BP at a Glance - Research Paper Example

BP at a Glance I. Company introduction BP, a global energy company which has its head-quarter in London, UK, “provides its customers with fuel for transportation, energy for heat and light, retail services and petrochemicals products for everyday items (BP.com 2010).” The company has started in 1908, starting with the discovery of oil in Persia. The company engages in activities ranging from “finding oil and gas, extracting oil and gas, moving oil and gas, making fuels and products, selling fuels and products, and generating low carbon energy (BP.com 2010).” From a local company, BP has grown to be one of the global leaders in energy with more than 80,000 employees in six continents and over 100 countries. The company operates under six major brands. Among these include BP, the company's core brand. Arco is the company's brand for a cleaner, low cost fuel within the west coast area of the US (BP.com 2010). The company markets its products in Germany under the Aral brand (BP.com 2010). As for its specialist lubricant and motor oil line, its brand Castor is one of the top global brands (BP.com 2010). The brand ampm is for its convenience shops in the western USA while Wild Bean Café is the company's brand for high-concept cafés that offer affordable and fresh coffee, foods and meals (BP.com 2010). In 2009, the company's sales and other operating revenues amount to $239 billion; while its proved reserves is equal to 18.3 billion barrels of oil, with a refining throughput of 2.3 million barrels per day. Its replacement cost profit amounts to $14 billion and is active in 30 countries (BP.com 2010). The company has 16 wholly or partly owned refineries, 22,400 service stations and 80,300 employees worldwide (BP.com 2010). II. Performance assessment BP's performance can be assessed by looking at the substantial changes in its financial statements through some key items, as well as finding the relationship between certain items in order to look at the company's performance in different aspects such as productivity, operating efficiency and productivity, and use of financial leverage. This can be accomplished by doing a ratio analysis. A. Substantial changes in the company's financial statements The company's total revenues and other income in 2009 amounts to 246,138 million. This is lower than its 2008 figure which amounts to 367,053 million, by 32.94%. The company's profit for the year amounts to 16,759 million, which is also lower than its previous year amount of 21,666 billion by 22.65%. In 2009, however, the net assets of BP increased from 92,109 million to 102113 million; a 10.86% increase. Its cash from operating activities is also lower by 27.25% at 27,716 million in 2009, from 38,095 million in 2008. The company has made a significant 12.72% reduction in its employees, from 92,000 in 2008 to 80,300 in 2009. B. Ratio analysis In order to assess the performance of BP, a ratio analysis has to be conducted. For this, the original ratios that comprise the Du Pont system of ratio analysis are used: return on equity, return on assets, net profit margin, total asset turnover and debt ratio (Brealey, Myers, Marcus 2004). The interrelation of these ratios with regard to the company's true performance is assessed. BP's return on equity in 2009 is 16.41%, lower than its 2008 figure of 23.52%. The company's return on assets is 7.10% in 2009, in contrast to 9.49% in 2008. The company uses 56.73% of debt in its total funding in 2009, a small decrease in percentage as compared to 59.64% of debt in 2008. The company's total asset turnover is lower in 2009 at 104.31%, than its 2008 figure of 160.82%. The company's net profit margin in the current year, however is higher at 6.81% than in 2008, at 5.90%. The return on equity, under the Du Pont system is derived by dividing the return on assets by the company's leverage ratio, or 1-debt ratio (Keown et al. 2002). By looking at the company's return on assets and the company's leverage ratio, BP's return on assets has decreased while the leverage ratio has increased, with the company utilising debt less in 2009 than in 2008. The joint impact of these in the company's return on equity results in a much lower figure than the previous year. This is apparent when the company's return on assets figures in both years are compared to the return on equity figures. In 2008, BP's ROE is 23.52% with an ROA of 9.49%. The huge difference is attributed to the lower leverage ratio of 40.36%. In 2009, however, the leverage ratio increased to 43.27%, thus a larger denominator results in a much lower quotient of 16.41%. The effect of the leverage is lower in 2009 than in 2008. While ROE is a function of the ROA and financial leverage, it is said that the true measure of performance is the company's return on assets (Brealey, Myers, Marcus 2004). This figure is lower for BP in 2009 than in 2008. According to the Du Pont system, ROA is derived by multiplying the company's net profit margin and its total asset turnover. By looking at these figures, it is apparent that the company's net profit margin has increased in 2009 from 2008. This signifies an increase in the company's ability to profit, as the ratio of the net income to sales has increased. Although the actual net income and sales figures have decreased during the year, in terms of the share of expenditures and income when it comes to the total sales, the company has done well. Expenditures must have been better managed in 2009. This can be attributed to the company's efforts to make its operations leaner as apparent in the huge decline in the number of employees, and perhaps a decline in facilities. If the net profit margin denotes the company's ability to profit, the total asset turnover depicts a company's efficiency in using its assets for its operations (Keown et al., 2002). This figure has faced a significant decrease in over a year, where the percentage in decrease is more than 50%. While the company's asset efficiency, as measured by this ratio in 2008 is very high, a significant decrease in productivity is apparent in 2009. Because of this huge decrease in total asset turnover, BP's increase in net profit margin is offset, which results in a much lower return on assets in 2009. The company has scored well in its ability to profit and control costs, but lower in utilising its assets to contribute to its operations. C. Conclusion Given the above assessments, BP's performance in 2009, when benchmarked from its previous year's performance has declined. With a huge decrease in key financial statement items such as its total revenue and other income, net profits, and cash from operating activities, the company has experienced quite a setback in terms of its operations. However, this does not mean that the company is on a shaky ground – the company has invested more and increased its asset base in 2009. Management's focus on making the company's future better is apparent in these efforts. By looking at the interrelationship of certain financial statement items through ratios, the company's performance is analysed on the basis of financial leverage, the company's profitability as well as asset efficiency. BP has utilised less financial leverage in 2009, which has resulted in a lower ROE-ROA difference than in 2008. In terms of profitability, the company has done better in 2009 as seen in its net profit margin increase despite the decrease in amounts of total revenue and other income, as well as net profits. This means that expenditures are well managed and are better controlled. Where the company fails huge, which has contributed in the decline in its ROA is the company's asset productivity as measured by its total asset turnover. The decline in asset efficiency is more than 50% which is very significant to its operations. III. Appendices A. Ratio analysis Bibliography BP.com. (2010). “BP Annual Report and Accounts 2009.” BP Plc. Date accessed: April 21, 2010 from http://www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/set_branch/STAGING/common_assets/downloads/pdf/BP_Annual_Report_and_Accounts_2009.pdf BP.com. (2010). “BP at a Glance.” BP Plc. Date accessed: April 21, 2010 from http://www.bp.com/sectiongenericarticle.do?categoryId=3&contentId=2006926 BP.com. (2010). “Our Brands.” BP Plc. Date accessed: April 21, 2010 from http://www.bp.com/extendedsectiongenericarticle.do?categoryId=9&contentId=7046348 BP.com. (2010). “Where We Operate.” BP Plc. Date accessed: April 21, 2010 from http://www.bp.com/sectiongenericarticle.do?categoryId=6&contentId=7019358 BP.com. (2010). “Who We Are.” BP Plc. Date accessed: April 21, 2010 from http://www.bp.com/subsection.do?categoryId=4&contentId=2006741 Brealey, R. A., Myers, S. C., & Marcus, A. J. (2004) Fundamentals of Corporate Finance. New York: McGraw Hill. Keown, A. J., Martin, J. D., Petty, J. W., & Scott, D. F. (2002) Financial Management: Principles and Applications. New Jersey: Prentice Hall, Inc. Read More