INDIVIDUAL ASSIGNMENT

Name: Yeoh Shin Yee (TP024979)

Module Code and Module Title: ABUS023-3.5-2/ Principles of Finance

Intake Code: UCD2F1204DIA

Name of Lecturer: Saqinah binti Kamil

Date Due: 3 December 2012

a)

Company Background of BP
BP PLC, also known as British Petroleum (19542000), is a British petrochemical corporation that became one of the worlds largest oil companies through its merger with the Amoco Corporation of the United States in 1998 (Encyclopdia Britannica, n.d.). BP was initially registered on April 14, 1909, as the Anglo-Persian Oil Company, Ltd (Encyclopdia Britannica, n.d.). It was renamed as the Anglo-Iranian Oil Company, Ltd., in 1935 and changed its name to the British Petroleum Company Limited in 1954 (Encyclopdia Britannica, n.d.). The name British Petroleum Company PLC was adopted in 1982 (Encyclopdia Britannica, n.d.). After merging with Amoco in 1998, the corporation took the name BP Amoco before assuming the name BP PLC in 2000 (Encyclopdia Britannica, n.d.). The companys headquarters are in London (Encyclopdia Britannica, n.d.). The Anglo-Persian Oil Company was formed to take over and finance an oil-field concession granted by the Iranian government to an English investor, William Knox DArcy (Encyclopdia Britannica, n.d.). The first successful oil wells were drilled at Masjed Soleyman, and crude oil was piped to a refinery built at Abadan, from which the first cargo of oil was exported in March 1912 (Encyclopdia Britannica, n.d.). Other Iranian fields and refineries were built, and by 1938 Abadan had the largest single refinery in the world (Encyclopdia Britannica, n.d.). The concession was revised in 1933, briefly suspended in 195153, and renewed in 1953 in a consortium with other oil companies (Encyclopdia Britannica, n.d.). In 1914 the British government became the companys principal stockholder and remained so (Encyclopdia Britannica, n.d.). Effective from January 1, 1955, British Petroleum became a holding company (Encyclopdia Britannica, n.d.). Beginning in 1977, the British government reduced its ownership of British Petroleum by selling shares to the public, and in the late 1980s the government turned over British Petroleum entirely to private ownership by selling its remaining shares (Encyclopdia Britannica, n.d.). This cleared the way for British Petroleum to acquire Britoil PLC, an independent oil company that produced oil from the North Sea fields (Encyclopdia Britannica, n.d.). British Petroleum developed oil fields and built refineries in several more countries, including major interests in Alaskas Prudhoe Bay and in the United Kingdom sector of the North

Sea, where, in 1965, British Petroleum made the first commercial discovery of natural gas and, in 1970, the first discovery of a major oil field (Encyclopdia Britannica, n.d.). Beginning in 1970, BP merged its assets in the United States with those of the Standard Oil Company (Ohio), in which BP acquired a controlling interest (Encyclopdia Britannica, n.d.). In 1987 BP acquired the remainder of the Standard Oil Company for almost $8 billion (Encyclopdia Britannica, n.d.). In merging with U.S. oil giant, Amoco in 1998, the newly created BP Amoco became the one of the largest petroleum concerns in the world (Encyclopdia Britannica, n.d.). The corporation changed its name to BP PLC following the acquisitions, in 2000, of Atlantic Richfield Company (known for ARCO brand gasoline in the western United States) and Burmah Castrol (a leading British oil, gas, and lubricants company) (Encyclopdia Britannica, n.d.). In 2010 the offshore drilling rig Deepwater Horizon, owned by Transocean and leased by BP, exploded and collapsed, causing a rupture in the riser of a very deep oil well (Encyclopdia Britannica, n.d.). An estimated 4.9 million barrels of oil were released into the Gulf of Mexico the largest marine oil spill in history (Encyclopdia Britannica, n.d.). The company subsequently paid billions of dollars in damages to individuals and businesses affected by the spill (Encyclopdia Britannica, n.d.). In 2012 BP agreed to pay more than $4.5 billion in fines and penalties to the U.S. government and to plead guilty to 14 criminal charges (Encyclopdia Britannica, n.d.). BP and its subsidiaries and associated companies continue to engage in the exploration, production, refining, transportation, and distribution of oil and natural gas and in the manufacture of chemicals, plastics, and synthetic fibers (Encyclopdia Britannica, n.d.). It operates convenience stores and filling stations through brands such as BP, Aral, ARCO, and ampm (Encyclopdia Britannica, n.d.).

Vision and Mission of BP

The BP values which are part of its mission statement include no harm to people or the environment (About.com, n.d.). Although not specifically labeled a vision or mission statement, BP has a published statement of What We Stand For (About.com, n.d.): BP wants to be recognized as a great company competitively successful and a force for progress (About.com, n.d.). We have a fundamental belief that we can make a difference in the world (About.com, n.d.). We help the world meet its growing need for heat, light and mobility (About.com, n.d.). We strive to do that by producing energy that is affordable, secure and doesnt damage the environment (About.com, n.d.). BP is progressive, responsible, innovative and performance driven (About.com, n.d.). BP further defines its mission to be progressive, responsible, innovative and performance driven with these following explanations, some of which are surprising in light of the 2010 Gulf oil spill disaster (About.com, n.d.). Progressive We believe in the principle of mutual advantage and build productive relationships with each other, our partners and our customers (About.com, n.d.). Responsible We are committed to the safety and development of our people and the communities and societies in which we operate (About.com, n.d.). We aim for no accidents, no harm to people and no damage to the environment (About.com, n.d.). Innovative We push boundaries today and create tomorrows breakthroughs through our people and technology (About.com, n.d.). Performance Driven We deliver on our promises through continuous improvement and safe, reliable operations (About.com, n.d.).

S.W.O.T analysis of BP
Strengths: 1. Strong brand management driven by the Beyond Petroleum slogan (YouSigma, n.d.). 2. Dominant market position (YouSigma, n.d.) BP is ranked at the worlds sixth largest energy company by measuring market capital at 2011 (PFC Energy, 2012). 3. Wide geographical presence (YouSigma, n.d.) BP has operations in over 50 countries (BP p.l.c., n.d.). 4. Vertically integrated operations (YouSigma, n.d.) BP operates in all areas of the oil and gas industry, including exploration, refining, distribution and marketing, petrochemicals, power generation and trading (BP p.l.c., n.d.). It also has renewable energy activities in biofuels, solar power and wind power, which managed by BP Alternative Energy (BP p.l.c., n.d.). Weaknesses: 1. Decline in crude oil and natural gas production (YouSigma, n.d.). Depletion of natural resources. Closing of 12 oil wells on Alaskas North Slope after allegations on oil leaking (NBCUniversal Media LLC, 2006). 2. Controversies and criticisms (YouSigma, n.d.) Explosion of BP refinery in Texas that caused 100 injuries and 15 deaths in 2005 (NBCUniversal Media LLC, 2005). The largest-ever spill in Alaskas North Slope region: up to 267,000 gallons of crude oil spilled onto the frozen ground about 250 miles above the Arctic Circle in 2006 (NBCUniversal Media LLC, 2006). Toxic spill of 2,000 gallons of methanol in the oil field (Prudhoe Bay) managed by BP (Morris Publishing Group, LLC, 2007).

Opportunities: 1. Increasing demand for natural gas in North America (YouSigma, n.d.). 2. Rising demand for refined products and petrochemicals in China (YouSigma, n.d.). 3. Launch of more flexible price policy to compete main rivals. 4. Oil and gas exploration projects (YouSigma, n.d.) BP uses sophisticated technologies and tried-and-true techniques to find oil and gas under the earths surface (BP p.l.c., n.d.). 5. Investments in alternative energy business (YouSigma, n.d.) BP is committed to invest 8 billion USD in the research of alternative fuel methods, including hydrogen, natural gas, wind and solar over the forthcoming decade (BP p.l.c., n.d.).

Threats: 1. Instability in some oil-producing regions (YouSigma, n.d.). Occasional refinery explosions Corrosion in pipelines 2. Environmental regulations (YouSigma, n.d.) Environmentally unsound policies due to oil and toxic spills. 3. Competition from ExxonMobil, PetroChina, Shell and Chevron 4. Further lawsuits considering the companys ecological activities.

b)

= 1.06 times Net working capital = Current assets current liabilities = $89164 $83780 = $5384

= 0.76 times

= (Cost of Goods Sold is not provided in the annual report)

= 4.22 = 4 days

= 50.94 = 51 days

= 1.28 times

= 2.05 times

= 62%

= 162%

= 31.96 times

= 11%

= 7%

= 3%

= 9%

= 23%

= $0.0000014

= 4%

= 21%

= 5.42 times

= 0.000093 times

c) As shown above, the current ratio of BP is just exactly 1 and the acid test ratio is 0.76. Low values for the current or acid test ratios (values less than 1) indicate that BP may have difficulty to cover its short-term obligations. Even though BP has positive net working capital, the value only reflects the overall liquidity of the company. Thus, we can conclude that the ability of BP to pay its short-term debt is poor. This statement can be further supported by average payment periods, which BP needs to take about 51 days to pay off its account payables or suppliers. There is a large gap between average collection periods and average payment periods, which BP only takes about 4 days to collect its account receivable. Besides, the total asset turnover ratio of BP is 1.28 times. This means that for every dollar of BPs assets, BP generated $1.28 in revenue. On the other hand, BP has a high fixed asset turnover ratio, which is 2.05 times. This shows that the company is efficient at managing its fixed assets. Fixed assets are important as they usually represent the largest component of total assets (ReadyRatios Team, n.d.). Fixed asset turnover ratio is most useful in "heavy industry," such as oil and gas industry, where a large capital investment is required in order to do business (Bragg, S., n.d.). Thus, we can conclude that BP is more efficient at using fixed assets to generate sales compared to current assets. In term of the ability to service debts, BP has a debt ratio of 62%. This indicates that 62% of BPs assets are financed by creditors. Next, BP has a debt-to-equity ratio of 162%, which is a very high figure. This means that BP has been aggressive in financing its growth with debt. In addition, BP has a Time Interest Earned of 31.96 times. This means that BP has earned approximately 32 times its interest charges. In term of profitability, BP has a gross profit margin is 11%. This means that for every dollar that BP earns on crude oil, it really has only $0.11 at the end of the day. BP has an operating margin of 3%, this means that it makes $0.03 (before interest and taxes) for every dollar of sales. Next, BP has a Return on Assets of 9%, it means that the company earned $0.09 for each $1 in assets. Moreover, BP has a Return on Equity of 23%, this means that BP generated $0.23 of profit for every $1 of shareholders' equity in 2011. Last but not least, BPs earnings per share is $0.0000014, which is very low. Thus, we can conclude that BP has a not ideal financial performance in 2011.

In terms of market ratios, BP has a dividend yield of 4%, which means that BP pays out only 4% in dividends each year relative to its share price. Next, BP has a dividend payout ratio of 21%. This means that BP distributed 21% of its net income as dividends in 2011 and retained the remaining 79% for other operating needs. Besides, BP has a price-earning ratio of 5.42 times, this means that the investors are willing to pay $5.42 for $1 of current earnings. Last but not least, BP has a price-to book ratio of 0.000093 times, which indicates that its stock is undervalued.

d) In conclusion, BP PLC is not an ideal company to invest as the liquidity and profitability ratio is very low. It also has a high leverage ratio, which could mean it is more risky for investors as BP has more liabilities and less equity.

References
About.com, (n.d.) The BP Mission Statement Includes "No Harm" or Damage to People or Environments [Online]. Available from: http://retailindustry.about.com/od/retailbestpractices/ig/Company-Mission-Statements/BPValues-and-Mission-Statement.htm [Accessed: 28 November 2012]. BP Alternative Energy, (n.d.) Our Businesses [Online]. Available from: http://www.bp.com/modularhome.do?categoryId=7040&contentId=7051376 [Accessed: 28 November 2012]. BP p.l.c., (n.d.) BP Worldwide [Online]. Available from: http://www.bp.com/multipleimagesection.do?categoryId=23&contentId=7017765 [Accessed: 28 November 2012]. BP p.l.c., (n.d.) Oil and gas exploration [Online]. Available from: http://www.bp.com/sectiongenericarticle.do?categoryId=9021489&contentId=7039991 [Accessed: 28 November 2012]. BP p.l.c., (n.d.) The 2011 International Conference on Low Carbon Energy and Climate Change Talk by Steve Westwell, EVP BP, at Tsinghua University on 24 March 2011 [Online]. Available from: http://www.bp.com/liveassets/bp_internet/globalbp/STAGING/global_assets/downloads/S/West well-BP-Presentation-Tsinghua-Univ-March-2011.pdf [Accessed: 28 November 2012]. BP p.l.c., (n.d.) What we do [Online]. Available from: http://www.bp.com/extendedsectiongenericarticle.do?categoryId=5&contentId=7044157 [Accessed: 28 November 2012]. Bragg, S., (n.d.) Fixed Asset Turnover Ratio [Online]. Available from: http://www.accountingtools.com/fixed-asset-turnover-ratio [Accessed: 30 November 2012]. Encyclopdia Britannica, (n.d.) BP PLC [Online]. Available from: http://www.britannica.com/EBchecked/topic/80326/BP-PLC [Accessed: 28 November 2012].

Morris Publishing Group, LLC, (2007) Methanol spills from Prudhoe pipeline [Online]. Available from: http://juneauempire.com/stories/101707/sta_20071017013.shtml [Accessed: 29 November 2012]. NBCUniversal Media LLC, (2006) BP closes some Alaska wells after allegations [Online]. Available from: http://www.msnbc.msn.com/id/13936129/ns/us_news-environment/t/bp-closessome-alaska-wells-after-allegations/#.ULs9eIOP1BA [Accessed: 29 November 2012]. NBCUniversal Media LLC, (2005) 15th body found after Texas refinery blast [Online]. Available from: http://www.msnbc.msn.com/id/7277890/ns/us_news/t/th-body-found-after-texas-refineryblast/ [Accessed: 29 November 2012]. PFC Energy, (2012) PFC Energy 50 [Online]. Available from: https://www.pfcenergy.com/~/media/Files/Public%20Files/PFC%20Energy%2050/Final_PFC_E nergy_50_2012.pdf [Accessed: 28 November 2012].