Your Partner For Success

FROM BRITISH PETROLEUM TO BEYOND PETROLEUM

We deliver energy to the world. We care deeply about how we deliver energy

to the world. We value safety, respect, excellence, courage and One Team.

“ ”

Group 1 Team B

Professional Skills

Cass Business School London

INVESTEMENT APPRAISAL

Anh Ho

Dorothy Kiew

Jenny Kuang

Nina Xiao

Yvonne Yang

BP

EXECUTIVE SUMMARY 2

INTRODUCTION TO BP 3

HIGHLIGHTS IN HISTORY 3

ETHICAL POSITION 3

FINANCIAL ANALYSIS 4 - 5

THE ENERGY INDUSTRY 6

BP’S MAIN COMPETITORS 6

SWOT ANALYSIS 7

CONCLUSION 7

APPENDIX 8

REFERENCES 9

CONTENTS

1

EXECUTIVE SUMMARY

This report aims to place BP on a pedestal while examining its merits for private investment. Among the facets meticu-

lously analysed are its ethics, sustainability, final accounts, and position in the energy market.

The multinational energy corporation whose two-letter world renown brand name has its history dating back to 1909 when

it was founded as Angolo Persian Oil; throughout its existence of over a century, BP has seen its name, logo and mission

statement, among other things, evolve. As scrutiny of the energy industry grew, BP instilled in the mindsets of its employ-

ees the grave importance of business ethics and amplified its investments into exploiting renewable energy and developing

environmentally friendly equipment.

Oil spills are not uncommon in this industry where deep-water drilling is involved, albeit its adverse effect on the environ-

ment. BP, regrettably, was involved in the largest oil spill in history in 2010 with 4.9 millions barrels of its oil floating on

the shores just off the Gulf of Mexico. Along with the taking of 11 men’s lives, monumental costs imposed by the US

Government were held to be BP’s responsibility. Financially and in terms of reputation, BP ‘took a hit’ and a lot was re-

quired to steer the company out of its dreadful situation. However, with competent senior management, recovery is under

way and since then, there has been substantial evidence to prove so.

BP’s earnings have increased considerably, goodwill has been regained and investors are taking greater interest in the

company. Financial ratios are improving and one or more have suggested that BP’s profitability is on the rise. Following

the “buy low, sell high” rule of thumb, its current share price proves to be a suitable share price for investment. In addi-

tion, with relatively high dividend yields due to constant net cash inflows, investors are able to experience an additional

revenue stream from this investment or if reinvestment for additional shares are made with the dividends, investors may be

able to indulge in capital gains in the future.

However, this therefore suggests that for short term (risky) investors, BP is not a suitable investment as its day-to-day var-

iations in share price is minimal and in comparison to its main competitors in the industry, BP does not hold a significant

superiority in the short term because as of now, BP is still in the midst of its recovery and such investors would need to

wait on the stock to gain great returns.

Upon leveraging BP’s strengths, weaknesses, opportunities and threats in a SWOT analysis, findings have inferred that its

strengths and opportunities outweigh its weaknesses and threats. Hence, our recommendation to the investor is that if you

are a long term and low risk investor, BP is a suitable company and this recommendation of ours is backed up by that of

other financial analysts from reputable organisations such as CNBC and Motley Fool.

2

INTRODUCTION TO BP

Formerly known as British Petroleum, BP is one of the world's leading international oil and gas companies, providing its

customers with fuel for transportation and petrochemicals products for everyday items. This multinational has 83,400 em-

ployees and 21,800 retail sites1, and is made up of subsidiaries BP, ARCO, ampm, ARAL, Castrol and Wild Bean Cafe.

Since 2000, BP has attempted to discover new resources including deeper water oil and gas, natural gas and wind while

focusing on substantial development. The aim of BP is to deliver energy to the world.

HIGHLIGHTS IN HISTORY2

1909 A British man established the company as Anglo Persian Oil company after having discovered the first

oil site in Persia.

1951 Iran nationalises oil industry under leadership of Mohammed.

1954 Name change to British Petroleum and market expansion into other regions took place.

1998-2000 Merges with Amoco, and acquires Arco and Burmah Castrol.

2010 Oil spill in the Gulf of Mexico killed 11 people and resulted in 4.9 million barrels of oil being discharged,

threatening marine life and hundreds of miles of coastline.3

ETHICAL POSITION

In 2010, while the environmental damages and wildlife threats due to the deep-water horizon explosion off the Gulf of Mex-

ico were near immeasurable, BP’s reputation was tarnished and their estimated pay-out costs and fines were rapidly increas-

ing. The public failed to find a strong enough justification for the worst oil spill in history and this led to BP suffering a col-

lapse in its public relations and reputation. However, with persistence on BP’s part, it has been able to reshape its image in

the public eye. Offering assistance to the US Government to minimise the impact of the issue and compensate people affect,

discovering alternative energy sources and becoming a sponsor of the London 2012 Olympic Games are among the few

initiatives carried out by BP that attributed to the restoration of its pronounced image and upright ethical position.

During the 2012 Games, BP helped to promote 'a Green London' to the world, and provided advanced fuels and engine oils

for over 5,000 official vehicles, fuel for generators and the liquefied petroleum gas (LPG) for the Games’ catering needs;

this demonstrated BP's care for both the society and environment. In addition, this served as an advertisement which aided

the recovery of BP’s public relations. BP has contributed to finding new forms of low-carbon energy while reducing its own

contributions to carbon in the atmosphere since the early years of the twenty first century. An example would be that its

greenhouse gas emissions were down to 61.8 Mte4 in 2011 due to a reduction in activity. Along with technological advance-

ment, the use of sustainable energy resources would enable the firm to be highly productive.5

The initial clean-up project for the Gulf of Mexico accident aimed to restore the natural resources and priority was given to

projects that benefitted the ‘affected wildlife, habitats and recreational uses’ most eminently. BP carried out over ‘12,500

bird observational survey sessions’ over a 4-month period from May 2010 to roughly measure the impact on their habitats

before implementing any project.6

1 http://www.bp.com/extendedsectiongenericarticle.do?categoryId=9021229&contentId=7039276 2 http://www.mcclatchydc.com/2010/05/08/93779/bp-has-a-long-record-of-legal.html 3 http://www.bbc.co.uk/news/science-environment-13123036 4 Mte - Million tonnes of CO2 equivalent. Source from: www.bp.com 5 http://www.bp.com/sectiongenericarticle.do?categoryId=9014445&contentId=7027526 6 http://www.bplondon2012.com 3

Non-GAAP Measures

Net Operating Cash Flows

Remained positive throughout Credit Crunch and Gulf of Mexico oil

spill

$22.2 bn in 2011; $13.6 bn in 2010

Gearing (Net Debt Ratio)

Remained close to 20.0% for the past 5 years

20.5% in 2011; 21.2% in 2010

BP has maintained a relatively stable liquidity position in the past years. Although there was a large fall in the net cash inflow in 2010

mainly due to the pay-outs relating to the Gulf of Mexico oil spill, net cash inflow in 2011 rallied back to above $20 billion. Some academ-

ics in Business Studies have argued that “Cash is King” because without cash in the bank, liabilities cannot be met when due and this may

lead to financial ruin (bankruptcy), therefore making sufficient cash at bank a necessity.

The gearing ratio which compares the value of debt to equity is, technically speaking, preferred to be in lower figures. However, this does

not mean that a higher ratio is unacceptable for a company because a higher ratio may indicate a company’s intention to expand by obtain-

ing loans for the financing of investments. Also, unless compared with figures from previous years or with other companies, a nominal

value of 20.5% would not suggest that BP has a high or low gearing ratio—there is no ideal ratio. Based on the gearing chart above, BP

has maintained its net debt ratio at around 20% and this suggests that in the past five years, for every £1 million worth of assets, around

£200,000 is financed by loans while the rest is financed by reserves, profits and share capital.

GAAP Measures

Total Shareholder Return

ADS Basis : 2.5%; Ordinary Share Basis : 3.0%

Positive in 2011; Negative in 2010

P/E Ratio

7.4413

Total shareholder return represents the percentage change in value of a shareholder’s investment, assuming dividends received are not

taken up for cash, instead, reinvested for additional shares. The improvement in shareholder return in 2011 is mainly due to the resump-

tion of dividend payments. A long term investor would be looking for a stable percentage instead of accelerating and abnormally high

returns as opposed to a short term (risky) investor because it would allow reinvestment for additional shares which will then provide for a

much larger return in the future due to significant capital gains once share prices increase.

The price-to-earnings ratio is a valuation of a company’s current share price compared to its earnings per share. Much like the gearing

ratio, a nominal value of 7.4413 would be insufficient to prove the profitability of investing in the company so comparisons to its previous

years’, competitors’ and industry’s as a whole would be needed. In this case, BP’s is below industry average and its main competitors but

justifiable explanations are given in the section on competitors and the energy market. In 2012, BP’s P/E ratios have been steadily increas-

ing and average around its 2008-2009 ratios.

FINANCIAL RATIOS

4

KEY BALANCE SHEET FIGURES

Net Assets increase by ≈ $20 bn

Shareholders’ Equity increase by $16.5 bn

Sales & Operating Revenues up by $78.4 bn in 2011 ( ≈ 26%)

Net increase in total revenues & other income

Largest increase in cost : Purchases

Largest decrease in cost : Production & Manufacturing Expenses

Profit before interest & tax : $39.8 bn

2010 : Loss of $3.7 bn

Retained Earnings : $26.1 bn

Up by ≈ $10 bn in 2009; Loss last year

GAAP Measures (continued)

Earnings Per Share (EPS)

0.9293

Dividend Yield

5.77%

FINANCIAL RATIOS (CONTINUED)

EPS shows the portion of company’s profit allocated to each share, serving therefore as an indicator of the company’s profitability. It is

generally considered to be the single most important variable in determining a share price. Hence, with BP’s low EPS, its share price too is

low. This is again to an investor’s advantage following the “buy low, sell high” rule of thumb because coupled with analysis of historical

share prices which indicate the opportunity for the price to reach at least 1.5 times its current price.

Dividend yield shows the amount paid out in dividends relative to its share price. Considering that many companies have not been paying

out dividends regularly (4 times a year) as they struggle to recover from the economic downturn, the yield is acceptable and it surpasses

that of its main competitors.

A net increase in total revenues and other income in 2011 which then led to an increase in retained profits despite the large increase in

purchases suggests that BP’s unfortunate accident in 2010 is no longer a significant financial hindrance. The increase in disposal gains

can be attributed to BP’s divestment programme whereby millions worth of assets are being sold off to improve liquidity.

Net assets value of $112 bn in 2011, an increase of around $20 bn from the previous year shows that the amount by which assets exceed

liabilities and by maintaining a greater difference between the two, BP can be said to be financially stable because its liabilities, when

due, can be covered by its assets. The increase in shareholders’ equity by $16.5 bn suggests that there is greater interest by investors in

BP and in turn, suggests that investors’ confidence in the company is rising.

KEY INCOME STATEMENT FIGURES

5

THE ENERGY INDUSTRY

The energy market could be regarded as an oligopoly with natural barriers to entry. A few companies such as BP and Shell make up the

main market share and dominate the regional or global market. ‘Energy companies can work in any of these different areas, and some

operate in all of three of them: electricity generation, networks and energy supply'.7 In response to the rapid climate changes in the recent

twenty years, the energy market has concentrated more on sustainability. More eco-friendly energy sources such as natural gas, nuclear

and wind power have been developed while improving the technology of extracting or exploiting those resources efficiently.

BP’S MAIN COMPETITORS

Royal Dutch Shell and Exxon Mobil are BP’s two main competitors; one of which was established in Netherlands whereas the other

was found in the US. Their performances are revealed and compared below as published by Forbes Global 2000.

Rank Revenue (billion $)

Profits (billion $)

Assets (billion $)

Market Value (billion $)

Exxon Mobil 1 433.5 41.1 331.1 407.4

Shell 4 470.2 30.9 340.5 227.6

BP 11 375.5 25.7 292.5 147.4

Financial Position

Financial Ratios

Share Price ($) Earnings per Share Dividend Yield (%) P/E Ratio*

Exxon Mobil 88 7.86 2.59 11.20

Shell 66.19 8.24 5.3 7.58

BP 41.6** 5.6** 4.9** 7.2**

Industry Average - 7.07 4.46 8.58

In terms of all the data including ranking, profits, P/E ratio and share prices, Exxon Mobil and Shell were running at better positions.

BP was fined $42bn because of the oil spill in 2010 and also $2.5bn for its trouble in Texas City refinery - where 15 people died, 170

injured in 2005. The oil disaster has had a profoundly negative influence on its financial position. However, the dividend yield of BP

is comparatively higher and this serves as a sign of recovery because dividends are only paid if the company has made enough profits

and it has sufficient cash. Long term shareholders should also be attracted by the low share prices because this means with the same

amount of capital, an investor can hold more shares.

7 http://www.energy-uk.org.uk/energy-industry/the-energy-market.html

* P/E ratio: A valuation ratio of a company’s current share price compared to its per-share earnings, the bigger value the better for investor.

** The value was in US market, in the UK, the value for each term is 431.60p, 0.935, 5.77%, 7.39, respectively.

Data from: www.bloomberg.com 6

SWOT ANALYSIS

STRENGTHS

BP was one of the major sponsors for the 2012 Olympic Games.

This attributed to its improved reputation which leads to

improved goodwill. Improved goodwill will increase the

net assets value in the balance sheet.

Employs sustainable energy resources.

This allows for reduced criticism from environmentalists

who can harm BP’s reputation and in turn, its goodwill

value under non-current assets.

Develops ‘green’ technology and carries out in-depth technological

research.

BP may become a leader in research and development,

possibly increasing its market share in the future.

WEAKNESSES

Tarnished reputation and massive costs due to the 2010 oil spill.

This caused negative operating cash flows, jeopardising

BP’s liquidity position and running the risk of failing to

meet creditors payment demands.

BP's current performance cannot compete with its competitors.

With weaker ratios, lower assets and profits, BP seems to

not be able to gain a reasonable return for an investor.

Most of BP’s resources are non-renewable, meaning they may even-

tually run out.

Should these resources run out, BP will lose its main reve-

nue stream and this may lead to profitability, liquidity and

possibly solvency issues.

OPPORTUNITIES

BP is exploring the uses of low carbon energy which is environ-

mental-friendly.

This gives BP the opportunity to expand in renewable en-

ergy market, suggesting that BP’s future may not be stunt-

ed by the running out of oil and gas.

Rising fuel price suggests significant profit increase.

Greater profits would mean that investors are likely to re-

ceive greater dividends.

High quality oil reduces the refining cost.

Lower costs may lead to greater profits which will then

benefit investors in terms of increased dividends.

THREATS

Fuel may be replaced by another resource found by other companies

without BP being aware of it.

If BP is unaware of such research, there is a chance of los-

ing out on a possible new market and might even lose prof-

its due to its current major industry being replaced.

Lower fuel price may result in a loss for BP.

As its industry has volatile prices, BP is subject to possibly

lower prices which may decrease profits.

Fuel oil and gas regulation in US and EU are stringent.

BP has to conform to all the strict regulations and failure to

comply or if accidents occur, heavy fines will be levied,

forcing BP’s financial position to be weakened.

In our opinion, BP is worth investing for the long run. There are 2 main reasons for our advice and they revolve around the im-

portance BP places on sustainability and its ability to navigate through obstacles. Since 2000, BP has indulged in numerous pro-

jects to discover renewable and cleaner energy resources as alternatives to traditional oil, and carried out research to effectively

extract these resources for everyday consumer use. By doing so, BP is ensuring that it has a place in the energy market in the fu-

ture because the decline of non-renewables may accelerate, and this allows BP to maintain its composed reputation, especially

with the media nowadays encouraging environmentalists to speak out against such firms. Finally, with competent senior manage-

ment, any accidents or difficulties faced can be met head-on by employees and clear targets set by management enables BP to be

built on a strong structure.

CONCLUSION

7

APPENDIX

Belbin’s Team Role Theory defines individuals’ function within a team. Ensuing our collective reflections, we believe that

Dorothy acted as the ‘Planter’ while Yvonne acted as the 'Completer Finisher'; the former requires motivation and problem-

solving skills whereas the latter, also known as a final editor, highlights errors and pays attention to the minute details to ensure

a polished final document. Jenny, Nina and Anh took up the role, 'Implementers' whereby specific tasks given were completed

efficiently and to their best ability. Yvonne, an au fait student took on an additional role as 'Coordinator', delegating tasks and

arranging for weekly meetings. In hindsight of our previous assignment in which we failed to identify our specific team roles

as a result of merely drifting along with the task entrusted, the assigning of each individual to a certain role this time round

improved the flow of information between team members, hence a reduced amount of time is wasted.

The initial problem we struggled with was insufficient structure in our planning. As tasks allocated to team members were not

well defined, individuals proceeded with research and returned only to realise that others returned with similar information.

This overlap of information collected forced our timeline to be shift backwards, leaving us with less time to construct our final

report. If a team is made up of 5 students who have chosen ‘Management’ as their first year elective there is ample chance that

trials relating to management failure can be resolved swiftly. Since ours is, we reached an agreement in no time—we agreed

that the social networking websites installed on our mobiles would be our form of communication as it enabled immediate re-

sponse. Improved communication easily led to us being driven back to meet our initially drafted timeline.

An enormous amount of financial data brought before us a tough challenge as there was a need to deal with complex infor-

mation, much of which we have yet to come across before in our studies. With the help of Dorothy as a ‘specialist’ of data due

to her previous studies and experience in the real world of finance, the rest of us learnt a great deal about gathering important

information. This proved that being good listeners and being open to learning from your team members is essential in team

work especially since as first year students, we have a lot to learn. Also, we learned, albeit through the hard way, that technolo-

gy is not to be relied on. This fundamental lesson came about when we lost the whole document as the Microsoft Office Pub-

lisher software stopped responding. Admittedly, it was partly due to negligence on our part as we forgot to save the document

every now so then, we had to restart everything from the beginning. It was perhaps the most discouraging and time-consuming

point of our project.

As we draw to the end of our Professional Skills assignment, we acknowledge that learning from mistakes made is acutely im-

portant. Making mistakes and enduring the mental distress that comes along with it is not pleasant but if it serves to prevent us

from making the same mistake twice, it is worth it. Through all the problems we encountered, from planning to researching, we

have come to realise that in order to really learn what we are taught, we have to actively practise it in real life because translat-

ing words into actions is not easy, to say the least. For further projects, a clear plan and structure from the very beginning given

ahead of any real actions is crucial to completing an assignment with ease.

8

REFERENCES

1. BP's Annual Report 2011

2. Key facts and figures

http://www.bp.com/extendedsectiongenericarticle.do?categoryId=9021229&contentId=7039276

2. Gulf oil spill: BP has a long record of legal, ethical violations

http://www.mcclatchydc.com/2010/05/08/93779/bp-has-a-long-record-of-legal.html

3. BP oil spill: The environmental impact one year on

http://www.bbc.co.uk/news/science-environment-13123036

4. Cleaning up the legal spill

http://www.economist.com/blogs/schumpeter/2012/11/bp-and-deepwater-horizon-disaster?

zid=298&ah=0bc99f9da8f185b2964b6cef412227be

5. Gulf of Mexico restoration

http://www.bp.com/sectionbodycopy.do?categoryId=41&contentId=7067505

6. History of BP: New millennium

http://www.bp.com/sectiongenericarticle.do?categoryId=9014445&contentId=7027526

7. BP's sponsorship with London 2012 Olympic Games

http://www.bplondon2012.com

8. The energy market explained

http://www.energy-uk.org.uk/energy-industry/the-energy-market.html

9. BP hopes $4.5bn fine will draw line under Deepwater Horizon disaster

http://www.guardian.co.uk/business/2012/nov/15/bp-fine-draw-line-deepwater

10. BP Global (BP) SWOT Analysis

http://www.wikiwealth.com/swot-analysis:bp

11. BELBIN Team Roles

http://www.belbin.com/rte.asp?id=8

12. Financal Data mainly from Bloomberg

http://www.bloomberg.com/ 9