REPORT ON ANALYSIS OF THE FINANCIAL PERFORMANCE OF BRITISH PETROLEUM

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ABSTRACT

This report is born out of the need to analyse how the deepwater oilrig explosion which occurred in April 2010 at the Gulf of Mexico affects 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

This report is divided into two parts, the first is the background of British petroleum and the second is the interpretation of accounts using financial ratio analysis of British petroleum.

TABLE OF CONTENTS

ABSTRACT 2

1.0 BACKGROUND 4

2.0 RATIO ANALYSIS FOR BRITISH PETROLEUM PLC FOR SECOND QUARTER 2009 AND SECOND QUARTER 2010 6

2.1 PROFITABILITY RATIO 7

2.1.1 RETURN ON CAPITAL EMPLOYED (ROCE) 7

2.1.2 RETURN ON ODINARY SHAREHOLDERS FUNDS (ROSF) 7

2.1.3 NET PROFIT MARGIN 7

2.1.4 CONCLUSION 8

2.2 EFFICIENCY RATIO 8

2.2.1 STOCK TURN OVER 8

2.2.2 DEBTORS COLLECTION PERIOD 8

2.2.3 CREDITORS PAYMENT PERIOD 9

2.2.4 CONCLUSION 9

2.3 LIQUIDITY RATIO 9

2.3.2 ACID TEST 9

CONCLUSION AND RECOMMENDATION 10

REFERENCES 11

1.0 BACKGROUND

British Petroleum (BP) was first originated in the 20th century; BP is about the third largest oil company in the world. BP has three main operations; the first operation is the exploration and production in the upstream sector of the oil industry, this operates in 29 countries and produces 1.93 million barrels of crude oil and 7.6 billion cubic feet of natural gas each day. The second operation is the downstream operation which involves refining, marketing, supply, and transportation; this operates 23 oil refineries, with an output of 3.2 million barrels. The third operation is the production of chemicals obtained from petroleum (by-products) substances, this generates a percentage of revenue being used in a wide range of applications, such as plastics, chemicals and household cleaning agents.

In the 21st century, BP sort to find new forms of reducing carbon emission in the atmosphere and expanded in its operations, by merging with Amoco, ARCO and Burmah Castrol and became BP plc.

In 2005, BP decided to address climate change by installing solar panels at every service station, providing electricity through solar power to remote villages in Algeria and the Philippines.

In 2006, the Baku-Tbilisi-Ceyhan (BTC) pipeline was inaugurated by presidents of Azerbaijan, Georgia and Turkey and BP was became of one the leading stakeholders for this project which transports crude oil onto world markets.

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 was penetrating new resource opportunities at Egypt the gulf of Mexico Iraq Indonesia and Jordan. British petroleum increased production and performance while maintaining safety, on the contrary global economic recession drove energy consumption low, this was a significant decline since 1982.

In 2010, British petroleum was hit by oil spillage at the Gulf of Mexico as a result of Deepwater Horizon oil rig explosion that lasted for 6 months. The spillage cost British petroleum a five thousand barrels a day oil spillage which amounted to $430,000 a day this affected the biotic and abiotic things of the region

B sells its four deeps of water in the Gulf of Mexico to Japan Marubeni Corporation for $650 million to pay for oil spill.

2.0 RATIO ANALYSIS FOR BRITISH PETROLEUM PLC FOR SECOND QUARTER 2009 AND SECOND QUARTER 2010

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. Financial ratios are veritable tools used to interpret accounts, they will be used to compare performance in the company between past and present outcome, in some cases they are used to anticipate feature outcomes. This report will apply most of these features of financial ratios.

2.1 PROFITABILITY RATIO

We will examine the profitability of second quarter 2010 and second quarter 2009 to analyse the effects of the oil spill on its financial summary for the period.

TABLE 1

Second quarter 2010 Second quarter 2009

ROCE -27.8% 64.3%

ROSF -19.9% 46.0%

Net Profit margin -32.1% 12.9%

2.1.1 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

2.1.2 RETURN ON ODINARY SHAREHOLDERS FUNDS (ROSF)

The return on ordinary shareholders' funds ratios compares the net profit after taxation and the share holders funds in the company for the period thus; British petroleum had an increasing net profit available to its share holders 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.

2.1.3 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.

2.1.4 CONCLUSION

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

2.2 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.

TABLE 2

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

2.2.1 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.

2.2.2 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.

2.2.3 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.

2.2.4 CONCLUSION

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.

2.3 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.

TABLE 3

Second quarter 2010 Second quarter 2009

CURRENT ASSET 1.5 2.4

ACCID TEST 1.3 2.2

2.3.1 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

2.3.2 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 British petroleum might be finding it difficult to meet up its short term obligations if the factor continues falling

CONCLUSION AND RECOMMENDATION

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