CHAPTER 5: BP ANALYSIS

5.1 Introduction

This Chapter will introduce BP Group’s key events and analyse the Group’s performance in
terms of business model, strategy, financial performance in comparison with its rivals and
related risk factors.

5.2 Group Overview

5.2.1 History

BP Group Plc is a multinational oil and gas corporation, operating in 72 countries over the
world. The company was established in the UK then expanding overseas and becoming one of
the largest global energy providers. It was ranked 23rd on the list of 26 world’s biggest Oil and Gas
Companies in 2016 by Forbes Magazine (Gensler, 2017). Some historical milestones are
mentioned as in Figure 5.27.

Figure 5.27 – BP Group's History

1901 1909 1925 1946 1971 2000

First Oil Early history World War II Post War Late Century New
Entering Millenium
Founded Expanding
Searching for Anglo- Persian across UK, Entering Russia, Releasing
oil and gas - in Oil Company in Europe and Asia-Pacific, restructuring alternative and
Persia the UK Middle East America and through low carbon
Latin mergers businesses
America

1903
1954 -
First 1914 - 2005
Changed to
Exploitation supply BP Group
British 1978 -
Company - 40m 1925 Plc
209,00 Petrolium Supplying
£60,000 barrels of Renamed
0 1970 20% of UK 2010
capital Anglo -
barrels 3.8m requiremen Deepwater
1912 - First Iranian
/ day in barrels/day t Horizon oil
shipment of
crude oil sale spill - Gulf

Source: http://www.bp.com

5.2.2 Business segmentation

BP Group’s business model includes six segments: Upstream, Downstream, Rosneft, Alternative
energy, Ventures and Global trading.

1
5.2.2.1 Upstream

In Upstream segment, BP Group operates oil and natural gas exploration, oilfield development,
extraction and production from underground. It also diversifies in midstream operations,
including resource transportation and storage, gathering and processing. Simultaneously,
marketing and trading of natural gas (liquefied, power and liquids) is classified in this segment.

To deliver Upstream activities, apart from US Lower 48 onshore 16 which is treated as a separate
business, the Group uses five different global functions and techniques (Figure 5.28).

Figure 5.28 – BP Group's Upstream functions

Technical and
operating
functions

Global Global
Reservoir Global wells
Exploration projects operations
development organization
rganizatio
on organization

Stewardship of Safe, reliable, Safe, reliable, Safe, reliable,

Renewing compliant compliant
resource compliant
resource execution of execution of
portfolio operations
wells project
s

Source: BP Annual Report 2016, p24

In 2016, BP Group operated Upstream activities over 28 countries across the world with the
production capability of 2,200 KBD, as well as developed 6 major projects in Africa and
America. With the exception in 2015 and 2016, Upstream segment represented the majority of
BP profit. (Figure 5.29).

16
US Lower 48 onshore is one of the biggest natural gas producers in America. It is entirely owned by BP but it has
run as a separate entity since 2015 with the purpose of increasing in competitiveness – a new business model of BP.

2
Figure 5.29 – BP's Upstream profitability ($ billion)

0.57
2016-0.54
2015-0.94
1.19
8.93
2014 15.20
16.66
2013 18.27

2012 22.47
19.44
26.37
2011
25.22
28.27
2010
25.07

Replacement cost (RC) profit before interest and taxUnderlying RC profit before interest and tax

Source: BP Annual Reports 2010 – 2016

5.2.2.2 Downstream
Figure 5.30 – BP’s Downstream businesses
BP Group’s Downstream segment
Fuels Lubricants Petrochemicals
is responsible for global refining
• Refineries • Manufacturing • Manufacturing
and marketing. The Group provides • Logistics • Marketing • Sales
networks • Brand • Distributions
the service of turning crude oil into • Marketing • Technology • Products used to
• Convenience • Collaboration make paints,
different usable products, retail sites with original plastic bottles,
• Fuels value equipment textiles
comprising of fuels, lubricants and chains (FVCs) manufacturing • Licensing BP's
• Sales of refined partners technologies to
petrochemicals. The details of each petroleum: third parties
business as shown in Figure 5.30. gasoline, diesel,
aviation fuel

BP’s Downstream business operates

Source: BP Annual Report 2016, p30
its brand over 70 countries, in which
Europe and America are the core markets, representing the significant amount of retail sites with
45% and 39.44%, respectively, of the total sites over the world in 2016 17. Following Upstream
business, the segment contributes a large part of BP’s profitability. (Figure 5.31).

17
Calculation from BP Annual Report 2016, p32.

3
Figure 5.31 – BP’s Downstream profitability ($ billion)

5.16
2016
5.63

2015 7.11
7.55
3.74
2014 4.44
2.92
2013 3.63
2.85
2012 6.46

2011 5.48
6.01
2010 5.55
4.88

Replacement cost (RC) profit before interest and taxUnderlying RC profit before interest and tax

Source: BP Annual Reports 2010 – 2016

5.2.2.3 Rosneft

Since 2013, BP has been possessing 19.75% shareholding in Rosneft, which allows BP benefit
from its investment in Rosneft based on equity method. Rosneft is the Russia’s largest oil providers
and the global largest publicly oil traded firm, based on the volume of hydrocarbon produced.
The Russian company operates both Upstream and Downstream activities majorly in Russia and
diversifies its portfolio over 17 countries globally.

Before 2013, BP owned 50% interest in TNK-BP 18, which was also a Russia integrated oil
company. On 21st March 2013, TNK-BP was acquired by Rosneft, then BP sold its shares in
TNK- BP to Rosneft with the price of $12.5 billion and became the second largest shareholder of
Rosneft. (Figure 5.32, 5.33).

18
Since 2003

4
Figure 5.33 – BP’s RC PBIT19 in TNK-BP Figure 5.32 – BP's RC PBIT in
($ billion) Rosneft ($ million)

2013 12.5 2016 0.59

2012 2015 1.31

3.37
2011 4.13 2014 2.10

2010 2.62 2013 2.15

Source: BP Annual Reports 2010 – 2013 Source: BP Annual Reports 2013 – 2016

5.2.2.4 Alternative energy Figure 5.34 – BP’s Renewable Energy

BP started investing in renewable

energy more than a decade ago in Biofuels Winds
the context of the increasingly
critical role of renewables.
Nowadays, this type of energy Brazil: 3 Brazil: US:14Netherlands
represents approximately 3% of bio-ethanol Export farms in 8
sites power states One farm
global energy demand, apart from
made from
10 million Capacity: Capacity:
large-scale hydropower. tonnes/yea
sugar cane
wasteto 1,452 MW 22.5MW
r
BP presently concentrates on 562GWh the local electricity
electricity
power grid
biofuel and winds in some
specific regions, as shown in Source: BP Annual Report 2016, p38
Figure 5.34.

5.2.2.5 Ventures

BP Group has been invested in private, high-growth potential technology and entrepreneurial
companies who provide leading innovations specialized in oil and gas, low carbon and
renewables categories for more than ten years. At present, the Group possesses a diversified investing
portfolio with the accumulated amount of capital is $300 million since 2006. Particularly, they
venture in 7 companies in Upstream, 12 in Downstream, 10 Funds and 5 other groups or
companies.

5
19
RC PBIT: Replacement cost profit before interest and tax

6
5.2.2.6 Global energy trading

The Group keeps its equity profile of natural gas, crude oil, feedstocks and currencies in global
trading markets with the purpose of trading for the world’s energy users and inputs for the
refined systems.

Figure 5.35 shows the profit (only in 2010) or losses of BP within alternative energy, ventures
and global trading.

Figure 5.35 – BP’s RC PBIT in other businesses and corporate ($ billion)

2016 -8.16
2015 -13.48
2014 -2.79
2013 -2.75
2012 -7.79
2011 1.33
2010 -42.37

Source: BP Annual Reports 2010 - 2016

5.2.3 Strategy

BP Group pursue Figure 5.36 – BP’s Strategy toward 2021

competitiveness in the context of
FIT FOR THE FUTURE
the world’s market fluctuation in
terms of politics, law and
regulations, prices and Shift to gas Market-led Venturing and Modernizin
and growth in low carbon g the whole
customers’ preferences. advantaged oil the across group
in the downstream multiple fronts
upstream
The Group deliver long-term
value through different categories
they invest. In respect of traditional
business, the Group plan to seek Foundations for strong performance:
Safe, reliable and efficient execution; Delivery competitive returns
new opportunities in the existing
Source: http://www.bp.com
oil and gas fields in the
upstream at

7
lower cost, whilst expanding their downstream’s market share. With regards to ecofriendly
products and modernization, they plan to invest in advanced technology projects at a larger
scale.

To achieve their objectives and after the Deepwater oil spill tragedy in the Gulf of Mexico 2010,
safety, reliability and efficiency are the Group’s priorities when performing their businesses.
They promise to minimize accidents and harmfulness to people and environment through digital
solutions, central security team and ethics monitors.

In 2014, the Group set out a new financial framework with cash cost reduction target towards
2021 in response to the sharp drop in the oil price, as shown in Table 5.7

Table 5.7 – Financial framework towards 2021

Optimize capital expenditure $15-17 billion per year

Make selective divestments $2-3 billion of divestments
Around $2 million in 2018, over $1 billion
Payment related to the Gulf of Mexico oil
spill from 2019 onwards

Maintain flexibility around gearing 20-30% band

Exceeding 10% by 2021 at oil price around
Group ROACE20
$55/barrel.
Source: www.bp.com

5.2.4 Management

As at 6th April 2017, the BP Group’s Board of Directors includes 15 members (BP AR 2016,
p52), who possess different backgrounds, majorly in oil and gas industry, technology and
engineering, and regulatory affairs.

Bob Dudley – aged 61 – is the Group chief executive since 1st October 2010. Over 30 years of
his career, he has been entirely working in oil and gas industry. He is also a non-executive
director of Rosneft of which BP is the major shareholder.

Dr. Brian Gilvary – aged 55 – was appointed as chief financial officer in January 2012. Before that,
he was a director of TNK-BP over two periods since 2003 until the sales of the TNK for Rosneft.

The details of BP’s Board of Directors are listed in Appendix 2.

20
Return on Average Capital Employed = EBIT/(Average total assets – Average Current liabilities)
8
5.2.5 Share ownerships

Share ownerships of BP Group are shown in Figure 5.37 and Table 5.8.

Figure 5.37 – BP’s regional share Table 5.8 – BP’s five biggest institutional owners
ownerships
Holder Owner Country
UK US EU and rest of the world
Black Rock, Inc 6.37% US
Capitial Research and
21% 3.36% US
Management Company
40% UBS Global Asset Management 3.35% Switzeland
State Street Global Advisors, Inc 3.18% US
39% Legal & General Investment
Management 3.12% UK

Source: www.globalresearch.ca Source: Glass Lewis Analysis

5.3 SWOT Analysis

BP Group’s SWOT Analysis is shown in Table 5.9.

Table 5.9 – SWOT Analysis of BP Group

STRENGTHS WEAKNESSES

Among 26 world’s biggest oil and gasFacing many significant environmental damage
companies with a number of globalissues around the world, especially Deepwater
subsidiaries and retail brands such as Amoco,Horizon oil spill in the Gulf of Mexico as
BP Express, ARCO. mentioned in Chapter 4, Texas oil refinery
Robust R&D capabilities, spending $400–
disaster in 2005.
$700 million per year between 2010-2016Fluctuation in production, closing many oil
(Statista, 2017a). wells which have occurred in poor economic
Diversified technological programs, includingcycles, resulting in many layoffs. For example,
advanced seismic imaging, enhanced oilBP shutdowns 5 more wells in Alaska in July
recovery in upstream segment, refining, fuels,2017 due to April petroleum leaking (Harball,
lubricants, petrochemicals, conversion in2017).
downstream

9
 that would support its competitive - Poorly handling disasters that leading to
performance. damage its reputation (Deepwater
- Strong brand name worldwide, operating Horizon).
in 72 countries.
- Vertically integrated operation, consisting
of upstream (accompanying with
midstream) and downstream.

OPPORTUNITIES THREATS
- More investment in alternative energy - Facing lawsuit and penalties with oil spills
such as wind, solar and hydrogen and and refinery explosion threatens.
starting to earn profit. - Climate change will increase the cost of
- Expanding oil export market and exploring natural resource production.
into new geographic territories. - Environmental issues and corporate social
- Implementing Merger and Acquisition responsibility put high pressure.
(M&A) activities. - High competition from other companies
- Repositioning the BP brand with such as Royal Dutch Shell, Exxon,
innovation and environmental Chevron.
responsibility. - Global, regional and local regulatory
changes will impact the way company do
its business.

5.4 Financial Analysis

5.4.1 Capital structure

10
Figure 5.38 – Debt ratio (%) BP remained its debt ratios between 15 –
% BP Royal Dutch Shell
25% with an increasing trend in the period.
EU Average US Average It seems a plan of the Group when profit
31
declined due to the effect of global oil and
22.55
18.74
20.43 gas plummet. BP Group exhibited a lower
21
16.68 15.12 16.30 15.82
leverage level than EU Average yet higher
11 than US Average and Shell (Figure 5.38).
Generally, the Group’s debt ratios raise no
1
2010 2011 2012 2013 2014 2015 2016 significant concern, the main elements of
Source: Calculation from debt were long-term borrowings ($58,300
Datastream (Debt ratio = Total
million in 2016 and $53,168 million in
debt/Total assets)
2015) and issued commercial papers ($971 million in 2016 and $869 million in 2015) (BP AR
2016, p163).

5.4.2 Operating performance

5.4.2.1 Operating profit margin

Figure 5.39 – Operating profit margin (%)

BP Royal Dutch Shell

The BP’s operating profit margin
%
EU Average US Average
30 decreased by 7.62% in the period (Figure
25 5.39). It is explained by the sharp decline
20 in oil and gas price leading to the
15 plummet in revenue and operating
9.2
8.22
10 4.99 income. Shell performed better than BP
3.45 2.78 2.37
5 1.58
due to its most revenue coming from Asia
0
2010 2011 2012 2013 2014 2015 2016 with high demand in the period (Chapter
-5
Source: Thomson Reuters Datastream 3, part 3.2.1). Meanwhile, EU exhibited
(Operating profit margin = Operating higher ratios in the first half then lower
income/Net sale/revenue)
thereafter than US due to the effect of
the gap
between oil and gas benchmarks as well as the price drop (as mentioned in Chapter 2, part 2.2.2).
Generally, the Group’s competitiveness was lower than its peers.

11
5.4.2.2 Return on equity (ROE)

Figure 5.40 – Return on Equity (%)

BP Royal Dutch Shell Negative ROE of BP in 2010 is the result

% EU Average US Average
30 of 2010 oil spill disaster (as mentioned in
24.08 Chapter 4) while in 2015 is due to large
25
19.83
20 operating expense and sale reduction. The
15 10.06 Group performed better in comparison with
10 the EU Average but worse than the US
3.07
5 0.12
Average which exposed to shale oil and gas
0 2010 2011 2012 2013 2014 2015 2016 production in 2015-2016. Clearly, the
-5 -3.88-6.19
returns to shareholder of the company
-10
Source: Thomson Reuters Datastream declined and less than its main rivals in the
ROE = (Net income – Bottom line
(depreciation, taxes, interest after taxes) – period. (Figure 5.40).
Preference Requirement)/ (Average of last year
and current year’s common equity)

5.4.2.3 Return on capital employed (ROCE)

Figure 5.41 – Return on Capital Employed (%)

% BP Royal Dutch Shell The Group’s ROCE decreased

EU Average US Average
30 significantly by 20.04% in the period. It
25 21.83 exhibited the similar trend in Royal
20.17
20 Dutch Shell, EU Average and US
Average. The sharp drop of oil and gas
15 11.67

10 8.35
price is the main reason for declining in
5.87
operating income for the whole industry
5 3.54
1.79
in the period. The ratios assessed the BP
0
2010 2011 2012 2013 2014 2015 2016 Group’s performance, as the common
Source: Calculation from Datastream tendency of the industry, the company
ROCE = Operating income/(Total asset – was not using
Current liabilities)

12
capital efficiently to generate profit from shareholders’ equity. (Figure 5.41).

5.4.2.4 Total asset usage

Figure 5.42 – Total asset usage (times)

The common downward trend of total asset
BP Royal Dutch Shell usage is mainly driven by the decrease in
EU Average US Average
2.5 revenue (Chapter 2 Summary), imposing

2
less efficiency of using asset in operation
for the whole industry. Both BP and Shell
1.5
1.31
1.19 exhibited modest ratios at around 1 times,
1.24 1.28
1 1.11 0.83 performing better than EU average yet
0.65
0.5 worse than US Average (Figure 5.42).

0
BP’s performance is expected to improve
2010 2011 2012 2013 2014 2015 2016 in the next period with faster growth in
Source: Calculation from Datastream
US market where a third of BP’s revenue
(Total asset usage = Revenue/Total
asset) comes from.

5.4.3 Financial strength measurement

5.4.3.1 Liquidity

Figure 5.43 – Current ratios (times) Figure 5.44 – Quick ratios (times)
BP Royal Dutch Shell BP Royal Dutch Shell
EU Average US Average EU Average US Average
2 1.5

1.8 1.3

1.6 1.1 1.06 0.99

1.4 1.37 0.9 0.91

1.33 1.29 0.83
0.82
1.2 1.16 0.7 0.75 0.74
1.19
1.08 1.06 0.5
1
2010 2011 2012 2013 2014 2015 2016
2010 2011 2012 2013 2014 2015 2016

Source: Thomson Reuters Datastream

Source: Thomson Reuters
(Current ratio = Current
Datastream (Quick ratio = (Current
asset/Current liabilities)
asset – Inventories)/Current
liabilities

BP recorded a small deficiency in liquid asset when quick ratios were slightly lower than 1. Also,
BP did not perform as good as its rivals (Figure 5.43, 5.44), however, exhibiting an upward trend
13
as Shell and EU Average. The year 2010 and 2011 observed the lowest values due to large
amount of the oil spill provision causing high current liabilities (Chapter 4, Figure 4.25).
Thereafter, the Group as well as EU market might tighten trade payables more than the decrease
in current asset to mitigate the effect of unfavorable oil and gas price in the second half period
(fluctuation of inventories and cash and cash equivalents). Whilst, US peers seem to remain more
stable at around
1.4 and 1 for current and quick ratios, respectively, thanks to rapid increase in production
(Chapter 3, part 3.2.2) which remained stability of inventories.

5.4.3.2 Efficiency

Figure 5.45 – Inventories turnover (days)

Day BP Royal Dutch Shell EU Average US Average The BP’s inventories turnover reduced to
70 29 days in 2014 (Figure 5.45) due to the
60 decline by a third in inventories than the
50 previous year. Thereafter, the ratio
36 38
40 32 31 increased to 38 days due to the significant
30 29 31
30
decrease in purchasing cost. Shell and EU
20
market observed the same trend with
10
higher ratios when production capacity
0
2010 2011 2012 2013 2014 2015 2016 seems to level off (Figure 3.12, 3.13)
Source: Thomson Reuters Datastream
(Inventories turnover = Average of last year and under oil and gas price increase.
current year’s inventories/Cost of goods sold * Meanwhile, US Average recorded an
365)
increase due to remaining inventory level
through the expansion of production and cost-cutting through shale revolution (Chapter 2, part 2.3).

14
Figure 5.46 – Debtor turnover (days) Figure 5.47 – Creditor turnover (days)
Day BP Royal Dutch Shell Day BP Royal Dutch Shell
EU Average US Average EU Average US Average
80 70
61
60
60 54 53 50
47 41
45 43 43 38
41 40 36
32 31 32
40
30
20 20

0 10
0
2010 2011 2012 2013 2014 2015 2016 2010 2011 2012 2013 2014 2015 2016
Source: Calculation from Datastream Source: Calculation from Datastream
(Debtor turnover = Receivables/Credit (Creditor turnover = Trade payables/Cost of
sales sales * 365)
* 365)

BP Group as well as Shell and EU market remained long debtor days at above 40 days while US
market recorded a shorter period (Figure 5.46). Conversely, BP and EU market exhibited a
shorter credit obtained than US Average (Figure 5.47). The former reflects the less efficient to
manage credit issued of BP in particular and EU in general than US market. The latter implies
US Average kept more working capital and attained cost reduction which benefited its operation,
especially in 2015-2016 when US oil and gas shale production grew rapidly.

5.4.4 Cash flow Analysis

5.4.4.1 Operating cash flow

Figure 5.48 – Operating cash inflow ($

billion)
35 The operating cash inflow was
32.75
significantly adjusted for depreciation
30
and amortization (varying between $11 to
25
22.22
$15 billion/year) from its profit or loss.
21.10
20 20.48 19.13 The year 2014 witnessed a soaring due to

15 huge gain on sale of businesses and fixed

13.62
asset and significant adjustment for
1010.69
2010 2011 2012 2013 2014 2015 2016 provision. Whilst, the year 2016 observed
the lowest amount in the period,
Source: BP Annual Reports 2010 - 2016
explained by loss from operating
15
activities of
$2.3 billion

16
and increasing in inventories of $3.7 billion (Figure 5.48). In brief, BP continually generated
positive net operating cash flow and is targeting cash cost reduction which might significantly
influence the operating cash flow in the future.

5.4.4.2 Investing cash flow

Figure 5.49 – Investing cash outflow ($ billion)

The year 2011 witnessed the highest

30
26.75 amount of investing cash outflow ($26.75
25
billion) due to huge cost of acquisition
20 19.57
17.30 ($10.9 billion, BP AR 2011, p181).
15 Besides, the cash outflow between 2014
13.08 14.75
10 and 2016 exhibited the higher values than
7.86
the other years (except for 2011), as a
5
3.96
result of significantly lower gain of
0
2010 2011 2012 2013 2014 2015 2016 disposal of fixed assets (Figure 5.49).
Source: BP Annual Reports 2010 - 2016 Although capital expenditure represented
the majority of the investing cash
outflow,
the Group reduced capital expenditure to $16.7 billion in 2016, as its target towards 2021 (Part
5.2.3, Table 5.7).

5.4.4.3 Financing cash flow

Figure 5.50 – Financing cash flow ($ billion)

2 1.98 Cash inflow from long-term financing

0.84 0.47 was the most significant in financing cash
0
2010 2011 2012 2013 2014 2015 2016 flow of BP Group. The positive cash flow
-2 -2.01
in 2010 could be explained by a
-4
-4.54 remarkable reduction in dividend
-5.27
-6
payment (only $2.6 billion) since the oil
-8 spill event whereas the same figure in
-10 -10.40 2011 was due to an abnormal increase in
-12 short-term debt ($2.27 billion). From
Source: BP Annual Reports 2010 - 2016 2012 to 2015, the net financing cash flow

17
turned to
negative
values, mainly
resulting from

18
repurchasing of shares (the year 2013 witnessed the highest value of share repurchasing of $5.4
million, BP AR 2013, p125). In 2016, the financing cash flow turned back to positive value,
mainly coming from increase in non-controlling interest (Figure 5.50). Generally, the financing
cash flow exhibited a fluctuation in the period, depending on the company’s policy of dividend
payment and share issuing.

5.4.5 Statement of Financial Position

Figure 5.51 – Total and Net asset growth

% The net asset growth is negative in 2010

20
due to the heavy impact of the oil spill
15
10 whereas the total asset grew at 18.36%,
5 explained by large provision for the event
0 (Chapter 4, Figure 4.25). The period 2011-
2010 2011 2012 2013 2014 2015 2016
-5
2013 witnessed better performance of BP
-10
than 2010 when enhancing value to
-15
Source: Calculation from Datastream
Total asset growth Net Asset growth shareholders (positive total and net asset
growth, operating profit margin, ROE,
ROCE and total asset usage also recorded the highest values as mentioned above). However,
both total asset and net asset exhibited a depreciation by 8% and 13% between 2014-2015,
respectively, as a result of oil and gas price plunge affecting the whole industry. In 2016, the
ratios turned to increase, thanks to a combination of BP’s targeting to cost reduction and more
favorable oil and gas price perspective.

5.4.6 Stock market standing

The dividend per share was paid at 40 cents in 2016, which remained as in 2015 ((BP AR 2016,
p148) and almost three times than that in 2010 which were affected by the Gulf of Mexico (BP
AR 2010, p180), yet decreased by 30% when compared with the figure before the event
happened.

Diluted earnings per share were significantly high in 2011, 2012, 2013 at 133.35, 57.89 and
123.87 cents, respectively (BP AR 2013, p158), yet exhibited the negative values in 2010 and
2015 due to huge losses. The earnings per share recorded in 2016 at 0.60 cents with the small
regain in profit on the year.

19
BP’s price on LSE and NYSE as at 30th July 2017 observed at 448.15p per ordinary share and
35.26 USD per ADS, respectively. These prices cannot return to above 500p and 50 USD before
the event of oil spill in 2010, indicating the heavy impact of the event on the company’s value
and reputation (As mentioned in Chapter 4).

5.5 Risk Factor Measurement

Potential risks faced by BP Group are classified into internal and external factors. Internal factors
connect directly with the Group’s operation function and labor management which can be
minimized by specific and combined actions. Whilst, external factors are in relation to market,
industry, environment and regulation which are critically important to understand in order to be
flexible with such changes.

Internal factors of the Group are clarified as in Table 5.10.

Table 5.10 – Internal risk factors

Risk factors Assessment Mitigation process

Operational risks
Safety: Working and personal High: The oil and gas Designing proper facilities and
safety can be intimidated by working environment robust engineering principles.
marine incidents, technical always contains some latent Issuing rigorous operating and
failure, human errors. Health hazards. In 2016, BP maintenance practices.
effects may arise in accidents reported two deaths and Following strictly safety and
or working with chemicals. It one injuries in Oman labor law and regulations.
also leads to legal actions or pipeline system (BP AR
penalties for injuries, loss of 2016, p44).
life and environmental
damages.
Drilling and production: The High: High level of Minimizing the postponement
physical characteristics of oil uncertainty and challenging by human failures and technical
drilling and production environment and depending errors.
contains often interruption or on operating regions. Applicable operating function
cancellation due to for specific area.
unexpected
drilling conditions, extreme

20
weather, irregularities or
failures during operation.
Digital solutions and Moderate: It is under Increasing security stance by
cybersecurity: Intentional or controlled but can happen using combination of different
unintentional attacks, breaches anytime. solutions.
of infrastructure or negligence Employing high-skilled and
could result in losses and experienced technical staff and
misuse of information, training.
people’s injury, disruption
and damage of operation and
reputation.
Product quality: Failure to Low: There has been no Ensuring proper process of
meet product quality criteria significant issues in relation product quality control.
can harm customers, the to BP’s product quality.
Group’s reputation, rising
legal obligations and affecting
financial performance.
Strategic risks
Insurance: BP only purchases High: a high likelihood of Assessment of potential risk
insurance if it is legally large loss when uninsured level for specific operating
required, facing some risks of events happen. activities to whether or not
unsecured losses and negative taking partial or entire
impact on cash flow and insurance.
financial position.
Liquidity and financial Moderate but increase: Following financial framework
capacity: Insufficient Lower operating profit and acceptable terms.
liquidity, overdue receivables, margin with some negative Reducing capital expenditure
payables and debts, values, lower ROE, ROCE, and increasing asset disposal to
overwhelmed pension higher debt and credit improve liquidity.
liabilities will lead to financial turnover (Chapter 5, part
losses and be unable to meet 5.4).
obligations, credit
rating downgrade, which

21
 impacts on acquirement of
external financing.
Project investments: Poor Moderate: Investment in Analysing geographical areas
investment choices or failure Rosneft keep making accompanying with proper
to develop high potential profit, with an exception of project management (strategy,
projects will affect negatively 2015 but with a small loss planned objectives, process,
in return on investment. (BP AR 2016, p153, acceptance criteria, an agreed
154). timescale and budget).
Alternative energy and
ventures are now remaining
in losses (Figure 5.35).
Crisis management: Inability Moderate: The Group Importance of management
to control and resolve possess an extensively team and the Group’s
unexpected events will cause experienced executive team governance to respond
operating disruption as well as and a head of risk appropriately in a timely
harm to business continuity. management. However, manner.
BP’s response to the oil
spill in the Gulf of Mexico
was supposed to be clumsy
and make the situation
worse
(Chapter 4, part 4.4.3).
Access to oil and gas Low: The reserve to Improving drilling techniques
reserves: Inability to access in production ratio is kept in existing wells and seeking
a timely manner will reduce higher 4 times and opportunities to new resources
refinery and production developing seismic through technology obtained
capacity and financial technology to help detect from investment in ventures or
performance. potential resources. The associates.
proven reserves is
remaining at medium-term
at current production
capacity. 21

21
Calculation from BP Annual Reports 2010-2016
22
 Control risks
Ethical misconduct and non- Low: There is no previous Complying ethic codes and
compliance: Bribery, fraud, experience of BP relating to DoJ22 and EPA23 settlements.
corruption, trade restrictions those problems. However,
and other sanctions are risk management team has
potential risks, resulting in responsibility to detect any
reputation’s damage, misconduct or non-
litigation and penalties. compliance during the
operation.
Treasury and trading Moderate: The Group use a Complying with all regulatory
monitoring: Failure to variety of financial requirements.
process and monitor a huge derivatives instrument to
number of complex hedge the risk of oil, gas
transactions in commodities and power price and
and currency market could currency fluctuation, cash
lead to huge loss, business flow hedges, fair value
interruption. hedges, including futures,
options, swaps, forward
sale, forward purchases
contracts. (BP AR 2016,
p171).
Reporting: failure to Low: In accordance with Scrutiny with external and
accurately report data could accepted accounting and internal reporting, estimates,
cause regulatory action and reporting law and provisions and reserves.
legal liability. regulations. Relying on the integrity of
systems and staff.

External factors of BP Group are defined as in Table 5.11.

22
US Department of Practice
23
The US Environmental Protection Agency

23
Table 5.11 – External risk factors

Risk factors Degree of exposure Mitigation process

Climate change risks
Global warming and High: According to IIGCC24, Driving to lower carbon
greenhouse gas emissions 70% of energy related- future.
raise concern of public about activities contributes to GHG Factoring carbon price into
environment issues. Law and (Greenhouse Gas) emissions own investment decisions.
regulations is now changing while 60% of such emissions Supplying more natural gas
to mitigate the problems, is caused by oil and gas which produces half GHG
including higher carbon price. industry emission of fossil fuels.
Investors will reduce their (Keystoneenergytools, 2015). Providing increasingly
portfolio in energy Particularly, BP’s revenues renewable energy, including
companies. It will reduce mostly come from carbon biofuel and wind.
BP’s revenue and profit emission related activities Increasing efficiency in
growth and increase cost, (through Upstream and operation.
impact on assets and downstream segments). Investing in start-up and
opportunities. innovation projects.
Supporting customers to
reduce their carbon footprint
by high-performance
products.
Commercial risks
Prices and markets: Oil, gas High: This is systematic risks Using underlying
and product prices can be that every oil and gas replacement cost profit or
volatile due to supply and company faces with. BP’s loss along as an additional
demand, political and group operates majorly in measurement to the profit or
technology change, economic Upstream and Downstream, loss status of the Group.
conditions and OPEC’s therefore, they are Using different kinds of
control. It can impact significantly affected by price financial derivative
immediately on revenue and volatility and market (As instruments to hedge market
costs or assets reassessment in mentioned in Chapter 2, part volatility.

24
Institutional Investors Group on Climate Change

24
a long-term period. Exchange 2.2.2). The Group also open
rate fluctuations can cause over 72 countries, hence its
currency exposure which lead exposure to exchange rate
to significant change in profit. risks supposes to be
remarkable.
Geopolitical: Political High: BP Group spreads its Be more flexible, changing
instability, such as strikes, operating activities in objectives to fit changes in
terrorism, insurrection, could different regions. Therefore, political conditions. For
make change in operating and political changes in specific example, boosting production
regulatory environment, area could change adversely to in US region under recent
taxation, trading and BP’s business and objectives favorable oil lifting ban could
investments in different (As mentioned in Chapter 3, increase in revenue in the
regions. It can result in part 3.3.1). future.
production decline, liability
increases, limitation of
seeking new opportunities
and
recoverability of assets.
Competition: Inability to High: BP Group are in a high Remaining efficiency,
control over costs and competitive matured market pursuing innovation and
margins, high quality of with a variety of oil and gas retaining skilled and
portfolio could impede its giants, especially in US experienced workforce in the
competitiveness with rivals market. (As mentioned in field of science, technology,
and fail to protect intellectual Chapter 3, part 3.4). engineering and mathematics.
property.
Joint arrangement and Low: BP Group has not Specifying appropriate rules
contractors: Limited control recorded any significant in contractual agreements with
over the standards, operations events related to those issues, other parties.
and compliance of partners, however, it should be
contractors and sub- concerned.
contractors might affect the
product quality and
production process.

25
 Regulatory risks
Regulation: Any changes in High: Following the Gulf of Complying stringently with
regulatory and legislative Mexico oil spill and other environmental laws and
environment could lead to cases in relation to regulations.
increase in the cost of environmental effects, oil and Pursuing safety, reliability and
compliance, impact on gas industry are subjected to efficiency.
provisions and limit access to pay higher fines of alleged
new opportunities. breaches of safety and
environmental regulations and
follow specific related
controls.
US government settlements: Moderate: In November 2012, Pursuing safety and reliability
Failure to meet with the terms US government and related in operations, ethics and
of settlements related to Gulf parties announced certain compliance, and corporate
of Mexico oil spill required by charges for the oil spill in the governance requirements.
US government and DoJ may Gulf of Mexico. The Group
lead to further penalties and records its compliance
liabilities, debarment of through annual fined
certain BP entities. payments, appeared in annual
financial statements.

5.6 Conclusion

BP performed better in the first half of the period with higher operating profit margin, ROCE,
more efficient total asset usage and high total asset growth under a favorable market condition
with high level of oil and gas price. In the second half, the Group seems to be more difficult in
making revenue and profit with some losses. The key driver for this problem is the plunge of oil
and gas globally which affect the whole industry. Besides, the rearrangement of oil and gas
producers and exporters towards US increases both opportunities and threats for the Group. BP
might boost its production in US region which is its principal market for revenue and reserves,
yet facing with intense competitiveness among oil and gas companies. The financial analysis
shows that BP earned some competitiveness in EU market by profit, efficient asset usage,
inventories and debtor turnover but overall less competitive than oil and gas giants in US
market. More importantly, BP’s
26
performance continued to be affected by 2010 Gulf of Mexico oil spill. The huge cost for that
events reduced BP’s return to shareholders, less dividend paid and delay net asset growth which
is supposed to be continue in the next five years. The projected increase in oil and gas price in
future prospect and clear financial framework might be the bright spots for the Group to operate
more efficiently. However, operating related risks might delay its development plan.

27
CHAPTER 6: BP VALUATION

6.1 Introduction

This chapter will give the reasonable valuation of BP Group by using dividend discounted
(DDM), free cash flow to equity (FCFE) and economics value added to equity (EVAE) models. The
chapter also provide sensitivity analysis in terms of different models when sorts of factors could
impact and reverse the result.

6.2 Valuation model

6.2.1 Key assumptions

Key assumptions are clarified as in Table 6.12.

Table 6.12 – Key assumptions for valuation

There are some favorable conditions for BP’s operation in the next five years:
- Forecasted increase in global GDP to 3.7% by 2019 (Chapter 2, Table 2.2)
which would stimulate energy demand.
- Modest increase in oil and gas price ($55/barrels oil and $5/mmBtu natural
gas target in 2018 – Chapter 2, Figure 2.3, 2.4) will accelerate BP’s
production and revenue at modest level.
- Global oil and gas demand continues to increase (Chapter 3, part 3.2.1).
This tendency would stimulate oil and gas production to provide enough
for demand in the future (Chapter 3, part 3.2.3).
Growth - US oil shale production continues to develop in this region (Chapter 2, part
rate
2.3, Chapter 3, part 3.2.2), where BP can gain more revenue and profit
4%/year
through this regional operation.
- UK oil based companies enhance its competitiveness (Chapter 2, part
2.2.3), thus production in this region, including BP, is forecasted to increase
slightly. However, since the oil spill 2010, BP continues to pay for litigation
and claims (Figure 4.26), plan to pay $2 million per year by 2018 and $1
thereafter (Table
5.7), which definitely reduces the company profit and mitigate its growth rate.
In response to fluctuation of oil and gas price, BP’s strategy is targeting cost
reduction ($15-17 billion capital expenditure/year) and efficiency, focusing on
reliability and sustainability which will increase its potential growth in

28
 comparison with the last period. Therefore, it is assumed the average annual
growth rate would be at moderate level of 4% with gradual increase in sale (which
exhibited a reduction between 2014-2016 by the impact of oil and gas drop).
The NOPAT margin fluctuated in the last seven-year period, yet at yearly average
of approximately 3%. Therefore, it is assumed that the NOPAT margin should
NOPAT25
be at a slightly higher value of 4.2%, reflecting the favourable oil and gas price
4.2%/year
(as mentioned in growth rate) and cost reduction complying with the company
commitment and US new technology of oil and gas shale production.
Interest Interest rate after tax depends on tax rate and amount of interest capitalized in
rate after the year. Tax rate exhibits a marginal reduction to 20% while the interest
tax capitalized remains around $200 million leading to a slight increase in interest
2.5%/year rate after tax than the last seven years of 2.3%.
After a hard period between 2014-2015, the net asset growth turned to increase
by 2016 (Chapter 5, part 5.4.5). It is forecasted to increase in the next period,
Working following the increase in revenue and total asset. As a part of net asset, net
capital/ operating working capital is estimated to increase moderately through
sales inventories increase (result of production growth) and reduction of current
ratio provision (majorly coming from the Gulf of Mexico oil spill, as mentioned in
10%/year Chapter 4, part 4.4.4). In the last seven-year period, the working capital/ratio is
calculated at 8.7% on average, then forecasted to increase by 1.3%, reaching
10% average.
The company possesses a significant amount of long-term assets. The net long-
term assets/sale is low at 50% between 2010-2015, due to large long-term
provision for 2010 oil spill (Chapter 4, part 4.4.4). However, this ratio is

Net long- increase to 74% in 2016, explained by reduction in long-term provision for the

term event (Chapter 4, Figure 4.25). Since 2016, BP plan to pay $2 billion for the events

assets/sales until 2018 then $1 billion thereafter (Chapter 5, Table 5.7), and provision for

ratio any adjustment by US government settlement (as mentioned in Chapter 5, Table

70%/year 5.12, regulatory risks) which will lead to less long-term provision than the last
period. Hence, net long-term asset is forecasted to increase but lower than the
increase in sale, the ratio is estimated at 70% of sales which is slightly lower
than that in 2016.

25
Net operating profit after tax margin

29
 Total The company aims to manage the net debt ratio (Total debt less cash, cash
debt/ Net equivalent and fair value asset/liability of hedges related to finance debt) within
capital 20-30% (Chapter 5, Table 5.7, gearing band and BP AR 2016, p164). Based on
ratio the net debt ratio and total debt ratio of 26.8% and 37.56%, respectively, in
37%/year 2016, the total debt/net capital ratio is forecasted at 37% on yearly average.

Cost of Risk free rate: 1.217% (UK 10-year government bond yield).
equity Beta: 1.2228 (Financial Times – June 29th 2017)
7.57% Risk premium: 5.2% (Fernandez and Baonza 2010, p4, on average by analysts).
(CAPM)
The company plan to keep dividend at 40 pence/share (BP AR 2016, p148) which
Dividen
accounted for the effect of 2010 oil spill, therefore the dividend payment should
d
keep constantly.
growth
0%/year

Based on the key assumptions, forecasts of Income Statement and Balance Sheet are given in Table
6.13 and 6.14.

Table 6.13 – Summary of Income Statement

$m26 2016 2017 2018 2019 2020 2021
Sales 186,606.00 194,070.24 201,833.05 209,906.37 218,302.63 227,034.73
NOPAT 1,462.57 8,150.95 8,476.99 8,816.07 9,168.71 9,535.46
Net IAT 27
1,290.57 1,457.50 1,436.12 1,493.56 1,553.31 1,615.44
NI28 172.00 6,693.45 7,040.87 7,322.50 7,615.40 7,920.02
Dividends 4,611 4,750 4,750 4,750 4,750 4,750

Table 6.14 – Summary of Balance Sheet

$m 2016 2017 2018 2019 2020 2021
Net operating
16,093.00 19,407.02 20,183.30 20,990.64 21,830.26 22,703.47
working capital
Net long-term
139,050.00 135,849.17 141,283.13 146,934.46 152,811.84 158,924.31
assets

26
Million
27
Net interest after tax
30
28
Net Income

31
 Total net assets 155,143.00 155,256.19 161,466.44 167,925.10 174,642.10 181,627.79
Debt 58,300.00 57,444.79 59,742.58 62,132.29 64,617.58 67,202.28
Shareholder
96,843.00 97,811.40 101,723.86 105,792.81 110,024.52 114,425.50
equity
Total net capital 155,143.00 155,256.19 161,466.44 167,925.10 174,642.10 181,627.79
ROA 29
1% 5.25% 5.46% 5.46% 5.46% 5.46%

The ROA in 2016 was only at 1%, however the average ROA for the last seven-year period at
5.72% which reflects better the financial performance of the company.

6.2.2 Dividend discounted model (DDM)

It is assumed that the dividend payment in the next period would be $4,750 million, which is
slightly higher than in 2016 due to the effect of number of share issued thereafter. Under the
assumption of constant dividend payment (shown in Table 6.12), dividend model gives the BP’s
valuation at 589.17 cents as in Table 6.15.

Table 6.15 – Dividend discounted model

$m 2017 2018 2019 2020 2021 202230 2023
Dividend
4,750 4,750 4,750 4,750 4,750 4,750 4,750
Payment
Terminal
0.00%
growth
Terminal
62747.69
value
Discounted
0.930 0.864 0.803 0.747 0.694 0.645
factor
PV 4,415.73 4,104.98 3,816.10 3,547.55 3,297.90 97,217.57
Value of equity 116,399.84
No. share (m) 19,756.5731
Value per share
589.17
(cent)

29
Return on net asset, is calculated as NOPAT / Net Asset
30
Terminal year
31
Thomson Reuters on 29th June 2017

32
6.2.3 Equity valuation model (EVM)

FCFE and EVAE are used to estimate BP’s valuation. Based on key assumption given in Table
6.12, both FCFE and EVAE give the similar result for BP’s valuation of 589.46 cents, which is
relatively the same as dividend discounted model (589.17 cents). FCFE and EVAE are shown in
Table 6.16 and 6.17, respectively.

Table 6.16 – Free Cash Flow to Equity Valuation Model

$m 2017 2018 2019 2020 2021 2022
Net income 6,693.45 7,040.87 7,322.50 7,615.40 7,920.02 9,762.49
Change in net OP
3,314.02 776.28 807.33 839.63 873.21 908.14
capital32
Change in net
-3,200.83 5,433.97 5,651.33 5,877.38 6,112.47 6,356.97
long-term assets

Change in net Growth

-855.21 2,297.79 2,389.70 2,485.29 2,584.70 2,688.09
debt in FCF
FCFE 5,725.05 3,128.41 3,253.55 3,383.69 3,519.04 5,185.47 4.0%
Terminal
145,251.35
value
Discount factor 0.93 0.86 0.80 0.75 0.69 0.69
PV of FCFE 5,322.16 2,703.60 2,613.87 2,527.12 2,443.25 100,847.32
Value of equity 116,457.31
No. share (m) 19,756.57
Value per share
589.46
(cents)

Table 6.17 – Economics Value Added to Equity Model

$m 2017 2018 2019 2020 2021 2022
BVE33 (start of
96,843.00 97,811.40 101,723.86 105,792.81 110,024.52 114,425.50
year)
NI 6,693.45 7,040.87 7,322.50 7,615.40 7,920.02 9,762.49
Charge for Growth
7,331.02 7,404.32 7,700.50 8,008.52 8,328.86 8,662.01
equity in AE

32
Net operating working capital
33
Book value of equity

33
 Abnormal
-637.57 -363.45 -377.99 -393.11 -408.84 1,100.48 4.0%
Earnings (AE)
Terminal
30,825.85
value
Discount factor 0.93 0.86 0.80 0.75 0.69 0.69
PV of AE -592.70 -314.10 -303.68 -293.60 -283.85 21,402.24
Value of AE 19,614.31
BVE at start 96,843.00
Value of equity 116,457.31
No. share (m) 19,756.57

Value per share

589.46
(cents)

When compared the values with the BP’s price in USD (the BP’s price on NYSE as at 30 th July
2017 was at 35.26 USD/ADS34, then the price per ordinary share was at 586 cents), the premium
on the price by DDM and EVM models records at 0.54% and 0.59%, respectively, indicating the
correct pricing of the company by the market.

6.3 Sensitivity analysis

6.3.1 Exchange rate

As at 30th July 2017, the BP’s price on LSE was at 448.15p 35 and GBP/USD was at 1.31. Therefore,
DDM and EVM models, which give the BP price of 589.17 and 589.46 cents, respectively,
would give the BP price of 449.75p and 449.97p, respectively. The result shows a premium on
the current market price of merely 0.36% and 0.41%, respectively, or the market is now correctly
pricing the BP’s value, giving the recommendation of “HOLD”.

Table 6.18 gives the analysis of GBP/USD rate. Since 2017, the exchange rate is highly likely
ranging from 1.25 to 1.35. Therefore, the highest price and lowest price are forecasted at 471.57p
and 436.42p, respectively, making up the maximum premium of 5.23% and the maximum
discount of 2.62%, hence, the “HOLD” indication is remaining with the forecasted price ranging
between 436.42p – 471.57p.

34
Financial Times
35
Financial Times

34
Table 6.18 – GBP/USD sensitivity Analysis
GBP/USD 1.23 1.25 1.27 1.29 1.31 1.33 1.35 1.37 1.39
DDM (p) 479.00 471.34 463.91 456.72 449.75 442.98 436.42 430.05 423.86
Premium/
6.88% 5.17% 3.52% 1.91% 0.36% -1.15% -2.62% -4.04% -5.42%
Discount
EVM (p) 479.24 471.57 464.14 456.95 449.97 443.20 436.64 430.26 424.07
Premium/
6.94% 5.23% 3.57% 1.96% 0.41% -1.10% -2.57% -3.99% -5.37%
Discount

However, there are some factors could change the result in either ways. The more uncertainty of
UK economy and favorability of US economy might result in the weakening in GBP in relation
to USD, which indicate the GBP/USD should be lower, representing a higher premium on
market price or the company is slightly undervaluated and vice versa.

6.3.2 Cost of equity

Table 6.19 – Factors influencing oil beta

Factors Relation The BP’s cost of equity is estimated at 7.57%,
10-year treasury bond rate Positive however, there are two related factors that
Debt (Leverage) Positive might change the result. In terms of the more
Financial risk management Negative uncertain market, the risk premium should be
higher. In respect to beta, which indicates the
Source: Talbot et al. 2013
tendency of the Group’s stock moving with the
market, could
be higher or lower than 1.22, as given in Table 6.19.

Table 6.20 – Cost of equity analysis

Risk premium Table 6.20 gives the cost of equity sensitivity

5.20% 5.67% 6.14% analysis in which shows the highest and lowest
0.9 5.90% 6.32% 6.75% cost of equity that could be. The higher the cost
1.1 6.92% 7.44% 7.95% of equity could be, the lower value of the
Beta

1.22 7.57% 8.15% 8.72%

company should be with keeping other factors
1.26 7.77% 8.36% 8.96%
constants and vice versa.

35
6.3.3 Dividend model

Table 6.21 – Dividend growth analysis (cents)

Dividend growth rate Premium/Discount

0% 1% 2% 3% 0% 1% 2% 3%
5.90% 676.34 793.64 971.10 1270.94 15.42% 35.43% 65.72% 116.88%
6.32% 649.88 753.17 904.28 1146.41 10.90% 28.54% 54.31% 95.63%
6.75% 626.33 718.00 848.27 1048.01 6.88% 22.53% 44.76% 78.84%
6.92% 617.87 705.55 828.87 1015.12 5.44% 20.40% 41.45% 73.23%
7.44% 594.48 671.67 777.23 930.00 1.45% 14.62% 32.63% 58.70%
7.57% 589.17 664.07 765.86 912.20 0.54% 13.32% 30.69% 55.67%
Cost of
equity

7.77% 581.36 652.97 749.40 886.26 -0.79% 11.43% 27.88% 51.24%

7.95% 574.70 643.56 735.56 864.74 -1.93% 9.82% 25.52% 47.57%
8.15% 567.66 633.68 721.17 842.64 -3.13% 8.14% 23.07% 43.80%
8.36% 560.67 623.92 707.07 821.25 -4.32% 6.47% 20.66% 40.15%
8.72% 549.53 608.51 685.04 788.33 -6.22% 3.84% 16.90% 34.53%
8.96% 542.65 599.06 671.68 768.67 -7.40% 2.23% 14.62% 31.17%

Based on the sensitivity analysis of cost of equity (Table 6.20), the dividend growth analysis is
given as in Table 6.21. Under a significantly favorable condition, for example, oil and gas prices
significantly increase to $90/barrel and $8/mmBtu, respectively, as in 2012-2013, which could
increase the company’s revenue, profit and production, the company might increase the dividend
payment per share, then leading to the dividend growth rate should be rather than 0%, is
supposed to be highly likely at 1-2%. Therefore, it is an indication of strengthening in the
Group’s value, BP would be underpriced by 13.32%-30.69%. However, under disadvantageous
circumstances that the cost of equity might rise, the Group’s value would be declined (negative
values in 0% columns). In terms of arising regulatory risks in relation to the Gulf of Mexico oil
spill (Chapter 5, Table 5.11), the company would delay dividend payment, assumed by a quarter
($3,563 million/year), which would reduce the value to 441.88p36, representing a discount of
30%, hence the company would be overpriced by 24.99%.

36
Calculation based on dividend model with lower dividend payment ($3,563 million/year) and 0% in dividend growth,
as in Table 6.15.

36
6.3.4 Equity valuation model

Table 6.22 – Equity valuation sensitivity analysis (cents)

Terminal growth
2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50%
5.90% 826.76 890.89 981.50 1,110.50 1,355.63 1,853.43 3,594.12
6.32% 734.21 776.31 833.15 914.23 1,039.54 1,269.32 1,746.34
6.75% 658.47 685.66 721.06 769.12 838.28 946.63 1,141.15
6.92% 632.60 655.32 684.53 723.56 778.47 861.67 1,003.03
7.44% 564.58 577.00 592.44 612.21 638.52 675.38 730.92
equity

7.57% 549.76 560.21 573.11 589.46 610.96 640.60 684.27

7.77% 528.40 536.18 545.67 557.53 572.85 593.49 622.96
o of
C st

7.95% 510.53 516.23 523.09 531.57 542.33 556.56 576.35

8.15% 492.01 495.70 500.07 505.37 511.97 520.49 532.01
8.36% 473.93 475.80 477.94 480.46 483.49 487.26 492.14
8.72% 445.81 445.10 444.17 442.94 441.29 439.04 435.93
8.96% 428.81 426.72 424.15 420.97 416.95 411.79 404.97

Table 6.23 – Premium/Discount on EVM sensitivity Analysis

Terminal growth rate
2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50%
5.90% 41.09% 52.03% 67.49% 89.51% 131.34% 216.28% 513.33%
6.32% 25.29% 32.48% 42.18% 56.01% 77.40% 116.61% 198.01%
6.75% 12.37% 17.01% 23.05% 31.25% 43.05% 61.54% 94.74%
6.92% 7.95% 11.83% 16.81% 23.47% 32.84% 47.04% 71.17%
7.44% -3.66% -1.54% 1.10% 4.47% 8.96% 15.25% 24.73%
equity

7.57% -6.18% -4.40% -2.20% 0.59% 4.26% 9.32% 16.77%

7.77% -9.83% -8.50% -6.88% -4.86% -2.24% 1.28% 6.31%
o of
C st

7.95% -12.88% -11.91% -10.74% -9.29% -7.45% -5.02% -1.65%

8.15% -16.04% -15.41% -14.66% -13.76% -12.63% -11.18% -9.21%
8.36% -19.12% -18.81% -18.44% -18.01% -17.49% -16.85% -16.02%
8.72% -23.92% -24.04% -24.20% -24.41% -24.69% -25.08% -25.61%
8.96% -26.82% -27.18% -27.62% -28.16% -28.85% -29.73% -30.89%

37
As the same as DDM sensitivity analysis, the EVM sensitivity analysis (Table 6.22 and 6.23)
illustrates the general review of BP’s valuation under different circumstances.

If the company can access more easily to natural resources, apply modern technology from its
partners as well as manage its operating cost more efficiently, combined with favorable market
condition (decline in cost of equity and increase in oil and gas price), its growth rate should be
higher, is supposed to be highly likely at 5%-5.5% and cost of equity at 7.44%, indicating a
premium of 15.25%-24.73%, then the Group is underpriced. If cost reduction target fails to
deliver, oil and gas prices exhibit a decrease which might reduce the company’s revenue and
profit, cost of equity increase and more provision of 2010 oil spill, the growth rate is supposed to
be lower at around 2.5%-3% and cost of equity at 7.95%, imposing a discount of 11.91%-
12.88%, then the Group is overpriced.

6.4 Conclusion

By applying three methods of valuation (DDM, FCFE, EVAE), the value of BP Groups is
forecasted to be relatively the same as market price, ranging between 436.42p-471.57p, making
up a difference with the current price of -2.62% to 5.23%, therefore, “HOLD” is recommended.
There are different factors which should be concerned, including exchange rate, cost of equity and
growth rate assumptions, to evaluate the Group’s value more precisely.

38