Assessing BP's Creditworthiness

ABSTRACT

This memo is focused on determining the creditworthiness of British Petroleum PLC. For this purpose, assessment of the annual report of British Petroleum is performed to determine revenue growth, cash position and debt position. It is identified as BP Plc has maintained stable growth so an organisation could gain more funds in the form of debt. It seems that the business entity will consider floating interest rates that could enhance the overall cost of finance.

COMPANY’S BACKGROUND

British Petroleum Company PLC (BP plc) is identified as a world’s leading British multination company. The company is having headquartered in London, England. It is the sixth largest organisation in the world in the context of the oil and gas industry

BP was found as Anglo-Persian Oil Company in 1908. It was a subsidiary of Burmah Oil Company. In 1954, this company was termed to British Petroleum (BP Annual Report and Form 20-F 2017, 2019).

BP plc is being addressed as the 12th largest company in the world in terms of revenue. It manages various operations in the oil and gas industry such as exploration, production, refining, distribution, marketing, power generation and petrol chemical.

BP is currently operating in more than 70 countries. In 2017, the company generated a revenue of USD 240208 Million. The EBITDA of BP is USD 8398 Million in 2017. Currently, more than 74000 employees are employed within BP at different locations.

HISTORICAL CREDIT RISK ANALYSIS

Operating performance: As per the annual report of BP plc, it seems that business entity has recorded positive growth in the total revenue of the company that is reached to USD 240208 Million in 2017 with the growth of 31%. In 2016, the organisation was addressed downfall of 18% in 2016, and it was reached to UDD 183008 Million as compared to USD 222894 Million of 2015. Similarly, cost of revenue has recorded similar trends in all three years that is respectively USD 221304 Million, USD 176484 Million and USD 218085 Million for 2017, 2016 and 2015. The assessment of EBIDTA of the last three years has addressed that BP has faced loss in 2015 and 2016. In 2017, EBITDA of BP was USD 8398 Million (BP Annual Report and Form 20-F 2017, 2019).

Liquidity/ Access to market: There are some up down addressed in cash and cash related securities of the company. The value of cash for 2015, 2016 and 2017 is respectively $24169 Mn, $ 23528 Mn and $25711 Mn. Similarly, short term debt of BP is increased to $7701 Mn in 2017 as compared to $6592 Mn of 2016. It seems that the business entity has issued new stock of $ 661 Mn in 2017 that is lower than the previous year. Furthermore, the business entity has repurchased its treasury stock of $ 343 Mn.

Cash flow: The evaluation of the cash flow statement has found that cash flow from operating activities has found significant up and down in the last three years. In 2017, the operating cash flow of BP was $18931 Mn that is higher than $10691 Mn of 2016 and lower than $19133 of 2015. In addition to that business, the entity has paid an appropriate dividend in the last three years (BP Annual Report and Form 20-F 2017, 2019). In 2017, BP had paid a dividend of $6153 Mn and repay some value of debt that is $6276 Mn. Therefore, the net cash flow of BP for 2017, 2016 and 2015 is respectively $25586 Mn, $23484 Mn and $26389 Mn. It can be stated that the business entity maintained appropriate cash in 2017.

Debt maturity / Capital Structure:

As per the above table, there is a negative debt ratio addressed for 2015 and 2016 due to negative EBITDA. In 2017, Gross, net and total debt were respectively 7.45, 4.41 and 21.20 times of EBITDA.

CREDIT RISK

In the context of BP Plc, credit risk has emerged from credit exposure that is managed by a company about guarantees issued by group companies under which the increment is identified in the outstanding exposure that was recognised on the balance sheet of $656 million in 2017 as compared to $309 million of 2016. It is resulted due to liabilities of joint ventures and associates and $382 million (2016 $370 million) in respect of liabilities of other third parties (BP Annual Report and Form 20-F 2017, 2019).

The group is focusing on removing credit risk entirely, but the company is expecting a certain level of credit losses. In 2017, the group was focused on credit enhancements in Dec 2017 that is designed to mitigate approximately $14.7 billion of credit risk concerning $11.6 billion of 2016.

It is identified that interest rate fluctuation is also playing a critical role in the credit risk of the company. The group’s incomes are also influenced by changes in interest rates that change concerning floating rate element (McNeil, Frey and Embrechts, 2015). If the floating interest rates are applicable, then the company’s financial cost will be increased by 1%. Therefore, it has been estimated that BP’s cost of finance for 2018 would increase by approximately $442 million.

There have been significant changes addressed in the internal energy market, and oil exploration project such as an increase in demand of renewable energy, reduction in the cost of the renewable energy power plant and state subsidise funding for green energy project have reduced credit availability for oil exploration companies in low-interest rates. In addition to that various international banking firms are focused on managing their investment in less risky renewable energy projects (Bluhm, Overbeck and Wagner, 2016).

FINANCIAL PROJECTIONS

The assessment of the last three revenue trend has addressed up-down, but the business entity is focused on various innovative solutions in order to enhance the revenue of the company. In addition to that, it is identified that the demand for energy has maintained continues growth that is mainly driven by rising incomes in emerging economies as well as a global population heading towards nine billion by 2040. Therefore, an increase in the population of the world has played a critical role in increasing the demand for energy. It will lead to a positive impact on revenue of British Petroleum. It is projected that the revenue of BP will attain the benchmark of $250000 Million within in the next three years. In addition to that business, the entity will be focused on a wide range of technological innovations that will improve the efficiency of BP.

As per the analysis of different data of annual report, it has been addressed that both long and short term loans of BP Plc have shown upward trends in which British Petroleum tries to identify new sources of finance in order to attain requirement of funds for different expansion projects. Further investigation has determined that Standard & Poor’s Ratings long-term credit rating for BP is A- that is stable and positive as compared to previous year, and Moody’s Investors Service rating is A1 that is showing the positive outlook (Mian and Santos, 2018). As per previous work experience, the management of British Petroleum is going to issue long-term taxable bonds. In addition to that time duration of bonds will be floated from one to twelve years period. Furthermore, the commercial paper will be issued by British Petroleum at competitive rates in order to attain short-term borrowing requirements. Therefore, it seems that BP will find positive growth in short and long term borrowings. In addition to that business, the entity is going to diversify its investment in various new ventures so as the company is taking more funds in the form of debt rather than equity (Chaibi and Ftiti, 2015).

It has found that a business entity has shown downward trends in net cash flow from the last three years. In addition to that, there are further negative trends addressed in new cash flow of the company because the business entity needs to pay a dividend on a regular basis. In addition to that BP is focused on enhancing operational efficiency in which management tries to reduce the cost of operations with the help of latest innovation and technologies. It will increase the company’s investment in various equipment and technologies for the attainment of long term business goals (McNeil, Frey and Embrechts, 2015). It reduces the amount of cash within business operations. It has been addressed that a business entity will adopt a floating interest rate for various long and short term loans. This approach will increase interest related expenditure that would reduce the net cash flow of oil and gas company.

SUMMARY

As per the above assessment, it is identified that BP has maintained appropriate growth in revenue. It has found that business entity has gained positive credit rating from different international agencies so as BP has appropriate business efficiency for acquiring more funds through debt.

REFERENCE

McNeil, A. J., Frey, R., and Embrechts, P. (2015). Quantitative risk management: Concepts. Economics Books.

Bluhm, C., Overbeck, L., and Wagner, C. (2016). Introduction to credit risk modeling. Chapman and Hall/CRC.

Mian, A., and Santos, J. A. (2018). Liquidity risk and maturity management over the credit cycle. Journal of Financial Economics, 127(2), 264-284.

Chaibi, H., and Ftiti, Z. (2015). Credit risk determinants: Evidence from a cross-country study. Research in international business and finance, 33, 1-16.

McNeil, A. J., Frey, R., and Embrechts, P. (2015). Quantitative Risk Management: Concepts, Techniques and Tools-revised edition. Princeton university press.