BP VS Shell: A Business to Business Financial Comparison
Introduction
Can you imagine two of the largest oil companies in the world competing for the top spot with all the financial, physical, and responsibility factors that become encumbrances along the race? BP and Shell – together - have been in business for decades, but with close examination of their financial records spanning over the last half of a decade, one can not only see why, but can also begin to financial analyze and examine their strengths, weaknesses, and shortcomings. They are two companies in the same line of work with completely different values and completely different environmental mistakes. BP, on their company website claims to be “one of the world’s leading international oil and gas companies”, but with a quick evaluation of their company site, mission statements, and vision statements it is not a difficult task to realize that they are more intimately involved with their shareholders than they are the environment (BP 2013). Shell Dutch – also a foreign enterprise - boasts that they are environmentally friendly and sustainable to the natural realm that they affect; their pride and joy is in providing an elite service to the petrochemical industry, while still exercising much consideration for the world around them (Shell 20103). This report will be an intricate comparison of not only the separate company’s business practices, but also what they do with the money that affords those practices.
BP Overview
BP – in fact – one of the largest oil refinery companies in the world, operating in over eighty countries, employing 85,900 persons, operating sixteen refineries and 20,700 retail locations, and grossing an average of $375, 765 million per year they are in operation (BP 2013). Originally named British Petroleum Company, from a shareholders’ viewpoint, may have been the picturesque company for a financial portfolio as their stock prices rose and they acquired many smaller firms since their start in 1909 – until the major oil spill they were responsible for at the peak of 2010. Scientists revealed that an estimated 170 million gallons of oil was released into the Gulf coast, because of the explosion and collapse of one of BP’s underwater oil rigs. The explosion killed and harmed over 8,000 marine animals and completely damaged all the waters the oil encountered. The explosion endangered many fisherman of the area and dented their profit margins until, just recently quotes the National Wildlife Federation in an article about the tragic happenings (National Wildlife Federation 2013). Because of the massive damage done by this freak accident, British Petroleum was forced into an enormous shadow of debt with company finances being heavily splurged on positive advertising, federal and personal lawsuits, and “reparation” of the Gulf of Mexico. Because of the accident and attempting to shield the public from the actual damages done to the Gulf initially, BP was faced with the death of eleven workers, the injuries of seventeen workers, a guilty plea to fourteen felony charges made by U.S. Congress, and a $4.5 billion fine – deemed the highest fine to a corporation in U.S. history (Newsweek 2013).
Although, previously known as almost the picture-perfect company to its shareholders, BP was faced with major punishments that not only affected their reputation, but their cash flow in the year 2010. As will be outlined below, their balance sheets and income statements confirmed the heavy “clean-up” financing. Pleading guilty to the charges and the incident proved their lack of responsibility to the public and the environment, which in turn affected their bottom line for their U.S. financial reports?
Shell Overview
As previously stated, Shell and BP may as well be polar opposites of one another, in respect to business practices and standards. Born as a Malaysian company in September of 1960, Shell must have always been the model oil corporation in regard to the human public as well as their shareholders. They are still a hefty competitor for the British-born BP with a turnover of RM 7.5 billion ( 2,471,580,000 American Dollars), employing over two hundred natural-born Malaysians, and harvesting Malaysia’s first Long Residue Catalytic Cracking system in 1999 – just without all of the damage to the environment around them (Shell 2013). Shell focuses more on the elimination of waste and the health and temperament of their employees, which they believe is the perfect equation for a more successful, clean, and responsible company. They believe that these practices warrant positive bottom lines without all of the negative aftermath and decisions. The following financial reports reflect these sentiments:
Financial Health: BP
Based on the mass of ratios and calculations presented above, BP’s most dramatic change in capital structure occurred in 2010 when the massive oil spill occurred. Pertaining to current events and the collection of financial statements from that year (especially the cash flow statement), BP was making egregious payments to the government and individual persons to cover the damages they did the environment and workers that were involved in the incident (BP 2010). Based on the profitability ranges from 2008 to 2012, their long-term ratios proved to be normal and reflecting their average of above-average profitability and amazing company performance. Return on Equity in the years 2008, 2009, 2011, and 2012 reflected a high percentages of money that generated by the company feeding back into the well-kept and closely watched equity invested in the company, reflecting a healthy capital structure, on its own. To compliment these facts, one may examine the remainder of the calculations to further analyze the operations and business decisions that affected the company’s financial data.
BP maintained excellent performance in respect to their return on assets percentages demonstrating that they do have a stronghold on the income that is generated by the company in relation to the assets that they maintain within the firm. Again, the only troublesome data that appeared via calculations using their financial records is the year 2010 when they had a -1.77% return on assets (BP, 2010). Regardless of this year, they more stabilized data for return on assets as well as fixed asset turnover, which showcased their ability to utilize their assets to further advance company operation. The company’s most impressive exhibition of their ability to do the aforementioned was in the year 2011, when they managed to manufacture a turnover ratio of 1.28 – just one year after the effects of the major oil spill (BP, 2011). This out rightly clarifying that they had major cash reserves, assets, revenue and easily liquidated equity to properly handle the freak accident; by fiscal year end 2012, they had an available working capital fourteen billion nine hundred and twenty-six million dollars, meaning that the company beheld an available total current asset amount to cover their liabilities many times over (BP, 2012). Lastly, until the year 2010, they were able to turn their accounts payable over in less than an third of a year, with the exception of 2010; based on most company financial records; this is a remarkable and dependable attribute to possess.
Cost of capital is a noteworthy detail to be examined when analyzes the financial documentation and health of a corporation, because if too much money that the money possesses is owed to creditors, banks, and other businesses, the assets of the company can be completely lost at any moment. Based on the calculations mentioned above and BP fixed asset turnover, cost of capital is not a problem for the corporation. According to the financial leverage ratios, again, their worst year for debt to equity ratio as well as debt to cash flow ratios, which are based on long term liabilities, total equity, and EBITDA, was 2008 and 2010. The company reflects amazing ability to leverage their equity against their liabilities and their equity against their liabilities, as well. This makes recovery from tremendous financial costs or shortages in cash flow easier to cover; BP has no issue with this because of the “free money cash reserves” they have available at any given time.
Financial Health: Shell
Less can be said about the financial health of Shell, because they are a moderate, conservative, and consistent company. Their financial records reflect an accumulation of balanced financial performances, as well as company performance that very seldom meanders or “goes against the grain”. They exercise safer investments, fewer large capital expenditure spending, and have more impressive data because of these factors mentioned.
With the exception of the years 2009 and 2012, Shell’s return on equity data reflected that they exercise above average management of their income over their equity. As noted, in the year 2008, their percentage was 33.59%, demonstrating that they turned their income into solid equity at an above-average percentage. These notions are constantly visible within their statements as their total working capital fluctuates sparingly and their accounts receivable turnover was as low as 1.38 in 2008 (Shell, 2008). Their debt to equity and debt to cash flow ratios are relatively healthy with regard to the years 2008 and 2009, reflecting that capital management is just as much as a problem as sustainability for the company: not a problem at all.
With respect to their profitability ratios, their operating profit margin was only troubled in the years 2008 and 2009, but after this point, they had somewhat stable numbers that unfortunately presented that they have only minimal flexibility in respect to the profit and sales. In 2010 the percentage was 7.56%; in 2011 it was a mere 1.46%; and in 2012 it was also a mere estimated 1.46%. This reflects that their sales are not translated to a high level of available cash flow; this could be an indication that revenues are not as high as BP and the operating activities may be stifled because of it. When compared to the current ratio (total current assets over current liabilities), the data presented above (within the text box exhibits) introduces the fact that their established company assets are much higher than their liabilities with record percentages, such as 334.22% in 2009. But again, in 2002, we see a calculated strata that read -8.83%, offering the inclination that this company has little room for mistake because the year before (2011) the percentage was 284.96%. This demonstrates also - though – that the company has substantial assets to liquidate as their cash reserve. Regardless of their weaker profit margin, they have suitable assets to substantiate for potential company losses or major capital expenditures – which they have very few, with quick reference to their financial statements.
Reviewing their liquidity ratios, Shell has extremely long accounts payable days records; the longest amount of time it took them to process accounts payable within the last five years was 894.32 days in 2010 (Shell 2010). On average – for the last five years – is 363.32 days which is close to an entire year. This is not a frightening figure, but it is significant enough to suppose that it is their other company assets (such as property, plant, and equipment, machinery, etc.) that are keeping them afloat during these harsher financial periods. The recession may have played a role in these happenings as we are dating back to the peak of the most major recession in decades (2008), but this may also be because the company has documented that their major expenses are accumulated by their practices of being a “green” company. Sustainability is an expensive procedure for any company to bring to fruition; and judging by Shell’s debt to equity ratio (total liabilities divided by total equity) in 2009 and 2010 ( ratios of 0.61:1 and 0.48:1), some years it is more difficult than others to fulfill the accountable promises the company has made to their employees, their board of directors, and their consumers (Shell 2009,2010). For this reason, we see the clear difference between BP and Shell: accountability and moralistic standard.
In conclusion, when comparing two remarkably outstanding businesses in the same industry, one can only derive from the information presented in this short dissertation that BP would win the financial race between Shell and BP. Although, Shell proves to be more stable, sustainable, and responsible – qualities which in the long run – judging by their financial data – make for a consistent flow of income without interruptive capital draining incidences, BP does not practice business operations that are proactive, but more so reactive – and yet they still prevail financially. Shell practices operations in a manner that are proactive, pro-community, and pro-safety, but their bottom lines sometimes suffer because of them, placing them behind their competition in regard to pure, liquidated money. The bottom lines of both companies may reflect substantial differences but surely a company may want to make less money with fewer hazardous contingencies, rather than make an abundance of revenue and wind up spending it on freak accidents caused by outright negligence and irresponsibility. On the same note, in the corporate field, the most important factor is the money that the company generates and the dividends available to its stockholders, and as demonstrated in the introduction and body of this dissertation, one principle that BP does possess is the ability and priority of ensuring that their shareholders are well taken care of. Based on five years of financial research, BP “takes the cake” financially but in regard to responsibility, humane-oriented business practices, and care for the environment and society, Shell is a more reputable and novel corporation. This dissertation presents a crossroads between money and humanity. Depending on the reader and the elements considered for a decision, either party could be considered the better candidate for an all-around “good company”. In a beauty pageant, BP would win the crown, but Shell would win the everlasting, never forgotten Ms. Congeniality Award.
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