Wyoming will increase production of natural gas from 125 to 250 million standard cubit feet per day by the end of the decade. • Sales Revenue growth is predicted to increase ~ 18% over the next 5 years • Strong Likelihood of future exploration into other resources for energy • Low risk • Foreign Stock will help diversify our portfolio Cons: • Warming of the Weather and Hurricanes Rita and Katrina have caused damages and production stoppages in the Gulf of Mexico. 4
  • • Possibility of reserve build up due to the “warming of the weather” could drive down the price. • Future Growth in sales and earnings is below the industry average. • Crude Oil futures correlated with price of stocks. • Missed the chance to jump on the energy train before crude oil prices reached all time highs moving stock prices up. • World economic growth appears to have been sustained at close to trend rates, despite the disruptions and uncertainties following the hurricanes. BP’s solid growth throughout its company’s history has allowed them to explore and research more advanced ways to fill the need for energy that our world needs. BP adds diversification to our portfolio being that it is an international stock. BP’s projected growth rates in the future show that it is a sustainable company for earnings and revenues. In the integrated oil and gas industry weather is an important factor to watch in determining the fluctuation of the stock. III. Company’s Description From the BP website information was attained: BP is a holding company of a major petroleum and petrochemicals group. Its main activities are exploration and production of crude oil and natural gas; refining, marketing, supply, and transportation; and manufacturing and marketing of petrochemicals. It is the second largest producer/manufacturer of energy in the world, trailing behind ExxonMobil. BP has been researching and testing a new sector of solar power generation. In 2004, their solar business recorded its first ever profit after restructuring in 2003. Said again, it supports all of its businesses with high quality research and technology. As one of the world’s leading companies, BP believes that it is their responsibility to set high standards, to be seen to be, a business which is committed to integrity. They applied a code of conduct in their everyday business rituals. The code of conduct includes many examples of how their shared group values should be applied in daily business operations. BP has five brands for which they are recognized and respected around the world. They are BP, am/pm, ARCO, Aral, and Castrol. 1. Am/Pm: There are more than 950 am/pm convenient stores throughout the US West Coast, serving nearly 2,200 different products. In the US, it averages around $1 billion gross sales. This is the place to food, drink, and snacks at a competitive price. The brand personality of am/pm is fun, cool, funky, irreverent, and young. 2. ARCO: First for gasoline retail quality, convenience and value on the US West coast. It provides value for your money. The brand personality of ARCO is smart, convenient, value oriented, familiar, American, and a good corporate citizen. 5
  • 3. Aral: Brand that stands for outstanding products and customer service on forecourts across Germany. In a recent survey carried out in 2002, 61% of motorists felt able to identify a difference, chose Aral for best quality petrol. 4. Castrol: Introducing a leader in automotive and specialist lubricants- renowned in 150 countries worldwide. BP strongly believes that progress is best achieved by working in partnership with our customers to develop our products and services. Dedicated to the development of superior technology, BP prides themselves on meeting customers needs. 5. BP: The BP brand encompasses all of their people, the products they sell, the technologies they develop and the relationships they build. They have four brand values that underpin everything they do: a. Performance: setting global standards b. Innovative: delivering breakthrough solutions c. Progressive: always looking for a new and better approach d. Green: demonstrating environmental leadership Leadership John Browne – group chief executive, who joined BP in 1966. John worked his way through BP holding several different positions. Between 1969 and 1983 he held a variety of exploration and production posts in Anchorage, San Francisco, London and Canada. 1984 became group treasurer and chief executive of BP Finance International. He was CFO, managing director and then in 1998 following the merger with Amoco, he was appointed chief executive. He was voted “most admired CEO” by Management Today in 2000, 2001 and in 2002. Lord Browne was knighted in 1998 at the Queen’s Birthday Honors and made a life peer in 2001. He holds a degree in Physics from Cambridge University and a MS in Business from Stanford University, California. He has been awarded several medals and honors for the field of engineering and the field of management leadership. He is given credit for the code of conduct and sustainability of BP today. Lord Browne is also noted as serving many external roles outside of BP, like; non-executive director of the Intel Corporation, non-executive director of Goldman Sachs, Trustee of the British Museum, and many more. David Allen – group chief of staff and group managing director, who joined BP in 1978. Other group accountabilities that David holds are; corporate communications, planning and performance management, strategy, chief economist, diversity and inclusion, group policy development and leadership education. Obtained a degree in Chemistry from Oxford University where he remained to perform research on gas laser fluorescence, leading to a Doctorate in Chemistry. In 1978 when he started he was in the BP Gas International dealing with Middle East and Far East trading before moving to the New York corporate offices. 1986 he moved to BP’s corporate planning department, following to be appointed as BP’s international crude oil trading activities. 1997 he joined the executive committee as chief executive of Exploration. He worked his way up to join main group BP plc as managing director in 2003. Byron Grote – chief financial officer, who joined in 1979. Byron’s group regional responsibilities include Asia, the Indian sub continent and Australia. Other group accountabilities Byron holds are Group integrated supply and trading activities. He has a PhD in Quantitative Analysis from Cornell University. His first five years with BP, he had many management responsibilities for a range of activities in international oil supply 6
  • planning, logistics and crude oil trading. 1986 he was appointed Vice President of retail sales where he was responsible for managing the US companies retail petrol operations. He also worked his way up to be on the executive committee as group chief of staff in 1997, and following the merger of Amoco and BP, he became executive vice president in 1999. In 2000 appointed to BP’s board of directors and less than two years later in November 2002 he became CFO. Lain Conn – executive director of the BP group, has been with BP for 12 years. Lain has regional responsibility for Europe, including the UK, together with Russia, the Middle East, the Caspian and Africa. He has functional responsibility for Health, Safety and Environment, Human Resource management, Marketing, Technology, Digital Business, Security, and Procurement and Pensions Operations. Studied Chemical Engineering and Management at Imperial College, London. Previously, he was Chief executive of BP’s petrochemicals segment, the third largest petrochemicals plant in the world. Before that he was group vice president responsible for BP’s marketing operations in Europe. His career began in commercial refining and oil trading but in the last 12 years he has spend various roles in Exploration and Production, Manufacturing and Marketing and also in Headquarters. He holds some external roles like non-executive director of the Rolls- Royce Group plc Board. Tony Hayward – chief executive, exploration and production, who joined the BP group in 1982. Holds a PhD in Geology 1982. 1999 he became part of the executive committee and became group treasurer in 2000. Dr. Hayward became an executive vice president in April of 2002 and was appointed chief operating officer in November 2002 and in January 2003 became chief executive of Exploration and Produciton. External roles he holds are that he is a non-executive on Citigroup’s advisory board. John Manzoni – chief executive, Refining and Marketing, who joined BP in 1983. He graduated from Imperial College, London in 1983 with a degree in civil engineering and a Masters in Petroleum Engineering. 2000 he was appointed regional vice president of East United States. Then in 2001 became chief executive of Gas, Power and Renewables and held this position until his current one in 2002. He was appointed to the Board of BP plc in January 2003. IV. Economic and Industry Environment Industry Relations to the Economy The price of crude oil is the engine that drives the energy industry. Analysts believe that the industry is at its all time high and will remain that way for a long time. In the late 1990s, in the wake of the Asian economic downturn, oil prices fell to $10 a barrel. This had a profound effect on the industry because many small companies went bankrupt while some larger companies merged. Drilling activities were halted thus causing a snowball effect: Oil service companies had fewer rigs to service, pipeline and storage companies had less oil and gas to transport and store, and refineries produced less gasoline. A greater demand for oil in China and India in conjunction with political turmoil in oil-producing regions have seen oil prices soar. Thanks to Hurricane Katrina a barrel of oil reached more than $70 a barrel in 2005 causing the industry to rebound. The higher prices have reached most of the industry – producers, refiners, pipeline companies, equipment makers, oil field service providers, and gas station operators – which all have 7
  • enjoyed new profits. Leading the charge are the world’s largest integrated oil companies: Exxon Mobil, BP, and Royal Dutch/Shell. The increased demand for oil and gas accompanied with the hurricanes and other disasters have caused the US to import more oil increasing the trade deficit to an all time high of $66.1 billion. The rate at which we consume oil is far beyond the supply that is given. If there is more demand than supply then prices will remain high until reserves are met. The industry life cycle is known to be a slow cyclical process. Lately however, we have not seen the bust, but only booms for the energy industry. The major integrated oil and gas industry is one of the few if not the only industry who has outperformed the S&P. Analysts believe that the demand for oil will increase another 1.5% this quarter and by 2% in 2006. In 2006, the IEA (International Energy Agency) has bumped its numbers that demand will increase 400,000 more barrels a day. This would lead that most of the companies in the integrated oil and gas industry are seeing growth and increases in profits. The large companies mainly, as mentioned on finance.yahoo.com, are reaping most of the benefits from this economic dilemma. There seems to be a positive correlation between the interest rates and the petroleum industry. When interest rates are high and business is peaking, the demands for these companies’ products are increasing. Since supply is not increasing, it proves that the prices of energy products will increase. If the US were to go into a recession or an economic downturn, if supply did not decrease then the demand for this industry would fall along with the prices as seen in the late 90s during the Asian crisis. If perchance the supply does drop too, then prices will remain high and stable. Obviously, with energy prices being high right now, we can infer that interests rates are rising or are stable at a high rate. Businesses in this industry are making more money and are able to expand their operations through stock repurchases and exploration and production. Companies are able allocate more money into research and technology as well for new advanced energy solutions. As seen today by BP and the other large companies in this sector. The fluctuations of the gas prices over the past several months leads us to infer that taxes on energy products do not directly effect the supplier, but rather the “demander” or user the most. Taxes on these industries products in the long or short run seem to have not effected consumer consumption since the demand is forecasted to grow even higher than it is now. Oil and gas being consumer goods will help signal whether or not the economy is prospering or declining. If demand for oil drops, and supply does not, then prices will fall, which in turn suggest as mentioned earlier an economic recession. In a country where public transportation is not regarded as efficient, it is highly unlikely that the demand will drop anytime soon for the consumption of the products in the major integrated oil and gas industry. Even with new technologies for natural gas, like liquefied natural gas, which emits less carbon than coal and oil, prices will be sustained in the long-run due to our economic infrastructure of our country. Company’s Relation to the Industry Leaders in Quarterly Revenue Growth (YoY) CONOCOPHILLIPS [COP] 46.90% CHEVRON CORP [CVX] 36.00% 8
  • BP PLC [BP] 35.60% EXXON MOBIL CP [XOM] 33.50% ROYAL DUTCH PET ADR [RD] 26.00% REPSOL YPF S.A. [REP] 24 This data table from finance.yahoo.com shows the industry’s leaders in quarterly revenue growth. From the high demand that the world is wanting from this industry, especially in China and India, with US not far behind, revenue growth can be this high. Leaders in Long-Term Growth Rate (5 yr) CHEVRON CORP [CVX] 10.00% BP PLC [BP] 8.70% EXXON MOBIL CP [XOM] 8.10% CONOCOPHILLIPS [COP] 7.50% REPSOL YPF S.A. [REP] 2.00% In this table, BP is among the leaders in long-term growth rate forecasted with good economic conditions. BP’s goal is not to achieve short term profits but achieve long term profitability with high growth potential, since maximizing shareholder value is their first priority. Many of the large integrated oil and gas companies are around today because of mergers and acquisitions. Potential possibility for new competition in this industry is virtually zero. The economic crisis in Asia in the late 90s caused most of these companies to consolidate pushing out the small players and leaving only the big companies to thrive. The costs that are associated with this market are high thus proving that the threat of new competition is extremely low. BP being one of the large international integrated oil companies prosper the most in this industry. Local refining companies in the home nation don’t really stand a chance against these leaders like BP and also the foreign state oil producers like Saudi Aramco. BP leads the board with market capitalization across the industry. Foreign competition, like Saudi Aramco, are hard to value and compare against BP. Since foreign governments don’t require the disclosure of financial information like the US does, comparison among them can seem difficult. BP biggest competitor to compare to would be Exxon Mobil who is the world’s largest integrated oil and gas company. V. Company Position Marketing Fundamentals BP is a global energy business with a family of brands known around the world. They do business in 100 countries, with operations in Europe, North and South America, Asia, and Africa. Since BP is an international company its advertising campaigns must be tailored to fit the culture and region that they are targeting. Obviously, the target market for energy is very broad, but government regulations and shared values of cultures make it a difficult task to campaign globally without offending anyone group. 9
  • BP operates in three business segments: Exploration and Production of crude oil and natural gas; Refining, Marketing, and Supply and Transportation of petrochemicals; and manufacturing and marketing of these chemicals. BP offers a wide range of products in the energy sector catering to all people. They are a well established business that is able to reap the benefits of energy demand not just locally, but globally as well. Their promotion of their products is geared now towards safety and environment issues. For the past decade, these have been the main challenges that BP has had to face. Whether it is air quality control or unfortunate oil spills, the idea of global warming and fossil fuels being a catalyst for global warming puts BP and other integrated oil and gas firms in the spot light for social responsibility and awareness. BP’s values are built upon responsibility and sustainability. Responsibility for choices that they make that positively or negatively impact society and the environment and sustainability for company growth and group adherence to work as a unit to maximize shareholder value. They base their promotions on their stern business principle of integrity. BP is a large business and it should conduct itself with the up most integrity. With all of BP’s brands and brand loyalty, BP has distribution outlets in almost every corner of the world. They have catered individual nation advertising campaigns, but stick to their original global campaign. Their global advertising campaign explains how they are acting on the challenges of climate change, energy security, new sources of energy and our ecological footprint. Research and Development BP is committed to support all of its businesses with the highest quality research and technology. One of BP’s commitments is to research and find new solutions to the challenges that they face. For example, they are dedicated to reducing carbon emissions in our society. BP was the first major company to publicly acknowledge the need to take steps against global climate change. They are investing $350 million over five years to reduce their internal CO2 emissions by up to one million tones each year. They are one of the world’s biggest investors in low carbon fuels and technologies. BP is also searching for new technologies and solutions for energy like in Solar power. Solar power provides carbon free electricity. BP supports a number of major international research initiatives seeking solutions to global climate change, including a Clean Energy Research and Education Program at Tsinghua University in China, the Carbon Mitigation Initiative, covering carbon capture and storage and other global technologies at Princeton University in the US and a program to research future technologies for energy use and storage in buildings at Imperial College in the UK. Demographics, Pricing and Price Stability The target market for oil and gas, petroleum products is infinite almost. Almost every country uses petroleum products or some form of energy to maintain a civilization. BP is able to cater to its consumers through its family of brands: BP, am/pm, Aral, ARCO, and Castrol. This is why they are an integrated oil and gas company because they have their business down to where they don’t have a middleman. They handle their own supply, logistics, marketing, production, refinery, …, which makes them a global giant in this industry. Along with Brand loyalty that consumers have associated with BP. BP offers 10
  • its products to the everyday consumer all the way to the government and even nations. They are able to do this because the commodity that they sell is in such demand and is our primary form of energy in the world. This would tend to be the only market that companies can get by with mass marketing. Petroleum products offer few differences when compared to other products. In the end, the demand is so much higher than the supply that it is a lot easier for marketers to sell their product in this industry. Pricing is competitive among the industry, but is heavily weighted on the consumer demand, supply, interest rates, and the economic state of the country. Analysts on finance.yahoo.com agree that the prices will remain stable through out the rest of the year and should remain stable, without knowing of unfortunate uncertainties like the Hurricanes this year which damage production and refinery facilities across the globe. Even with the oil price dropping, and reserves being replenished, the stock price of BP will remain stable because the demand is so high right now for investors to get into the energy sector. The energy sector and industry is the only industry that has outperformed the S&P consistently. Threat of Substitution The threat of substitution for BP, as well as the energy, is virtually (again) zero. Ever since man made automobiles, they have made combustion engines which run off of petroleum. Granted a couple of cars before combustion engines were steam powered, we’ll just disclose them for this argument. Hybrids can be environmentally better and may even begin to increase in sales, but the fact is that most of the cars in production and in operation run off of petroleum. The market for petroleum will most likely never die. There are electric cars and solar powered cars too, but not everybody wants one. There is always going to be a market for automobiles that run on petroleum. Most of the threats of substitution are internal. Most of the largest companies in this sector, mainly BP, are pouring research and technology into finding new sources of energy to cut back on global climate changes. The cost that the world would incur if gasoline was not in production would be devastating to national economic GNP. Though we import a lot more than we export, all the jobs, construction, and drilling sites would cause economic disaster for an economy. BP has nothing to worry about as far as substitutions are concerned, but should be more concerned with their public and environmental image. Technology BP is a leader among the industry in technology. They back their research an technology 100% which allows them to search for new sources of energy and ways to reduce the effects of global climate change. In a recent press release on October 21, 2005, BP made their ninth oil discovery in ultra-deepwater Block 31, offshore Angola. Called ‘Hebe-1’, this the ninth successful discovery BP has drilled in Block 31, following Plutao, Saturno, Marte, Venus, Palas, Ceres, Juno, and Astraea. Hebe-1 was drilled by the Jack Ryan drillship, in a water depth of 2,008 meters, and a total depth of 4,823 meters below sea level. The well was tested at 5,956 barrels of oil a day through a mere 2 inch choke. That is pretty good technology. On October 20, 2005, Apex-BP Solar was contracted by Tunisie Telecom for the construction of four telecommunication repeater stations powered solely by photovoltaic solar power in the open desert, where it is still not connected to the electricity grid and where climatic conditions are extreme (Temperatures 11
  • in excess of 122 degrees Fahrenheit, sandstorms, etc.), the choice of solar power was obvious. They were selected for their expertise in electrification of remote areas. Technology is all about scientists and engineers making a real difference to BP’s business and the world in which we live. From the discovery of new oil and gas fields to the introduction of innovative processes and new products for our customers, the scientists and engineers help shape BP’s current business performance and future success. It is the focus of their efforts on the technologies that make a real difference to BP’s future business. BP is the leader in Technology for their industry, and they quote, “Technology is at the heart of everything we do – one of the most powerful means we have to run our business more efficiently and competitively.” Lord Browne. Production BP has 21 refineries spread around the world and more than 27,000 service stations for customer convenience. The first refinery established by BP was the Whiting Refinery, built in 1889. They are building two more in the deepwater Gulf of Mexico in 2005. The difference in age is 116 years. In the more recent years, from 1970s on, multiple refinery construction projects were erected. The Whiting Refinery, though the oldest is the second largest refinery that BP has. It is the largest inland refinery and the third largest refinery in the United States. It operates 24 hours a day, 365 days a year, and employs around 1200 people. It makes 16 million gallons of product a day, half of which is gasoline. On an average day the refinery produces enough to fully fill 430,000 automobiles, 10,000 farm tractors, 22,000 semi-trucks, 2,000 commercial jet liners, and fill 350,000 propane cylinders. The daily production results from BP are approximately 2.5 million barrels of oil and NGL’s; 8.5 billion cubic feet of natural gas. The Refinery capacity is 3.2 million barrels of crude oil per day. There are 5 refineries in the USA and 14 in foreign countries and 2 that are in production. BP has big economies of scale in that it leads the way in market capitalization and research and technology allowing them to utilize even their oldest refineries. They do business in 100 countries, with operations in Europe, North and South America, Asia, and Africa. Image BP is very actively involved in the community. BP states that some of the biggest scientific challenges facing the world today relate to our use of energy. BP is working with the world’s leading scientists and engineers in our international university research program. BP’s work with universities is about focusing on the future and working at the frontiers of science and engineering on the issues that will make a real difference to the way people around the world live their lives and the way that BP runs their business. BP spends around $30 million dollars a year in these university programs. Environment and Safety are two key aspects in their business operations. The road to sustainability begins with our fundamental purpose: to provide better goods and services in the form of light, heat, power and mobility to increasing numbers of people, and thereby to deliver shareholder value on a long-term basis. One achievement that BP is proud of is that they actively participate in community programs in Georgia and Turkey, including school repairs, improvements in agricultural techniques and business 12
  • development and education. The challenges that BP faces can sometime effect their image. Fatalities from accidents caused 11 deaths in 2004, but more stringent safety standards are in place now. Greenhouse Gas Emissions is an ongoing challenge of managing the growth in our emissions as our productions increases. Oil spills can negatively hurt the company’s image. In 2004, BP had its largest oil spill in four years. Having been filed alleging multiple air quality violations at the Carson Refinery in California, BP in March of 2005, without admitting liability, agreed to settle all outstanding claims including $25 million in cash penalties and approximately $6 million in past emissions fees. Quality of Management The quality of management at BP is of the highest standards. All of their board of directors have worked with BP for several years. The group chief executive, Lord John Browne has been with BP for almost 40 years. Please refer to section III for individual qualifications of each of the board of directors of BP. The merger with Amoco in 1998 is when John Browne took over and since then have seen growth and profitability even during the Asian economic downturn crisis which impacted the integrated oil and gas industry. They are committed to providing the world and shareholders with exceptional respect and strive for sustainability of operations while maintaining an environmental and societal good image. John Browne was voted “most admired CEO” by Management Today in 2000, 2001, and 2002. All of the boards of directors are actively involved in external roles which help better the community. The board recognizes that it has a unique roll in representing and promoting the interests of shareholders. It is accountable to its shareholders for the activities and performance of the group. There are also 12 independent non-executive board members which help manage and oversee the company. VI. Financial Statement Analysis Accounting Procedures 1. Inventory Valuation: Stocks, other than stock held for trading purposes, are valued at cost to the group using the FIFO method or at net realizable value, whichever is the lower. Stores are valued at cost to the group mainly using the average method or net realizable value, whichever is the lower. 2. Depreciation: Oil and gas production assets are depreciated using a unit-of- production method. Cost of producing wells is amortized over proved developed reserves. License acquisition, decommissioning and field development costs are amortized over total proved reserves. The field development costs are subject to amortization are expenditures incurred to date together with sanctioned future development expenditure. Other tangible and intangible assets are depreciated on the straight line method over their estimated useful lives. Average estimated useful lives of refineries is 20 years, chemicals manufacturing plants is 20 years and service stations is 15 years. Other intangibles are amortized over a maximum period of 20 years. The group undertakes a review for impairment of a fixed asset or goodwill if events or changes in circumstances indicate that the carrying amount of the fixed asset or goodwill may not be recoverable. 13
  • 3. Investment Valuation: Derivative financial instruments are used to manage certain exposures to fluctuations in foreign currency exchange rates and interest rates, and to manage some of its margin exposure from changes in oil, natural gas and power prices. Derivatives are also traded in conjunction with these risk management activities. Derivatives are carried on the balance sheet at fair value (market to market) with changes in that value recognized in earnings of the period. This method is used for all derivatives that are held for trading purposes. 4. Intangibles: Other tangible and intangible assets are depreciated on the straight line method over their estimated useful lives. Average estimated useful lives of refineries is 20 years, chemicals manufacturing plants is 20 years and service stations is 15 years. Other intangibles are amortized over a maximum period of 20 years. 5. Pension Plans: non-contributory pension plans. It provides for you and your family in retirement and also provides financial protection during your career for you and your dependents. You can choose to enhance this benefit by making additional payments. The scheme assets are measured at fair value and scheme liabilities are measured on an actuarial basis using the projected unit method and discounted at an interest rate equivalent to the current rate of return on a high quality corporate bond of equivalent currency and term to the scheme liabilities. These schemes are charged to the Income statement. BP switched from UK GAAP rules to International Financial Reporting Standards (IFRS) early. They adopted it for the 3rd quarter and will continue from hear on out using the IFRS format. The main differences between IFRS are that companies can take certain exemptions. Financial Ratios 14
  • Obtained through MSN Money Growth Rates % Company Industry S&P 500 Sales (Qtr vs year ago qtr) 27.10 34.80 14.00 EPS (YTD vs YTD) 39.90 50.30 19.80 EPS (Qtr vs year ago qtr) 43.50 65.60 27.00 Sales (5-Year Annual Avg.) 18.19 13.71 5.05 EPS (5-Year Annual Avg.) 11.50 20.53 10.28 Dividends (5-Year Annual Avg.) 6.16 14.84 4.44 Price Ratios Company Industry S&P 500 Current P/E Ratio 12.2 9.3 18.6 P/E Ratio 5-Year High 29.6 21.9 64.8 P/E Ratio 5-Year Low 11.0 9.1 17.4 Price/Sales Ratio 0.72 0.85 1.46 Price/Book Value 2.91 2.65 2.80 Price/Cash Flow Ratio 7.40 6.30 12.10 Profit Margins % Company Industry S&P 500 Gross Margin 21.6 28.8 47.1 Pre-Tax Margin 9.1 15.3 12.0 Net Profit Margin 6.1 9.2 8.1 5Yr Gross Margin (5-Year Avg.) 19.1 27.2 47.3 5Yr PreTax Margin (5-Year Avg.) 8.0 12.5 9.3 5Yr Net Profit Margin (5-Year Avg.) 5.2 7.4 5.8 Financial Condition Company Industry S&P 500 Debt/Equity Ratio 0.16 0.15 1.06 Current Ratio 1.0 1.1 1.4 Quick Ratio 0.7 0.8 0.9 Interest Coverage 45.1 24.0 3.5 Leverage Ratio 2.5 2.2 5.7 15
  • Book Value/Share 22.26 24.77 13.24 Investment Returns % Company Industry S&P 500 Return On Equity 24.4 28.5 15.5 Return On Assets 9.6 13.0 2.7 Return On Capital 21.0 24.8 7.5 Return On Equity (5-Year Avg.) 14.3 18.7 11.8 Return On Assets (5-Year Avg.) 6.5 8.5 2.0 Return On Capital (5-Year Avg.) 12.1 15.4 5.6 Management Efficiency Company Industry S&P 500 Income/Employee 187,000 139,000 29,000 Revenue/Employee 3 Mil 2 Mil 355,000 Receivable Turnover 7.7 10.4 7.8 Inventory Turnover 16.3 17.6 8.0 Asset Turnover 1.7 1.6 0.4 Trend Analysis of BP vs. S&P 500 16
  • • This trend analysis is BP compared to the S&P over the last 5 years. Note that BP has outperformed the S&P almost every year. This graph is from Morningstar.com The high returns in 2004 and increasing to phenomenal returns in 2005 are relevant due to the sky rocket and record setting crude oil prices. August 30, 2005 hit an all time high, a crude barrel for $70.90 thanks to Hurricane Katrina. • 1-Year trend also observed hear. • This trend analysis from finance.yahoo.com shows how BP has outperformed the S&P over the past year. Note also that the correlation of movement in the S&P and BP move up and down together. Proving that the integrated oil and gas industry is affected by systematic risk, or regular risk like interest rate fluctuations. However, BP has still outperformed the market as well as the entire energy industry. 17
  • BP vs. Exxon Mobil (BP’s closest competitor) – 1 year trend • This graph shows how BP stacks against the S&P 500 and its closest competitor Exxon Mobil. BP has still outperformed the S&P 500, but fell short to Exxon Mobil. Both energy moguls/businesses show the same trend that it follows a similar pattern to that of the market. Demand can be interpreted to be quite high. BP vs. Industry vs. S&P 500 (Monday, November 14, 2005) • In this trend analysis, BP has outperformed the S&P 500 as well as its industry. Note that BP significantly has beaten the industry on November 14, 2005. Continue to notice the trend that the energy industry is outperforming the market but follows its movement very closely. BP is outperforming its industry average. 18
  • Industry vs. S&P 500 (5 day trend) • The industry over the past five days has dropped below the returns of the S&P 500. The reason for this drop in late last week can be attributed to closing last week at a three month low in crude oil. It slowly is starting to rise back up because demand is still present and on Monday, to investors dislike, December crude finished 16 cents up at $57.69. Unleaded gasoline rose 1.05 cents to $1.49 per gallon, while heating oil rose 0.69 cents to finish out Monday at $1.73 a gallon. • Week’s Key data for oil traders will be Wednesday’s Energy Department update of U.S. fuel inventories. • Analysts think that the report will state that crude oil and gasoline will fall by 2 million barrels and distillates, jet fuel, will rise by 2 million barrels. • The recent weather has also played an important factor in the recent weeks as relative warmth has blanketed the Northeast and driven down prices. Cooler temperatures will arrive in the Northeast by midweek as a cold front brings rain, showers and thunderstorms, Weather.com reported. • Sustained cold weather is not expected to last and traders/investors are not expecting a freeze yet. 19
  • BP vs. Industry (5 day trend) • Over the last 5 trading days, BP has been closely correlated with its industry. BP edged out an increase at the close of November 14, 2005. • The industry which BP is in is referred to as the Major Integrated Oil and Gas. The sector they are affiliated with is referred to as Basic Materials. From all of the previous graphs and charts, one can infer that the energy industry, Major Integrated Oil and Gas Industry, has outperformed the S&P 500, except for the three month low closing of December crude. The industry is closely follows the movements of the market thus looking like it is mimicking the market but with higher returns, if price of crude oil rises. BP has outperformed the S&P but only recently has it passed the industry. The competitors within this industry are o Exxon Mobil: XOM:NYSE o Chevron Corp. CVX:NYSE o Royal Dutch/Shell: Pvt1 (private filing and must ask for statements) o Valero Energy. VLO: NYSE o ConocoPhillips. COP: NYSE • Those five are BP’s main competitors within its Major Integrated Oil and Gas Industry. Valero might now be considered part of the Major Integrated Oil and Gas Industry. • The industry as a whole is down to the market (S&P 500) because of last weeks close of December crude. On Monday however, December Crude rose as well as gasoline and heating oil. Thus, causing an increase slightly in the price. And Stocks rise because of this. 20
  • BP vs. XOM vs. CVX vs. S&P 500: 1 year, 5 day, and 1 day Trends BP’s direct competitors are Exxon Mobil (XOM) and Chevron Corp. (CVX) • Looking at the one year trend, BP and Chevron Corp. are very correlated (almost identical patterns of returns), while Exxon Mobil seemed to have outperform both of them consistently throughout the year. The Major Integrated Oil and Gas industry noting a one year trend analysis has had higher returns then the S&P 500. • Now looking at a five day trend, the S&P 500 has had greater returns then the Major Integrated Oil and Gas industry. Exxon Mobil, BP, and Chevron Corp. have not outperformed one another but have felt the effect of falling crude oil prices. As said earlier, last weeks close for December crude marked a three month low of $57.53. News of the falling crude is reflected starting Wednesday November 9, 2005. 21
  • • On Monday, November 14 oil prices began to rise again moderately. The price increase raised the return for the energy industry and is reflected in the rising returns. • Last, looking at a one day trend analysis of the Major Integrated Oil and Gas Industry businesses compared to the S&P 500, BP and Exxon closed with higher returns than Chevron Corp. and the S&P 500. BP on Monday November 14, had significant increase of 1.19% and closed at $65.49. • The energy industry follows the market pattern for volatility. So as long as the market is not in a recession than in the long run, energy stocks and BP will have higher returns than the S&P 500. • Among energy stocks, Amex oil index closed up 1.1% and Philadelphia Stock Exchange Oil Service Index gained 1.3%. Exxon Mobil climber 0.23%, BP inched up 1.19%, Valero Energy gained 4.12%, while Chevron dropped 0.02% and ConocoPhillips fell 0.27%. • Note, this week’s key data for oil traders and investors is Wednesday’s Energy Department update of U.S. fuel inventories. 22
  • Competitors and BP Key Statistics Obtained from finance.yahoo.com DIRECT COMPETITOR COMPARISON BP CVX XOM Pvt1 Industry Market Cap: 1.37 T 127.07B 352.50B N/A 126.84B 1 Employees: 102,900 56,000 105,200 112,000 56.00K Qtrly Rev Growth (yoy): 35.60% 36.00% 33.50% N/A 27.50% 1 Revenue (ttm): 345.02B 174.10B 324.50B 265.19B 168.05B Gross Margin (ttm): 14.80% 29.60% 47.56% N/A 29.23% EBITDA (ttm): 44.33B 28.45B -6.01B N/A 25.95B Oper Margins (ttm): 9.17% 11.25% -4.99% N/A 11.26% Net Income (ttm): 22.11B 13.40B -38.55B 18.18B1 12.28B EPS (ttm): 1.002 6.310 -6.088 N/A 2.18 P/E (ttm): 65.37 8.97 N/A N/A 10.26 PEG (5 yr expected): 1.17 0.84 1.35 N/A 1.17 P/S (ttm): 3.94 0.73 1.08 N/A 0.76 CVX = Chevron Corp. XOM = Exxon Mobil Corp. Pvt1 = Royal Dutch/Shell Group of Companies (subsidiary or division) Industry = Major Integrated Oil & Gas 1 = As of 2004 • Comparing BP to its direct competitors and to the industry, BP is substantially leading the way. BP has the biggest Market capitalization, highest revenue, highest net income, high P/E ratio and practically outperformed its competitors and the industry. • These integrated companies primarily dominate the energy industry, however, Valero Energy has a higer quarterly revenue growth, P/E, and PEG. It is not listed however as a direct competitor of BP. VII. Financial Forecasts 23
  • 1. Income Statement 24
  • PERIOD ENDING 31-Dec-04 31-Dec-03 31-Dec-02 Total Revenue 285,059,000 232,571,000 180,186,000 Cost of Revenue 249,259,000 203,752,000 158,267,000 Gross Profit 35,800,000 28,819,000 21,919,000 Operating Expenses Research Development - - - Selling General and Administrative 15,642,000 14,532,000 13,276,000 Non Recurring (1,424,000) 17,000 - Others (1,436,000) (1,714,000) - Total Operating Expenses - - - Operating Income or Loss 23,018,000 15,984,000 8,643,000 Income from Continuing Operations Total Other Income/Expenses Net 3,817,000 3,067,000 5,452,000 Earnings Before Interest And Taxes 26,835,000 19,051,000 13,941,000 Interest Expense 642,000 851,000 1,279,000 Income Before Tax 26,193,000 18,200,000 12,662,000 Income Tax Expense 8,873,000 5,939,000 4,342,000 Minority Interest (230,000) (170,000) (77,000) Net Income From Continuing Ops 17,090,000 12,091,000 8,397,000 Non-recurring Events Discontinued Operations - - - Extraordinary Items - - - Effect Of Accounting Changes - 1,052,000 - Other Items - - - Net Income 17,090,000 13,143,000 8,397,000 Preferred Stock And Other Adjustments (2,000) (2,000) (2,000) 25
  • 2. Balance Sheet: 26
  • PERIOD ENDING 31-Dec-04 31-Dec-03 31-Dec-02 Assets Current Assets Cash And Cash Equivalents 1,156,000 1,947,000 1,520,000 Short Term Investments 328,000 185,000 215,000 Net Receivables 46,696,000 40,716,000 33,150,000 Inventory 15,698,000 11,617,000 10,181,000 Other Current Assets - - - Total Current Assets 63,878,000 54,465,000 45,066,000 Long Term Investments 18,392,000 18,637,000 4,728,000 Property Plant and Equipment 96,455,000 91,911,000 87,682,000 Goodwill 11,079,000 10,838,000 10,354,000 Intangible Assets 4,204,000 4,473,000 5,128,000 Accumulated Amortization - - - Other Assets 7,069,000 1,139,000 4,633,000 Deferred Long Term Asset Charges (1,533,000) (65,000) (78,000) Total Assets 199,544,000 181,398,000 157,513,000 Liabilities Current Liabilities Accounts Payable 54,341,000 41,128,000 36,215,000 Short/Current Long Term Debt 10,184,000 9,456,000 10,086,000 Other Current Liabilities - - - Total Current Liabilities 64,525,000 50,584,000 46,301,000 Long Term Debt 17,412,000 12,869,000 11,922,000 Other Liabilities 11,734,000 21,783,000 18,139,000 Deferred Long Term Liability Charges 19,438,000 15,273,000 13,514,000 Minority Interest 1,343,000 1,125,000 638,000 Negative Goodwill - - - Total Liabilities 114,452,000 101,634,000 90,514,000 27
  • 3. Free Cash Flow PERIOD ENDING 31-Dec-04 31-Dec-03 31-Dec-02 Net Income 17,090,000 13,143,000 8,397,000 Operating Activities, Cash Flows Provided By or Used In Depreciation 12,583,000 10,940,000 10,401,000 Adjustments To Net Income (9,105,000) (6,750,000) (5,694,000) Changes In Accounts Receivables (10,920,000) (5,628,000) (2,672,000) Changes In Liabilities 9,861,000 1,750,000 2,846,000 Changes In Inventories (3,595,000) (841,000) (1,521,000) Changes In Other Operating Activities - - - Total Cash Flow From Operating Activities 24,066,000 16,731,000 15,903,000 Investing Activities, Cash Flows Provided By or Used In Capital Expenditures (13,035,000) (12,440,000) (12,116,000) Investments - 41,000 1,147,000 Other Cashflows from Investing Activities 1,081,000 2,705,000 (234,000) Total Cash Flows From Investing Activities (11,954,000) (9,694,000) (11,203,000) Financing Activities, Cash Flows Provided By or Used In Dividends Paid (6,074,000) (5,654,000) (5,264,000) Sale Purchase of Stock - (1,826,000) 555,000 Net Borrowings - 760,000 (736,000) Other Cash Flows from Financing Activities - - - Total Cash Flows From Financing Activities (6,074,000) (6,720,000) (5,445,000) Effect Of Exchange Rate Changes - - - Change In Cash and Cash Equivalents $6,038,000 $317,000 ($745,000) 28
  • Earnings, Revenue and Growth Forecasts from Analysts Obtained data from finance.yahoo.com Earnings Estimates and Trends BP Current Qtr Next Qtr Current Year Next Year Earnings Est Dec-05 Mar-06 Dec-05 Dec-06 Avg. Estimate 1.87 1.83 6.35 7.00 No. of Analysts 11 4 17 17 Low Estimate 1.57 1.45 5.70 5.51 High Estimate 2.23 1.97 6.82 9.00 Year Ago EPS 1.33 1.39 4.63 6.35 Current Qtr Next Qtr Current Year Next Year EPS Trends Dec-05 Mar-06 Dec-05 Dec-06 Current Estimate 1.87 1.83 6.35 7.00 7 Days Ago 1.87 1.83 6.35 7.00 30 Days Ago 1.96 2.07 6.68 7.31 60 Days Ago 1.81 1.63 6.42 6.49 90 Days Ago 1.72 1.77 6.15 6.16 • BP’s current estimate fluctuated starting low, then increasing and then reducing their estimate. An explanation for the drop in their explanation from 30 days ago could be that crude oil prices are on their way done and thus there profits are decreasing. Revenue Estimates and Trends Current Qtr Next Qtr Current Year Next Year Revenue Est Dec-05 Mar-06 Dec-05 Dec-06 Avg. Estimate N/A N/A 322.98B 355.36B No. of Analysts 0 0 3 3 Low Estimate N/A N/A 271.10B 275.72B High Estimate N/A N/A 384.40B 476.93B Year Ago Sales N/A N/A N/A 322.98B Sales Growth (year/est) N/A N/A N/A 10.0% Growth Est BP Industry Sector S&P 500 29
  • Current Qtr. 40.6% N/A N/A N/A Next Qtr. 31.7% N/A N/A N/A This Year 37.1% N/A N/A N/A Next Year 10.2% N/A N/A N/A Past 5 Years (per annum) 7.1% N/A N/A N/A Next 5 Years (per annum) 8.7% N/A N/A N/A Price/Earnings (avg. for 10.2 N/A N/A N/A comparison categories) PEG Ratio (avg. for 1.17 N/A N/A N/A comparison categories) • Notably most of the information was not submitted and therefore further analysis is impossible. VIII. Analysis of Risk •BP is a stable company and is a proven leader in its industry. BP has settled all of its claims outstanding in March of 2005 and it does not pose any threat to hurting our portfolio. The energy industry has been outperforming the S&P 500 and analysts believe that the integrated oil and gas industry will keep returns higher than the market. The energy sector is pretty correlated with the movements of the market. As long as our economy does not go into recession, then the demand for petroleum products will keep rising. China and India consuming so much oil and with expected forecasts of a 2% increase in consumption in 2006, the demand is going to definitely outweigh the supply that the world has. It is included in the Amex • BP is traded on the NYSE under the ticker, BP, and its price is currently between its 52 week high and low. • BP has a Beta of 0.50 (www.advfn.com) and it’s standard deviation, or relevant risk is 3.30 Marketability • Trading Location: New York Stock Exchange (NYSE) • Average Volume: (3 mo.) 3,589,640 Total Risk • 52 week range • The 52 week range for BP is $56.60 - $72.66. The closing price on Monday November 14, 2205 was $65.50 which was a 1.19% increase from Friday November 11, 2005 with a stock price of $64.72. • Finance.yahoo.com graph: 30
  • • Clear to see that BP’s stock price is not that volatile and has been on a steady increase. • Standard Deviation: 3.3 Systematic Risk The beta of BP is 0.50 and does not cause much threat. (MSN money) IX. Fundamental Valuation Estimation of the required rate of return CAPM = Re = Rf + Beta(Rm-Rf) To calculate the required rate of return then we will just use the CAPM model. This return is estimated from a period of data lasting over a 9 year period (1995-2004),which was done by using historical data on the S&P 500. The S&P 500 is what I used for my proxy in this calculation. The equity risk premium calculated on the market was 6.38%. Re = 4.3 + .5(6.38) Requity = 7.49% is the required rate of return Estimating the growth rate Growth rate = g = (1-p) x ROE Stock Price $65.50 as of 11/14/2005 Market Cap. 229,437.6 (million) Beta 0.50 31
  • EPS 4.25 DPS 1.71 P/E 12.2 Dividend Yeild 3.3% Dividend Payout Ratio 40% Required Rate of Return 7.49% ROE 24.4% Forecasted growth rate 6.05% Forecasted Growth Rate G= (1-p)*ROE = (1- .40) * 24.4 = 14.64% P/E Valuation of BP V = P/E x EPS According to advfn.com numbers: P/E = 12.2 EPS = 4.25 V = 12.2 x 4.25 = $ 51.85 According to MSN money: P/E = 12.2 EPS = 5.30 V = 12.2 x 5.30 = $64.66 Using MSN money’s calculations for EPS, the value is within a dollar from what the stock closed on Monday November 14, 2005. According to this estimate it would suggest that the stock is overvalued as of right now, but not by much. Of the two estimations that I used, I feel as if the Price to Earnings multiplied by Earnings per share seems to be the one that would fit and work well within the current value of the stock. Valuation Using Constant Growth Model Formula: {D x (1 + g)} / (k-g) • Valuation of the stock correctly will depend on my growth rate that I decided to use as well as the estimated required rate of return. V= {1.71 x (1 + .1464)} / (.0749 - .1464) V= $ - 27.42 • Obviously this value is wrong and will be emitted from our consideration. 32
  • X. Other Considerations From MSN money software they rate the stock. BP plc (ADR), a large-cap value company in the energy sector, is expected to match the market over the next six months with very low risk. They rated it a 6. In the short term, the next 1-2 months, StockScouter forecasts that value stocks will be neutral, large-cap stocks will be in favor, and energy stocks will be in favor. Mean Recommendation Conversion Table 1.0 = Strong Buy 1.1 thru 2.0 = Moderate Buy 2.1 thru 3.0 = Hold 3.1 thru 4.0 = Moderate Sell 4.1 thru 5.0 = Strong Sell MSN money ratings are pulled from. Analyst Ratings Recommendations Current 1 Month Ago 2 Months Ago 3 Months Ago Strong Buy 13 12 9 9 Moderate Buy 2 2 2 2 Hold 4 4 5 5 Moderate Sell 0 0 0 0 Strong Sell 0 0 0 0 Mean Rec. 1.60 1.63 1.89 1.89 Many analysts consider BP a moderate buy. XI. Conclusions 1. I believe that we should definitely buy this stock. 33
  • 2. Many analysts agree that this stock may stay neutral for a while but, in the long run large cap companies will have the advantage and especially in the energy sector. 3. BP has outperformed the market consistently over the past 5 years. The demand for petroleum products is so high right now and the supply is limited, BP will continue to grow. They are the industry leader in many different areas and are committed to maximizing shareholder value while being socially and environmentally safe. 4. The price point that it is at now is between it’s 52 week range and seems to be climbing up. Forecasts for oil in 2006 are reportedly suppose to be 2% higher than they were in 2005. 5. Though gas prices are falling it does not mean that their stock is going to fall. PROS • The price to earnings multiple is lower than average for all stocks in the StockScouter universe. (Positive analysts say) • Earnings growth in the past year is holding steady compared to earnings growth in the past three years. (Neutral analysts say) • Strong leadership within their company since the merger with Amoco • The Major integrated oil and gas Industry has been outperforming the S&P 500 and is said to continue in that direction for a long time • After restructuring their Solar Power division in 2003, in 2004 they made their first profits. • They are the leaders in research and technology and have made impacts with their carbon free liquefied natural gas which America, Africa, Mexico and the UK have all signed agreements on. • They have not outstanding claims against them in court. Con • The most recent quarterly earnings report was slightly lower than analysts’ consensus forecast. Neutral/Negative • One or more analysts has modestly decreased quarterly earnings estimates for BP. Negative • The uncertainties of tragedies like Hurricanes Katrina and Rita can cause significant damages to refineries they produce out of. 34
  • • The global climate warming trend has had a negative effect on the petroleum business. • Prices might fall after Wednesday’s announcement from the US Department of Energy on fuel reserves. • The energy sector is highly correlated to the market in movements, so as long as the market doesn’t slide into a recession then businesses will prosper and the demand for petroleum products will be there. 35