Individual Financial Report On British Petroleum

Published Date: 02 Nov 2017

The purpose of this individual report is to analyze in details the financial performance of BP Limited during the financial year of 2008 to 2010. The analysis also aims at making conclusion and recommendation for the company for future directions.

This report is classified into four main parts, introduction, stating why the company has been chosen and linking on to the background of the company, secondly the significant historical developments over the last 3years.Thirdly the financial ratio analysis of BP Limited using key indicators as profitability, efficiency and liquidity ratios and the last part is the impact or links of the recent 2010 to the company’s financial statement, conclusion and recommendations.

The analysis of the BP Limited is made based on the published financial statement for 2008 to 2010 and the available ratios already calculated from FAME (financial analysis made easy).

Introduction

The choice of British petroleum (bp) plc. Steams from being one of the world’s leading oil and Gas Company based on market capitalization, production and proved reserves. Its operation includes production and exploration of gas and crude oil, marketing of liquefied gas, natural gas and power. The company’s staff strength of 79,700 people according to FAME (2010) shows bp is a huge employer of labour boosting UK economy.Bp has some key strength that makes it a fancied company which includes dominant market position, (upstream, midstream and downstream oil business operations), and its wide geographical presences in 80countries, investments in the alternative energy business (wind and solar power) aside its weaknesses like its violation of tax laws in turkey and oil spill in the gulf of Mexico has significant effect on the company’s financial statement relevant to this report.

Background

BP (British petroleum) is one of the world's largest oil and gas companies. It has presence in more than 80 countries with its parent company dating back to 1901 when William Know tried to explore oil in Persia. The company's operations primarily include the exploration and production of gas and crude oil, trading and marketing of natural gas liquid, power, and natural gas. BP is headquartered in London, the UK and employs about 79,700 people. The past three years has seen BP in the fore front of oil business in the world.

CURRENT EVENTS THE LAST THREE YEARS THAT HAS SHAPED BP

2008

-BP made a significant gas discovery at record depth in the Nile depth which added upstream exploration its first significant high pressure, high temperature, offshore discovery.

-BP announced 15th may 2008 that it has begun 30,000barrels a day oil production in the Gulf of Suez, Andy Inglis, BP’s Chief Executive of Exploration & Production, said: "Saqqara is another major project delivered successfully. It will contribute to BP’s production profile for the next decade and beyond. Egypt is an important growth area with further potential."(BP press release).

2009

-(Bp press release) in July 2009 BP announced a "4% increase in production and a $2million reduction in cash cost has been achieved" this will have a huge impact in its end of year financial statement. Another significant development in 2009 was the discovery of oil in 2nd September at its Tiber prospect in the deep water US Gulf of Mexico with net production of over 400,000 barrels of oil per day, the joint venture of BP and national petroleum company (NPC) to commence production in "the onshore Risha concession in the north east of the country" has added Hugh increase in production capacity that year.

2010

- In March 2010, BP announced its decision to sell its marketing businesses in Namibia, Malawi, Tanzania, Zambia, and Botswana to puma energy for an agreed fee of $296million.the major event that has a huge impact on their end of year financial statement was the massive oil spill in the gulf of Mexico where the rig worth over $500 million sank triggering an oil spill in the Gulf of Mexico killing 11 rig workers leaking 500 barrel of oil per day. Analyst estimated a plugging cost of $300million losing a stock market value of $25billion.

- In a 2010 report by financial times, BP posted a loss of $32.2billion for the second quarter of the year as a result of mainly the oil spill in the Gulf of Mexico. The company decided a suspension on shareholder dividend payment as a result of damage control plan for full recovery 4% drop in production was recorded as a result of the Gulf of Mexico spill. The company sold some non-core assets worth $30million to help offset the oil spill loss.

3. Analysis of the Ratios

PROFITABILITY RATIO

This are ratios used to determine the firm’s ability to operate efficiently to generate income over a certain period of time compared with the business expenses and is of primary concern to owners, creditors and management. In this section, this report will focus on profit margin, return on capital employed (ROCE), and return on shareholders’ fund (ROSF).

Profit margin

This quantifies how much a company saves from their net income or net profit as compared to a rival company in the same industry with similar size. This report is limited to comparison between the last three years.

31/12/2010

31/12/2009

31/12/2008

-1.56%

10.21%

9.34%

As noted in the comparison table above the company made profit of 10.21% in 2009 an increase of 0.87% compared to 2008 and a significant drop in profit margin of (1.56%) a difference of 11.77% comparing 2010 to 2009.The shocking fall in profit is mainly a result of the oil spill in the Gulf of Mexico.

4.1.2 Return on capital employed (ROCE)

The profitability of the company’s capital employed in business is shown below.

31/12/2010

31/12/2009

31/12/2008

-2.59%

14.34%

21.88%

From the table above a decrease of 7.54% was recorded comparing 2009 and 2008 and the huge decline in 2010 to 16.93% might be put to credit crunch that year that affected most businesses and environmental cleaning and compensation cost in the oil spill in the gulf of Mexico decreasing the return on capital employed.

4.1.3Return on shareholders’ fund (ROSF)

This ratio indicates the returns shareholders’ earn on their investment in the organization.

31/12/2010

31/12/2009

31/12/2008

-5.08%

24.73%

37.55%

The decrease of 12.82% on the return on shareholders’ fund can be related to credit crunch of 2009 affecting most business and the significant drop of 29.81% from 2009 to 2010 is mainly due the huge compensation cost and environmental restoration in the gulf of Mexico a fall in share price and a reduction on production.

EFFICIENCY RATIO

This ratio shows the rate of a company to turn their services and production into cash generating revenue for the company. Efficiency ratios measures how this is achieved by measuring the efficiency of the entity (Dyson 2007). This section looks at debtor’s collection days, creditor’s payment days and stock turnover.

Debtor’s collection days

This ratio compares between three years the number of days it takes the company to collect its debts from debtors.

31/12/2010

31/12/2009

31/12/2008

28.66

33.52

22.74

Using the ratio above, comparing 2008 and 2009 shows a whooping increase in days of 11days collect its money from debtors and in 2010 a decrease of 5days showing an improvement on time to collect its debt.

Creditor’s payments days

This ratio compares between three years the number of days it takes the company to pay its creditors. (Dyson, 2007) states that if there is an upward trend in the average level it takes an entity to pay its creditors, it may be that there is some difficulties in paying the creditor’s which might amount to the fact that the company may be having financial difficulties.

31/12/2010

31/12/2009

31/12/2008

32.50

33.94

20.02

From the above ratios it show an increase of 19days was made between 2008 and 2009 by the company to pay its creditor but by 2010 a slightly insignificant decrease of a day in the creditors payment days.

Stock turnover

Stock turnover shows the company ability to convert their stock into cash, and this ratio is normally expressed as a number. The company appears more efficient when there is greater stock turnover (Dyson 2007).

31/12/2010

31/12/2009

31/12/2008

11.78

10.89

21.82

The significant (improvement) in ratios shows it took bp a shorter time to convert its stock to cash in 2010 and 2009 compared to the increase of 11days the previous year(2008).

LIQUIDITY

This section focuses on the ratios that show the company’s ability to turn stock into cash with little or no loss in value. This part will be looking at liquidity, solvency and gearing ratio.

Liquidity ratio

Liquidity ratio is simply the measure of current asset minus its inventory or stock to its current liability.

31/12/2010

31/12/2009

31/12/2008

0.84%

0.76%

0.71%

The table above shows a steady increase in the company’s repayment ability of its short term debts from 0.05 from 2008 to 2009 to 0.08 from 2009 to 2010 despite its drop in production and cleaning cost of its spill the increase also indicate the company sales of assets did much to offset that huge loss and debts.

Solvency ratio

Solvency ratios measure a company’s ability to meet up with its long term monetary commitments.

31/12/2010

31/12/2009

31/12/2008

35.17%

43.32%

40.31%

Their slight increase of 3.01% from 2008 means the company improved in its ability to meet long term commitments. But the decrease of 8.15% should be as a result of the cost of contamination control correcting the oil spill in the Gulf of Mexico. But since the company hits a solvency ratio above 20% it can be said to be healthy (investopedia)

Gearing ratio

Gearing ratio determines how much risk the company has in borrowing money especially when financed by a bank. It’s simply the percent ratio of the company’s borrowed capital to its total capital.

31/12/2010

31/12/2009

31/12/2008

107.09%

82.42%

89.52%

There was a 7.1% decrease between 2008 and 2009 showing fewer borrowed loan where taken in 2009 compared to the shocking 24.67% increase in borrowed capital in 2010 obviously to offset bills incurred in 2010 like majorly the gulf of Mexico spill.

4. THE IMPACT OF CURRENT EVENTS SINCE THE LAST BALANCE SHEET DATE

BP has experienced a significant impact over the last year 2010 aside the credit crunch in 2009 but majorly the oil spill on the Gulf of Mexico. Observing the events in 2010 mainly shows some impact on the company’s end of financial statement. First the cost of environmental cleaning and the sales of its 5african business affects the income statement, secondly the loss of revenue from these stations and the 5 companies in African obviously affected their balance sheet. The proceeds from the sales brings cash in offsetting the huge loss, so their cash flow was also affected as shown from the ratio analysis above and the figures from FAME(2010).

5. Conclusion and Recommendations

From the ratios analyzed above, significantly there has been a decline in the company’s profitability

ratio mainly due to its accidental loss in the oil spill but have been able to record an improvement in its ability to handle huge setbacks and accidents as shown in its improvement in its efficiency and liquidity remaining in business. Surely With hands-on management measures put in place it was able to reduce the maximal effect of the huge financial setback(oil spill).BP has been able to manage its loss so I see the company coming back strong with it has always been among the fore front in the worlds oil and gas exploration company maintaining its key strength we have always admire over its long existence.