ExxonMobil vs BP - a Comparative Fundamental Analysis - Essay Example

ExxonMobil versus BP: A Comparative Fundamental Analysis Name: Instructor: Course: Date Executive Summary A fundamental analysis, one of whose subsets is the financial ratio analysis, examines an organization’s financial statements, management, status of health, and position on competitive landscape in a bid to determine its valuation. The fundamental analysis contained here evaluates the state of BP and ExxonMobil between 2013 and 2014 by looking at all the parameters mentioned. It achieves this by performing qualitative and quantitative analyses on these two companies. The analysis reveals ExxonMobil as the superior of the two in terms of financial health as well s future projections of the same. A recommendation is therefore made based on the analysis to invest in ExxonMobil as opposed to BP. Introduction Western Australia’s state economy is largely driven by exportation of iron ore and liquefied natural gas. According to a publication by the Western Australian government, most of Australia’s petroleum reserves are located off the Western Australian coast. The very production of natural gas from these offshore reserves is termed particularly important to the Western Australia economy. Oil and gas production consists of extraction of natural gas from offshore gas fields, use of offshore production platforms to separate components and transport liquefied petroleum gas, crude oil and condensate to onshore processing site for further processing (ExxonMobil Corporation 2014). Among the major companies involved in oil and gas production are ExxonMobil and BP. This paper seeks to compare and contrast historical and future performances of ExxonMobil Australia a listed company and its competitor BP Australia both companies of which are major players in the oil and gas industry with operations in Western Australia. It also seeks to give a comprehensive qualitative and quantitative analysis then present key findings in a logical cohesive format. ExxonMobil One of Australia’s industrial leaders in oil and gas production is ExxonMobil Australia established in 1895. A derivative of Exxon Mobil Corporation, ExxonMobil’s activities extend widely from exploring and producing oil and gas to refining petroleum to supplying lubricants, chemical products fuels, natural gas and bitumen. ExxonMobil has actively contributed to gas projects such as Scarborough, Kipper Tuna Turrum and Gorgon. ExxonMobil invested 25 percent in the joint Gorgon project operated by Chevron which holds 47 percent of the investment alongside Osaka Gas, Tokyo Gas and Chubu Electric Power. Esso Australia Resources, a subsidiary of ExxonMobil Australia operates a gas field in located in Scarborough offshore Western Australia. This project considers a floating LNG concept due to the location of the gas reserves. Exxon Mobil Corporation has other multiple affiliates including Mobil, XTO and Exxon. ExxonMobil stands at 5th as the world’s largest company in terms of revenue and in market capitalization is the second largest publicly traded company. ExxonMobil is considered a ‘supermajor’ also termed the largest refiner in the world (ExxonMobil 2014). BP: the competitor BP is a giant multinational company that deals in oil and gas having branched out into green energy such as bio fuels and wind power. In 1901, William Knox D’Arcy who was mining magnate of Australian-British descent got a concession from Persia (currently Iran) to explore oil in the nation’s South West. Over 7 years of constant exploration bore fruit leading to establishment of BP. Before the World War I, the British government was the major stakeholder of BP thanks to Winston Churchill’s prodding. It is ranked as the sixth-largest company by market capitalization also coming in fifth in terms of revenue. BP Australia began crude oil and natural gas exploration operations in 1919. It has its operations in two out of five Australia’s refineries including Kwinana in Western Australia, a crude oil refinery which supports cleaner fuel production and Bulwer Island in Queensland. The company also markets Castrol lubricants, a market leader in world class lubricants (BP Annual Report 2013). Stock price movements ExxonMobil listed in New York Stock Exchange (NYSE) as XOM is the largest of the vertically integrated major oil corporations. The company’s total earnings in 2010 were 30.5 billion U.S. Dollars an impressive up of 57% from 2009 and this was excluding special items. (ExxonMobil 2014) ExxonMobil’s (NYSE; XOM) total cash flow from operating activities were $45.12 million up from $44.91 million in 2013. Investing activities amounted to $26.98 million down from $34.20 million in 2013. ExxonMobil’s 2014 annual report shows upstream earnings at $27.55 million, an increase from $26.84 million with earnings per common share at $7.60. Downstream earnings in 2014 were $3.1 million compared to 2013’s $3.45 million. The share of equity at year’s end in 2014 was $174.4 million with share of equity per common share standing at $41.51 up from 2013’s recorded $40.14. Total assets at the end of 2014 amounted to $349.5 million (ExxonMobil Summary Annual Report 2014). BP recorded a decline in prices of LNG in Europe and Asia but new LNG project in Australia and other recovering supplies parts of Africa added to the market in 2014. The three year 10-point plan set in 2011 was completed in 2014 helped with the stabilization of BP with its first priority being a relentless focus on safety. A strong balance sheet was presented at the end of 2014 with the company staying within its range target of between 10-20 percent decreasing significantly from 20.4% in 2011 to 16.7% in 2012. Operating cash flow in 2014 was reported at $32.8 billion exceeding the 50% percent target set in 2011. The $38 billion divestment ahead of plan indicating the active portfolio management with a further $10 billion planned for 2015 (BP Annual Report 2013). Impact of general local and global economic conditions ExxonMobil has observed a couple of economic conditions that continue to affect their activities in the region. Currency fluctuation rates impacts heavily on the demand of petrochemicals and the rates at which they are traded. (Exxon Mobil Corporation 2014) The high cost of the Australian dollar has put strain on trading within the local scene. Gasoline reliance has plateaued due to growth in alternative fuel options such as ethanol, liquefied natural gas and diesel. Coastal trading legislation which is a shipping legislation has raised the possibility that Mobil; an ExxonMobil subsidiary, may incur increased costs in coastal transportation of fuel. Manufacturing costs have also gone up due to carbon costs (Oil Spill Liability 2010 (WA) reg 3). Policy response is much needed to eliminate if not significantly reduce carbon dioxide (CO2) emissions. Policy options presented to oil and gas companies include Emission Trading Schemes (ETS) and carbon tax. ETS involves the scale, cost and trade-offs which limits a firm’s abatement. ETS have it that the quantity of abatement is certain but the price of carbon varies pending supply and demand. However, more economists are in support of carbon tax through which companies are required to pay a certain amount of tax as per the amount of carbon they emit per tonne of their manufacturing. This comes in the wake of heightened emission of greenhouse gases. Global CO2 emissions are predicted to increase by approximately 1.2 percent per year to 2030 which puts the approximation to an annual 37 billion tonnes. Implementation of carbon pricing is set to create a stable CO2 price table (ExxonMobil Australia Pty Ltd 2011). ExxonMobil being at the forefront of the oil and gas table in Western Australia has shown aggressive measures in energy improvement placing their investment in more green energies such as liquefied natural gas. Economic progress in developing nations is set to drive global energy demand higher despite substantial efficiency gains. Australian refineries formerly derived additional value from production of lubricating oils meaning changes in lubricating oil technology have rendered local production unviable. Australian refineries are subject to generally higher levels of environmental regulations than competing refineries in the region (Coastal Trading Act 2012 (Cth) s 10). Exports in liquefied natural gas (LNG) have contributed to about 12 percent to the Annual Australian GDP a substantial $200 billion. LNG projects are largely expected to continue their growing contribution with LNG expected to be the second largest export commodity in terms of value after iron ore by the year 2018.In 2013, Australia ranked as 3rd largest exporter of LNG and this is contributed to largely by large scale conventional projects in Western Australia and North Territory including the world’s first floating LNG vessel located offshore in Browse Basin although crude oil was the leading competing source of fuel in the oil and gas scene (Roger & Stern 2014). BP refinery operates a refinery in Western Australia in Kwinana that refines up to 3000 mega litres annually. (AIP, Downstream Petroleum 2011, p.5) BP in Kwinana began operations in 1955 and is ranked as the largest refinery with a processing capacity of 146, 000 barrels of crude oil per day. BP has a 27 billion dollar investment in the North West Shelf venture and also taken to LNG projects in Janzs-lo and Browse basin. BP also faces economic constraints like high labour costs, competitive disadvantage from high operating cost base, lack of economies of scale compared to the regional competitors and a high Australian Dollar (BP Annual Report 2013). Industry trends and an assessment of each company’s ability to cope The traditional structural discipline in the oil and gas sector has been replaced with systemic imbalance marked by vastly increased supply and demand receding demand. There is a recorded shifting energy demand growth because of the oversupply of energy products contributing to price fluctuation in local and international markets. Alternative energy sources in the market have posed great challenges to key players in oil and gas even giant multinationals like ExxonMobil and BP. Technological innovations such as efficient engines for vehicles and power plants. Global economic weakness witnessed in China’s slow growth and European financial woes affect the trade for oil and gas companies (Oil and Gas Reality Check 2015). ExxonMobil has stridden beyond its competitors first because the company has a large E&P portfolio giving it liberty to select investments taking into account the political and technical risks. ExxonMobil’s production operations and reserves are well established, large and diverse traversing the Asia Pacific including Australia, North America, Europe and West Africa. The company has invested in newer more efficient technological advancements too to support production of LNG, heavy oil and tight gas. ExxonMobil is looking to up its portfolio yet again by purchasing BP plc the main reason being the decline of crude oil prices with oil prices having dipped by 50% since June 2014 (Crooks 2015). BP’s Gulf of Mexico oil spill in 2010 has led to a decline in the company’s market capitalization by an astounding 30%. The impact of the oil spill on BP’s finances has been very significant with BP spending over $50 billion in disaster management and other related legal and environmental implications. ExxonMobil’s purchase of BP will see to the company’s growth in reserves with an additional 17.52 billion barrels of oil equivalent (BOE) to its existing 25.72 billion (BOE). During the last quarter, ExxonMobil partly outsourced refining processes to meet market demands meaning a boost from the Exxon’s 36% refining capacity to benefit significantly from BP’s refining of 1.88 million barrels per day (Kaufman 2015). Trend Analysis The trend analysis is useful in evaluating a company’s financial information over multiple periods of time (Margoshes 1960). How the numbers have been behaving over a given time period serves as a good indicator for the company’s state of health. It is achieved by calculating the change and percentage change over the time period set out, which will be two years (2013 and 2014) in our case. This section will contain an analysis of select trend lines including operating revenues, gross profit margins, net profits, cash, accounts receivable and debt (Heisinger & Hoyle 2013; Thompson & Strickland 2003). For Exxon Mobil, operating revenues decreased 6% while the gross profit margin decreased 8%. Net profit however increased 3% while cash went down 1%. In more good news, accounts receivable increased 3%, while in more bad news, debt went up 28% (Financial Statements and Supplemental Information 2013; Financial Statements and Supplemental Information 2014). BP on the other hand seemed to be in much the same predicament with operating revenues decreasing 7% and gross profit margin decreased 7% as well. Net profit saw a huge leap downward decreasing 83% while cash went up 32%. In more good news, accounts receivable increased 97%, while debt also increased 10% (BP Annual Report and Form 20-F 2013 2014; BP Annual Report and Form 20-F 2014 2015). Financial Ratio Analysis Background A financial ratio analysis is a subset of the larger fundamental analysis of a company. The financial ratio analysis is a tool that allows one to contextualize results and give them more meaning by comparing them to previous years and other competitors within the market (D'Amato 2010; Thomsett 2006). Financial ratio analysis is a tool used in the evaluation of a company’s performance, and has been for a very long time. It was first brought into popularity by Benjamin Graham, a Colombia business school professor form 1928 and a successful financial investor as well. Mr. Graham also served as mentor to the famous Warren Buffet (Bull 2008). This section will analyze ExxonMobil Australia and BP using a number of ratios measuring profitability, liquidity, leverage, and investment valuation. In doing so, we will gain a deeper understanding to the companies’ performances and how they compare to each other with regard to key business success measures (D'Amato 2010; Heisinger & Hoyle 2013). The analysis ExxonMobil’s financial ratio analysis goes as follows: Gross profit margin ratio for ExxonMobil averaged at 28.09 with a decrease of 1%. Net profit margin ratio average was 6.685with an increase of 10%. Current ratio averaged at 0.2725 with an increase of 14% being observed there. PDACL average was 6.2419 denoting a 4% increase. OCFCL was at 0.8017 with a 1% decrease in 2014 from 2013. TLTAI on the other hand averaged at 0.4922 showing a 1% increase, the DE ratio at 0.1433 which marked a 28% increase and finally the dividend yield ratio at 2.5% with a 7% increase in 2014 from the previous year. BP’s financial ratio analysis: Gross profit margin ratio for ExxonMobil averaged at 98.38 with a 3% increase. Net profit margin ratio average was 3.7 which marked a drastic decrease of 82%. Current ratio averaged at 1.35085 with an increase of 3% being observed there. PDACL average was 0.24645 denoting an 81% decrease. OCFCL was at 0.2588 with a 33% decrease in 2014 from 2013. TLTAI on the other hand averaged at 0.63485 showing a 5% increase, DE ratio at 0.11445 which marked a 62% decrease, and finally though the dividend yield ratio averaged at 8.4%, this was a 42% decrease in 2014 from the previous year. Changes to note for ExxonMobil were in DE ratio which increased by 28%. This increase can be attributed to the increase in long-term debt values upon the issuance of $55,000 million of long-term debt in the first quarter of 2014 (Financial Statements and Supplemental Information 2014, P.48). For BP, the Net profit margin decreasing by 82% can be said to have been caused by changes in commodity prices resulting in a sustained unprofitable performance; low plant utilization; significant revisions of estimated reserves of gas and oil downwards; as well as increases in the value of development expenditure estimated for the future (BP Annual Report and Form 20-F 2014 2015, P.103). The same explanation can also be offered for the 33% decrease in OCFCL. The 42% decrease in the dividend yield for BP was due to the multi-decade slump in process of oil. To Invest or Not to Invest? The dividend yield determines how attractive a company is to financial investors, thus this shall serve as the ultimate tool with which to make the decision of whether or not to invest in either company (Garrison, Noreen & Brewer 2006). Given the 42% decrease in the BP dividend yield, this should serve as indicator to scare away investors if this is a trend to go by. In the same vein, the 7% increase in ExxonMobil’s dividend yield is an attractive sign, even though the yield itself was lower than BP’s in 2014. The increase serves as a mark of health for the company and it shows that there are better times ahead for ExxonMobil. Following the above analysis, the recommendation is made to invest in ExxonMobil. Conclusion ExxonMobil is one of the largest, if not the largest, oil and gas companies in Western Australia and in the world while BP is hot on its heel. This has been the case for a while. The fundamental analysis above was conducted on the two companies. Challenges were encountered in retrieving the exact information needed for calculating the ratios and for the trend analysis as not all this information was available within the annual reports. The analysis’s strengths include some important ratios such as profitability, liquidity, leverage and valuation ratios. While its main is that weakness it does not include any ratios directly calculating financial risk. This analysis has however aided in getting a better understanding of both companies and their financial state, as well as in making an informed decision on the route to take in as far as investment is concerned. References BP Annual Report and Form 20-F 2013. (2014). 1st ed. [ebook] BP. Available at: https://www.bp.com/content/dam/bp/pdf/investors/BP_Annual_Report_and_Form_20F_2013.pdf [Accessed 3 Oct. 2015]. BP Annual Report and Form 20-F 2014. (2015). 1st ed. [ebook] BP. Available at: https://www.bp.com/content/dam/bp/pdf/investors/BP_Annual_Report_and_Form_20F_2014.pdf [Accessed 3 Oct. 2015]. Bull, R. (2008). Financial ratios. Oxford: CIMA. Coastal Trading Act 2012 (Cth), Available from: [28 September 2015]. Crooks, E 2015, ‘ExxonMobil at the crossroads: buy a rival or shrink in long term’, Financial Times June. Available from: < http://www.ft.com/cms/s/0/5f72f354-09c3-11e5-b6bd00144feabdc0.html#axzz3nmAVHWr5>. [05 October 2015]. D'Amato, E. (2010). The Top 15 Financial Ratios. 1st ed. [ebook] Melbourne: Australian Shareholders' Association. Available at: http://members.lincolnindicators.com.au/content/filestore/research/top-15-financial-ratios.pdf [Accessed 2 Oct. 2015]. Dopita, M & Williamson, R 2009, Australia’s renewable energy future, Australian Academy of Science December 2009. Available from: . [05 October 2015] Environmental management of oil and gas exploration and production, n.d, An overview of issues and management approaches, UNEP. Available from: . [05 October 2015]. ExxonMobil 2014, Financial Statements and Supplemental Information. Available from: . [28 September 2015]. Exxon Mobil Corporation 2014, Form 10-K for the Fiscal Year Ended December 31, 2014 Available from: [28 September 2015]. ExxonMobil Annual Report 2014 Financial Statements and Supplemental Information Available from: . [05 October 2015]. Financial Statements and Supplemental Information. (2014). 1st ed. [ebook] ExxonMobil. Available at: http://cdn.exxonmobil.com/~/media/Global/Files/Investor-Reports/2015/2014-Financials.pdf [Accessed 2 Oct. 2015]. Financial Statements and Supplemental Information. (2013). 1st ed. [ebook] ExxonMobil. Available at: http://cdn.exxonmobil.com/~/media/Global/Files/Summary-Annual-Report/2013_ExxonMobil_Summary_Annual_Report.pdf [Accessed 2 Oct. 2015]. Garrison, R., Noreen, E. and Brewer, P. (2006). Managerial accounting. Boston: McGraw-Hill/Irwin. Heisinger, K. and Hoyle, J. (2013). MANAGERIAL ACCOUNTING,VERSION 1.0. Washington, DC: Flat World Knowledge, Inc. Kaufman, M 2015, ‘Here is why Exxon Mobil Corporation can acquire BP plc’, Bidness Etc 13 April. Available from: . [05 October 2015]. Margoshes, S. (1960). Price/Earnings Ratio in Financial Analysis…Its Use and Abuse. Financial Analysts Journal, 16(6), pp.125-130. Oil Spill Liability and Regulatory Regime 2010 WA reg 3. Available from: . [05 October 2015] Oil and Gas Reality Check 2015, A look at top issues facing the oil and gas sector, Deloitte. Available from: . [06 October 2015]. Rogers, H & Stern, J C 2014 ‘The Dynamics of a Liberalised European Gas Market – Key Determinants of Hub Prices and Roles and Risks of Major Players’, Oxford Institute of Energy Studies Available from: . [29 September 2015]. Standfield, K. (2005). Intangible finance standards. Burlington, MA: Elsevier Academic Press. Strategy& 2015, 2015 Oil and Gas Trends. Available from: . [05 October 2015]. Submission the Joint Select Committee on Australia’s Clean Energy Future Legislation 2011 ExxonMobil Australia Pty Ltd company submission Available from: . [29 September 2015]. Tharoor, I 2010, ‘A Brief History of BP’ Time Magazine 02 June. Available from: . [05 October 2015]. Thompson, A. and Strickland, A. (2003). Strategic management. Boston: McGraw-Hill/Irwin. Thomsett, M. (2006). Fundamental analysis. Hoboken, N.J.: J. Wiley and Sons. APPENDICES PROFITABILITY RATIOS 1. Gross profit margin = Sales - Cost of goods sold ______________________ *100 Sales ExxonMobil 2013: (420,836 – 301863) = 118,973/420,836 *100 = 28.27 2014: (394, 105 – 284128) = 109,977/394, 105 *100 = 27.91 BP 2013: (379,136 - 1,068) /379,136 *100 = 97.08 2014: (353,568 - 1,148) /353,568 *100 = 99.68 1. Net profit Margin = profits after taxes _______________________ *100 Sales ExxonMobil 2013: 26841/420,836 *100 = 6.38 2014: 27548/394, 105 *100 = 6.99 BP 2013: 23,758/ 379,136 *100 = 6.27 2014: 4,003/ 353,568 *100 = 1.13 LIQUIDITY RATIOS 2. Current ratio = current assets __________________ Current liabilities ExxonMobil 2013: 59,308/71,724 = 0.8269 2014: 52,910/64,633 = 0.8186 BP 2013: 96,840/72,812 = 1.3300 2014: 87,262)/ 63,615= 1.3717 3. Profit before depreciation and amortisation to current liabilities (PDACL) ratio = PDACL =________________ Current Liabilities ExxonMobil 2013: 438,255/71,724 = 6.1103 2014: 411,939/64,633 = 6.3735 BP 2013: 30,221/72,812 = 0.4151 2014: 4,950/63,615 = 0.0778 4. Operating cash flow to current liabilities (OCFCL) ratio = Operating cashflow _____________________ Current liabilities ExxonMobil 2013: 57,711/71,724 = 0.8046 2014: 51,630/64,633 = 0.7988 BP 2013: 22,520/72,812 = 0.3093 2014: 13,253/ 63,615 = 0.2083 5. Total liabilities to tangible assets (TLTAI) Total liabilities = _______________________ Tangible assets Where: Tangible assets = Total assets – intangible assets ExxonMobil 2013 TLTAI: 166,313/ (346,808 - 7,522) = 0.4902 2014 TLTAI: 168,429/ (349,493 – 8,676) = 0.4942 BP 2013 TLTAI: 175,283/ (305,690 - 22,039) = 0.6180 2014 TLTAI: 171,663/ (284,305 - 20,907) = 0.6517 LEVERAGE RATIOS 6. Debt to equity ratio (DE Ratio) Total debt = _________________ Shareholders’ equity Where: Shareholders’ equity = total assets minus its total liabilities ExxonMobil 2013: 22,699/ (346,808 - 166,313) = 0.1258 2014: 29,121/ (349,493 - 168,429) = 0.1608 BP 2013: 21,550/ (305,690 - 175,283) = 0.1653 2014: 7,159/ (284,305 - 171,663) = 0.0636 VALUATION RATIOS 7. Dividend yield ratio (expressed as a percentage) Full year dividend = ____________________________ Share price ExxonMobil 2013: 2.46/ 101.74 = 2.42 % 2014: 2.70/ 104.76 = 2.58% BP 2013: 0.830/7.83 = 10.6% 2014: 0.376 / 6.28 = 6.2% Table 1: Analysis of financial ratios ExxonMobil 2013 2014 Average Increase (Decrease) % Increase (Decrease) Gross profit margin 28.27 27.91 28.09 -0.36 -1% Net profit magin 6.38 6.99 6.685 0.61 10% current ratio 0.2551 0.2899 0.2725 0.0348 14% PDACL 6.1103 6.3735 6.2419 0.2632 4% OCFCL 0.8046 0.7988 0.8017 -0.0058 -1% TLTAI 0.4902 0.4942 0.4922 0.004 1% DE Ratio 0.1258 0.1608 0.1433 0.035 28% Dividend yield ratio 2.42 2.58 2.5 0.16 7%             BP           Gross profit margin 97.08 99.68 98.38 2.6 3% Net profit magin 6.27 1.13 3.7 -5.14 -82% current ratio 1.33 1.3717 1.35085 0.0417 3% PDACL 0.4151 0.0778 0.24645 -0.3373 -81% OCFCL 0.3093 0.2083 0.2588 -0.101 -33% TLTAI 0.618 0.6517 0.63485 0.0337 5% DE Ratio 0.1653 0.0636 0.11445 -0.1017 -62% Dividend yield ratio 10.6 6.2 8.4 -4.4 -42% Table 2: Analysis of major financial trends ExxonMobil Amount 2013 Amount 2014 Increase (Decrease) % Increase (Decrease) Operating Revenues 420,836 394,105 -26731 -6% Gross profit margin 118,973 109,977 -8996 -8% Net profit 26841 27548 707 3% Cash 4,664 4,616 -48 -1% Accounts receivable 16,135 16678 543 3% Debt 22,699 29,121 6422 28%           BP         Operating Revenues 70,374 65,424 -4950 -7% Gross profit margin 378068 352420 -25648 -7% Net profit 23,758 4,003 -19755 -83% Cash 22,520 29,763 7243 32% Accounts receivable 168 331 163 97% Debt 48,192 52,854 4662 10% (BP Annual Report and Form 20-F 2013 2014; BP Annual Report and Form 20-F 2014 2015; Financial Statements and Supplemental Information 2013; Financial Statements and Supplemental Information 2014). 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