Financial Performance of British Petroleum - Essay Example

?British Petroleum British Petroleum (BP) is one of the world’s leading international oil and gas companies that operates and markets products in more than 80 countries, providing its customers with fuel for transportation, energy for heat and light, retail services and petrochemical products for day-to-day activities (Bp.com n.d). The sales and other operating revenues of the company during 2010 were $297,107 million, with human resource strength of 79,700 employees (Bp.com, 2010). The British Petroleum (BP) share prices have been at its lowest level prior to its rising by the end of July 2011. There were many reasons that affected the BP share prices during beginning of 2011. The issue that had highly impacted the BP share prices was the decision taken by Transocean Ltd after conducting an internal investigation. Transocean Ltd is the world’s largest offshore drilling contractor whom the BP had contract with. They provide the most versatile fleet of mobile offshore drilling machineries to assist customers find and utilise efficiently oil and natural gas reserves. Transocean Ltd announced on June 22, 2011 the release of an internal investigation report illustrating the reasons behind the explosion on the Deepwater Horizon rig on April 20, 2010. Transocean operated and owned the Deepwater Horizon rig that was drilling on the oil well in the Gulf of Mexico and their report had an impact on the BP prices the following weeks. In the opinion of Transocean, HP was to be held accountable for the disaster at the rigs as HP was controlling the drilling process at the oil well. The report explains that some of the inaccurate decisions made by HP resulted in the massive explosion on the oil well. According to the findings of the report the reason behind the explosion was the preparing a wrong design of the well, which was carried out by BP, together with an ineffective cement program. The guardian reports this; “the explosion and the oil spill was the result of a succession of well design, construction, and temporary abandonment decisions that compromised the integrity of the well and compounded the risk of its failure; the Swiss firm, Transocean Ltd, also said that many of the decisions were made by well owner BP in the two weeks before the incident” (The Guardian, 2011). Lacombe (2011) said that the report of Transocean can affect the BP share prices as it indicated that the decisions of BP included narrowing of the geological window in order to keep the drilling safe. Moreover, at the end of the week the BP share prices had declined to around 437.15p (Yahoo Finance, 2011). However, after the sudden decline in the BP share price due to the Transocean report, the company was seen prospering in the market. Weatherford International was the first contractor whom the British Petroleum had been in association with at the Macondo oil well, and the business association continued for quite a long time. And when the financial management of the Weatherford International had taken the decision to clear all the settlement claims with the British Petroleum, the decision created a great effect on the PB share prices. In fact, Weatherford International was the first contractor whom the company was intending to make settlement with, and it was of great significance as the settlement process was moving forward and would potentially create a positive effect on BP share prices. Moreover, the financial management of the company decided to clear all its association at the Macondo oil well which has been the prime target at the oil spill at the Gulf of Mexico during last year. As Lacombe (2011), points out, when the good news about the Weatherford International’s settlement with British Petroleum at Macondo oil well was spread around, the BP share prices increased by 16.1p and was closed at 445.7p. Apart form these, Mitsui of Japan, one of the minority partners of the BP Company at the oil well, also made the decision to settle its claims with the company soon after the Weatherford International settlement news was out. With the declaration of Mitsui moving forward to settlement, the BP share prices started to flow once again. The BP Company maintains clear and specific policies regarding its financial management decision and investment proposals. The investment decisions of the firm are evaluated with consistent set of economic assumptions, tested against multiple sensitivities, and go through rigours assessment of financial and non-financial risk (BP plc, 2011). The objective behind such evaluation is to make sure that the company functions in a way that is environmentally accountable while cutting down wastage and emissions and working energy efficiently. On of the major financial management decision taken by the company was to create a joint venture with Husky and to consider investing in the Sunrise steam assisted gravity drainage (SAGD) project, that was aligned to BP’s upstream growth (ibid). Working on the Canadian oil sands was considered a competitive opportunity for restructuring the company, influencing BP’s reputation and capability in the frontier technology advancements, thereby creating value by amalgamating heavy oil industry and BP’s refinery commerce in North America. The company strategy was accepted by the board as it was based on the company’s view of the international energy supply that could equalise the demand over the next 25 to 35 years. The company is also focused on the quick advancement of technology for developing oil sands and the creation of further value through assimilation of BP’s combined fuel value chain. Likewise, the company maintains clear policies and processes regarding its financial management decisions. In 2007, the BP management team opted for new ventures in deepwater drilling as well as in investing with foreign markets. The company started up the deepwater project of Atlantis in the Gulf of Mexico in the year 2007, under the leadership of Tony Hayward, the group chief executive of the project. The company invested also in Greater Plutonio deepwater project in Angola in the same year. By the end of the year, BP bought the minority shareholding of its refinery in Rotterdam in the Netherlands from Chevron. In the same year, the company sold its refinery in Coryton, UK. The decision taken by the management had, in fact, affected the BP share prices as it closed at 615p in December 2007, increasing almost 100p compared to its opening at 534.50p in January 2007 (Yahoo Finance, 2011). Looking at the share prices, it is evident that the following year was not much favourable when compared to the previous year. The share prices had gone down to 533.50p by the end of January and the closed at 526p in December (ibid). Unlike the previous year, there was a sudden decline in the share prices and the share price index showed higher degree of price fluctuations about 100-150p. The price decline was due to the management’s decision to execute resource replacement and reserves replacement. It was during 2008, the company achieved resource replacement of more than 200% and reported reserves replacement of more than 100% (Bp.com, 2011). In 2009, Carl-Henrc Svanberg succeeded as the chairman of the company. And BP started its production from the three deepwater drilling units of Atlantis Phase 2, Darado and King South in the Gulf of Mexico. Moreover, this was the 17th consecutive year of the company reporting reserves replacement exceeding 100%. And the major significant financial management decision made by the BP was to declare the quarterly dividends. With such great management decision of the firm, its share prices had gone to its highest phase in the recent years. The financial management’s decision to declare dividend had a great impact in elevating the share prices. The opening of the share price was at 532.75p on 2nd January and did not experience much fluctuations or heavy heaping until half-yearly closing at 475.11p on 30th June (Yahoo Finance, 2011). But the news about declaration of dividend boosted up the share prices. The share price moved up from 479.50p on 1st July, to a very high segment at 600.00p on 31st December (ibid). The financial decision of the company, including reserves replacements played a great role in increasing the BP share prices. However, 2010 was the year when the BP faced the highest fall in its share prices. The BP’s proposals to invest more on deepwater drilling and to contract with other multinational oil and gas corporations were the major decisions taken by the company. Moreover, besides the decision making, the tragic accident on the Deepwater Horizon rig, claiming many lives and injuring much more, had affected the operations of the company. The incident also posed a question towards the efficiency and credibility of the company. The management was in need of taking quick financial management decisions in order to face the consequences of the incident. Amidst many accusations against inefficiencies, the share price fell heavily from 602p on 1st January to 319.36p on 1st June (refer: Graph 1) (Yahoo Finanance, 2011). However, by overcoming such impacts BP brought three major projects on-stream: production started at the In Salah Gas compression project in Algeria, the Great White field in the Gulf of Mexico, and the Noel field in Canada (Bp.com, 2011). The company also took final investment decisions on other 15 projects. Besides, BP boosted up the production for the Rumaila field in southern Iraq by 10% above the contracted rate with Rumaila Operating Organisation partners and the Iraqi Ministry of Oil, thereby becoming eligible for service fees. There was also an increase in production in Iraq by 2.5% when compared with 2009. Moreover, following the Gulf of Mexico oil spill, the financial management decided to dispose of almost $22 billion of non-core assets. Such managerial decions taken by the company influenced the BP share prices that were moving downward until then. Thus, by the end of 2010, the prices started to gradually climb, closing at 465.55p in December (refer: Graph 1). Finally, in 2011 after the sudden decline in the BP share price due to the Transocean report, the company was seen prospering in the market. The management’s decision to clear the settlement with Weatherford International had an effect on the BP share prices. In the same way, management of the company decided to clear all its contracts at the Macondo oil well which has been the prime target at the oil spill at the Gulf of Mexico during last year. With the Weatherford International’s settlement the BP share prices increased by 16.1p and was closed at 445.7p in Ocotber 2011. Moreover, BP also made the decision to settle its claims with Mitsui of Japan, one of the minority partners of the company. With the declaration of BP moving forward to settlement, the share prices once again started to flow closing at 460.75p on 1st November 2011 (Yahoo Finance, 2011). It is evident that this decision of the most of the company was taken using the Financial Theory of Investment, an approach brought forward by Hyman Minsky, a theory that gained much popularity especially during the global financial crisis following the subprime mortgage market in the US in 2007. According to Minsky’s, “the investment is forthcoming today only if investment is expected in the future—since investment in the future will determine profits in the future; because investment today produces profits to validate the decisions undertaken “yesterday” to invest, expectations about “tomorrow” affect ability to meet commitments that were made “yesterday” when financing the existing capital assets” (Wray and Tymoigne). Besides, another financial management theory applied by the financial management of the team while taking financial decision is Keynes’s General Theory. According to Keynes, “the theory deals with the two fundamental flaws of the capitalist system: an inability to achieve full employment and excessive inequality; moreover, stability cannot be achieved—even with appropriate policy—because it changes behaviour in ways that promote evolution toward fragility” (Wray and Tymoigne). Therefore, the company should focus on structuring the institutional composition in order to attenuate the thrust towards unemployment, inflation and unsteady growth. The success of the firm cannot be permanent therefore adequate policies should be continually adapted to changing situations. Thus, it is seen that the BP share prices have been affected by the financial decision of the company. The financial decisions of the firm have been depended on many factors such as, foreign exchange rates, capital expenditure, balances of cash inflows and outflows, dividends and optional scrip dividends, shareholder distributions, gearing, production and production growth, depreciation, oil and gas prices in the global market, taxation, demand for petrochemicals, and environmental operating expenses (Bp.com, 2011). Therefore, there is always greater chance for the financial decisions to affect the share prices. However, expectations about future involve great risk and uncertainty as they relate to events and depend on incidents that may or may not occur in the future and so are outside the control of the company. The BP share prices are also depended on various other elements like, general economic conditions, demand and pricing, political stability, economic growth, and changes in laws and governmental regulations. The success of the Company cannot be permanent, and so it must adapt proper polices in time to face the changing circumstances. Graph 1: British Petroleum share price for the year 2010 (Source: Yahoo Finance 2) Graph 2: British Petroleum share price for 2007-2011 (Source: Yahoo Finance 2) References Bp.plc.com n.d, ‘Oil sands resolution and response’, pp.1-4, Viewed 04 December 2011, Bp.com n.d, ‘Annual F & OI’, Viewed 04 December 2011, Bp.com 2011, ‘What’s inside?’, Financial and Operating Information 2006-2010, pp.1-87, Viewed 04 December 2011, Bp.com 2010, ‘What’s inside’, Annual Report and Form 20-F 2010, pp.1-250, Viewed 04 December 2011, The Guardian 22 June 2011, ‘Transocean report blames BP for Gulf of Mexico oil disaster’, Viewed 04 December 2011, Lacombe, B 2011, ‘Roller coaster ride for BP share prices’, Planet, Viewed 04 December 2011, Wray, R & Tymoigne, E n.d, ‘The financial theory of investment’, Viewed 04 December 2011, Yahoo Finance 2011, ‘Historical prices’, Viewed 04 December 2011, Yahoo Finance 2011, ‘Technical analysis’, Viewed 04 December 2011, Read More