Brief Introduction to BP

-BP plc, with the former name of British Petrolium is a British multinational oil and gas company headquartered in London. The company was founded in 1909 as an ancillary of Burmah Oil Company to exploit oil discoveries in Iran.Later on the company expanded it’s operations beyond Middle East to USA and now operates in more than 80 countries worldwide. Among them USA (Alaska),Mexico(Gulf of Mexico),Egypt,UK(North Sea),Norway,Azerbaijan(Caspian Sea) are the major ones. Activities of company involve exploration and production, refining,distribution and marketing,power generation and trading.The company also has expertise in renewable energy field such as wind power and biofuels.

-Based on 2012 results the company is the 5th biggest company in the world with total of 85 000 employees. At the same time BP is on of the 6 superpowers in oil and gas industry with total of 3,2 million per day production amount and 17 800 service stations.In 2012 the net income figure of company was 11 816 million$.The chairman of the BP board of directors is Carl-Henric Svanberg and the chief executive officer is Bob Dudley. -The stock of BP is consisted of original BP shares and the shares acquired through merging with AMACO and ARCO. It also posseses 19,75% of shares in Rosneft(Russian oil company). The company has a primary listing on the LSE and secondary listing in FSE and NYSE. BP is also one of the founders of FTSE100 index(companies with highest market capitalisation).

-BP has been criticized on several major environmental and safety incidents. Among them were the 2005 Texas City Refinery explosion, which caused the death of 15 workers and the 2006 Prudhoe Bay oil spill, the largest oil spill on Alaska's North Slope, which resulted in a US$25 million civil penalty, the largest per-barrel penalty at that time for an oil spill.

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Fundamental Analysis of BP

-BP is a well-established non-risky company; so the fundamental analysis of the company will be conducted in top-to-down order. All the assumptions during this report are based on 2013 results;

Economic Analysis

-The major non-company related factors and their possible impact on stock prices of the company can be summarized as follows;

Global Economy-US economy represents the significant part of the world economy; on the other hand it’s the second largest market that BP operates in. In this respect performance of US economy should be evaluated for it’s possible effect on stock prices. As it’s known US economy is in a recovery period after 2008 financial crisis. Despite the fact that economic indicators not yet reached to it’s pre-crisis level, significant improvements such as decrease in unemployment rate, increase in consumer spending and low inflation level raise hopes for further healing. Perhaps one of the most promising factors is GDP growth at a rate of 2,4%; in addition FED hints at interest rate rise in 2015. The Fed lowered it's overnight interest rate to 0% and started buying bonds in December 2008 in an attempt to trigger growth in the economy and to keep long-term borrowing costs low. The stimulus efforts seems to have had an impact as economy performing better.The same upward trend can be observed in Eurozone and Emerging Market economies.Naturally the stock indexes reflect this positive trend;in US S&P500 index increased by 20%;in UK FTSE 100 index (which is BP is a part of) hit 6838 in February 2014;

Global Political Events-increasing tension between Russia and Ukraine poses the risk of stock depreciation. Russia may respond to actions of international community by cutting it’s oil and gas export to EU countries .In this case oil and gas prices will go high both in EU and US (US not depends on Russian oil or gas but prices are set by global market). Increase in energy prices will negatively effect economic performance; this possibility will frighten investors and they will start to invest in safe assets. As a consequence stock prices will fall.

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-Taking all into account we can interfere that if the conflict will not be settled in near future the volatility may inhibit positive tendency deriving from economic growth in stock markets;

Macroeconomic indicators-since the headquarter of BP locates in UK and the core operations are placed in this country indicators of UK economy should be examined.;

GDP-as of 2013 growth rate was 1,9% which constituted the fastest growth since 2007 crisis. The growth in GDP means that the economic activity is high.On the other hand high performing economy contributes elevated profit levels.Taking this relation in to account we can conclude that stock indexes and GDP growth positively correlates.This correlation is more visible during the period from 2008 to 2009 when the GDP diminished by approximately 1%. As a result the price of BP's shares fell from about 650 pounds to nearly 350;

Unemployment-the high level of unemployment corresponds with less disposable income available for investment and less purchasing capacity. In addition in high levels of unemployment compensation programs will start to eat government budget. As a result tax revenues of government will decrease and budget deficit problem will occur. To combat with this governments probably impose new taxes or rise existing ones which in turn hurt the profits of companies. In conclusion stocks are adversely affected by unemployment news. But in the case of UK unemployment level has encouraging influence on stock prices as it tends to drop. In 2013 the rate was 7,2% compared to 7,8% in 2012;

Inflation-the high level of inflation instigates the operating costs of companies and causes drop in company earnings. In UK inflation rate is in a downward tendency since it reached 5,7% in 2008 crisis. As of 2013 the rate was 2,5%. According to BOE the rate will be below 2% by the end of 2014;

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Interest rates-higher interest rate will make borrowing more expensive and push up finance costs. As a result company profits will shrink. In addition NPV of future cash flows of company will decline. In world financial crisis government set interest rates as low as 0,5% to encourage growth. The latest decision of BOE is to keep this rate until unemployment fall below 7%;

Budget Deficit-in 2010 government commenced austerity programme in an attempt to eliminate budget deficit. The programme was initially intended to last for 5 years. Recently government representatives announced the programme will be implemented until 2018.Deficit hurts company profits in two ways; the first one is taxes which government imposes in order to cope with shortage and the second one is government borrowing which initiates rise in interest rates;

Currency Rate-oil is traded in USD so fluctuations in this currency have influance on company earnings. If the dollar value declines against the UK pound, the dollars received by oil exporting companies are worth less. Consequently, the oil producers will try to increase the price of oil in order to keep the purchasing power of the money they earn through selling.The GBP pursues an upward tendecy against USD.The average exchange rate for 2013 was 1,56(GBP to USD);

Fiscal Policy- in 2013 corporate tax reduced by 1% and and now is 21%.It's quite an important amount for companies like BP as millions of pounds is paid on taxes;

Reports-according to 2013 Moody’s report the rating of UK is Aa1(stable);in Fitch report the rating is AA+(stable). On the other hand the latest IMF economic forecast suggested that the UK would be the fastest growing G7 economy in 2014;

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Future Perspectives of UK Economy

- UK continues to show consistent signs of recovery. Future growth is also viable given that business and consumer confidence have risen in recent months.    

-Consumer spending has grown steadily supported by rising employment and a stronger housing market. Recently revised data show that business investment also started to pick up and we would expect this to continue in 2014-15 if consumer demand continues to strengthen and there are no major international shocks.

-It’s estimated that GDP growth for the UK will rise from 1.9% in 2013 to around 2.6% in 2014.

-Downside risks remain in relation to the global economic environment, notably as regards emerging markets and the situation in Ukraine as mentioned above. Inflation fell below the Bank of England’s 2% target in January for the first time in more than four years and is projected to stay in this level.

-Official interest rates are expected to start rising during 2015 in response to stronger growth, but only very gradually as officials promise.

-Based on 2013 indicators and near future forecasts we can conclude that positive mood will continue to prevail in markets. Despite the fact that both US and UK economies haven’t reach to their pre-crisis level yet, upward tendency creates confident atmosphere.

Industry Analysis

-The industry is in the maturity stage of industry life cycle for the reasons of;

Steady market share of participants; Relatively stable demand; Capital and investment need is a bit lower; Well-established business models; The industry dominated by several large companies;

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- Oil and Gas companies seem to left behind ‘easy money’period. The economic fragility,geopolitical risk and troubles in supply flared up fluctuations in oil and gas prices.Companies started to drill in increasingly remote locations as competition over current reserves is intensified.Facing with regulatory pressures and public criticism after Gulf Mexico spill companies considered structural changes which involved a shift in consumption from West to East and the rise of non-conventional hydrocarbon sources, such as shale gas, oil sands and biofuels - On the other hand price is unlikely to return anytime soon $150 per barrel oil or $7 per thousand cubic feet natural gas level to rescue the industry’s profit margins; thus energy companies will have to work harder to earn their profits in the years ahead. In this respect cost control is crucial as companies face higher costs of capital, a depreciation on cash and the need for major capital expenditure. As a result, many oil and gas companies are reducing headcount, making working capital improvements and seeking to make their operations more efficient through the increased use of shared services and centralization. Mergers and acquisitions are on the surge as oil and gas companies are looking for removing non-core assets and as increased competition urges a wave of consolidation among oilfield service companies. In order to gain access to reserves or service opportunities in many countries, companies must increasingly rely on joint ventures to distribute risk and capital. -Analysis of the factors driving global energy supply and demand points to an extended period of moderate prices for oil and natural gas. As a part of recovery period demand for energy grows but not as faster as pre-crisis level. It is estimated that consumption will grow as the world’s population increases and low and medium economies will continue to prosper. But we are leaving a phase of very high energy consumption growth, driven by the industrialization and electrification of non-OECD economies, notably China. The 2002-2012 decade recorded the largest ever growth of energy consumption in volume terms over any ten year period, and this is unlikely to be surpassed in the years ahead. On the other hand trends in oil show an increase in supply, though the amount of the rise depends on a wide range of variables. The one possibility is a return of Iraqi production to pre-war levels which will probably inflate supply. Similarly, if Iranian nuclear program conflict is solved sanctions will be lifted and another 4 million barrels per day oil will be added to world’s oil supply. In the Americas, meanwhile, rising output from U.S. shale formations and Brazilian deepwater fields pushes potential oil supplies even higher.

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-Given that the sensitivity of oil prices to political events it’s a mere bizarre to precisely predict the future oil but current trends indicate a long-term range of $70 to $90 per barrel by 2020,down significantly from the levels of just a few years ago. It should be mentioned that current tension in East Europe have potential to shift the current trend. -In brief the major challenges industry will face in near future are capital and cost effectiveness, regulatory uncertainty(higher EU pollution standards),public perception and moderate prices. -In respect to competition the following information can be provided;

the major players are Royal Dutch Shell,Total,Exxon Mobile,Chevron and Conoco Philips;

competition is fierce as all of them produce similar products; new entrance possibility is low as industry requires huge

investments;

Company Anaylsis

-The first stage of company analysis is the review of individual company information. Generally evaluation is performed based on the below mentioned facts;

Date of foundation-1909; Founder-William Knox D'Arcywas one of the principal founders of

the oil and petrochemical industry in Persia;

Executive Team-Bob Dudley(CEO-had served as President and Chief Executive of TNK-BP and in 2010, was assigned to be BP executive in charge of the Gulf Coast Restoration Organization

responding to the Deepwater Horizon oil spill), Andy Hopwood(COO),Brian Gilvery(CFO);

Share capital-BP’s share capital is consisted of ordinary shares of US$0.25 each, 8% cumulative preference shares of £1 each (‘First preference shares’), and 9% cumulative preference shares of £1 each (‘Second preference shares’).The primary market for BP’s ordinary shares is the LSE;shares are also traded on the FSE.In the US, the securities are traded in the form of ADSs (US investor can invest in foreign companies without dealing with

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currency conversions).Each ADS represents six ordinary shares and are listed on the NYSE;

Products and services-motor and oild lubricants,industrial lubricants,lpg for home,marine fuels,petrochemicals are among the wide range of offers that company makes.The threat of substititues such as wind,coal,gas,solar power and nuclear energy is feasible but not significant as of today;because these energy sources are still in development stage and highly costly;

Position in the market-in terms of revenue BP is the third biggest oil company as of 2013.The first and second places are occupied by Royal Dutch Shell and Exxon Mobile accordingly;

Date of going public-the partial sale of British Petroleum (BP) through a public offer- occurred in 1977 during the Labourist government led by PM James Callaghan;

Shareholders-40% of company owned by British shareholders, ,39% by US shareholders and 21% of company belongs to shareholders form other countries. Major institutional shareholders include Wellington Managament Company,Franklin Resources,State Street Corporation,Morgan Stenley;

Investments- BP is financing projects on alternative energy technologies that can help to reduce carbon emissions levels.In 2005 the company set a target to spend $8 billion on alternative energy technologies by 2015 and achieved that last year.The most of this funds was invested on wind power but in april 2013 company decided to sell this division and concentrate on it's core businesses.This situation rises question about the viability of BP projects.The company holds 19,75% of Rosneft shares. BP started it’s investments in Russia in 2003 by founding TNK-BP with a group of Russian billionaires with an $8 billion initial investment. TNK-BP was ultimately sold to Rosneft for $55 billion last year, giving BP a stake in Rosneft. Following the current crisis the value of company fall by 4,3billion$ which caused BP to lose 849million$. Effective January 2, 2014, BP PLC acquired a 25% stake in Spain company of Bahia de Bizkaia Electricidad SL

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Dividend -Shareholders have urged big oil companies such as BP and Shell to control spending and give back more cash because of concerns over rising costs in the oil and gas industry and their impact on profitability. Profits were also hit by a drop in the contribution from BP's stake in Russian oil company Rosneft. BP, the largest foreign investor in Russia through its nearly 20 percent stake in the Russian oil champion.Officials of BP has said repeatedly that it will stand by its investments in Russia since Moscow's intervention in Ukraine.To protect interests of shareholders oil giant announced that it will buy back $8bn (£5.2bn) of shares, returning to shareholders the money they had put into a complicated Russian venture.This action can be interpreted as stakeholder-friendly policy.In addition in 2013 company reported a dividend of 0,37USD,which represents a 10.61% over the last year. Analysts expect further 8,77% increase;

Risk-perhaps one of the major risks for company ahead is Gulf Mexico Spillover Trial which is set for January 2015.Fines under Clean Water Act could top to 17 $ billion an amount more than BP’s profit in 2013.The other possible threat is the state of Rosneft. Diffuculties deriving from negative public opinion toward company following accidents, new EU standards on carbon emission, strict regulations in US are also probable;

Financial Statement Analysis

-To reveal the positive tendency in company’s financial health if any we will look historical data of company for the previous 3 years. First of all we will review the balance sheet. At first glance increase in total assets, decrease in total liabilities hence increase in net worth is easily observable. Improvement in cash amount is significant for liquidity; on the other hand growth in property account is promising in respect to durability; decrease in investing activities is also notable. Income statement figures of company are also promising and the profit follows positive trend.

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-To gain further insight to company’s financial strength ratio analysis should be performed;

Ratio 31.12.2013 Industry Average

Current 1,33 1,26

Quick 0,87 0,83

Cash 0,32 0,27

Debt-to Equity 0,37 0,27Debt-to Capital 0,27 0,21

Interest Coverage 29,30 44,91

Receivables Turnover 13,13 10,76Payables Turnover 11,27 7,96Inventory Turnover 11,15 12,12

Receivables Collection Period

28 34

Payables Collection Period

32 46

Inventory Proc. Period 33 30

Net Profit Margin 6,19 7,01Return on Investment 7,67 6,95

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Return on Equity 18,14 14,06

Ref.NYSE.com

-Liquidity ratios are above industry average; the fact proves company’s ability to finance it’s short term obligations and operations;

-Financial leverage ratios reveal possible problem with debt amount; Interest Coverage ratio implies problem with either EBIT(less than average) or interest expense(more than average).The high interest expense coincides with high debt amount supposition;

-Activity Ratios indicates that company successfully converts it’s products to cash thus easily generates revenue;

-Profitability ratios shows that company’s performance is better than industry average in respect to profit; investors gain more than industry average by investing in BP shares; in addition company is employing it’s total assets to make a profit successfully.

-Despite the existence of some potential threats fundamental analysis indicates positive future tendency.

Technical Analysis -We will conduct technical analysis covering 3 monthes period. -To begin with NASDAQ rating of BP stocks is bullish which points out consistently rising prices over the long term. A bullish stock’s value may rise and fall periodically, but every time its value peaks, it’s at a higher point than the previous peak.

-Line chart (Figure 1) stock movements exhibits an upward trend which coincides with characteristics of bullish share.

-The movements of stocks have followed the FTSE 100's trend. Thus the reference market currently has a greater influence on the share price than any company-specific news.

-In the figure 2 we can define resistance level of 52 and support level of 48,3.The chart reflects the performance of

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the past 3 months. The Resistance indicates the upper bound of a price range that has stopped in the past the price growth. The Support is the level of price at which the buyers' pressure is greater than the sellers'. The Support indicates the lower bound of a price range.

Figure 1

Figure 2

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-RSI(Figure 2) is above 70 which indicates the existence of strong buying pressure. Bollinger band is wide as a result of fluctuating price.

Figure 3

-In summary the analysts offering 12-month price forecasts for BP PLC have a median target of 53.57, with a high estimate of 60.00 and a low estimate of 46.49. The median estimate represents a +5.43% increase from the last price of 50.81. The current consensus among investment analysts is to hold stock in BP PLC (Figure 3).

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References

Yatirim Analizi ve Portfoy Yonetimi,Prof.Dr.Mehmet Baha Karan,

www.NASDAQ.com

www.NYSE.com

www.telegraph.uk

www.bbcnews.com

www.Pwc.com

www.Deloitte.com

www.EY.com

www.BP.com

www.investopedia.com

www.wikiinvest.com

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