British Petroleum - Impact of Financial Management Decisions on a Firms Value - Case Study Example

Impact of Financial Management Decisions on a Firm’s Value: A Case Study of British Petroleum (BP) Introduction: British Petroleum (BP) – establishedin 1909 – is one of the largest oil and gas companies in the world. The company is operating in more than 80 countries and is mainly providing its consumers with gas and fuel for transportation, and for energy purposes. The organization is operating two segments mainly, i.e. the exploration and production, as well as the refining and marketing. The company has a large business infrastructure to operate because of it working all around the world. Therefore, the company’s stakeholders to undertake important decisions related to different fields that must be taken care of on regular basis. One of the main concerns for such a widespread company is to control the finance and budgeting. Since the last couple of years, the company has been seen to be undertaking important financial management decisions that have been suspected to lead to their declining performance and impact in the market. The purpose of this report is to highlight the important financial management decisions taken by the operatives of the firm, their direct impact on the firm’s market value, as well as the critical analysis of these decisions. The report will also provide important recommendations and conclusions based on the decisions made by the company officials in the past, and a strategy will be suggested in financial grounds that if adopted, might be fruitful for the business to expand. Financial management decisions taken in past: According to an important federal report published in 2010 reported and blamed directly on to the bad financial management decisions taken by the BP officials over the last few years. The ultimate responsibility of the demise of BP was largely put on the key officials of the company. The series of financial management decisions made by the BP officials have further complicated the cementing operations that they were undertaking, which have directly played its role in the ultimate debacle of the cement job. Many of the observers consider the oil spill of the BP as an influential and decisive moment in terms of the corporate social responsibility. The Washington Post representative Chrystia Freeland goes further by stating that the corporate social responsibility taken up by the officials of the BP has been quite rigorously been exposed as the “fetish encouraged by the philanthropies that feed off it and funded by the corporate executives who have found that it serves their bottom line". The report will be explaining three types of financial management decisions that have been made by the officials of the BP on various occasions in the past. In terms of the capital budgeting, which is concerned with the process of planning and managing the company’s long term investments, the officials decided to cut down its capital budget for the next five years. This was the decision made in 2010, where the officials decided to slash the company’s budget by selling $10 billion worth of money into assets. The company also decided to drop the dividend to pay for the $20 billion spill response fund. The most important that the company ignored in terms of the capital budgeting was the size, as well as the timing of the budgeting process as the company needed to make more investments into the future projects because of the declining performance. Capital structure is another field inside the financial management decisions that has to be considered. The decision making in this niche refers to the particular mixture of the long term debt and equality used by the firm for financing its operations. Third category in terms of the financial management decisions is related to the working capital management which actually refers to the short term assets contained by the company. The next section will explain how the decisions in these particular niches have affected the business performance of BP. The recent decision of the company to spread an oil pipeline has produced serious doubts of the credibility of the company in terms of the other important operations not being considered seriously, and the critics state that this operation that is being spread on a widespread scale might be ignored on the later stages. The decision making bodies have stated that an estimated $100 million will be spent on this project. This also makes some serious doubts on to the company as there have not been much of the surpluses in the last few years and also the company is undergoing into losses. Another key decision that the company officials have made, relates to the pricing of the products and services offered by the company to its clients. The recent increments of 34% of the prices in the oil, gas and other energy resources have not been a very fruitful development for the company in terms of gaining profits. The present evidence of this decision is the falling shares of the company in the stock markets. Also, this has raised serious doubts in terms of the unexpected matches in the revenues, sales, and profits. The report will be presenting some arguments related to the financial management decisions taken by the company officials since the last three years. The arguments will be made from an external perspective, where the direct involvement in the company will not be the case. Financial management decisions and their role in firm’s value: The BP’s financial performance over the last three years has not been very exceptional as it used to be before 2005. The main blame is to be put on the decision making bodies, especially those who are concerned with the financial management decisions. According to an independent and external point of view, the decisions made by the officials cannot be considered to fall into the normative view of the decision making, according to which the officials could enable themselves to make the best decision out of the options they have to consider. In case of the BP, the net financial costs in 2008 year alone were $1547 million which were slightly higher than in year 2007. This increase has largely been reported due to the reduction in the capitalized interest, as several major construction projects have been included into the reports for the future. Another reason was the conclusion and completion of several projects in the ending of 2007 and therefore they did not need any finance to be spent on. The company also decided to make an increment in the net finance income of the pensioners and other retired personnel, and this benefit had risen to $591 million in 2008. This budget might also have caused the company’s other operations to be ceased or discontinue due to the lack of finance in hand. Also the company is indebted and therefore cannot borrow finance from banks. The company also decided to increase the corporate tax charge on replacement cost profit, which was estimated to be increased to $14,669 million. In comparison, to 2007, the increment of 36% was made, as in the 2007 year; the figure was $9,359 million in 2007. The group earns income in many countries and, on average, pays taxes at rates higher than the UK statutory rate of 28% for 2008. The increase in the effective rate in 2008, compared with 2007, primarily reflects the change in the country mix of the group’s income, resulting in a higher overall tax burden. Capital expenditure and acquisitions amounted to $30,700 million. This included $4,731 million in respect of our transaction with Husky Energy Inc. and $3,667 million in respect of our purchase of all Chesapeake Energy Corporation’s interest in the Arkoma Basin Woodford Shale assets and the purchase of a 25% interest in Chesapeake’s Fayetteville Shale assets. Acquisitions in 2007 included the remaining 31% of the Rotterdam (Nerefco) refinery from Chevron’s Netherlands manufacturing company. Considering the role that had been played by these decisions in terms of affecting the value of the firm, a reasonable doubt has been established. The reason is that the company has made many key decisions related to its project development efforts, according to which several projects are being operated all over the world simultaneously. This has been a positive development as the company is now considering making a rapid growth in their business and making staunch efforts to make the business even more expanding. In terms of the decision making theories involved in the company’s management processes, the normative approach, as has been said earlier, cannot be the case as the company has not been seen to make the perfect decisions that could really boost the business of the firm, rather this can be argued that the company officials made smart efforts to make the business grow, but the perfect execution of those decisions and plans could not be the case and that caused serious trouble to the company as either the projects that were started within the span of last three years, could not be completed on time, or had been left unfinished, or had been discontinued for a long period of time due to the financial constraints which were not predicted before but in reality were quite visible there. Conclusions and recommendations: Over the past 4 years, the financial management decisions made by the officials of the BP have not been quite remarkable. The main reason might be the debt crisis covering the whole Europe due to which the company has not been able to extract profits in the same way as it had been before the last three years. Another main concern might be the one related to this debt issue, i.e. the company might have made important decisions related to its future planning and projects that will be carried out, and then due to the debt crisis and the global recession, the company might not have been able to extract the regular amount of profits which might have made the company unable to complete those projects they had decided to undertake. This produce serious concern about the performance as well as the image of the company as the decision makers must be able to forecast the revenue and profits they are going to make in near future and according to that they should be making the decisions about the future projects. The company must also be applying the normative theory of decision making as this theory helps the officials to reach out to the perfect decision and with the help of the most feasible decision; they might be able to have the most perfect solution. Not considering the normative theory of decision making might have made the company’s reputation not that much respectful because the decision making bodies are the main asset of the company and if BP is not able to make the right financial decisions for the futures, then the perfect execution of the plans is not possible and that has been the main concern in affecting the positive image of the company into an ordinary one. 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