The Performance Management of the Energy Industry

The energy industry is one of the most dynamic in footings of invention and public presentation direction. The industry is soon dominated by a few big multi-nationals that control the production, processing and distribution of major beginnings of energy in the universe. Since its find, oil has formed a important part of the universe ‘s energy ingestion. BP p.l.c. and Exxon Mobil Corp. are two major energy companies with presence in all the continents and tremendous fiscal, logistical and technological capacity to set about major oil geographic expedition, excavation and processing undertakings. Due to the complex nature of oil geographic expedition, boring and processing, established oil houses have enjoyed near monopoly position and have experienced high degrees of profitableness over the old ages.

BP and Exxon Mobil have grown to go two of the largest and most successful companies in the sector. Despite their prima place in the oil market, the two companies have frequently experienced reverses that sometimes compromised their steady public presentation and profitableness. This paper conducts a critical comparative rating of the fiscal public presentation of BP during the fiscal old ages 2008 and 2009 in order to derive more apprehension on its present and likely future public presentation ; taking in to account the present market state of affairs and public presentation of other equals in the market such as Exxon Mobil. The analysis reveals that Exxon Mobil has better market basicss and is more worthy of investing than BP.

2.0 Introduction

British Petroleum p.l.c. ( BP ) is one of the largest and oldest energy companies in the universe. Traditionally a petroleum-based company, BP has undergone major transmutation over clip both in merchandise portfolio and in engineering, which has seen the incorporation of air current and, other signifiers of renewable energies such as bio-fuels as portion of its merchandise scope. However, this phenomenal growing has non been without challenges ; the resiliency of the company anchored on sound fiscal and operational direction has seen it get the better of some of the most hard challenges.

Over the last few decennaries, the energy industry, peculiarly the crude oil sub-sector has experienced tremendous challenges, some of which have threatened their profitable being. These have ranged from increased competitory force per unit area from national oil companies formed in oil bring forthing states and those founded in emerging economic systems such as China and Brazil, to stringent statute laws on environmental and other operational issues. The fiscal deductions of these challenges have been tremendous and the major oil companies have had to invent ways to get the better of the challenges and retain or better their market portion and sustainable profitableness.

The engineering spread between major energy houses has been a major avenue for deriving strategic competitory advantage and oil houses have continuously sought better boring engineerings that would conform to predominating environmental and other statute laws and significantly cut down their operational cost. This has frequently led to big sums of disbursement on research and development and preparation of forces, which have had a important impact on the short-run fiscal public presentation of BP.

Further, the dwindling oil militias in certain traditional oil Fieldss such as the Middle East and Russia coupled with increased competition from local and other multinationals seeking to acquire a portion of the oil gross has been a major cause for concern among the oil houses. This has led BP and other transnational oil companies to earnestly see obtaining boring rights to alternate oil Fieldss through find of new oil Fieldss and has resulted in monolithic outgo in oil geographic expedition and research and development in better geographic expedition and accurate reservoir-location engineerings for better public presentation of oil rigs upon constitution and commissioning.

Despite these odds, a speedy reappraisal of the fiscal statements uncover assorted consequences in the 2009 fiscal twelvemonth. The consequences show a bead in cardinal public presentation indexs such as gross revenues and operating gross but at the same clip indicate positive public presentation in other countries such as decrease in operating costs and general rise in entire comprehensive income. The intent of this paper is to critically measure BP ‘s public presentation against that of the industry over the same period and do decisions on the existent growing and public presentation potency of the company over the same period.

3.0 Methodology

The paper is based on quantitative analysis of secondary informations obtained from assorted beginnings including audited histories of BP and similar oil houses, informations from industry regulators ‘ web sites and periodicals, statements from both the concern and political leaders in assorted for a including intelligence media. However, the audited fiscal statements will organize the footing of this analysis and any decision reached thereon is based on the fiscal statements for the period under reappraisal ; that is the fiscal old ages 2008 and 2009.

4.0 Background

Unless subjected to thorough analysis, the inside informations given in fiscal statements may non give the true degree of public presentation of an organisation. Furthermore, fiscal statements of many corporations seldom indulge in elaborate comparative analysis of their equals in the industry, which is every bit of import in understanding the public presentation of an organisation in relation to similar organisations in the same sector.

It is against this background that makes elaborate analysis of fiscal public presentation as reported in audited histories, of import to assorted users of fiscal statements than even the statements themselves. It besides helps in measuring the future sustainability of public presentation as reported in the audited fiscal statements by seeking to bring out the implicit in causes of good or bad public presentation the extent to which they are likely to impact on future public presentation of the organisation.

5.0 Literature reappraisal

5.1 Role of Financial Statements

The function of fiscal coverage is to give information on public presentation, fiscal place and alterations in public presentation and fiscal public presentation to a broad scope of users who require the information for usage in doing sound economic determination ( Robinson, Greuning, H, & A ; Broihahn, 2009 ) . On the other manus, fiscal analysis involves utilizing fiscal statements prepared by organisations and or their hearers to measure its yesteryear, present and or future public presentation for intent of doing economic determinations ( Robinson, et Al, 2009 ) .

5.2 BP Financial Statements

Like any other public company, BP is under legal duty to fix one-year audited fiscal statements for its internal usage and for usage by all stakeholders ( Markham, 2006 ) . The function of the hearers in this instance is chiefly to supply an independent position of the fiscal place of the company ; whether the fiscal statements are accurate and stand for a true and just position of its province of personal businesss ( Rittenburg, Johnstone, & A ; Gramling, 2009 ) . The fiscal statement therefore conforms to the International Financial Reporting Standards and other relevant criterions that govern fiscal coverage ( Moerck, 2005 ) . In many ways, the fiscal statements include every bit much as possible, information relevant for decision-making ( Robinson, et Al, 2009 ) . The same attack is besides followed by all public corporations doing their fiscal statements similar in many respects and by and large comparable. However, due to the nature of the organisations, fiscal statements necessarily lack inside informations that may merely be uncovered through more focussed analysis.

5.3 The Financial Markets

Both BP and Exxon Mobil are listed in major stock markets around the universe such as the New York Stock Exchange and UK ‘s FTSE. Listing of organisations clears them up for thorough public examination of its public presentation and any negative sentiments is instantly reflected in the market monetary values of stocks. For illustration, the recent Gulf of Mexico oil spill resulted in to a bead in value of BP ‘s stocks at the FTSE by more than 50 % . Such negative market sentiments affect the assurance of investors and moneymans and do it harder for organisations to entree cheaper funding with less prohibitory footings and conditions.

Over the old ages, affluent oil companies such as BP and Exxon Mobil have been able to acquire off with certain environmental malpractices by buttonholing actively buttonholing for favourable statute laws and ordinances for their industry. However, this state of affairs has changed significantly in the recent yesteryear, with more consciousness on the demand to conserve the environment and adhere to fair concern patterns. The major oil houses are progressively being held accountable for their actions and in some instances forced to pay brawny mulcts for any environmental or other amendss emanating from their activities. Such alterations are bound to impact their profitableness.

6.0 BP Financial Analysis

6.1 Consequences from Operationss

A speedy reappraisal of BPs fiscal statements in 2009 reveal a important bead in public presentation during the 2009 fiscal twelvemonth. During this period, the company experienced a bead in operating gross of up to 33.7 % and a corresponding bead in runing net incomes of 21.64 % . This difference in bead in runing net incomes and runing gross implies that the company ‘s operating gross is non absolutely marched to its operating costs ; and the company continues to incur operating costs even during period of lower activity. The bead in runing public presentation may hold been occasioned by a general diminution in the planetary economic activity during the same period ensuing in to lower demand for crude oil merchandises.

6.2 Measures of Efficiency and Profitability

BP suffered a bead in profitableness as given by assorted profitableness indexs. Return on Investment ( ROI ) dropped to 7.19 % in 2009, from the old value of 22.87 % in 2009, Return on Capital Employed ( ROCE ) besides dropped from 23.68 % in 2008 to the present value of 15.25 % . This indicates the company ‘s inability to expeditiously use its resources to bring forth net incomes. The economic slack resulted in to underutilization of the company ‘s resources, some of which were likely acquired utilizing debt funding that carry regular involvement duties irrespective of the prevalent economic state of affairs. Relatively, the company performed better the industry norm for the same period ; ROCE for the industry dropped from 23.44 % to 1.75 % in 2009 and this implies that certain oil companies in the industry posed worse public presentation than BP. This confirms that the bead in public presentation was mostly due to factors external to the company ; the factors which affected the whole industry and this besides indicates a singular degree of resiliency and operational efficiency of BP with respects to reacting to challenges from its concern environment.

6.3 Asset Use

Inventory-days for the 2009 period was much higher than in 2008, at 34.01 as compared to 16.77 in 2008. This confirms a general decrease in concern activity for the company during this period. The company was therefore keeping stock list about twice longer ensuing in definite addition costs related to storage of the stock list and slack in operating hard currency flows. However, BP still posted impressive public presentation with respects to turning around its histories receivables with the ratio of gross revenues to account receivable worsening from 12.93 % in 2008 to 10.52 % in 2009.

6.4 Capital Structure

The capital construction of BP indicates fiscal debt over assets ratio of 14.55 % in 2008, which remains steady in 2009 at 14.67 % . Likewise, the debt-equity ratio of 36.4 % in 2008 reduced somewhat to 34.11 % in 2009. The two ratios indicate that the company ‘s debts are good covered by its assets and the part by equity holders to the company ‘s capital is significantly larger, therefore guaranting their control of the company ‘s operations. BP ‘s stableness as a traveling concern seems certain without any immediate menace of take-over from debt holders.

7.0 BP vs. Exxon Mobil Financial Comparision

7.1 Operating Revenue and Net incomes

First, both BP and Exxon Mobil recorded a immense diminution in their gross revenues and runing gross of 33.7 % and 29.87 % . However, there was besides a corresponding bead in purchases and operating disbursals at 38.6 % and 13.3 % severally for BP and 38.74 % and 12.86 % severally for Exxon Mobil bespeaking a bead in demand for their merchandises during this period occasioned by forces external to both companies such as public presentation of the economic system ; holding unvarying effects in the industry. On the same step, the industry experience a diminution in operating gross of 29.85 % , somewhat less than the diminution experience by Exxon Mobil. This means that BP ‘s diminution was much more than industry norm and indicates that the company runing public presentation was more affected by the economic slack likely due to its merchandise mix, niche markets that were more badly affected by the economic lag.

7.2 Operational Efficiency and Profitability

A comparative analysis of the fiscal statements for BP and Exxon Mobil indicate that BP performed less imposingly as compared to Exxon Mobil in their respectively profitableness and operational efficiency. In 2008, ROCE for BP and Exxon Mobil was 23.68 % and 69.79 % severally. However, in 2009, both companies encountered a diminution in public presentation and posted ROCE of 15.25 % and 24.93 % for BP and Exxon Mobil severally. The industry norm for ROCE for the 2009 period was 13.15 % , which implies that BP still reported better profitableness as compared to the other participants in the market. Similarly, the ratio of EBIT over gross revenues for BP and Exxon Mobil was 9.2 % and 11.37 % severally for the 2009 fiscal period. These ratios indicate that Exxon Mobil performed better in using its resources, both debt and equity-financed to make value to its equity holders and debt holders. However, BP reported a better net net income over gross revenues ratio of 6.93 % as compared to Exxon Mobil ‘s 6.21 % , which shows that the company had less involvement committednesss for the same period as compared to its chief rival, Exxon Mobil and the industry mean both of which stood at 6.21 % .

Assuming that the other public presentation and profitableness factors applied uniformly for the two organisations, it may be argued that Exxon Mobil operated more expeditiously and was able to post better public presentation with relatively similar sum of investing as BP. However, measuring the public presentation of the two organisations for merely two fiscal periods may non supply sufficient grounds sing the degree of efficiency of the two organisations in the long term.

There is ever need to measure if the returns obtained meet the basic investing criterions of the economic system in which the capital employed is applied. In many economic systems, the basic public presentation threshold for capital employed is represented by the hazard free rates of authorities securities and bonds. Therefore where ROCE is lower that the base loaning rate, so the investors should oppugn the principle of their investing in more hazardous concern ventures with returns lower than the hazard free-steady income base loaning rate offered by authorities establishments ( Robinson et al, 2009 ) . The ROCE of both companies is nevertheless higher than the base loaning rates of many states or economic blocks such as the EU doing investing in both companies still a worthwhile venture with better chances of returns from Exxon Mobil.

7.3 Capital Structure

The capital construction of both companies, BP and Exxon Mobil is unusually different. For illustration, the fiscal debt over assets ratio for BP and Exxon Mobil was 14.67 % and 4.12 % severally in the 2009 fiscal period. The ratio of fiscal debt over equity was 34.11 % and 8.69 % severally for the two companies over the same period. Clearly, Exxon Mobil capital construction reveals less geared and indicates more control of equity holders on the assets of the company, with minimum opportunities of possible coup d’etat in the close hereafter. The deduction of this ratio to a possible investor is based on the impact of these differences in capital construction to the future net incomes in footings of dividends to the equity proprietors. Highly geared houses have immense committednesss in footings of involvement payable on the loans and this may significantly cut down the sum available for equity holders for distribution as dividends.

Then involvement coverage ratio for Exxon Mobil and BP for 2009 was 20.29 and 174 severally. This means that Exxon Mobil has better coverage of its involvement than BP and is more able to defy future negative net income fluctuations and still honour its involvement duties. The fixed charge coverage for Exxon Mobil for the old ages 2008 and 2009 was 52.2 and 26.1 severally. The ratios for BP for the same periods are non easy determinable from the histories since the fixed charges are non clearly indicated, but would surely be much lower since the company has much higher involvement duties and recorded lower degrees of profitableness for the period.

7.4 Evaluation Multiples

The Earnings per Share ( EPS ) for BP and Exxon Mobil for the periods 2008 and 2009 were $ 3.99 and $ 8.70 and $ 0.885 and $ 1.123 severally. The bead in EPS for Exxon Mobil was much higher, at 54 % compared to 20 % for BP. However, the EPS for Exxon Mobil is still much higher in absolute values for both the fiscal old ages 2008 and 2009, than that of BP and this may be luring to investors who prefer faster capital additions and growing in value in the short term that may ensue in to immediate capital additions at the stock markets.

Decisions

From the concluding statements, the two energy companies, BP and Exxon Mobil are in many ways similar in size, profitableness, operations and strategic focal point. Apart from prosecuting more or less similar growing schemes, the two organisations besides recognize the of import function played by non-financial public presentation factors such as efficient and effectual human resources, public dealingss etc. The two organisations put a batch of accent on their human resources and authorise them through preparation and support for research to acquire the best from them in footings of invention, committedness and end product.

From an investor ‘s point of position, both BP and Exxon Mobil have strong public presentation basicss that make them good options for both short term and long-run investings. Their line of concern, the energy sector has ever had a steady demand over the old ages with major fluctuations noted merely during economic rhythms. Demand for energy in the hereafter seems obvious given the recorded increasing demand for energy among developed and developing economic systems. Energy lack remains a major challenge for both houses since they have been unable to run into the ever-increasing demand for energy and have been forced to research other alternate energy beginnings such as air current and bio-fuels to run into the projected future demand with environmentally friendlier beginnings of energy.

Judging from the turning involvement in development of renewable energy beginnings by major oil corporations, renewable energy represent the new frontier for strategic growing for the oil houses. The oil houses are passing one million millions of dollars in developing renewable beginnings of energy and even though technologically still at babyhood, renewable energy is quickly taking its portion in the energy supply pool. In the twelvemonth 2009, BP announced a US $ 55 Million joint venture with a Brazilian house in the development and production of bio-fuels. Similarly, Exxon Mobil has made important fiscal investings to development of renewable of energy. The returns from these renewable energy beginnings have non been important but the oil companies have on occasion benefitted from authorities support on the development of renewable energies in line with the authorities policy on developing ‘clean ‘ energies for sustainable development. This has cushioned them against the hazards associated with investings in renewable beginnings of energy.

Developments in other sectors may hold besides influenced the thrust to develop alternate beginnings of energy or hazard at hand low demand in the hereafter. A instance in point is the car industry, which is one of the major consumers of crude oil merchandises, which has been involved in aggressive research on developing engines that use other signifiers of energy such as solar and bio-fuel. Major discoveries have been made in this forepart and soon there are intercrossed autos produced in commercial measures. Research in development of renewable energies and in efficient engineerings to minimise use or new engineerings that utilize alternate beginnings such as bio-fuel and solar power will finally ensue in to decreased demand for oil and natural gas or even extinguish their use wholly.

From the analysis conducted on both companies, Exxon Mobil appeared to hold outperformed BP in certain cardinal countries and investor planning to put his money in either of the two houses would be strongly advised to put in Exxon Mobil. This is because the company posted better values of ROI and Capital Gearing for the same period therefore promises better returns both in the short term and long term than BP. The company besides has better involvement coverage and therefore better chances of long term stableness and profitableness as a traveling concern.

It is besides of import to observe that the geartrain of both companies are within acceptable bounds and does non endanger their long-run operations as a traveling concern ; the involvement duties of these debts would hold minimum effects to their hard currency flows and operations. However, in the event of serious breaks to normal operations, the involvements and other debt duties for BP may significantly cut down the sums of net incomes after revenue enhancements available for equity holders every bit good as reinvestment determinations that may hold been planned for future growing in value. Based on these and other consideration already discussed, Exxon Mobil is the better option for an investor since it has better fiscal indexs for present and jutting hereafter public presentation.

Mentions:

Markham, J. , 2006. A fiscal history of modern US corporate dirts: from Enron to reform. New York: M.E Sharpe.

Moerck, R. , 2005. A history of corporate administration around the universe: household concern groups. Chicago IL: University of Chicago Press.

Rittenburg, L. E. , Johnstone, K. , & A ; Gramling, A. A. ( 2009 ) . Auditing: A concern hazard attack. Mason OH: Cengage Learning.

Robinson, T. , Greuning, H. , H, E. , & A ; Broihahn, M. ( 2009 ) . International fiscal statements analysis. Hoboken, New Jersey: John Wiley and Sons.

Bibliography:

Daft, R. , 2009. Organizational theory and design. New York: Cengage Brain.

Hunt, P. , 2009. Restructuring amalgamations and acquisitions: a usher to making stockholders value. London: Aspen Publishers.

Nofsinger, J. , and Kim, K. , 2003. Infectious Greed: Restoring assurance in American companies. New York: FT Press.

BP p.l.c. , 2009. Annual studies and histories.

Exxon Mobil Corp. , 2009. Annual studies and histories.

Appendix 1

Calculations:

Ratio/ Constant

BP

Exxon Mobil

Percentage alteration in gross revenues and operating gross ( SOR )

{ SOR ( 09 ) -SOR ( 08 ) } /SOR ( 08 ) X 100 =33.7 %

{ SOR ( 09 ) -SOR ( 08 ) } /SOR ( 08 ) X 100 =34.4 %

Percentage alteration in purchases

{ Purchases ( 09 ) -Purchases ( 08 ) } /Purchases ( 08 ) x 100 = 38.6 %

{ Purchases ( 09 ) -Purchases ( 08 ) } /Purchases ( 08 ) x 100 = 38.74

Tax return on Investments ( ROI )

ROI = EBIT/Total Assets x 100 = $ 26,426/ $ 235968 x 100 = 11.2 %

ROI = EBIT/Total Assets x 100 = ( $ 34,777+ $ 34,819+ $ 25,936 ) / $ 233,323 x 100 = 400 %

Capital Gearing Ratio ( CGR )

CGR= ( Debt finance + fixed involvement portions ) / Entire equity = 25518+3198+3474 ) /102113 x 100 = 31.5 %

CGR= ( Debt finance + fixed involvement portions ) / Entire equity = ( 7129+17651 ) /115392 x 100 = 21.4 %

Interest coverage

TIE= EBIT/Interest Expense = $ 26,426/ ( 1110+192 ) =20.29

TIE= EBIT/Interest Expense= ( $ 34,777+ $ 34,819+ $ 25,936 ) / $ 548= 174

Liquidity/Current ratio

Current assets/current liabilities = $ 67,653/ $ 59,320=1.14

Current liabilities/current assets = $ 55,235/ $ 52,061 = 1.06