This report is borne out of the need to analyse how the deepwater oilrig explosion which occurred in April 2010 at the Gulf of Mexico affected the financial performance of British petroleum. This event happened in the second quarter of the year; hence the report will compare the second quarter of 2010 and second quarter 2009 to ascertain the level of significance the event has on British petroleum plc.
This report is divided into three parts; the first is the background of British petroleum. The second is the comparison of the company's performance between the past three years and with a major competitor Chevron Ltd. And the third; interpretation of accounts using financial ratio analysis of British petroleum to ascertain the impact of recent events on its financial statements and finally, conclusion and recommendation
The financial ratios used for comparison were gotten from FAME (online) and the financial analysis of BP was made based on published balance sheet and income statement for second quarter 2009 and second quarter 2010. Appendix A and B for details.
British Petroleum (BP) was first originated on the 14th 0f April 1909 and has its accounting date on 31th of December every year; BP is about the third largest oil company in the world. BP has three main operations; the first is the upstream sector of the oil industry which has to do with the exploration and production of crude oil, The second operation deals with downstream operation which involves refining, marketing, supply, and transportation of the refined products; The third operation is the production and marketing of petrochemicals obtained from petroleum by-products, BP's petrochemicals are used in a wide range of applications, including packaging, fuel additives, synthetic rubber, detergents, cosmetics, and pharmaceuticals (Reference for business, 2010). They are also actively involved in gas and power generation
In 2008, oil began to flow at the Gulf of Mexico, one of the world's largest platforms called Thunder Horse. It produces 250,000 barrels of oil and 200 million cubic feet of natural gas in a day.
In 2009, British petroleum experienced its first full year of production from the thunder horse field in the United States among other operations that were carried out. They penetrated new resource opportunities around the world. British petroleum increased production and performance while maintaining safety, on the contrary global economic recession drove energy consumption low within the year, this brought about the worst significant decline in energy supply since 1982.
On April 20th, 2010, British Petroleum was hit by oil spillage at the Gulf of Mexico as a result of Deepwater Horizon oil rig explosion. The spillage which lasted for six months, costing British petroleum 5000 barrels a day, this amounted to $430,000 a day (vizworld, 2010). This affected the biotic and abiotic things of the region.
2.0 FINDINGS
Financial ratios are veritable tools used to interpret accounts, they will be used to compare performance between/within periods and, in some cases they are used to anticipate feature outcomes. This section will compare ratio analysis between BP and chevron ltd on the performance of their profitability efficiency and liquidity
2.1 RATIO ANALYSIS FOR BRITISH PETROLEUM PLC AND CHEVRON LIMITED
Ratio analysis can be used to show and explain the activity of a company; it helps in decision making to improve organisational goals and objectives. In order to ascertain the performance of BP it is necessary to analyse and compare it with its competitors, below is Table 1 for the percentage values have been derived and gotten through FAME. (See Appendix B)
BRITISH PETROLEUM CHEVRON LTD.
2009 2008 2007 2009 2008 2007
ROCE 14.34 21.88 21.08 13.33 -3.32 15.95
ROSF 24.73 37.55 33.74 14.24 -4.14 19.56
PROFIT MARGIN 10.21 9.34 10.85 2.66 -0.50 4.10
STOCK TURNS 10.89 21.82 10.98 10.58 18.65 12.48
DEBTORS COLLECTION 35.52 22.34 41.35 36.98 26.29 45.00
CREDITORS PAYMENTS 33.94 20.02 38.49 11.98 10.24 15.12
CURRENT RATIO 1.14 0.95 1.04 1.67 1.78 1.85
LIQUIDITY RATIO 0.76 0.71 0.69 1.60 1.30 1.47
TABLE 1
2.1.1 PROFITABILITY
BP recorded a significant decline in ROCE and ROSF between 2008 and 2009, this was due to an increase in loans and overdraft whereas chevron limited had a declined between 2007 and 2008 for the same reason but achieved an increase by 2009, this could be as a result of high operating profit. They both registered a decrease in their profit margin in 2008 as against an increase in 2007nand 2009, this could be as a result of huge overheard cost. On the average BP Plc would attract more investors than CHEVRON Ltd because of its profitability ratio are higher.
2.1.2 EFFICIENCY
There is a positive reduction in stock turns between 2008 and 2009 for both companies which see's sales going up from the negative they both had in 2007 but on the other hand there is a negative increase between 2008 and 2009 for both company's trade receivables and payables as against a positive in 2007, this would be a cause for concern as their credit ratings will reduce.
2.1.3 LIQUIDITY
The liquidity ratio and acid test ratio are relatively similar, BP improved in both ratios within the period but recorded a fall between 2007 and 2008 for their current ratio but chevron's current ratio dropped from 2007 to 2009 while the acid test rose against all odds over the period.
2.1.4 SUMMARY
Profitability and liquidity ratios proved that BP is performing better than Chevron whereas Chevron's efficiency ratio was better. On the contrary, on the average BP is a better option for any investor to invest in but recently.
2.2 RATIO ANALYSIS FOR BRITISH PETROLEUM PLC FOR SECOND QUARTER 2009 AND SECOND QUARTER 2010
BP was hit by a deepwater oilrig explosion at the Gulf of Mexico which lasted for six months. This event has affected the profitability, efficiency and liquidity of the company, making them vulnerable.
This section will apply most of the features of financial ratios to ascertain the effects of the oil spill at the gulf Mexico which occurred in the second quarter of 2009 and will be compared with the second quarter 2010 to know the level of significance of the incident.
2.2.1 PROFITABILITY RATIO
We will examine the profitability of second quarter 2009 and second quarter 2010 to analyse the effects of the oil spill on its financial summary for the period.
SECOND QUARTER 2010 SECOND QUARTER 2009
ROCE -27.8% 64.3%
ROSF -19.9% 46.0%
Net Profit Margin -32.1% 12.9%
TABLE 2-(see Appendix A-computation of ratios and financial summary for the period)
2.2.2 RETURN ON CAPITAL EMPLOYED (ROCE)
The return on capital employed ratio compares net profit before taxation to long term capital invested. There is a significant decrease in return on capital employed of the company by 36.8% in the second quarter of 2010 compared to the second quarter of 2009. This was as a result of an increase in the production and manufacturing expenses in relation to the oil spill at the Gulf of Mexico amounting to $32,192 million
2.2.3 RETURN ON ODINARY SHAREHOLDERS FUNDS (ROSF)
The return on ordinary shareholders' funds ratios compares the net profit after taxation and the shareholders funds in the company for the period thus; British petroleum had an increasing net profit available to its shareholders in second quarter 2009, but the reverse was the case in the second quarter of 2010 as the company recorded a decline of 26.1%, this effect was attributed to the credit charge of $10.003 million in taxation in relation to the gulf of Mexico oil spill.
2.2.4 NET PROFIT MARGIN
Net profit margin also known as operating profit margin shows the percentage of net profit of the company over its sales for the period, due to the enormous expenses causes by the Gulf of Mexico oil spill. The company in its second quarter of 2010 recorded a decrease in its net profit margin of -32% compared to a positive 12.9 in the second quarter of 2009.
2.2.5 SUMMARY
It can be deduced that British petroleum's performance has declined drastically in the second quarter of 2010 compared to the second quarter of 2009. This is as a result of huge production and manufacturing expenses caused by the oil spill in the Gulf of Mexico amounting to $37979 million in the second quarter 2010 as against $ 5997 million in the second quarter of 2009
2.3 EFFICIENCY RATIO
Efficiency ratio is one of the important scales for measuring a company's performance. This report will elaborate more by using available to analyse the company's efficiency.
SECOND QUARTER 2010 SECOND QUARTER 2009
STOCK TURN OVER 26.9 30.9
DEBTORS COLLECTION PERIOD 43.6 48.1
CREDITORS PAYMENT PERIOD 75.1 86.9
TABLE 3
2.3.1 STOCK TURN OVER
The efficiency ratio for stock turn over for the second quarter of 2010 is slightly up from the second quarter of 2009. On the average it takes the company 28.75 days to turn its stocks over.
2.3.2 DEBTORS COLLECTION PERIOD
British petroleum has improved its debtor's collection period for 2009 and 2010 respectively, it has been reduced from 48.1 days in the second quarter of 2009 to 43.6 days in the second quarter of 2010. The debtor's collection period has improved which indicates a good sign of debt management efficiency.
2.3.3 CREDITORS PAYMENT PERIOD
The average trade creditors payment period dropped from 86.9 in the second quarter of 2009 to 75.1 in the second quarter of 2010 this trend shows the company is settling its debts ahead on time. This show the company has a good debt servicing efficiency.
2.3.4 SUMMARY
In terms of efficiency there was a slight upward trend for most of the indicators for the second quarter of 2010 compared with second quarter of 2009 the indicator showed that they recovered their debts quicker, their stock turns were on the increase and their debt servicing was ahead on schedule.
2.4 LIQUIDITY RATIO
The liquidity ratio is an essential measuring tool, it indicates how long it will take for the company to convert its assets to cash for short and long term financial obligations.
SECOND QUARTER 2010 SECOND QUARTER 2009
CURRENT ASSET 1.5 2.4
ACID TEST 1.3 2.2
TABLE 4
2.4.1 CURRENT ASSET
In the second quarter of 2009 and second quarter 2010 British petroleum assets were sufficient to cover its current liabilities by a factor of 1.5 to 1 in the second quarter 2010 and 2.4 to 1 in the second quarter 2009 although there was a decline of 0.9 between the periods due to an increase in current liabilities in 2010, this indicates poor liquidity management
2.4.2 ACID TEST
When stock is withdrawn from the current assets divided by current liabilities it measures the company's immediate liquidity position, having said that, the factor dropped by 0.9 in the second quarter of 2010. This reduction indicates that BP might be finding it difficult to meet up its short term obligations if the factor continues falling.
3.0 CONCLUTION
The oil spill incident at the Gulf of Mexico has reduced the goodwill of British Petroleum plc. This was as a result of persistent political and public critics from pressure groups. It has damaged its face value and brand, if not handled properly this would impede the company's feature growth.
BP was not as profitable in the second quarter of 2010 as it had been in the second quarter of 2009, its turnover increased but its operating profit was reduced due to huge operating expenses resulting from the oil spill in the gulf of Mexico and the company is still subject to more remediation and compensation charges which will affect the future financial position of the company.
From all indications BP plc liquidity position is a course for concern. The position in second quarter 2010 was slightly declining from that of 2009 as a result; the credit rating of the company has been on a downward trend.
In terms of efficiency there was an upward trend which indicated speedy performance in its stock turns, debt servicing and receivable efficiency.
4.0 RECOMMENDATION
The company should focus on full remediation of the affected biotic and abiotic things affected by the oil spillage. Introduce new quality, quantity and safety control to prevent such magnitude spillage. Introduce a control switch or valve at the bottom of the oil rig to automatically shut down in the event of future explosion. If and when this is done i believe it will bring back the company's face value
In order to curb this effect the company will have to sell off some of its fixed assets to pay for its outstanding charges; it is believed that the company is proposing to sell off its businesses in Venezuela and Vietnam to settle those charges.
The liquidity position of British Petroleum as a result of the oil spillage indicates that the company should balance the timing of its cash receipt carefully against its cash payments, to do this the company has to set aside a contingency fund account to service the charges accrued from the effects of the oil spill
In terms of efficiency, If strong operating performance is maintained within the company it should return to profit making in the third quarter.
