History: BP Plc

Discuss about the Analysis on the Performance of BP and Caltex.

The oil industry entails the exploration, extraction, refining, transporting and marketing of petroleum products. Fuel oil and petrol is the largest volume produced from the above process. Over 80% of the world’s oil reserves are controlled by national oil companies. Of the top 20 largest oil companies 15 are national companies i.e. are state owned. The seven largest (super majors) international oil companies in order are; Exxon-Mobil, Royal Dutch Shell, BP/ Amoco, Total, Chevron and Conoco Phillips. These are publicly traded oil companies. 30 billion barrels of oil industry products are consumed every year, making this industry the world’s largest in dollar value. Of the total oil produced in 2007 the USA consumed 25%. (Anon, 2018).

The use of oil (unrefined) can be traced back to the early human history where it was prominently used for fires and in warfare. Humans’ oil usage has evolved from the use of whale oil for lighting in the 19^th century and well into the 20^th century, where greater industrialization necessitated the use of coal and wood to complement whale oil as energy sources. The demand for petroleum increased in the 20^th century after it was discovered that kerosene could be extracted from crude oil, (Halliday, 2018). The popularity of kerosene lamps led to the growth of the oil refinery sector. Americans first oil refinery was established in 1853 by Samuel Kier. The first oil tanker, Zoroaster, was commissioned in 1878 by Ludvig Nobel on Branobel Company and plied the Caspian Sea. Up until the 1^st quarter of the 10^th century, Russia was, the leading oil producer. It was however overtook by the USA. After WW2, the Middle East took the lead in oil production from the USA. New techniques have been adopted in the oil industry ever since such as deep water drilling, introduction of drill ships and a global network of tankers and pipelines. However despite the necessity and importance of the oil industry it remains to be a source of great environmental pollutant in all its stages leading to air pollution, acid rain, ailments etc.

“To find, develop and produce essential sources of energy and turn the sources into products needed everywhere. We expect to be held to high standards in what we do. We strive to be a safety leader in our country, a world class operator, a good corporate citizen, a great employer we are BP” (Jurevicius, 2018).

Caltex

VALUES; safety, respect, excellence, courage and one team.

Formerly known as British petroleum, is a multinational oil and gas company, headquartered in London, England. It is one of the oil industry super majors. In 2012, BP was ranked the 6^th largest energy company by market capitalization and the 12^th largest by revenue turnover. It is a vertically integrated player in the oil industry, that is to say it engages in all aspects that constitute the oil industry processes (exploration, extraction to marketing) including petrochemicals and power generation. It offers varied products including petroleum natural gas, motor fuels, aviation fuels and petrochemicals. Its operations extend to 72 countries and owns about 18000 service stations. BPs largest division is BP America in the USA. Its Chairman is Carl-Henric Svanberg and Bob Dudle is the Chief Executive Office.

BP was founded in 1908 in the name of the Anglo-Persian oil company which was a subsidiary of Burmah Oil Company. In 1935 it was renamed the Anglo-Iranian oil company which was a decision of new leadership.  In 1951, the countries elected premier, Mossadegh nationalized its holding shutting off an important pipeline. In 1954 the company rebranded to the BP Company. In 1959, it expanded beyond the Middle East to Alaska where it was the first to strike oil in the North Sea. In 1978 it acquired majority control of the Standard Oil of Ohio and privatized it. In 1998, it merged with Amoco to become BP Amoco and acquired ARCO and Burma Castrol and become BP plc. In 2001. (Tikkanen, 2017). In 2005, there was an explosion in a BP, refinery killing 15 workers, in 2006 there was an oil spill of over 25000gallons leading to a costly cleanup. Despite it’s beyond petroleum initiative it has scaled down its renewable energy efforts. In 2012 it closed its solar energy unit.

“Committed to delivering superb service and top quality products, we will rely on our tradition of innovation to do more than satisfy customers. We intend to win their loyalty. Our core beliefs of people, service and value are the foundation of a new Caltex-a service  driven, innovative marketer that consistently meets/ exceeds the expectations of its retail, industrial and commercial customers this is the spirit by which we live, work and measure our performance”.( Microsites.caltex.com.au,2018)

Caltex began in 1936 as the California Texas oil company which was a joint venture between the Texas Company (later named Texaco) and standard oil of California (later named chevron corporation). It aimed on developing overseas opportunities for oil refining and marketing. Caltex suffered great losses with Japan’s invasion and confiscation of all Caltex drilling equipment to fuel japans wartime world military. After WWII, Caltex drew resources from chevron and Texaco to further its expansion agenda overseas where it adopted a local hiring policy. In the 1950s Caltex, Nippon oil co and Koa oil co. and South Korean engineers constructed the largest tanker and oil holding facilities in the world. Caltex furthered its joint venture partnerships within Australia, New Zealand and Philippines.

Top Down Analysis

In Australia, Caltex opened refineries in the 1950s and 1960s. It encountered fierce competition from the all Australian oil importer, Ampol in the service station arena and oil product marketing. Caltex acquired Golden Fleece. In 1995, Caltex and Ampol merged making it the largest refiner and marketer of oil in Australia. (Companieshistory.com, 2018).

Caltex is a vertically integrated company, that is to say it is involved in exploration, extraction, refining, transporting and marketing of petroleum products. Its supply chain involves the use of pipelines, depots, terminals and fleets. Its marketing arm entails operation of service stations, convenience stores (Caltex, Woolworths, and starmart), retail fuels, automotive products (ATFs, grease and engine oils), groceries, fast foods, automotive services as well as car wash. They offer online account management where clients can through their website access information as regards the company, its products and services. More than 85% of its employees are nationals of countries within which it operates. It has major presence in East Africa, East Asia, China, Middle East, South East Asia, and South Pacific and is the only international petroleum firm that operates in all major Asian markets.

The Australian economy is stable and people and business are optimistic as revealed by the confidence index (8) given by the national Australian bank. Interest rates have remained low since august 2016 and is currently 1.5% the inflation rate is 1.9% (lower than the projected 2-3%) and is especially favorable to the non-mining business expansion. Consumer spending levels are higher (financed by rising debt levels rather than income growth) (Riley, 2018). Inflation remains steady. Australia is the 2^nd wealthiest nation (wealth per adult) and ranks as the 13^th nation in terms of nominal GDP. (The Guardian, 2018). There are several factors as discussed below that greatly affect this industry.

Financial crisis

In times of financial crisis, there normally follows a steep decline in the prices of goods and services. The lower prices mean lower revenues for the industry. Also it follows that the credit conditions are tighter forcing the  players (who are usually highly leveraged) to pay higher interest rates in raising capital, curtailing their investments in production and consequently lowering their revenues which are already low owing to the lower prices fetched by their products in the market (Tonby, 2009).

Interest rates

Most oil and gas industry players are heavily leveraged thus subject to interest rates. High interest rates makes borrowing for investment very expensive as it raises the capital costs of producers (Arora, 2011). As a result only a few engage in the production, leading to lower production and obeying the law of demand where the quantity demanded and price are inversely related thus consumers are required to pay higher prices. The higher interest rates on the production end serves to raise operating costs of the companies thus lowering their revenues (as they have to pay out higher interests on their debts) in the case that price does not rise to mitigate the higher rates by raising the revenues. Interest rates also influence exchange rates, (Kim and Jung, 2018)

Supply and Demand Risks

The nature of the oil industry is coupled with inflexibility such that you cannot easily lower production or raise it as per market needs in the short term. Operations take a lot of time and capital to get going and are not easy to shut down when with extended periods of high oil prices consumers seek fuel efficient vehicles, reduce driving, businesses and individuals get into energy conservation thus reduced demand for oil industry products.

Cost Risks.

These are basically operational costs. The more the regulations a company faces the greater the costs for the company which eat deeper into their revenues (Guimaraes, 2012). The ease of the drill determines the cost of the project. If it is difficult drilling gets costly lowering net revenues. Payroll cost is yet another key cost. Companies will want to hold on to their key expert employees even in low production periods who they will still pay even with reduced production capacity even if their role is significantly reduced as at that time.

Tax

Taxes act to reduce the revenues. Higher taxes or lower tax subsidies for the oil industry translates to higher production costs for the players. This in turn serves to lower the revenue for the players as the higher costs eat into their earnings. High taxes on petroleum products may reduce output which may in turn lead to higher prices. However, most nations give tax subsidies/ incentives to encourage production as it is the most common source of energy (Mark and Cussen, 2018). For instance, in the US the tax rate of the oil industry is 9% while companies in other industries pay 25%.

There are various measures used in evaluating the performance of a company. They include liquidity, solvency, efficiency and profitability.

Liquidity ratio – these show a company’s ability to meet its short term needs. Liquidity refers to the amount of cash and easily convertible to cash assets a company has. A ratio greater than one is an indicator of flexibility and is thus preferable

Current ratio = current assets/ current liabilities

Current liabilities: (accounts payable +short term debt current portion of long term debt).

Current assets = (net receivables inventory +short term investments.)

 Caltex,

=3876.94m/2360

=1.64

 BP,

=74,968m/64,726m

=1.15

They are all well equipped to meet their short term debt obligations. However, Caltex is better equipped than BP as can be deduced from its higher current ratio.

Solvency ratios – they show a company’s ability to pay for its long term debt obligations .shows a company’s ability to meet its debt obligations on going concern basis. The debt/equity ratio indicates debt sustainability against stockholders equity. The smaller the ratio the better.

Caltex

71.4+870.92/ 2590

=0.36

 BP

10547m+69380m/9849m

=0.81

The lower the ratio the more solid the financial base of the company. In this regard Caltex has a higher debt sustainability as compared to its counterpart Caltex.

Efficiency: Efficiency ratios show how efficient a company’s management is. One of the ratios measuring efficiency is the inventory turnover ratio. This shows how effective a company is in converting its stock into cash (sales) and is given as a ratio of the cost of goods sold relative to its inventory. A higher ratio is thus more preferred.

Inventory Turnover 

Caltex,

=22.81B/ 2.03

=11.23

For BP,

203945m/19011

=10.72

The companies are successful in converting inventory into sales. Caltex is more efficient in the inventory conversion to sales as can be seen from its higher inventory turnover relative to BPs.

Profitability ratios – they show how well a company utilizes its assets to attain profitability and value to its shareholders. Profitability ratios are the most used ratios by say investors when choosing whether to invest in any given company.

Return on capital invested – this ratio is most preferred as compared to its counterpart the return on equity. This is because contrary to return on equity which considers only equity capital, the return on capital measures the total revenue generated by all providers of capital, that is, debt and equity.

(EBIT-Tax) / (value of debt +equity).

Caltex

(863.6-242.69)/ (942.32+2590)

=EBIT (earnings before interest and tax)

=0.1758

 BP

(9254-2074)/ (79927+98491)

=0.04

Caltex (0.1758) is more profitable than BP (0.04).

Gross profit: EIBT/sales. Shows ability to pay for fixed costs and interests thus survive slowdown. It is also an indicator of the strength of management.

Caltex,

863.6/2435

=0.035

 BP

9254m/240208

=0.0385

In this case BP is better equipped to survive an economic slowdown as compared to Caltex.

The oil industry’s products are used in every household, company and government. This means that a hitch in its production would be felt by every single person in their budget. Governments need to create an enabling environment for the industry e.g. a tax subsidy which eases pressure in production availing more output to the market and consequently lower prices. The players in turn need to explore production of energy from the renewable energy sources in preparation for the extremity of exhaustion of oil fields.

Anon, (2018). [Online] Available at: Https://www.ciagovernmentlibrarypublications/the-world-factbook [Accessed 20 May 2018].

Arora, V. (2011). Asset Value, Interest Rates and Oil Price Volatility. Economic Record, 87, pp.45-55.

Companieshistory.com. (2018). Caltex Australia. [Online] Available at: https://www.companieshistory.com/caltex-australia/ [Accessed 20 May 2018].

Guimaraes, M. (2012). Evaluation of Political and Regulatory Risks in the Oil Industry. The Open Business Journal, 5(1), pp.28-36.

Halliday, F. (2018). The M.E in international relations. USA: Cambridge university press, p.270.

Jurevicius (2018). BP mission statement. [Online] Slideshare.net. Available at: https://www.slideshare.net/sovjure/bp-mission-statement [Accessed 20 May 2018].

Kim, J. and Jung, H. (2018). Dependence Structure between Oil Prices, Exchange Rates, and Interest Rates. The Energy Journal, 39(2).

Mark, P. and Cussen, A. (2018). Oil: A big investment with big tax breaks. [Online] Investopedia. Available at: https://www.investopedia.com/articles/07/oil-tax-break.asp [Accessed 25 May 2018].

Microsites.caltex.com.au. (2018). Caltex 2017 Annual Report. [Online] Available at: https://microsites.caltex.com.au/annualreports/2017/ [Accessed 20 May 2018].

Reid, C. (2011). World Economic Factbook 2010 (17th Ed.) 2011118Euromonitor International. World Economic Factbook 2010 (17th Ed.) London. Reference Reviews, 25(3), pp.26-26.

Riley. (2018). Inflation – Consequences of Inflation [Online] Available at: https://www.tutor2u.net/economics/reference/inflation-consequences-of-inflation [Accessed 24 May 2018].

Tikkanen, A. (2017). BP PLC. [Online] Britannica.com. Available at: https://www.britannica.com/topic/BP-PLC [Accessed 20 May 2018].

Tonby, O. (2009). Global financial crisis—implications for Australia’s oil and gas industry. The APPEA Journal, 49(3).