Example Of Report On British Petroleum: Project Report

Type of paper: Report

Topic: Company, Finance, Oil, Investment, Taxes, Business, Gas, England

Pages: 6

Words: 1650

Published: 2021/01/07

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Introduction

British Petroleum, also known as BP plc. is the sixth largest oil and gas company of the world. Headquartered in London, England, BP plc. is a multinational organization with its operation spread across 80 countries. By market capitalization, it is the sixth largest energy company in the world, producing oil equivalent to 3.2 million barrels (510,000 m3/d) per day. As of April 2014, its market capitalization was £85.2 billion, the fourth largest of any organization listed on the London Stock Exchange. With 17,800 service stations around the world, its largest division is based in the USA. It has 19.75% stake in Russia-based Rosneft, which is the largest publicly traded oil and gas company in terms of hydrocarbon reserves and production in the world. BP has total proved oil reserves of 17.9 billion barrels (2.85×109 m3). BP has secondary listings on the New York Stock Exchange and the Frankfurt Stock Exchange.
Recently in 2010, BP got itself drawn into a controversy when due to the explosion and sinking of the Deepwater Horizon oil rig, 210 million US gallons of oil was spilled into the Gulf of Mexico, thereby causing severe economic, environmental and health related consequences. The case damaged the reputation of BP significantly. The verdict of the case is still pending in the court, but BP has been charged of several counts of felony manslaughter, lying to Congress and misdemeanors. Apart from this incident, BP has also been involved in several other major environmental and safety incidents, including 2006 Prudhoe Bay oil spill, 2005 Texas City Refinery explosion, oil spill on the North Slope of Alaska, and the wreck of Torrey Canyon. This paper would present a project report on BP, touching upon different aspects of the company, highlighting its finances.

Conceptual Framework and Financials Statements of BP

Conceptual framework is an initiative by International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) to formulate a guideline for the companies to follow for financial reporting. Before the conceptual reporting came into existence, companies were free to define their own accounting practices, inventory definitions, assets and liabilities definition and disclosure requirements. However, FASB in the USA and IASB mainly in Europe created a framework for publishing financial statements and annual statements for publicly listed companies to protect the rights of shareholders, other stakeholders, share market investors, government, general public and the company employees. This is a common framework used by all the companies so that almost anyone can compare the health of two companies by looking at the financial statements.
Currently, conceptual framework revision work is done by IASB only. As per the conceptual framework, IASB has provided clear definitions for assets, liabilities and shareholders’ equity. These definitions are also available specific to industry. IASB also defines the elements of financial statements and provides guidance about recognition and de-recognition of revenue. Companies in the past used to employ innovative accounting practices, as Enron did during 1998-2001, to recognize revenue when there were no actual earnings. However, with clear revenue recognition and de-recognition techniques, it is not difficult for companies to inflate revenue to improve in share prices or deflate profit to save on tax. IASB conceptual framework also provides guidance about measurement of revenue earned and how to measure assets and liabilities. Finally, presentation and disclosure requirements are also clearly defined. For example, a publicly listed company not only needs to publish income statement, balance sheet and cash flow statement at least once a year, but also needs to publish additional information such as salary of the top management and board of directors, corporate governance structure, investments, legal proceedings, major changes in assets and liabilities, code of ethics and major shareholding information.
After the Enron scandal and after it became apparent how companies employ innovative strategies to operate in different countries to save tax, IASB came up with its definition of reporting entity. Definition of reporting entity makes sure that a company that has operations in many countries, holds share in multiple companies and has several subsidiaries must correctly furnish information related to its income for tax purposes. The definition of reporting entity also ensures that a company is not taxed more than once for the same revenue. In summary, conceptual framework promotes harmonization of regulations, accounting procedures and standards related to the presentation of financial statements. This has also helped reduce the alternative accounting practices. This framework helps the national governing bodies to create their national accounting laws and standards.
British Petroleum follows transparent accounting practices. As it was originally a government concern before 1987, BP inherited rigorous accounting practices. Its current accounting practice fulfills all the requirements and recommendations suggested by the IASB conceptual framework. The current sections of BP financial statement are as shown below:

Source: (“Annual Report and Form 20-F 2014” 2015)

Company Analysis of BP
BP is a non-risky well-established company. Hence, the analysis of the company will be made in top-to-down order. All the assumptions are based on information retrieved from 2013 and 2014 annual report of BP.

Executive Team

Founded in 1908 as an Anglo-Persian Oil Company, it was a subsidiary of Burmah Oil Company that exploited oil discoveries in Iran. It turned into the Anglo-Iranian Oil Company in 1935. It became British Petroleum in 1954. Its executive team consists of Bob Dudley (CEO, who also served as President and Chief Executive in 2010), Andy Hopwood (Chief Operating Officer), and Brian Gilvery (Chief Financial Officer), and several other key members.

Share Capital

The share capital of BP comprises ordinary shares worth $0.25 each, 8% cumulative First preference shares worth $1 each, and 9% cumulative Second preference shares worth $1 each. For ordinary shares, the primary market of BP is the London Stock Exchange (LSE). Ordinary shares are also traded on the Frankfurt Stock Exchange (FSE). American Depository Shares are used to provide the securities. As per ADS, the US investor can invest in foreign companies without going through the problem of currency conversions. Each ADS stands for six ordinary shares and have listing on the New York Stock Exchange (NYSE).

Products and Services

BP offers a wide range of products and services including industrial lubricants, motor and oil lubricants, marine fuels, LPG for home, and petrochemicals. Though the company faces the threat coming from the alternative energy substitutes such as wind, solar power and nuclear energy, but the threat is not significant as of now, because all these energy resources are expensive and are still in rudimentary stage.
BP went public with the partial sale of the company through a public offer that took place in 1977 during the Laborist government under the tenure of PM James Callaghan. As of 2014, in terms of revenue, BP is the third largest oil company. The first and second positions are occupied by Royal Dutch Shell, UK and Sinopec, China respectively.

Shareholders

As regards shareholders, British shareholders have 40% stake in the company, US shareholders have 39% stake and rest of the 21% belongs to shareholders from other countries. Some of the primary institutional shareholders of the company include Franklin Resources, Wellington Management Company, Morgan Stanley, and State Street Corporation.

Dividend

Shareholders have requested oil giants such as Shell and BP to control expenditure and give back more cash due to concerns for the rising cost in the oil and gas industry and its impact on the overall profitability. Since BP is the largest foreign investor in Russia with about 20% stake in Rosneft, it is expected of BP to help Rosneft stay afloat in the face of the current trouble. In order to protect the interests of shareholders, BP has adopted a stakeholder-friendly policy by announcing that it will buy back shares worth $8 billion from TNK-BP, thereby returning to the shareholders the money they had contributed to the complicated Russian venture. Additionally, the company declared a dividend of $0.37.

Recording of Business Transactions

The ability to accurately record all business transactions is vital for any business to understand its financial situation and cash situation. BP follows a double entry book keeping system, which is the standard accounting practice for most of the companies across the world to record each and every transaction. BP also keeps a good inventory of all its source documents that bear the proof of the entries in T-accounts. It maintains separate journal entries and T-accounts for its asset, liabilities, equity, dividend, revenue and expense accounts. Based on the recorded transactions in the T-accounts, corresponding values of the asset, liability, equity, income or expense goes up or down. Apart from the standard double entry system, BP also uses contra accounts for some of the elements of balance sheet. For example, BP offsets accumulated depreciation with a contra account entry in equipment. Similarly, it also adjusts for allowance for bad debts against the contra account for term notes receivable.

Presentation of Financial Statement

British Petroleum has a benchmark process for presenting its financial reporting through the annual statement. It starts the reporting of financial statement with highlights of the business for the previous year. The highlights for year 2014 are as shown below:
Source: (“Annual Report and Form 20-F 2014” 2015)
Highlights give the basic information about the company performance, future trends and profitability and earnings. After providing the basic highlights for the year, BP provides its present state of operations around the world like existing manufacturing plants, oil extraction sites, exploration sites and natural gas extractions sites. This is followed by the Chairman’s letter, highlighting the key strategy that BP is following presently, and whether any strategy change will take place in the future. This part also highlights the major changes in shareholding pattern, if any. For example, in the 2014 report, BP announces that it has bought back shares worth $8 billion from TNK-BP of Russia. In the financial statement, BP also shares with the shareholders about the future market conditions as envisioned by BP. For example, in the 2014 report, BP gave the energy consumption predictions by region and fuel type for the next 20 years.
Source: (“Annual Report and Form 20-F 2014” 2015)
BP also presents its strategy, operating model, key performance indicators, future markets in the subsequent sections. After providing the basic figures and the strategy and outlook, BP gets into the detail of providing the financial performance of the company by presenting cash flow statement, balance sheet and income statement. It also gives details about why a particular element in the financial statement has shown significant decline or rise. For example, the revenues in 2014 decreased for BP compared to 2013. BP explained the cause for the decrease as low product prices in the market and lower liquid realizations. This section also highlights the decommissioning of the projects (like few gas wells in Angola in 2014 by BP), details of write-offs ($845 million due to extraction of non-commercial grade oil), new exploration/investments done (such as new contract sign with Azerbaijan), productions forecasts, gas trading, downstream operation details, other business operations, legal proceedings (Gulf of Mexico Oil spill) and major partner operations (Rosneft). Subsequent sections talk about corporate social responsibility (such as accidents trend), corporate governance, additional disclosures (liquidity), downstream capacity changes, environment expenditure, legal cases, code of ethics and shareholder information.

Recorded Inventory and Merchandizing Operations of BP

In the oil and gas industry, the calculation of inventory is different from that of other industries. There are different types of inventories. For example, for raw materials reserve, the inventory is calculated only on the basis of the proved reserve. However, this inventory is not a part of balance sheet as assets. Although this inventory is managed by BP, this proved reserve is only shown as upstream reserve in the BP financial statement. The upstream reserve of the raw material proved reserve for BP is shown below:
Source: (“Annual Report and Form 20-F 2014” 2015)
It can be seen from the above figures that the proven reserve of both crude oil and natural gas has gone down from 2013 to 2014. This means that during this time BP was unable to determine fewer sources of new oil or natural gas fields than the total extraction of crude oil and natural gas.
The production operation in 2014 also witnessed a decline mainly due to soft demand in the European market and the overall sluggishness in the global economy. The production of crude oil decreased in 2014.
Source: (“Annual Report and Form 20-F 2014” 2015)

Investments and International Operations

Investments
Currently, BP is making investments on projects involving alternative energy technologies to help reduce its carbon footprint. The target set in 2005 for spending $8 billion on alternative energy technologies by 2015 has already been fulfilled by the company. Though BP spent a significant portion allotted for alternative energy technologies on wind power, in 2013 April, however, the company sold the division of wind power and focused all its attention on its core businesses. This situation has raised eyebrows regarding the viability of BP projects.
As of now, BP holds 19.75% shares in Rosneft. It also invested heavily in Russia by founding TNK-BP in 2003 with a group of Russian billionaires, spending a whopping $8 billion as initial investment. In 2013, BP sold half of the TNK-BP joint venture to Rosneft for $55 billion, and thus, BP acquired a 19.25% stake in Rosneft. However, due to the current conflict in Ukraine and the sanctions imposed on Moscow by the west, the crude prices have dropped by 50% due to which the value of Rosneft has plunged by $4.3 billion, causing BP to incur a loss of $849 million.

International Operations

British Petroleum has operations in all six continents of the world. Also, it has customers in more than 80 countries. BP’s headquarter is located in London. The majority of its shares is held by British shareholders (40%) followed by American shareholders (39%). It has major petroleum extraction sites at the Gulf of Mexico, Alaska, Kuwait, Northern Ireland, the North Sea, and North Africa. BP has major natural gas extraction facilities in the Gulf of Persia, Egypt, the North Sea and Argentina. Apart from oil and natural gas, the company has three sugar cane mills in Brazil, a bioethanol plant in the UK and 16 wind energy generation plants in the USA. Azerbaijan is one of the countries in the North-West Asia where BP has a significant presence in both oil and natural gas extraction process. Apart from all these countries, BP has huge operation in Russia through Rosneft. Rosneft is the largest hydrocarbon producer in the world, and as per the estimation of BP, Rosneft holds one of the largest proved reserves of natural gas in the world.
British Petroleum has significant presence in Africa as well. BP has nine major deep water oil blocks over an acreage of 32,600 square kilometer off the coast of Angola. It has heavy investment in that area. Apart from extraction, BP has petrochemical manufacturing sites in Asia, America and Europe. The majority of the company’s manufacturing capacity currently is located in Asia (48%), followed by America (27%) and Europe (25%).

Statement of Cash Flow and Financial Statement Analysis of BP

Source: (“Annual Report and Form 20-F 2014” 2015)
The balance sheet clearly shows that the total asset of the company has slightly reduced in 2014 compared to 2013 and the total liability has gone up. This has reduced the total net worth of the company. However, overall between 2012 and 2014, the net worth trend is still positive. Healthy property account is a positive sign for the company but the net cash in hand has significantly increased, which speaks volume about the liquidity condition of the company. However, long term investments have gone down.
Source: (“Annual Report and Form 20-F 2014” 2015)
Looking at the income statement, it can be seen that the net income rose substantially in 2013. However, due to input cost pressure and decreasing oil price, the overall revenue for the year 2014 has come down. It has also impacted the profit which has reduced drastically from $23 billion in 2013 to $11.2 billion in 2014. Non-recurring cost has increased mainly due to legal settlement charges of oil spill in the Gulf of Mexico. In fact, the company is expected to pay a few more billion dollars as settlement charges in the coming years.
Source: (“Annual Report and Form 20-F 2014” 2015)
Cash position of the company deteriorated due to changes in liabilities in 2013, but in 2014, BP was able to improve the liquidity situation substantially due to improved cash position from operations. Cash situations mainly improved due to an adjustment in the net income. However, apart from that, the overall cash situation of BP is not moving towards the right direction.
The quick ratio of BP has improved over the last 10 years. It was at 0.95, below industry average, in 2008. From there, BP took some loan restructuring initiatives. Currently, it has a healthy quick ratio of 1.37, which is higher than the industry average of 0.99, and also higher than its main competitors like Chevron and Exxon Mobil.
BP’s debt equity ratio of 0.41 is one of the lowest in this industry. In fact, oil and gas is an industry where most of the players have high debt to equity ratio. BP is in a good position to leverage this to get more debt from the market in case some lucrative investment opportunity comes up.
BPs has a cash conversion cycle of 12.5 days and inventory of 28 days; both of these figures are one of the best in industry and are one of the reasons for BP to make more profit than its close competitors. BP experienced a huge growth through mergers and acquisitions in 2012 and 2013, but due to bad investment decisions in the past, it sold some business in 2014, and also some of its equity partners performed poorly resulting in the decrease in its growth rate in 2014. BP’s historical profit margin of close to 6-7% is higher than the industry average. However, in 2014, due to decreasing dollar sales and input cost pressure, the profit margin plummeted to 1.5% of the revenue.

Conclusion

British Petroleum is one of the top ten largest companies in the world. It has seen some major setbacks like the Gulf of Mexico oil spill in its operation over the years, but its operational practices and core strength is such that it was able to bounce back every time. BP has a sound financial reporting practice. It follows almost all recommendations of IFSB as per its conceptual framework. Apart from publishing quarterly financial report, BP publishes detailed financial report every year. It not only publishes the financial statements, but also discloses information about corporate governance, investments, future strategy, ethical code of conduct and bad debts/write offs. In 2014, BP’s profit plummeted due to input cost pressure and revenue decreased due to lower oil price. However, it was able to respond to the situation with proper measures and ended the year at a positive cash position. The finances of the company appear solid and BP is ready to explore new challenges. The only concern for the company remains the Gulf oil spill related settlements and the resultant damage to its brand image.

Work Cited

"2014 ranking of the global top 10 oil and gas companies based on revenue (in billion U.S. dollars)". Statista. 2014. Web. 31 Mar 2015 <http://www.statista.com/statistics/272710/top-10-oil-and-gas-companies-worldwide-based-on-revenue/>
"Annual Report and Form 20-F 2013". BP Plc. 2013. Web. 31 Mar 2015 <http://www.bp.com/content/dam/bp/pdf/investors/BP_Annual_Report_and_Form_20F_2013.pdf>
"Managing your shares - ADS holders". BP plc. 2015. Web. 31 Mar 2015 <http://www.bp.com/en/global/corporate/investors/shareholder-information/managing-your-shares---ads-holders.html>
Adams, Christopher. "BP suffers as oil price and Russia crisis weigh on Rosneft stake". The Financial Times Ltd. 4 Jan 2015. Web. 31 Mar 2015 <http://www.ft.com/cms/s/0/173ef1da-927e-11e4-b213-00144feabdc0.html#axzz3W01fCTl2>
“A Review of the Conceptual Framework for Financial Reporting”. International Financial Reporting Standards (IFRS). 2014. Web. 31 Mar 2015 <http://www.ifrs.org/current-projects/iasb-projects/conceptual-framework/discussion-paper-july-2013/documents/discussion-paper-conceptual-framework-july-2013.pdf>
“Annual Report and Form 20-F 2014”. British Petroleum (BP). 2015. Web. 31 Mar 2015 < http://www.bp.com/content/dam/bp/pdf/investors/BP_Annual_Report_and_Form_20F_2014.pdf>

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