BP p.l.c.BP p.l.c. - Financial and Strategic Analysis ReviewPublication Date: 03-Aug-2012                                 ...
BP p.l.c.BP p.l.c. - SWOT AnalysisSWOT Analysis - OverviewBP is one of the largest oil and gas companies in the world. The...
BP p.l.c.In March 2012, the company reached an estimated $7.8 billion deal with businesses suing over the massive 2010 Gul...
BP p.l.c.expected to increase from 14.2 billion barrels of oil equivalent (boe) in 2009 to 30-35 billion boe over the next...
BP p.l.c.and Tunisia, which led to the overthrowing of governments. Protests across Kuwait, Syria, Bahrain, Morocco, Jordo...
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  1. 1. BP p.l.c.BP p.l.c. - Financial and Strategic Analysis ReviewPublication Date: 03-Aug-2012 Reference Code: GDGE178FSACompany Snapshot Company OverviewKey Information BP p.l.c. (BP) is an oil and gas exploration and production company. BP conducts the exploration, production, refiningBP p.l.c., Key Information and marketing of oil and natural gas, and alternativeWeb Address www.bp.com energy business. It markets and trades in liquefied naturalFinancial year-end December gas (LNG), power and natural gas liquids (NGLs). BPNumber of Employees 83,400 carries out the transportation of crude oil, petroleum, petrochemical products and related services. It has shaleLON BP. positions in the Eagle Ford, Fayetteville, Haynesville andSource : GlobalData Woodford. The company sells its products under the brands of Castrol, BP, Arco, Aral, am/pm and Wild BeanKey Ratios Cafe. It has operations in Africa, Asia and Middle East, Australasia, Europe, North America and South America.BP p.l.c., Key RatiosP/E 4.78 SWOT AnalysisEV/EBITDA 3.11 BP p.l.c., SWOT AnalysisReturn on Equity (%) 23.06 Strengths WeaknessesDebt/Equity 39.67 Vertically Integrated LitigationsOperating profit margin (%) 10.29 OperationsDividend Yield 0.04 Liquidity Concerns Market LeadershipNote: Above ratios are based on share price as of 01-Aug-2012Source : GlobalData Robust Upstream Asset Base Opportunities ThreatsShare DataBP p.l.c., Share Data Strategic Initiatives Economic Slowdown and Market DynamicsPrice (GBP) as on 01-Aug-2012 4.28 Significant Growth in the USEPS (USD) 1.34 Shale Gas Market Rising Capital Costs in the Refining SectorBook value per share (USD) 5.87 Expansion in ChinaShares Outstanding (in million) 19,136.20 Stringent Tax PoliciesSource : GlobalData Source : GlobalDataPerformance ChartBP p.l.c., Performance Chart (2007 - 2011) Financial Performance The company reported revenues of (U.S. Dollars) USD 386,463.00 million during the fiscal year ended December 2011, an increase of 25.10% over 2010. The operating profit of the company was USD 39,759.00 million during the fiscal year 2011, whereas the company reported an operating loss of USD 3,779.00 million during 2010. The net profit of the company wasSource : GlobalData USD 25,700.00 million during the fiscal year 2011, whereas the company reported a net loss of USD 3,719.00 million during 2010.BP p.l.c.- Financial and Strategic Analysis Review Reference Code: GDGE178FSA Page 1
  2. 2. BP p.l.c.BP p.l.c. - SWOT AnalysisSWOT Analysis - OverviewBP is one of the largest oil and gas companies in the world. The company is involved in both upstream and downstream oilbusinesses, giving it the advantages related to operational efficiencies. The company has presence in over 80 countries,which provides it with economic stability. Moreover, the impact of the Gulf of Mexico oil spill and fluctuating commodityprices pose a threat to the company. Nevertheless, strategic ventures and new expansion projects could enable it toexpand its business.BP p.l.c. - StrengthsStrength - Vertically Integrated OperationsBP is one of the largest vertically integrated companies in the world. The company has its presence across the energyvalue chain. Its operations involve exploration and production of oil and gas; construction and maintenance of pipelines;trading; and operating a fleet of large tankers and ships to transport oil and gas worldwide. The company also engages inrefining and processing crude oil into refined products such as Liquefied petroleum gas (LPG), Kerosene (paraffin),Lubricating oils, Heavy fuel oils, Bitumen and Waxes; and chemical products including acetyls and aromatics. BP’sdownstream operations involve selling fuels and lubricants at about 1,200 airports in 90 countries and about 1,000 portsaround the world. Such integrated operations provide the company with greater flexibility and significant control over itsprocesses to optimize operations and produce higher-value products with lower feedstock and operating costs.Strength - Market LeadershipBP is one of the world’s leading oil and gas companies on the basis of market capitalization and proved reserves. Thecompany is also one of the largest producers of oil and natural gas in the US. It operates in more than 80 countries acrossthe world and has over 13 million customers worldwide. BP operated 22,100 service stations globally, and had explorationand production operations in 30 countries along with interests in 16 refineries worldwide. BP Alternative Energy is focusedon creating low carbon business through investments in wind, biofuels, solar, and carbon capture and storage. Thecompany is one of the strongest brands across the world, with brands such as BP Helios, Aral, ARCO and Castrol that arewell recognized and trusted by customers. The company’s dominant market position gives it significant competitiveadvantage in the global oil and gas industry.Strength - Robust Upstream Asset BaseBP is one of the largest producers of natural gas in North America and carries out its upstream activities in about 30countries. The company is one of the strong players in the deepwater oil exploration. Its geographic coverage includesAngola, Azerbaijan, Trinidad & Tobago (Trinidad), Canada, Egypt, Russia, Norway, the UK and the US. BP maintainssubstantial reserve replacement ratio. Reserve replacement ratio is the extent to which production is replaced by provedreserve additions. In fiscal 2010, the company’s reserve replacement ratio was 106%. Its reserve replacement ratio in2009, 2008 and 2007 was 129%, 121% and 112%, respectively. Moreover, BP reported reserves replacement ratio,excluding acquisitions and disposals, of 103% for 2011. The company has reported a reserve replacement ratio of over100% for 18 consecutive years. In fiscal 2010, it added 1,503 MMboe of proved reserves through new discoveries,improved recovery and extension to existing field. New discoveries in 2011 include five additional deep-water explorationand production blocks offshore Angola, the Salmon gas discovery in the North El Burg Offshore Concession of Nile Delta, a100% interest in the offshore West Aru I and II PSAs in Indonesia, and a discovery for the Itaipu-2 pre-salt appraisal welllocated in block BM-C-32 in the deepwater sector of the Campos Basin. Such robust upstream asset base ensures thecompany’s long-term production sustainability.BP p.l.c. - WeaknessesWeakness - LitigationsBP p.l.c., BP Exploration & Production Inc. (BP E&P) and various other BP entities are among the companies named asdefendants in approximately 600 private civil lawsuits resulting from the 20 April 2010 explosions and fire on thesemi-submersible rig Deepwater Horizon and resulting oil spill. Involvement legal issues not only harm the company’sbrand image but it also causes monetary losses. In September 2011, the company entered into a settlement agreement topay $20.5m to settle claims that the company knowingly underpaid royalties on natural gas produced on federal andAmerican Indian leases between 1986 and 2008. The government has accused BP and its subsidiaries of violating theFalse Claims Act by using improper reporting and accounting methods to reduce their royalty payments. In December2011, the company entered into a settlement agreement with Cameron International Corporation of claims related todeepwater horizon accident. BP agreed to indemnify Cameron for compensatory claims resulting from the accident,including claims brought relating to pollution damage stemming from the accident or any damage to natural resources. InJanuary 2012, the company announced that it is required to indemnify Transocean LTD. for compensatory damagesasserted by third parties against Transocean related to pollution that did not originate on or above the surface of the water.BP p.l.c.- Financial and Strategic Analysis Review Reference Code: GDGE178FSA Page 2
  3. 3. BP p.l.c.In March 2012, the company reached an estimated $7.8 billion deal with businesses suing over the massive 2010 Gulf ofMexico oil spill.Weakness - Liquidity ConcernsDeclined liquidity is an area of concern to the company, which is majorly impacted by clean-up costs and claims resultingfrom litigations and lawsuits related to the Gulf of Mexico (GoM) oil spill. During the fiscal year 2011, the company’s netcash outflow in lieu of the Gulf of Mexico oil spill was $6.8 billion. While BP has sold about $30 billion of its non-core andmature assets since the oil spill incident, its total debt stood at $44,213m in fiscal 2011 as compared to $45,336m in 2010.In March 2012, the company also expensed an additional $7.8 billion (estimated) settlement to resolve the economic lossand medical claims from the Deepwater Horizon accident and oil spill with the Plaintiffs Steering Committee.The company cash & equivalents position declined from $10,347m at the end of fiscal year 2010, to $9,195m in 2011.While its cash & equivalents component (as a percentage of total current assets) declined from 11% in 2010 to 9.42% in2011, the company’s trade receivables (as a percentage of total current assets) increased to 30.15% in 2011 from 27.02%in 2010. BP’s cash ratio declined to 0.17 times in 2011, as compared to 0.24 times in 2010. Although the company’s cashflow to debt ratio stood at 46.5% at the end of 2011; it is still less compared to a 70.6% in 2009, pre GoM oil spill.BP p.l.c. - OpportunitiesOpportunity - Strategic InitiativesBP aims to bring on stream about 40 projects, which is expected to contribute about one million barrels per day to totalproduction by 2015. In 2010, the company decided to invest on 15 projects out of 40. Besides, BP’s three major projectcame on stream in 2010: In Salah Gas compression project in Algeria, the Great White field in the Gulf of Mexico, and theNoel field in Canada. Its major upstream projects are located in Alaska, Algeria, Angola, Asia Pacific, Azerbaijan, Canada,Egypt, Gulf of Mexico Deepwater, Middle East and South Asia, North Sea, Russia and Trinidad. BP intends to investprimarily in the biofuels value chain under the alternative energy segment. It also aims to invest in solar, wind and carboncapture and storage projects. Such strategic initiatives would help the company in its comprehensive growth and exploringnew market opportunities.Opportunity - Significant Growth in the US Shale Gas MarketWith the company carrying out exploration and production activities in the US, it stands to gain from the growth in the USshale market in the long run. BP has around 1 billion barrels of oil equivalent in the Eagle Ford distributed over 450,000acres, and also has significant positions in the Woodford, Fayetteville and Haynesville shales. Over the past three years,natural gas production in the US has increased owing to increase in production from unconventional sources such as CBM(Coal Bed Methane), tight gas and shale gas. According to in-house data, natural gas production is expected to increase byapproximately 64.3 Bcf/d by 2015, at an AAGR of 1.9% with contribution of unconventional gas increasing to 60% by 2015.The unconventional gas production in the US is estimated to increase from approximately 30.4 Bcf/d in 2009 to 38.6 Bcf/din 2015 at an AAGR of 4%. A major share of the increase is expected to be from shale gas plays in the country.Shale gas production in the US is expected to increase from approximately 8.4 Bcf/d in 2009 to 15.4 Bcf/d in 2015 at anAAGR of 10%. The US shale gas plays have attracted huge investments over the past few years. From 2006 to June 2010,the industry attracted about USD 84 billion of investment through mergers, acquisitions and asset transactions. With almostall the major international oil companies holding interests in the US shale gas market, these plays are expected to witnessan increased level of activities during the period 2010–2020.Opportunity - Expansion in ChinaChina and India being prospective markets for future energy and petrochemical supplies, companies are targeting thesecountries for capturing growth. As per in-house research, the overall LNG imports in China and India are expected to cross50 MMTPA by 2015. Besides, being developing economy India and China are importing huge amounts of crude oil andnatural gas for domestic consumption and industrial usage. In fiscal 2011, BP decided to expand its production capacity inChina. The company initially plans to increase purified terephthalic acid (PTA) production in BP Zhuhai Chemical CompanyLimited (BP Zhuhai) through a major project. BP Zhuhai is a joint venture between BP and Zhuhai Port Co., Ltd. Thecompany plans to build a new world-scale PTA plant and through debottlenecking plans to increase capacity upto 200,000tonnes a year. The company schedules the commencement of operation by the first quarter of 2012.Opportunity - Brazilian Offshore Pre-Salt RegionThe deepwater exploration and production market in Brazil offers a unique opportunity for the growth of oil and gascompanies such as this. With easily accessible areas for oil finds becoming scarce, the ultra-deep, Brazilian pre-salt areahas emerged as one of the few areas of growth in global oil and gas industry. Pre-salt discoveries in Brazil havetransformed the country into one of the highest potential investment acreages globally. Oil and gas reserves in Brazil areBP p.l.c.- Financial and Strategic Analysis Review Reference Code: GDGE178FSA Page 3
  4. 4. BP p.l.c.expected to increase from 14.2 billion barrels of oil equivalent (boe) in 2009 to 30-35 billion boe over the next few years.According to Brazil’s ANP (Agencia Nacional do Petroleo), in total, Brazils pre-salt oil area could hold between 50 billionboe and 80 billion boe of high-quality light crude. The announced recoverable pre-salt reserves in the Santos and Camposbasin are expected to more than double Brazil’s reserves in the coming years. BP’s purchase agreement with DevonEnergy for its assets in Brazil will give the company interest in eight offshore license blocks in the Campos andCamamu-Almada basins and two onshore block. Campos basin blocks include three discoveries – Xerelete, pre-saltWahoo and Itaipu.Opportunity - Strategic VenturesThe company strategically enters into partnership with other established energy companies to increase profitability anddevelop business further. In August 2011, the company completed the acquisition of a 30 % stake in 21 oil and gasproduction sharing contracts that Reliance Industries Limited operates in India. It also includes the producing KG D6 block.Besides, both the companies have planned to form a 50:50 joint venture for the sourcing and marketing of gas in India. InJanuary 2011, the company signed an agreement with Rosneft for a strategic global alliance. BP and Rosneft plans to forma joint venture to explore and develop three license blocks on the Russian Arctic continental shelf. The companies alsoentered into a related share swap agreement whereby BP will get 9.5% of Rosneft’s shares in exchange for BP issuing newordinary shares to Rosneft worth approximately $7.8 billion. The strategic alliance will provide the company with increasedsynergies and expertise. Besides, during February 2011, BP and Reliance Industries Limited entered into a major strategicalliance to form an upstream joint venture in India. Under the agreement, BP will have 30% stake in 23 oil and gasproduction-sharing contracts which Reliance operates including the producing KG D6 block and 50% interest in a jointventure for the sourcing and marketing of gas in India. The joint venture will be benefited from BP’s deepwater explorationand development expertise and Reliance’s project management and operations capabilities.BP p.l.c. - ThreatsThreat - Economic Slowdown and Market DynamicsThe company could face several challenges due to global economic slowdown. According to IMF, global economy isprojected to grow at 4% in both 2011 and 2012, which is down from 5% achieved in 2010. According to IMFs September2011 report, Eurozone economy is forecast to grow 1.1% in 2012, down from the IMFs June 2011 forecast of 1.7% for2012. The agency also predicted that the US economy would expand at around 1.8% in 2012. This is in contrast to theagency’s previous estimate of more than 2.5% growth in 2012. During 2010, fears of a sovereign debt crisis surfaced invarious European countries, including Portugal, Ireland, Italy, Greece, Spain, and Belgium. Such crises could lead toincreasing deficit, followed by an increase in debt and economic downturn, ultimately leading to high defaults, which couldalso spill-over to other emerging economies. The sluggish economic growth could lead to the inability of some of thecompany’s customers to fully comply with the terms of their contracts.Threat - Rising Capital Costs in the Refining SectorThe rising capital costs for refineries’ expansion and/or modernization requires heavy investments by companies such asBP. Refineries worldwide are becoming more complex and flexible to allow refiners to process different qualities of crude.Even in developing countries, petroleum product quality norms are getting more stringent and this is resulting in anincrease in costs for building secondary conversion units like fluid catalytic crackers, hydro crackers and cokers.Additionally, shifting yield patterns in favor of light and middle distillates instead of fuel oil also requires huge investments toupgrade simple refineries to complex ones.Threat - Stringent Tax PoliciesThe company could incur more taxes due to significant changes in the tax policies. In February 2011, the OfficeManagement and Budget released a summary of the proposed U.S. federal budget for fiscal year 2012, and the TreasuryDepartment released a general explanation of tax related proposals in such budget. The proposed budget repeals severaltax incentives and deductions that are currently used by the US oil and gas companies and imposes new taxes. Thechanges in the proposed budgets include, but are not limited to, the repeal of the percentage depletion allowance fornatural gas and oil properties; the elimination of current deductions for intangible drilling and development costs; theelimination of the deduction for certain U.S. production activities; and an extension of the amortization period for certaingeological and geophysical expenditures. The proposed provisions, if passed, would have an adverse effect on itssubsidiary companies financial position, results of operations, and cash flows; thereby hampering its drilling activities in theUS.Threat - Political Unrest in Middle East and AfricaThe recent political situation in various Middle Eastern and African countries could affect the business operations of thecompany. Due to the tense political situation in the region, some government projects could be delayed. The Middle Eastregion experienced significant political turmoil during 2011. The Arab Spring involved protests across Libya, Egypt, YemenBP p.l.c.- Financial and Strategic Analysis Review Reference Code: GDGE178FSA Page 4
  5. 5. BP p.l.c.and Tunisia, which led to the overthrowing of governments. Protests across Kuwait, Syria, Bahrain, Morocco, Jordon,Algeria, Iraq, Oman, Mauritania, Lebanon, Sudan and Saudi Arabia, were reported. Political disorder in the Middle-East andNorthern African countries resulted in uncertainty of crude oil supply in recent times. The high risk environment in Iraq isamong the major threats to the oil and gas sector. Political instability and civil wars could pose serious challenges to thecompany. In 2011, the political situation in Libya was very fragile due to civil unrest in several Libyan cities. This promotedone of the largest international military interventions in the region since the Iraq war. Since then the situation in the countyhas remained very fragile. Such volatile political situation in the Middle East and Northern Africa could affect the company’soperations as its growth plans could be severely affected.NOTE:* Sector average represents top companies within the specified sectorThe above strategic analysis is based on in-house research and reflects the publishers opinion onlyBP p.l.c.- Financial and Strategic Analysis Review Reference Code: GDGE178FSA Page 5