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Oil Company

Essay by   •  February 12, 2013  •  Case Study  •  3,163 Words (13 Pages)  •  1,254 Views

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Company History and Background

From its humble beginnings as Anglo-Persian Oil Company in 1901, BP (British Petroleum) has grown into one of the world's leading international oil and gas companies; employing over 80,000 people and operating in over 80 countries worldwide.

BP has experienced many success and numerous disappointments from the vision of investor William D'Arcy and explorer George Reynolds to finding oil in Persia on May 26, 1908. However, finding oil was not a guarantee for success. Although they had plenty of oil, by 1914 they were nearly bankrupt because they had no one to sell it to. This was due to the fact that At the time there wasn't a market for automobile fuel yet and more established companies in Europe and the New World had the market in industrial oils cornered.

This difficulty would not loom over them long. As the automobile became a staple in Europe, BP-labeled gas stations grew from 69 pumps in 1921 to over 6,000 by 1925 (BP). Shortly after changing the company name in 1935, as a result of Persia changing its name to Iran, the next major game changer would arise, World War II.

Gasoline became a rationed commodity and Anglo-Iranian, Shell, and other brands sold in the United Kingdom with consolidated together into a generic fuel named 'Pool'. Nationality trumped commercial viability, and BP's growth on the continent abruptly stopped. Like many companies, BP lost a lot in World War II but it also gained the resolve it needed to keep moving forward.

Rebuilding began by investing in refineries in France, Germany and Italy, new marketing efforts in Switzerland, Greece, Scandinavia and the Netherlands, and gas sales in New Zealand (BP). Again the fragile new stability Anglo-Iranian would soon be shattered by political crises in the oil-rich Middle East, with tremors that would shake the 'Iranian' right out of the company's name.

Questioning the right of Westerns to profit from Middle East resources caused Anglo-Iranian's refineries to come to a screeching halt in 1951. It would be 18 months before, an agreement was reached and their oil refining operation would restart. As a result of this crisis, the board of directors decided to rename the company and in 1954 it became British Petroleum (BP).

Another crisis in the Middle East in the 1970's, would again move BP to their resolve to move forward continued to contribute to their success, combined with their recent discovery of major oil fields in Alaska and off the coast of Scotland.

To guarantee their ability to bring the first Alaskan gasoline to market, BP purchased a 25% stake in Standard Oil of Ohio. Ultimately in 1987, BP bought the company outright, it brands also includes Amoco, Aral, ARCO, and Castrol.

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Financial Analysis

As indicated in their 2010 annual report, their 2010 results were greatly impacted by the charge recorded for the Gulf of Mexico spill incident (BP Global). However, as illustrated below (Figure 1) at first glance it is difficult to see when comparing some of the 2010 to 2009 figures, where their net sales increased by 19.5%, their current assets increased by 24.6% and their net assets increased by 13.3% .

Figure 1

Comparison of 2009-2010 Net Sales, Current Assets, and Net Assets

(Based on data found in BP's 2010 Annual Report, page 146 and 148)

To truly assess BP's performance you would have to look at 2010 as an exception and that the new rule. Given the fact that over the past 5 years BP's has an average net income of $20.9 million and average net sales of $281.3 million. (More content needed)

Figure 2 Figure 3

Net Income Comparison Sales & Other Operating Revenue Comparison

(Figures based on data found in BP 2010 Figures based on data found in BP 2010 Annual Report

Annual Report, page 146 and Annual Report, page 146 and

2007 Annual Report, page 96) 2007 Annual Report, page 96)

Another important factor that must also be evaluated, given events in the Gulf of Mexico, is BP's short-term viability as a company, particularly its ability to pay and/or reduce its liabilities and fund capital expenditures.

BP's current ratio in 2010 was slightly above 1:1, which means that they can sufficiently cover its current obligations. The strength of their 2010 current ratio can be attributed to their "free cash flow and their recent asset divestment" according to Stephen Simko, a Morningstar Senior Stock Analyst (Simko, 2011). In comparison to other leading oil and gas companies (see Table 1), BP's current ratio is lower than (More content needed)

Table 1

Current Ratio Comparison ($ millions)

BP ExxonMobil Chevron Shell Total ConocoPhilips

Current Assets 89,725 58,984 48,841 112,894 56,936 34,660

Current Liabilities 82,832 62,633 29,019 100,552 40,251 27,419

Current Ratio 1.083 0.942 1.683 1.123 1.415 1.264

In addition to the current ratio, one must review and analyze a company's Statement of Cash Flow to determine where its money is coming from, and how it is being spent. In Table 3, it can be noted that with the exception of 2008 and 2010, BP has an average of $26.5 million from their operating activities.

Table 3

Cash Flow Comparison ($ millions)

2005 2006 2007 2008 2009 2010

Cash from by Operating Activities 26,721 28,172 24,709 38,095 27,716 13,616

Cash Used in Investing Activities (1,729) (9,518) (14,837) (22,767) (18,133) (3,960)

Cash From Financing Activities (23,303) (19,071) (9,035) (10,509) (9,551) 840

Currency Translation (88) 47 135 (184) 110 (279)

Net Cash Flow 1,601 (370)

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