NYSE: BP
BP plc
Current Price: $36.18
Target Price: $51.21
Recommendation: Buy
Investment Thesis
Analyst Information
BP is one of the largest integrated oil and gas
companies in the world, with an estimated global market
share of 3% of oil and gas production and 4% of refining
capacity in the major global markets in which it operates
in. Although both the global demand and price of crude
oil are still uncertain for 2009, I believe that BP’s
corporate strategy and operating efficiencies give them a
competitive advantage in this current economic state.
Given these advantages, I feel that BP will generate
above-average returns, when compared to its industry,
over the next two years.
Analyst
Luke A. DiTomas
Fisher College of Business
The Ohio State University
Columbus, OH
Summary
Sector: Energy
Industry: Integrated Oil and Gas
52 Week Range: $33.70—$77.69
Beta: .68
Based on my analysis, I have assigned BP a
12-month price target of $51.21. Below are key
assumptions which support my valuation:
• Production from US refineries is forecasted to grow
between .5-.75 million barrels per day
• The energy sector is anticipated to grow between 3%4% in 2009
• BP plans to increase its dividend yield during fiscal
year 2009
• Operating and profit margins have remained
consistent during volatile swings in crude oil prices
• The integrated oil and gas sector is currently fair
valued
• When using both absolute and comparative multiples,
BP is undervalued
• Both DCF models yielded a target price 32%-49%
higher than the current share price, suggesting BP’s
intrinsic value is greater than its current value
$
Contact Information
Phone: (216) 337-0191
Email: DiTomas.1@osu.edu
Updated: March 10, 2009
Stock Information
2008 Revenue Breakdown
Other Businesses and
Corporate, 1.21%
Exploration and
Production, 21.64%
Refining and
Marketing, 77.14%
$ Million
o
Share Price vs. Volume
2008
Share Price
$80.00
2007
Volume
2006
150,000
$60.00
120,000
$50.00
90,000
$40.00
60,000
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2008
210,000
180,000
$70.00
Revenue
Financial Highlights
2007
2006
365,700
288,951
Growth
26.6%
6.8%
10.9%
EBITDA
52575
37388
33622
Growth
Operating Income
Growth
Profit for the Year
Diluted EPS
270,602
40.6%
11.2%
-8.7%
35,239
32,352
35,158
8.9%
-8.0%
2.3%
21,666
$8.17
21,169
$5.75
22,286
$6.72
TABLE OF CONTENTS
I. Company Profile ........................................................................................ 1 Company Overview ........................................................................................................ 1 Business Segments .......................................................................................................... 1 Brands ............................................................................................................................. 2 II. Sector Analysis ........................................................................................... 3 Overview ......................................................................................................................... 3 Macroeconomic Drivers.................................................................................................. 3 Outlook ........................................................................................................................... 4 III. Industry Analysis....................................................................................... 5 Overview ......................................................................................................................... 5 Background ..................................................................................................................... 5 Current Life Cycle .......................................................................................................... 6 Macroeconomic Drivers.................................................................................................. 6 Recent Performance ........................................................................................................ 8 Competition..................................................................................................................... 9 Valuation ....................................................................................................................... 10 Outlook ......................................................................................................................... 11 IV. Company Analysis ................................................................................... 12 Strategy ......................................................................................................................... 12 Competitive Advantage ................................................................................................ 12 Financial Analysis......................................................................................................... 13 Equity Valuation: Multiples .......................................................................................... 14 Equity Valuation: Discounted Cash Flow V1 ............................................................... 15 Equity Valuation: Discounted Cash Flow V2 ............................................................... 16 V. Summary .................................................................................................. 18 Strengths and Opportunities .......................................................................................... 18 Weaknesses and Threats ............................................................................................... 18 Conclusion .................................................................................................................... 18 VI. Appendix 1: BP plc Financial Statements From 20-F ......................... 19 VII. Appendix 2: Discounted Cash Flow Models ......................................... 22 DCF V1 ......................................................................................................................... 22 DCF V2 ......................................................................................................................... 23 TABLE OF EXHIBITS
Exhibit 1: Exploration and Production Financials
Exhibit 2: Refining and Marketing Financials
Exhibit 3: BP Alternative Energy Financials
Exhibit 4: Crude Oil Supply as a % of Production
Exhibit 5: Crude Oil Inventories vs. Production
Exhibit 6: Regression Analysis
Exhibit 7: Products and Service Segmentation
Exhibit 8: OPEC Spare Capacity may Lead to Rising Oil Prices
Exhibit 9: World Consumption vs. Non-OPEC Production
Exhibit 10: Global Oil Cost Curves
Exhibit 11: Industry Profitability Analysis
Exhibit 12: Industry Multiple Valuation
Exhibit 13: 10-Year Absolute Multiples Valuation of Industry
Exhibit 14: 10-Year Multiples Valuation of Industry vs. Sector
Exhibit 15: 10-Year Multiples Valuation of Industry vs. S&P 500
Exhibit 16: Margin Analysis Income Statement
Exhibit 17: Dupont Analysis
Exhibit 18: Interest Coverage Multiples
Exhibit 19: 10-Year Multiples Valuation of BP
Exhibit 20: 10-Year Multiples Valuation of BP vs. Sector
Exhibit 21: 10-Year Multiples Valuation of BP vs. S&P 500
Exhibit 22: Share Price Sensitivity Analysis- DCF V1
Exhibit 23: Share Price Sensitivity Analysis- DCF V2
Exhibit 24: BP Gas Station
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3
3
4
5
6
7
8
8
10
10
11
11
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I. Company Profile1
COMPANY OVERVIEW
Headquartered in London, England, BP plc or British Petroleum operates as an international
integrated oil and gas company. They currently employ 96,200 employees, have exploration
activities in 23 countries and 17 refineries located around the world. BP products are sold in over
150 countries.
They started operations in April 1909, originally known as Anglo-Persian Oil Company. In
December 1998, British Petroleum merged with Amoco (formerly Standard Oil of Indiana) forming
BPAmoco. The name lasted until 2000 when the company renamed to BP and adopted the tagline
"Beyond Petroleum," which still remains in use today. Currently, BP is the second largest publicly
traded oil and gas company and fourth largest US refiner. The company is broken down into three
separate businesses: Exploration and Production, Refining and Marketing and BP Alternative
Energy.
BUSINESS SEGMENTS
Exploration and Production: Focuses on
accessing, finding and developing the largest fields
in order to produce and transport oil and natural
gas. This segment consists of BP’s upstream and
midstream activities;
o
o
Exhibit 1: Exploration and Production Financials
$ Million
Total Revenues
Replacement
Cost Profit
Total Assets
Capital
Expenditure and
Acquisitions
2008
2007
2006
89,902
69,376
71,868
37,915
136,665
27,729
125,736
30,953
124,803
Upstream Activities: The exploration of oil
and natural gas, field development and
22,227
14,207
13,252
production.
Midstream Activities Responsible for the management of crude oil and natural gas pipelines,
processing and export terminals and liquefied natural gas (“LNG”) processing facilities.
During 2008, the segment experienced a replacement cost profit* of $38 billion, a 39% increase
from 2007. The result was primarily driven by higher oil and gas realizations, supported by
underlying production growth of 5% and new cost efficiencies. 2008 also marked the 15th
consecutive year that reserve replacement for the year was greater than 100%. Their continued oil
and gas reserve growth provides BP with a foundation for future growth in both production and
recovery rates.
Refining and Marketing: The role of BP’s refining
Exhibit 2: Refining and Marketing Financials
and marketing business is to manufacture and $ Million
2008
2007
2006
supply more efficient products and services to its
Total
Revenues
320,458
232,833
71,868
customers. During 2008, the segment produced a
replacement cost profit of $4.2 billion, an increase Replacement
Cost Profit
4,176
2,621
5,161
of nearly 62% from 2007. Despite lower refining Total Assets
75,329
95,311
80,738
margins and adverse foreign exchange effects, the Capital
segment was able to significantly increase its profit Expenditure and
6,634
5,495
3,127
by restoring the overall availability of its refining Acquisitions
system, reducing operating costs and an ongoing “simplification” of the business. In total, BP saw
its 17 refineries produce, on average, 2.155 million barrels of oil per day (“MBD”), an increase of
* Replacement cost profit reflects the current cost of supplies. The replacement cost profit for the year is
determined by excluding from profit inventory holding gains and losses.
1
5% from 2007. Both the Whiting and Texas City refineries were restored to full operating capacity
and are expected to play a crucial role in achieving BP’s 2009 goal of a 2.2MBD global average.
*BP Alternative Energy: BP is helping to meet the
world’s growing demand for sustainable and
affordable energy by building an alternative energy
portfolio with the potential to grow and compete far
into the future. In 2008, BP prioritized a $1.4
billion investment into four areas with significant
long-term growth potential:
o
o
o
o
Exhibit 3: BP Alternative Energy Financials
$ Million
Total Revenues
Replacement
Cost Profit
Total Assets
Capital
Expenditure and
Acquisitions
2008
2007
2006
5,040
3,972
71,868
(1223)
19,079
(1209)
20,595
(841)
16,315
Wind: Its 274-turbine facility in Cedar
1,839
939
852
Creek, Colorado can produce 432
megawatts (785 megawatts gross) while in operation; it has enough potential total energy
generating capacity to supply electricity to six million average American homes.
Solar: BP’s strategy is to invest in lower-cost manufacturing of solar modules to enable
energy from its products to compete with conventional sources of energy. They currently
have solar modules installed around the world and continue to support the Solar Cities
concept.
Biofuels: In 2008, BP announced two strategic partnerships with industry leaders in
bioethanol technology. These partnerships should considerably help BP produce biofuel
sources that minimize any impact on food supplies while simultaneously developing
advanced technologies to greatly improve the efficiency of biofuels.
Carbon Capture and Storage (“CCS”): CCS captures the CO2 emitted during the burning and
processing of fossil fuels and transports it safely into deep geological formations such as oil
and gas fields. BP is currently looking into technology that will enable low-carbon
production of electricity using secure sources of coal and other fossil fuels.
BRANDS
BP currently operates under six brands which include: BP, Aral, ARCO, Castrol, ampm and Wild
Bean Coffee. Ampm is a brand which operates convenience stores in the Western US, whereas Wild
Bean Coffee offers affordable and fresh coffee and food within convenient stores. Even though
ampm and Wild Bean Coffee and brands under BP, they were not described in detail because they
are not associated with BP’s core business.
BP: BP is the main global brand which appears on production platforms, refineries,
ships and corporate offices as well as on solar products, wind farms, research
facilities and at retail service stations. Since BP petrol first appeared for sale in
Britain in the 1920s, the BP brand has grown to be recognized for quality gasoline,
transport fuels, chemicals and other petroleum-based products around the world.
Aral: Aral has a significant presence in the German petrol market and has been
named Germany’s most trusted brand of fuel several years in a row. Aral is also
the country’s third largest fast food retailer, after McDonald’s and Burger King.
ARCO: BP acquired the brand in 2000. Its name appears on all BP-owned and
franchise-operated stations in the Western USA, from the Rocky Mountains to the
Pacific Ocean. Since the 1908s, Arco has been known as a source for cleaner fuels,
1
Company 20-F
2
or blends of gasoline which give off less pollution by keeping the car and truck engines they pass
through cleaner.
Castrol: BP acquired the brand in 2002 to help grow its lubricants business.
Castrol is known for producing motor oils for automobiles and motorbikes, but the
company makes lubricants for every conceivable application on land, sea or air.
They continue to work collaboratively with VW, Audi, BMW, Komatsu and others.
II. Sector Analysis2
OVERVIEW
BP is part of the energy sector; companies within this sector include integrated oil and gas
companies, and pure-play companies in various areas which include: exploration and production,
refining and marketing, transportation and pipeline services and oilfield services and drilling. The
sector is unique in the fact that even though there are different industries within the sector, each
industry is geared towards the production and refinement of crude oil.
Exhibit 4: Crude Oil Supply as a % of
Production
Exhibit 5: Crude Oil Inventories vs.
Production
380
80,000
360
75,000
320
70,000
300
65,000
280
260
60,000
240
55,000
220
200
50,000
March-94
September-94
March-95
September-95
March-96
October-96
April-97
October-97
April-98
October-98
May-99
November-99
May-00
November-00
June-01
December-01
June-02
December-02
June-03
January-04
July-04
January-05
July-05
January-06
August-06
February-07
August-07
February-08
August-08
Inveotories
340
Production
Historically, the energy sector has been cyclical in
that it has experienced a number of boom and bust
periods. In recent years, 1996 – present, the sector
has experienced stronger-than-expected demand
growth due to the increased global need for energy.
Prior to the upswing in energy demand, oil and gas
companies emphasized return on investment
(“ROI”), rather than production and reserve growth.
Furthermore, oil and natural gas prices were much
lower than historical averages, which placed a
burden on these companies to keep supply levels up.
As seen in the graphs, when the energy sector began
to rebound in the late 1990s, supplies dropped below
the historical average (represented by the green lineexhibit 4) and production volume increased as
companies tried to replenish both their reserves and
supplies. Companies then shifted their strategy to
focus on reserve replenishment and production
capacity, rather than ROI. Due to these changes, it is
projected that the energy sector will shift to a more
defensive sector in order to position itself for the
anticipated higher levels of energy needed in the
coming years.
Crude Oil Inventories
International Crude Oil Production
MACROECONOMIC DRIVERS
After performing a regression analysis, the two main macroeconomic factors that drive the S&P
500 energy sector are crude oil prices and US Gross Domestic Product (“GDP”) growth. A linear
regression was performed using weekly averages of crude oil prices and quarterly GDP data from
March 1998 - March 2009. The regression returned an R2 of.899, and each independent variable
2
Credit Suisse Research Report
3
returned a t-score above two, meaning this regression can explain 89.9% of the variance from S&P
500 energy sector returns.
Exhibit 6: Regression Analysis
Regression Statistics
Multiple R
0.948482017
R Square
0.899618137
Adjusted R Square
0.899232052
Standard Error
21.05208643
Observations
523
ANOVA
df
Regression
Residual
Total
Intercept
Crude Oil ($/Barrell)
US Gross Domestic Product
2
520
522
SS
2065363.896
230458.9784
2295822.875
MS
F
Significance F
1032681.948 2330.109319
2.6938E‐260
443.190343
Coefficients
Standard Error
t Stat
‐334.7086784
22.67292964 ‐14.76248035
1.565787383
0.067145495 23.31932134
0.031502195
0.002400276 13.12440266
P‐value
1.9205E‐41
7.36046E‐83
3.4341E‐34
Lower 95%
Upper 95%
Lower 95.0% Upper 95.0%
‐379.2504744 ‐290.1668825 ‐379.2504744 ‐290.1668825
1.433877612 1.697697154 1.433877612 1.697697154
0.026786764 0.036217625 0.026786764 0.036217625
After careful analysis, the results of the regression were what I expected. First, the very strong
correlation between crude oil prices and sector returns was expected. Production costs essentially
remain unchanged when fluctuations in crude oil prices occur, whereas revenue numbers do change
with price fluctuations, giving way for changes in operating profit. Furthermore, in regards to GDP
and sector performance, the results were also what I expected. GDP growth in a very important
factor in the energy sector because in a separate regression, it was determined that GDP growth
explains 93% of the change in demand for petroleum based products. This growth can be attributed
to increases in consumer spending and personal/business travel.
OUTLOOK
Based on economists’ predictions, US real GDP is expected to decline by 2.7% in 2009, which is
3.3% increase when compared to fourth quarter 2008. This increase is expected to trigger an
increased demand for petroleum based products, but crude oil prices are only expected to see modest
growth because recent lower global oil demand has caused an increase to the oil surplus. Given the
above mention regression analysis, the energy sector is expected to follow GDP growth and see 34% growth in 2009.
4
III. Industry Analysis3
OVERVIEW
BP is part of the integrated oil and gas industry
within the energy sector.
This industry is
responsible for the refinement of crude oil into
different petroleum based products including:
gasoline, diesel fuel, jet flue, petroleum coke, still
gases, LPG, asphalt and residential fuel oil. The
two most important products refined from crude oil
are gasoline and diesel fuel, which account for
46% and 23% of refinery production.
Exhibit 7: Products and Service Segmentation
Gasoline- 46.0%
Diesel Fuel- 23.0%
Jet Fuel- 8.0%
Other- 4.8%
Petroleum Coke- 4.5%
Still Gases- 4.0%
Residual Fuel Oil- 3.7%
LPG- 3.5%
Asphalt- 2.5%
Nearly 70% of the output of this industry is
absorbed by road users. This is compromised of
gasoline, which is consumed by individuals, and
diesel fuel, which is mainly used in commercial transport; a small portion of diesel fuel consumption
is attributed to individuals. In the United States, the average number of miles driven was down 10%
in 2008. The current downturn in our economy has decreased consumer spending, which has
impacted the output of the automotive industry. Due to these reasons, both gasoline and diesel fuel
consumption have fallen 14% in the last year.
The aviation industry absorbs 9% of the industry’s production. The importance of this market to
the industry’s performance has declined in recent years due to heightened concerns over terrorist
attacks on airplanes, lower ticket sales and the impact higher fuel prices have on the aviation
industry. However, US refinery output to this industry remained somewhat constant in 2008, mainly
because imports bared the brunt of the decline in demand.
BACKGROUND
The modern petroleum industry was started in 1859, as this was the year that the first person was
able to drill successfully for oil. Crude oil was first refined into kerosene and used as fuel for
lighting devices, but Thomas Edison’s invention of the electric light but a decline on the commodity.
The emergence of the automobile industry in the early 1900s created a market for gasoline, which
had originally been a waste product of the industry.
As the automotive and energy markets grew, so did the oil and gas industry. Today, the United
States is responsible for 8% of the total world production of oil, where as in 1934 its production
accounted for 60% of the world total. Furthermore, crude oil, natural gas and coal account for 88%
of the world’s energy needs.
3
IBIS Industry Report
5
CURRENT LIFE CYCLE
The integrated oil and gas industry is in the mature phase of the product life cycle. The reasoning
for this can be attributed to these four statements:
o
o
o
o
The total number of enterprises and individual establishments has peaked due to the
considerable rationalization seen in the industry since the 1980s.
Total industry revenue tends to increase at a slower pace than the economy as a whole.
The industry is dominated by “supermajors” international integrated oil and gas companies.
The six largest companies produced over $1.8 trillion in revenue in 2008.
The products that this industry produces are well established, and demand for them moves in
respect to GDP growth. However, these companies are beginning to establish/grow their
alternative energy businesses.
MACROECONOMIC DRIVERS
After running a simple regression between annual change in crude oil prices vs. average annual
revenue growth for the six largest oil and natural gas companies, R2 was .969, meaning annual
changes in crude oil prices explain 96.9% of changes in annual revenue for the six companies. Given
such a high correlation, I found it necessary to examine what factors affect the price of crude oil.
When trying to predict crude oil prices, there are additional outside factors that must be considered.
It is important to note that oil markets do not act entirely like other commodity markets because a
market premium may be attached for various reasons. For example, a political concern in countries
such as Iran and Nigeria and the reliability of their oil supply. In addition, the management of spare
crude oil supplies by a cartel of nations, Organization of Petroleum Exporting Countries (“OPEC”)
or National Oil Companies (“NOCs”). These organizations have less incentive to increase production
than publicly traded oil and gas firms. The graph represents that falling OPEC spare capacity can
lead to increases in crude oil prices.
Exhibit 8: OPEC Spare Capacity may Lead to Rising Oil Prices
One of the main factors that affect crude oil prices in supply and demand. Crude oil prices
increased consistently from mid 2004 - 2008 because oil suppliers struggled to meet the higher-thanexpected increases in global demand, particularly from emerging countries. As mentioned earlier,
the main problem for this was oil and gas companies emphasizing ROI rather than production and
reserve growth.
6
Furthermore, another factor affecting supply and demand of crude oil is the global demand due to
the industrialization of Asia, the Middle East, Latin America and other emerging countries. In many
industrialized countries, outsourcing is becoming a popular strategy because of rising labor and
equipment costs. As a result of these corporate strategies, strong economic growth is expected in
these countries and an anticipated increased demand in crude oil by .5MBD in 2009. Another
country expected to play a large role in crude oil demand in 2009 is China. Their GDP is expected to
grow by 9% in 2009, with an increase in demand for oil by 5% to around 9MBD.
Even with expected increases in crude oil demand by a number of countries, world consumption is
projected to fall by 1.2MBD. The overall global economy is expected to remain weak in 2009, with
global GDP assumed to decline by .1% during the year. Even with this estimate, production from
US refiners is expected to increase by .5-.75MBD; the reason for this is the before mentioned shift in
corporate strategy to grow both production and reserves. When compared to 2007, global production
remained the same in 2008. All these figures are shown in the graph below.
Exhibit 9: World Consumption vs Non-OPEC Production
(Change from Previous Year)
Due to the anticipated decrease in crude oil demand, the oil supply is also going to be affected.
The supply is anticipated to grow by 150 million barrels in 2009, which is a decrease when
compared to 2008, which experienced supply growth of 330 million barrels; that increase was the
result of longer-than-expected delays in key projects, larger-than-expected decline rates in mature
production basins, and supply disruptions in the Gulf of Mexico and Central Asia. However, the
overall increase in oil supply can be beneficial to oil companies. The graph below represents the
2008 cost curve and the expected 2009 cost curve. During periods of increased supply, oil
companies experience additional operational cost cuts and capital expenditures (“CAPEX”)
reductions. In regards to BP, they are expected to reduce operating costs by $2 billion in 2009.
Companies also reduce these costs by eliminating EOR projects; projects which are unprofitable if
oil is above a certain $ per barrel average for an assigned period. In addition to reducing spending in
EOR projects, mature projects will have marginal CAPEX reduced, which helps reduce costs.
7
Exhibit 10: Global Oil Cost Curves
Even though the demand for crude oil is expected to decline in 2009, there is still a growing
demand in many emerging countries. Furthermore, an increase in supply is not necessary a bad thing
as oil companies are able to imply another round of cost cutting and eventually operate more
efficiently. After careful analysis of the effects supply and demand have on crude oil prices, my
analysis estimates crude oil prices to average $60 per barrel in 2009.
RECENT PERFORMANCE
In order to analyze the integrated oil and gas industry, I first made the assumption that the six
largest companies in the industry, which are known as the “supermajors” would best represent the
industry as a whole.
Exhibit 11: Industry Profitability Analysis
Company
BP plc
Chevron Corp.
ConocoPhillips
Exxon Mobil Corp.
Royal Dutch Shell plc
Total SA
Ticker
LSE:BP.
NYSE:CVX
NYSE:COP
NYSE:XOM
LSE:RDSA
ENXTPA:FP
Price
03/06/09
$35.01
58.27
35.36
64.03
20.71
45.55
Equity
Enterprise
Total Debt/ Total Debt/
LTM
3-yr. Revenue
[1]
Value
Value
Total Debt
EBITDA
Capital
Revenue
CAGR
$109,325.6 $135,138.6 $33,204.0
0.7x
23.3% $361,143.0
14.6%
116,805.7 116,615.7
8,901.0
0.2x
7.1% 255,112.0
11.3%
52,341.3
80,141.3
27,455.0
0.7x
34.4% 225,424.0
11.5%
316,412.6 298,388.6
9,425.0
0.1x
2.9% 466,359.0
12.2%
129,307.4 138,969.4
23,269.0
0.4x
15.3% 458,361.0
14.3%
101,515.1 117,161.5
30,263.9
0.8x
23.0% 202,912.1
11.1%
Mean
Median
Company
BP plc
Chevron Corp.
ConocoPhillips
Exxon Mobil Corp.
Royal Dutch Shell plc
Total SA
Mean
Median
0.5x
0.5x
LTM Gross
Margin
16.2%
28.5%
26.8%
38.4%
13.7%
30.8%
25.7%
27.6%
LTM
EBITDA
$46,950.0
49,904.0
40,408.0
96,530.0
64,747.0
39,998.7
LTM EBITDA
Margin
13.0%
19.6%
17.9%
20.7%
14.1%
19.7%
17.5%
18.7%
LTM
EBIT
$35,585.0
40,376.0
31,396.0
84,151.0
51,091.0
32,155.9
LTM EBIT
Margin
9.9%
15.8%
13.9%
18.0%
11.1%
15.8%
14.1%
14.9%
LTM
$8.17
11.67
(11.16)
8.69
4.26
5.97
17.6%
19.1%
EPS
2009E
$5.74
5.20
5.05
4.80
3.01
5.48
12.5%
11.9%
2010E
$6.13
8.02
6.56
6.81
3.61
6.65
LT EPS
[2]
CAGR
5.5%
8.5%
7.8%
6.4%
6.3%
(0.1%)
5.7%
6.4%
2008 was a very profitable year for the integrated oil and gas industry. Revenue growth for the
industry was 28.6% in 2008, compared to a 3-year revenue compound annual growth rate (“CAGR”)
of 12.5%. Crude oil prices have increased since 2004, with a major increase coming in the middle of
2008 when it reached $145.66 on July 11, 2008.
In regards to earnings before interest expense, taxes, depreciation and amortization (“EBITDA”),
the average margin in 2008 was 17.5%, which is consistent when compared to recent years. In
regards to earnings before interest expense and taxes (“EBIT”) margin, it was 14.1% for the year
which is also in line with previous year’s margins. Consistency in margins is a typical characteristic
8
of a mature industry. Both EBITDA and EBIT growth rates for the year were significant when
compared to previous years, 29.4% and 52.2% respectably. The growth in 2008 is a direct result of
revenue increases seen in the same period.
Every company in the group reported very strong earnings per share (“EPS”) numbers; with the
acceptation of ConocoPhillips- they had a $35billion write-down in the fourth quarter 2008. Much
like EBITDA and EBIT growth, EPS growth is directly attributed to increases in crude oil prices.
The average last twelve months (“LTM”) EPS CAGR average for the industry was 5.5%.
COMPETITION
Integrated oil and gas companies compete on the premise of who can operate in the most efficient
manner. Given 70% of refinement is gasoline, operating efficiency is the most important factor to
success in this industry because price per gallon of gasoline is a much larger determinate of where a
consumer purchases gasoline, rather than the brand of gasoline. Companies distinguish themselves
by distributing dividends, reserve replenishment and production capacity.
Intensity of Rivalry: HIGH
o Heightened government control has restricted access to new upstream resources.
o Oil and gas and facing growing competition from other fuel sources.
o Increasing difficulties in extracting the remainder of the world’s oil will lead companies. to
strive for greater efficiencies- hence increasing rivalry.
o Increasing security of supply and transport costs has pushed companies to build plants closer
to major demand centers. Threat of Entry: LOW
o High start-up costs.
o Economies of scale.
o Multiple permits and licenses needed for exploration of oil.
o Large amount of vertical integration to support downstream businesses.
o Oil exploration requires large amounts of cast reinvested in the business each year.
Supplier Bargaining Power: MODERATE
o Foreign governments require permits and licenses in order to conduct drilling/extraction.
o Facilities need specialized parts and equipment to ensure proper functioning.
o Vertical integration has reduced the reliance of input suppliers.
Buyer Bargaining Power: LOW
o Commodity traders effect oil prices, shifting price power away from buyers.
o Demand by foreign countries is expected to increase.
o Oil is one of the main commodities that drives the US/Global economy.
Substitutes: LOW – MODERATE
o Although there is movement towards alternative energies, there hasn’t been a sustainable.
Energy source which could be a true substitute oil.
o Oil is one of the main commodities that drives the US/Global economy.
9
VALUATION4
The first valuation metric I used was multiples compared to enterprise value. The industry has had
very constant multiples for each category as seen in the chart below. When compared to past values
however, there was a difference. In regards to Enterprise Value to LTM Revenue, the average for
2008 was .45x, vs. the 2007 average of .88x. This does not mean the industry is undervalued though;
revenues for the industry increased on average 40% in 2008, which would significantly alter the
multiple value. The same is seen in Enterprise Value to LTM EBITDA and Enterprise Value to
LTM EBIT as the 2008 averages are much lower than the 2007 averages. What is important here is
that the market has adjusted and the multiples are now constant for the industry.
Exhibit 12: Industry Multiple Valuation
Enterprise Value to LTM
EBIT
Revenue
EBITDA
0.37x
2.9x
3.8x
0.46x
2.3x
2.9x
0.36x
2.0x
2.6x
0.64x
3.1x
3.5x
0.30x
2.1x
2.7x
0.58x
2.9x
3.6x
Company
BP plc
Chevron Corp.
ConocoPhillips
Exxon Mobil Corp.
Royal Dutch Shell plc
Total SA
Mean
Median
0.45x
0.42x
2.56x
2.61x
3.19x
3.22x
The second valuation metric I used was another absolute and comparative multiples analysis. The
chart below uses 10-year averages to calculate the multiples. In absolute terms, the industry is
currently undervalued; the currently multiples are, on average, 29.78% lower than the 10-year
averages.
Exhibit 13: 10-Year Absolute Multiples Valuation of Industry
Absolute
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G ratio
ROE
High
26.60
1.68
4.00
14.80
17.60
2.80
28.50
Low
Mean
7.30
0.38
1.30
2.00
3.50
0.70
8.70
Current Percent
Valuation
From
Opinion
Mean
10.10
9.80
-3.0% Fair Value
0.85
0.38
-55.3% Undervalued
2.40
1.40
-41.7% Undervalued
5.00
2.60
-48.0% Undervalued
7.50
3.80
-49.3% Undervalued
1.60
1.50
-6.3% Fair Value
23.90
22.70
-5.0% Fair Value
Furthermore, when the industry is compared to the sector as seen in the chart below, the industry is
currently valued appropriately. The absolute valuation is returning the sector as undervalued
because of recent years having very high multiples, which may be “skewing” the averages. As seen
in both valuation techniques, the market is still adjusting after 2008 being such a highly profitable
year, and the industry is moving towards its fair value.
4
StockVal
10
In comparing the industry vs. the S&P 500, the industry is currently fairvalued, which suppors my
thought that the market is adjusting and valuing the industry correctly.
Exhibit 14: 10-Year Multiples Valuation of Industry vs. Sector
Industry vs.
High
Sector Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G ratio
ROE
Low
0.94
1.01
1.12
1.11
1.1
1.77
1.29
Mean
0.75
0.61
0.72
0.66
0.71
0.75
0.94
Current Percent
Valuation
From
Opinion
Mean
0.83
0.83
0.0% Fair Value
0.79
0.69
-12.7% Undervalued
0.89
0.91
2.2% Fair Value
0.87
0.88
1.1% Fair Value
0.86
0.94
9.3% Fair Value
1.22
1.17
-4.1% Fair Value
1.1
0.94
-14.5% Undervalued
Exhibit 15: 10-Year Multiples Valuation of Industry vs. S&P 500
Industry vs.
S&P500
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G ratio
ROE
High
Low
1.01
0.73
0.94
1.34
1.03
1.87
1.69
Mean
0.37
0.43
0.53
0.40
0.48
0.74
0.48
0.53
0.53
0.76
0.58
0.60
1.27
1.38
Current Percent
From
Mean
0.87
64.2%
0.58
9.4%
0.89
17.1%
0.54
-6.9%
0.64
6.7%
1.42
11.8%
1.59
15.2%
Valuation
Opinion
Overvalued
Fair Value
Fair Value
Fair Value
Fair Value
Fair Value
Fair Value
OUTLOOK
The financial performance of this industry will continue to rely on the price of crude oil and the
demand for petroleum based products. Revenues are forecasted to drop by 40% in 2009, but EPS
estimates for 2009 are 30% lower than 2008. Overall global demand is forecasted to decline in 2009
with production figures seeing slight increases. The outlook for 2009 isn’t all bad though;
companies will continue to cut costs and operate more efficiently going forward. Also, reserve
growth is expected to grow as companies begin to position themselves for an upswing in demand.
Oil is expected to average $60 per barrel, there is however the potential for political events or natural
disasters to give rise to sharp and substantial, if short-term, movements in oil.
11
IV. Company Analysis5
STRATEGY
BP’s corporate growth strategy and priority for the future is to focus on expanding its portfolio by
adding new acreage, pursuing aggressive exploration programs, investing in organic growth, and
making selective acquisitions. Specifically, the company seeks to grow its upstream business by
leveraging its geographical diversity and investing in areas of resource opportunity. BP will also
focus on technology and innovation as a means to discover new income streams including oil sands
production, gas to liquids conversion, and alternative energy sources.
BP pursues a cost-leadership business strategy. Due to the inherent nature of the energy business,
BP looks to increase margins by optimizing its cost structure and minimizing waste. In short, BP’s
homogenous products necessitate a cost-leadership strategy. Indeed, consumers don’t choose BP
due to any differentiation in the product. One of the primary ways BP is able to pursue a costleadership strategy is by being vertically integrated, which allows for considerable economies of
scale.
COMPETITIVE ADVANTAGE
BP currently has a competitive advantage in its upstream activities because of a recent restructuring
of the business segment. 18-months ago, BP noticed potential to improve their already very efficient
exploration and production business. The restructuring of the business proved to be very affective as
they were the only supermajor to meet their 2008 guidance estimates for production growth. BP was
also able to hold production costs the same as 2007, even with the 5% increase in production.
Furthermore, the industry average for the profit per refined barrel of oil is $3.50-$4.00; BP’s 2008
average was $7.00. Also, BP is expected to see operating costs fall by $2 billion in 2009 due to the
recent restructuring. Given how even more efficient the business segment now operates, BP sees
continued production growth through 2013, and could continue that growth through 2020 if
necessary. In my opinion, BP is the most well-position integrated oil and gas company in the
industry and has the most potential for above average returns in the next two years
As mentioned above, BP’s strategy has always been one of continued innovation and growth. This
has lead to another competitive advantage in their production of acetic acid known as CATIVA.
Acetic acid is an important commodity that is used as a feedstock for a range of chemicals including
paints, adhesives and coatings. BP originally used technology licensed to them by Monsanto; in
1986 they acquired the rights to Monsanto's methanol carbonylation technology which allowed them
to further develop and eventually create the CATIVA process. Compared with the basic
carbonylation process, CATIVA delivers a 50% savings in conversion costs and reduces the capital
cost of building a new 500,000 tonnes per annum (tpa) plant by 30%. In addition, BP's process is
also very energy efficient, emitting virtually zero pollutants into the atmosphere. The acquisition
was completed over 20 years and BP continues to dominate the market, holding a 25% market share.
Given BP’s before-mentioned strategy, they only continue to improve upon an already successful
process and will continue to be the industry leader.
To conclude, BP’s last competitive advantage is in their Alternative Energy business. In the
beginning of 2008, CEO Tony Hayward pledged to invest in a “focused and disciplined way in areas
where we believe we can create the greatest competitive advantage.” Given this strategy, BP had an
5
http://www.bp.com/marketingsection.do?categoryId=2&contentId=7013628
12
extremely successful year in the progression of this business segment. They saw solar sales increase
by 40%, as well as optimizing manufacturing costs. Furthermore, they now have the third largest
wind farm in the country, and also entered into a joint venture with Tropical BioEnergia S.A. which
created the single largest investment into biofuel technology. After reading about other companies in
the industry and their approach to alternative energy, I feel that BP currently has the most wellpositioned portfolio of investments, and its portfolio has the largest potential for growth in 2009 and
beyond.
FINANCIAL ANALYSIS
Return on Equity: (Net Income/Shareholder’s Equity): Measures the amount of net income
returned as a percentage of shareholder’s equity. Shareholders are particularly interested in this as it
is revealing how much profit a company is generating with the money that they have invested. BP’s
ROE of 23.5% is currently best in the industry. Even with BP additional debt in recent years, the
company has been able to keep ROE constant because of additional operating efficiencies.
Return on Assets: (Net Income/Total Assets): Measures how profitable a company is relative to its
total assets. This is an important metric because it allows shareholders to see how efficient the
company is at using its assets to generate revenues. The continued increase can be attributed to BP’s
focus on improving capacity and production of its fixed assets.
Profit Margin: (EBIT/Sales): Measures how much out of every dollar of sales a company keeps in
earnings. A higher profit margin indicates a more profitable company that has better control over its
costs compared to its competitors. Continued improvement in this metric is not surprising as BP just
finished restructuring its upstream actives to be more profitable and is currently in the process of
doing the same to its downstream activities.
Asset Turnover: (Sales/Assets): Measures the amount of sales generated for every dollar's worth of
assets. It is calculated by dividing sales in dollars by assets in dollars. The ratio is used to gauge a
firm's efficiency at using its assets in generating sales or revenue. The metric has seen slight
improvement in recent years which is because of management’s goal of increasing overall
production from existing assets.
Leverage Multiplier: (Total Assets/Total Stockholders’ Equity) Measures how a company uses
debt to finance its assets. BP’s leverage multiplier is above the industry median, but only by a slight
margin. As seen in the interest coverage exhibit, BP is generating significantly more in EBIT than it
is paying in interest. The decrease in the interest coverage multiple over the past few years is due to
BP’s growth strategy and additional debt to finance acquisitions/joint ventures.
Margin Analysis: As seen in the table below, BP has seen improvement in each metric in recent
years. This is attributed to BP’s continual improvement in operating efficiencies. The most
significant change was seen in the SG&A margin, as it decreased over 47% since 2003.
In sum, BP’s capital structure is very sound and has performed extremely well with the recent
changes in crude oil prices. If necessary, the company is in a position to take-on additional debt to
aid in its growth strategy and can remain profitable.
6
Company 20-F
13
Exhibit 16: Margin Analysis Income Statement
2003
23.03%
7.64%
15.06%
10.17%
7.58%
7.54%
Gross Margin %
SG&A Margin %
EBITDA Margin %
EBIT Margin %
Earnings from Cont. Ops Margin %
Net Income Margin %
2004
23.29%
6.65%
16.15%
11.87%
9.20%
8.88%
2005
21.75%
5.67%
15.35%
12.14%
9.11%
9.19%
2006
19.48%
5.26%
12.64%
10.40%
8.40%
8.39%
2007
18.87%
5.18%
13.15%
9.71%
7.33%
7.33%
2008
18.29%
4.02%
13.84%
11.08%
7.61%
7.61%
Exhibit 17: Dupont Analysis
ROE
ROA
Profit Margin
Asset Turnover
Leverage Multiplier
BP- 2008 Industry Median- 2008
23.5%
20.4%
9.3%
9.0%
11.1%
3.4%
1.30x
1.90x
2.52x
2.02x
BP- 2007 BP- 2006 BP- 2005 BP-2004 BP- 2003
23.38%
27.20%
27.9%
24.2%
18.1%
7.61%
8.14%
9.1%
7.7%
6.3%
9.70%
10.40%
12.1%
11.9%
10.2%
1.30x
1.30x
1.20x
1.00x
1.00x
2.49x
2.55x
2.53
2.49
2.29
Exhibit 18: Interest Coverage Multiples
EBIT
Interest Expense
Interest Coverage
2008
2007
2006
2005
2004
$35,239 $32,352 $35,158 $32,682 $25,746
$1,547 $1,393
$986
$874
$768
22.78x 23.22x 35.66x 37.39x 33.52x
EQUITY VALUATION: MULTIPLES
The first technique I used to value BP was historical multiples. Much like the industry, when
compared to its self, BP is currently undervalued. The target multiples I selected were 90% of the
10-year means because I feel the industry will not revert back to 100% of its historical averages
during 2009. This valuation yielded a share price of $56.99, which is approximately 49% higher
than BP’s current share price. This upside was expected given the previous valuation of the industry.
Exhibit 19: 10-Year Multiples Valuation of BP
Absolute
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G ratio
ROE
High
Low
30.1
3.0
5.5
18.6
22.6
3.0
30.1
Mean
8.2
0.3
1.2
2.2
3.4
0.7
9.0
11.5
1.0
2.7
6.4
8.5
1.8
20.0
Current #Your
*Your Target
Target E, S, B,
Multiple etc/Share
9.2
0.3
1.3
2.5
4.1
1.8
19.8
9.2
0.824
2.16
5.12
6.8
1.44
16
4.17
112.82
29.51
15.34
9.36
21.31
1.94
Your
Target
Price
(F x G)
$38.36
$92.97
$63.74
$78.56
$63.62
$30.69
$31.00
14
In comparing BP to both the energy sector and S&P 500 is where the valuation differences appear.
BP is currently undervalued in the majority of the metrics. As mentioned previously, the industry
and sector multiples vs. the S&P 500 yielded a result of the industry being valued correctly when
compared to the sector.
BP vs. Sector
Multiples
Valuation
Exhibit
Exhibit#:
20:Exhibit#:
10-Year
10-YearMultiples
Multiples
Valuation
Valuation
ofofBP
BP
vs.
vs.Energy
EnergySector
Sector
Stock vs. Sector High
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G ratio
ROE
Low
1.21
1.84
1.6
1.66
1.38
2.61
1.44
Mean
0.69
0.51
0.67
0.69
0.67
0.68
0.83
Current Percent
Valuation
From
Opinion
Mean
0.98
0.75
-23.5% Undervalued
0.97
0.6
-38.1% Undervalued
0.98
0.86
-12.2% Fair Value
1.11
0.75
-32.4% Undervalued
0.96
0.89
-7.3% Fair Value
1.23
1.37
11.4% Fair Value
1.04
0.83
-20.2% Undervalued
Exhibit 21: 10-Year Multiples Valuation of BP vs. S&P 500
Stock vs.
S&P500
Valuation
P/Forward E
P/S
P/B
P/EBITDA
P/CF
P/E/G ratio
ROE
High
Low
1.14
1.32
1.10
1.70
1.34
2.22
1.72
Mean
0.42
0.39
0.43
0.41
0.45
0.54
0.50
Current Percent
Valuation
From
Opinion
Mean
0.63
0.75
19.0% Fair Value
0.64
0.49
-23.4% Undervalued
0.83
0.82
-1.2% Fair Value
0.75
0.50
-33.3% Undervalued
0.68
0.62
-8.8% Fair Value
1.30
1.58
21.5% Overvalued
1.19
1.37
15.1% Fair Value
After analysis of this valuation technique, I determined that BP is undervalued. Both the industry
and sector it operates in were determined to be valued appropriately, but that doesn’t mean that every
stock in the industry and sector are correctly. This valuation gives upside to BP in that its intrinsic
value is higher than its current share price.
EQUITY VALUATION: DISCOUNTED CASH FLOW V1
In order to find the most accurate intrinsic value of BP, I built two different DCF models. The first
model is driven off historical growth rates and margins. In DCF V1, revenue is calculated by
forecasting its growth rate for 8 years. Given how correlated revenues are to crude oil prices, it was
difficult to predict the revenue growth rate. Due to crude oil prices dropping significantly in fourth
quarter 2008, BP revenue numbers are forecasted to drop between 20-25% in 2009. Going forward,
I laddered revenue growth because oil is expected to gradually increase in the coming years. In
2018E revenue growth is 3.92%; that is the 10 year average enterprise growth rate for the
supermajors. The following assumptions are for DCF v1:
15
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
o
Cash and Equiv: Calculated as a percentage of sales based on 3-year historical averages
and held consistent throughout forecasted years.
Trade and Other Receivables: Calculated based on same set of same assumptions as Cash
and Equiv.
Inventories: Calculated based on same set of same assumptions as Cash and Equiv.
Trade and Other Payables: Calculated as a percentage of sales with the % growing each
year because of historical trends.
Operating Expenses: Calculated based on same set of same assumptions as Cash and
Equiv.
Depreciation: Calculated as a percentage of sales for 2009 based on 3-year historical
average, but grew the % in each forecasted year in order to have it trend towards CAPEX.
Operating Margin: Calculated based on assumptions made above.
Tax Rate: Assumed 33% tax rate.
Interest Expense and Income: Calculated based on same set of same assumptions as Cash
and Equiv.
Minority Interest: Calculated based on same set of same assumptions as Cash and Equiv.
CAPEX: Calculated based on same set of same assumptions as Cash and Equiv.
Terminal Discount Rate: 11.0%- Discount Rate used in Credit Suisse Research Reports.
Terminal FCF Growth: 3.92%- Average 10-year growth rate of Enterprise Value for
supermajors.
Shares Outstanding: Taken from fourth quarter 2008 earnings press release (in ADS terms)
1 ADS share = 6 common shares.
Cash: Taken from fourth quarter 2008 earnings press release.
Debt: Taken from fourth quarter 2008 earnings press release.
Share Price: $38.36- Close price on February 27, 2009.
Terminal
FCF Growth
After running the model, it returned a target share price of $57.30, an upside of 49.36% compared
to the current share prices. I also ran a
Exhibit 22: Share Price Sensitivity Analysis- DCF V1
sensitivity analysis using different
Share Price Sensitivity Analysis
terminal discount and FCF growth rates.
My model returned an implied range of
Terminal Discount Rate
values (inside square in exhibit) of
0.5
8.0%
9.5%
11.0%
12.5% 14.0%
2.4%
$76.76
$61.78
$52.60
$46.55 $42.37
$48.10- $78.12, all of which are at least
3.2%
$84.59
$65.94
$55.05
$48.10 $43.41
25% higher than the current price. The
3.9%
$95.29
$71.21
$57.30
$49.93 $44.59
DCF value was also very close to the
4.7% $110.82
$78.12
$61.70
$52.10 $45.97
multiples target price of $56.99
5.4% $135.37
$87.58
$66.37
$54.74 $47.59
EQUITY VALUATION: DISCOUNTED CASH FLOW V2
Given the amount of uncertainty there is with crude oil prices for 2009, I wanted to build another
DCF model which was drive off different metrics than my original DCF. The model runs by first
inputting 2008 actual EBITDA. When looking at historical financial statements, average EBITDA
growth for BP for the last 10 years is 9.8%. To keep the model on the conservative side, I laddered
the growth rate to return to the 10-year average in 2013E. The next metric calculated is Enterprise
Value, by inputting EV/EBITDA forecasted multiples. The industry has historically traded between
5.005.5x and like EBITDA growth, I laddered the multiple to return to the historical average in
2013E. The next value calculated in the model is revenue, by entering the forecasted EV/Revenue
multiple. Again, the forecasted values were laddered based on 10-year historical averages. The net
16
income margin compared to EBIT was very consistent in historical years and was kept the same for
the forecasted period. Free cash flow is calculated the same as DCF v1.
The following assumptions are the same as DCF V1: Cash and Equiv, Trade and Other
Receivables, Inventories, Trade and Other Payables, Depreciation, Interest Expense and Income,
Minority Interest, CAPEX, Terminal FCF Growth, Shares Outstanding, Cash, Debt, Share Price.
The terminal discount rate used in this model is 13.0%- a 2% premium was attached because with a
5-year forecasted time horizon more emphasis is placed on the terminal value.
Exhibit 23: Share Price Sensitivity Analysis- DCF V2
Share Price Sensitivity Analysis
Terminal
FCF Growth
After running the model, it returned a
target share price of $50.81, an upside
of 32.46% compared to the current share
prices. I also ran a sensitivity analysis
using different terminal discount and
FCF growth rates. My model returned
an implied range of values (inside
square in exhibit) of $43.24- $64.08.
0.0
2.4%
3.2%
3.9%
4.7%
5.4%
10.0%
$64.45
$69.00
$74.69
$81.97
$91.63
Terminal Discount Rate
11.5%
13.0%
14.5%
$53.98
$46.96
$42.04
$56.74
$48.74
$43.24
$60.05
$50.81
$44.61
$64.08
$53.26
$46.20
$69.11
$56.19
$48.04
16.0%
$38.48
$39.32
$40.27
$41.34
$42.56
TARGET SHARE PRICE CALCULATION
In order to derive my target share price, I took a weight average of the following:
o
o
o
o
o
DCF V1- 20%
DCF V2- 20%
Price/Forward EPS- 20%
ROE- 20%
Price/EBITDA- 20%
After considering all the analysis in this report, my target share price for BP is $51.21, which is a
33.5% upside compared to the current stock price.
17
V. Summary
STRENGTHS AND OPPORTUNITIES
BP has several strengths in the current market. Their corporate strategy has given them
competitive advantages that will allow BP to be profitable even during poor economic times.
Furthermore, BP’s Alternative Energy portfolio is one of the best in the industry and may receive a
significant amount of funding from the government as President Obama is pushing very hard for our
country to focus on alternative energy sources. In terms of valuation, all my techniques returned the
same result, BP is currently undervalued. Finally, management has announced that they plan to
increase the dividend yield beginning in 2009 as a push to return more money to shareholders
through dividends, rather than share repurchases.
WEAKNESSES AND THREATS
BP is also faced with many threats in the current market. There is the possibility that the economy
continues to decline and crude oil prices drop to $20 per barrel. There is also the current issue of
OPEC and there production cuts. They agreed to cut production by 4.2MBD by the beginning of this
year, but as of January 1, 2009, only 60% of the cuts had been enforced. If OPEC does not follow
through with the production cut, which could even further alter the supply and demand curve.
CONCLUSION
In conclusion, BP is a mature company with a strong balance sheet and very sound corporate
strategy. Based on my analysis, I am recommending BP as an immediate buy and assigning a oneyear target share price of $51.21
Exhibit 24: BP Gas Station
18
VI. Appendix 1: BP plc Financial Statements From 20-F
Group income statement
$ million
For the year ended 31 December
Sales and other operating revenues
Earnings from jointly controlled entities – after interest and tax
Earnings from associates – after interest and tax
Interest and other revenues
Total revenues
Gains on sale of businesses and fixed assets
Total revenues and other income
Purchases
Production and manufacturing expenses
Production and similar taxes
Depreciation, depletion and amortization
Impairment and losses on sale of businesses and fixed assets
Exploration expense
Distribution and administration expensesa
Fair value gain (loss) on embedded derivatives
Profit before interest and taxation from continuing operations
Finance costs
Net finance income (expense) relating to pensions and other post-retirement benefits
Profit before taxation from continuing operations
Taxation
Profit from continuing operations
Profit (loss) from Innovene operations
Profit for the year
Attributable to
BP shareholders
Minority interest
Earnings per ordinary share – cents
Profit attributable to BP shareholders
Basic
Diluted
2006
2007
2008
265,906
3,553
442
701
270,602
3,714
274,316
(187,183)
(23,793)
(3,621)
(9,128)
(549)
(1,045)
(14,447)
608
35,158
(986)
470
34,642
(12,331)
22,311
(25)
22,286
284,365
3,135
697
754
288,951
2,487
291,438
(200,766)
(25,915)
(4,013)
(10,579)
(1,679)
(756)
(15,371)
(7)
32,352
(1,393)
652
31,611
(10,442)
21,169
–
21,169
361,143
3,023
798
736
365,700
1,353
367,053
(266,982)
(29,183)
(6,526)
(10,985)
(1,733)
(882)
(15,412)
(111)
35,239
(1,547)
591
34,283
12,617
21,666
–
21,666
22,000
286
22,286
20,845
324
21,169
21,157
509
21,666
109.84
109.00
108.76
107.84
112.59
111.56
19
Group balance sheet
$ million
At 31 December
Non-current assets
Property, plant and equipment
Goodwill
Intangible assets
Investments in jointly controlled entities
Investments in associates
Other investments
Fixed assets
Loans
Other receivables
Derivative financial instruments
Prepayments
Defined benefit pension plan surplus
Current assets
Loans
Inventories
Trade and other receivables
Derivative financial instruments
Prepayments
Current tax receivable
Cash and cash equivalents
Assets classified as held for sale
Total assets
Current liabilities
Trade and other payables
Derivative financial instruments
Accruals
Finance debt
Current tax payable
Provisions
Liabilities directly associated with the assets
classified as held for sale
2007
2008
97,989
11,006
6,652
18,113
4,579
1,830
140,169
999
968
3,741
1,083
8,914
155,874
103,200
9,878
10,260
23,826
4,000
855
152,019
995
710
5,054
1,338
1,738
161,854
165
26,554
38,020
6,321
3,589
705
3,562
78,916
1,286
80,202
236,076
168
16,821
29,261
8,510
3,050
377
8,197
66,384
66,384
228,238
43,152
6,405
6,640
15,394
3,282
2,195
77,068
33,644
8,977
6,743
15,740
3,144
1,545
69,793
163
77,231
69,793
1,251
5,002
959
15,651
19,215
12,900
3,080
6,271
784
17,464
16,198
12,108
9,215
64,193
141,424
94,652
10,431
66,336
136,129
92,109
5,237
88,453
93,690
962
94,652
5,176
86,127
91,303
806
92,109
Non-current liabilities
Other payables
Derivative financial instruments
Accruals
Finance debt
Deferred tax liabilities
Provisions
Defined benefit pension plan and other
post-retirement benefit plan deficits
Total liabilities
Net assets
Equity
Share capital
Reserves
BP shareholders’ equity
Minority interest
Total equity
a
BP elected not to adopt International Accounting Standard No. 39 'Financial Instruments: Recognition and Measurement' (IAS 39) until 1 January 2005
and so financial assets and liabilities, including derivatives, are reported on the basis of UK generally accepted accounting practice (UK GAAP) for 200
2004. The balance sheet at 1 January 2005 is also presented to show the effect of adopting IAS 39.
20
Group cash flow statement
$ million
Operating activities
Profit before taxation from continuing operations
Adjustments to reconcile profits before taxation to net cash provided
by operating activities
Exploration expenditure written off
Depreciation, depletion and amortization
Impairment and (gain) loss on sale of businesses and fixed assets
Earnings from jointly controlled entities and associates
Dividends received from jointly controlled entities and associates
Interest receivable
Interest received
Finance costs
Interest paid
Net finance income (expense) relating to pensions and other
post-retirement benefits
Share-based payments
Net operating charge for pensions and other post-retirement benefits,
less contributions and benefit payments for unfunded plans
Net charge for provisions, less payments
(Increase) decrease in inventories
(Increase) decrease in other current and non-current assets
Increase (decrease) in other current and non-current liabilities
Income taxes paid
Net cash provided by operating activities of continuing operations
Net cash provided by (used in) operating activities of Innovene operations
Net cash provided by operating activities
Investing activities
Capital expenditures
Acquisitions, net of cash acquired
Investment in jointly controlled entities
Investment in associates
Proceeds from disposal of fixed assets
Proceeds from disposal of businesses, net of cash disposed
Proceeds from loan repayments
Other
Net cash used in investing activities
Financing activities
Net repurchase of shares
Proceeds from long-term financing
Repayments of long-term financing
Net increase (decrease) in short-term debt
Dividends paid
BP shareholders
Minority interest
Net cash used in financing activities
Currency translation differences relating to cash and cash equivalents
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
2006
2007
2008
34,642
31,611
34,283
624
9,128
(3,165)
(3,995)
4,495
(473)
500
986
(1,242)
347
10,579
(808)
(3,832)
2,473
(489)
500
1,393
(1,363)
385
10,985
380
(3,821)
3,728
(407)
385
1,547
(1,291)
(470)
416
(652)
420
(591)
459
(261)
340
995
3,596
(4,211)
(13,733)
28,172
–
28,172
(404)
(92)
(7,255)
5,210
(3,857)
(9,072)
24,709
–
24,709
(173)
(298)
9,010
2,439
(6,101)
(12,824)
38,095
–
38,095
(15,125)
(229)
(37)
(570)
5,963
291
189
–
(9,518)
(17,830)
(1,225)
(428)
(187)
1,749
2,518
192
374
(14,837)
(22,658)
(395)
(1,009)
(81)
918
11
647
(200)
(22,767)
(15,151)
3,831
(3,655)
3,873
(7,113)
8,109
(3,192)
1,494
(2,567)
7,961
(3,821)
(1,315)
(7,686)
(283)
(19,071)
47
(370)
2,960
2,590
(8,106)
(227)
(9,035)
135
972
2,590
3,562
(10,342)
(425)
(10,509)
(184)
4,635
3,562
8,197
21
VII. Appendix 2: Discounted Cash Flow Models
DCF V1
DCF Valuation V1
3/10/2009
Ticker: BP
Luke DiTomas
($ in million)
11.0%
3.92%
956
0.26%
35,239
9.64%
365,700
2008
8,569
33.0%
373
141
0.05%
26,107
9.26%
281,884
-22.92%
2009E
19,350
7%
8,896
33.0%
472
0.00%
26,956
9.33%
288,947
2.51%
2010E
11,962
4.02%
(1,040)
-0.35%
21,193
7.13%
19,182
-1%
9,171
33.0%
562
89
0.03%
27,881
9.38%
297,240
2.87%
2011E
9,828
10%
12,881
4.21%
(1,072)
-0.35%
21,833
7.13%
19,851
3%
9,448
33.0%
668
92
0.03%
28,723
9.38%
306,216
3.02%
2012E
10,821
10%
13,865
4.39%
(1,106)
-0.35%
22,525
7.13%
20,586
4%
9,748
33.0%
795
95
0.03%
29,634
9.38%
315,923
3.17%
11,899
10%
14,920
4.57%
(1,142)
-0.35%
23,273
7.13%
21,395
4%
10,071
33.0%
947
98
0.03%
30,617
9.38%
326,412
3.32%
13,075
10%
16,053
4.75%
(1,182)
-0.35%
24,081
7.13%
22,284
4%
10,421
33.0%
1,126
101
0.03%
31,680
9.38%
337,739
3.47%
2015E
14,359
10%
17,272
4.94%
(1,225)
-0.35%
24,952
7.13%
23,264
4%
10,798
33.0%
1,340
105
0.03%
32,827
9.38%
349,965
3.62%
2016E
15,766
10%
18,585
5.12%
(1,271)
-0.35%
25,893
7.13%
24,345
5%
11,205
33.0%
1,595
109
0.03%
34,064
9.38%
363,158
3.77%
2017E
17,312
10%
20,001
5.30%
(1,321)
-0.35%
26,908
7.13%
25,540
5%
11,645
33.0%
1,898
113
0.03%
35,400
9.38%
377,394
3.92%
2018E
Terminal Discount Rate =
Terminal FCF Growth =
Operating Income
Operating Margin
12,617
33.0%
509
18,061
4%
11,102
3.84%
9,330
3.23%
20,602
7.13%
8,911
-54%
2014E
Interest Expense and Income
Interest (net) % of Sales
17,397
10,317
3.66%
17,373
6.16%
20,098
7.13%
19,180
-25%
Forecast
2013E
Taxes
Tax Rate
Minority Interest
10,985
3.00%
(15,683)
-4.29%
26,074
7.13%
25,653
-292%
Year
Net Income
% Growth
(13,375)
Add Depreciation, Depletion
and Amortization
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Revenue
% Growth
Free Cash Flow
YOY growth
254,105
89,238
89,492
178,730
-7.48%
57.30
38.36
Terminal
P/E
EV/EBITDA
Free Cash Yield
Terminal Value
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
3,119.4
$
50%
50%
Shares Outstanding
$
49.36%
Current Price
Upside/(Downside) to DCF
8,197
33,205
Implied equity value/share
Cash
Debt
Terminal
Value
254,105.1
9.9
5.04
6.81%
22
DCF V2
DCF Valuation V2
3/10/2009
Ticker: BP
Luke DiTomas
($ in million)
Terminal Discount Rate =
Terminal FCF Growth =
13.0%
3.92%
2009E
2010E
Forecast
2011E
2012E
2013E
292,955
-19.89%
300,808
2.68%
308,598
2.59%
321,872
4.30%
323,686
0.56%
52,575
41.00%
14.38%
54,152
3.00%
18.48%
56,995
5.25%
18.95%
60,985
7.00%
19.76%
66,474
9.00%
20.65%
72,988
9.80%
22.55%
35,239
9.64%
28,710
9.80%
29,479
9.80%
30,243
9.80%
31,543
9.80%
31,721
9.80%
148,494
2.8x
0.41x
178,702
3.3x
0.61x
216,582
3.8x
0.72x
256,137
4.2x
0.83x
305,778
4.6x
0.95x
372,239
5.1x
1.15x
Net Income
EBIT Margin
21,666
5.92%
20,038
69.80%
20,575
69.80%
21,108
69.80%
22,016
69.80%
22,140
69.80%
EPS
Analyst Estimates
$8.17
$5.74
$4.37
$6.30
$5.97
10,985
3.00%
(15,683)
-4.29%
26,074
7.13%
10,722
3.66%
17,373
5.93%
20,888
7.13%
11,558
3.84%
9,177
3.05%
21,448
7.13%
12,419
4.02%
9,412
3.05%
22,003
7.13%
13,540
4.21%
9,817
3.05%
22,949
7.13%
14,206
4.39%
9,872
3.05%
23,079
7.13%
(9,106)
27,246
-399%
6.56x
19,862
-27%
10.90x
20,937
5%
12.23x
22,424
7%
13.64x
23,140
3%
16.09x
Year
2008
Revenue
% Growth
365,700
EBITDA
Growth
Margin
Operating Income
Operating Margin
Enterprise Vaule
EV/EBITDA
EV/Revenue
Add Depreciation, Depletion
and Amortization
% of Sales
Plus/(minus) Changes WC
% of Sales
Subtract Cap Ex
Capex % of sales
Free Cash Flow
YOY growth
EV/FCF
-16.31x
Terminal Value
NPV of free cash flows
NPV of terminal value
Projected Equity Value
Free Cash Flow Yield
264,832
80,488
78,016
158,505
-5.75%
Shares Outstanding
3,119.4
Current Price
$
38.36
Implied equity value/share
$
50.81
Upside/(Downside) to DCF
Terminal
Value
Terminal
P/E
EV/EBITDA
Free Cash Yi
264,831.7
12.0
5.22
8.74%
32.46%
23