In current times, one quickly associates British Petroleum (BP) to a single, unfortunate event that took place in the Gulf of Mexico. This event, though significant, does not properly communicate or evaluate how highly successful and well known this corporation has become globally. From a financial perspective, there are few companies that can match the size, influence and considerable accomplishments that are attributable to British Petroleum. To properly evaluate this company, one must review both its history and current status, including the business model and target customer groups. A comparison should be drawn on the performance and trends this company is experiencing, and how it compares to other competitors within its markets. Such a large company is complex, and various business strategies should be analyzed and understood in order to comprehend existing priorities and activities. Lastly, recommendations should be provided on how BP can capitalize on its opportunities and current strengths in order to more effectively serve both its shareholders and also its customers.
- BP’s history and current status. What are the major events (external and internal to the firm) in its history that led to its current position? What is its business model? Who are its customers?: BP’s history is as old as the industry itself, with roots deep within the earliest stages of world oil exploration. Established as a brand name in the early part of the twentieth century, British Petroleum has grown and flourished over the years, and according to its 2011 annual report proudly proclaims to be a world leader among integrated oil and gas companies. BP became its own, unique brand in 1920, and was credited with assisting the war effort during World War II through its accomplishments in increasing oil production. BP was a pioneer in discovering and cultivating oil production in Alaska, and was also the first company to mass market unleaded gasoline in the early seventies. More recently, BP has been acknowledged as a leader in developing technology tied to deep water oil exploration.
BP’s more recent history has to some extent overshadowed its accomplished past, notably due to the infamous oil spill in the Gulf of Mexico. According to an article by Scheer and Moss, this oil spill released 205.8 million gallons of oil into the gulf. This accident was horrific, causing deaths and damages to both the environment and the reputation of the company. This event by itself cannot be blamed for all of the damage to BP’s reputation, as there have been many accidents in modern times. According to an article by Bryant and Hunter, there were serious accidents in 2005 and 2006 that caused deaths and significant oil spillage by BP. Smaller incidents that happened in 2008 and 2009 suggest a recurring pattern that has plagued the large oil company. A recent article by Fowler cites how the U.S. Government recently blocked BP from obtaining any new government contracts, citing a “lack of business integrity” largely as a result of criminal charges and a violation of the Clean Water Act tied to the gulf oil spill.
BP’s business model, according to its 2011 annual report, is to be a leading integrated gas and oil company in the world. One of its two major business segments focuses on exploration and production, while the other major business segment provides refining and marketing. The company highlights its mission to find, develop, and produce essential sources of energy, and then transform these energy sources into products needed by its customer. The customers they serve are as broad and as diverse as the products that are created by oil, and include everything from transportation needs to products made from plastics. Since most of the world relies on oil for products they consume, BP has products with exceptionally broad appeal to consumers.
- BP’s comparative performance and performance trends using several measures and metrics. How does this compare to relevant others/competitors? Is this trend sustainable? BP can define its direct competition as the other giants within its industry, such as Exxon Mobil or Shell Corporation. BP has been historically competitive and successful within an industry where its peers have also enjoyed tremendous success. There is a significant, notable difference with BP’s performance as it relates to current stock value. This disparity began with the gulf spill incident in 2010, and according to an article by Team still factors into a trading value 33% less to what would be otherwise. There are multiple reasons for this, mostly attributable to the potential for liability representing billions of dollars through resulting litigation, government requirements, clean up efforts and related health issues. As for competition, BP is highly cognizant their influence on its potential performance, as it is communicated as a key risk factor in its 2011 annual report. This report describes the industry as highly competitive, and competition places pressure on pricing, marketing, and management. It goes on to cite the potential for advances by competition in areas such as exploration, production, and technology that have potential to place BP at a competitive disadvantage over a short span of time.
Other determinations can be gleaned through performance statistics of several metrics found in BP’s 2011 annual report. One addresses operating cash flow over a five-year period:
This chart communicates graphically the impact of the 2010 gulf oil spill, and there is a correlating graphic that shows profit per share of stock:
During 2010, there was a significant financial impact tied to the gulf oil spill, resulting in a net loss per share of $26.17 cents. Cash flow was reduced to $13.6 billion compared to $27.7 billion the previous year. The net conclusion is that the company lost billions of dollars of wealth as a result of a single incident. On a positive note, the stock value has rebounded in 2011, though it still trades at a discount. Cash flow began to recover in 2011, though still down from 2009 and a five-year peak in 2008.
Through its refining/marketing business segment, BP has statistics to support that even in 2010, the company had made progress to minimize accidents because the number of total oil spills it experiences has declined in four of the past five years:
2011 marked a five year low for BP, who experienced 228 spills during that period. The company maintains that it is taking measures to strengthen mandatory safety-related processes and standards, which include both operational risk assessments and also integrity management of those processes and standards.
- What is BP’s strategy? How does it try to differentiate itself from others? What is it doing that is new/interesting? What is working well, and not so well, for BP? British Petroleum’s 2011 annual report identifies a three-pronged need to address concerns about safety, establishing trust, and adding value for its shareholders. To accomplish these needs, they have a stated strategy designed to deliver stability while restoring trust and value. This is represented by a ten point plan heavy on strategic goals and measurement of financial performance. BP commits to keeping focus on safety and risk management issues, playing to their strengths of exploration, building relationships, and developing technologies. They promise to be a stronger, more focused company, simpler in its organizational approach with more streamlined processes. The company also commits to being more transparent with its reporting, providing more detailed information that is more broken out by individual business segments.
For financial performance metrics and strategies, the company wishes a more focused portfolio of assets that take advantage of company strengths, while targeting new projects that have higher potential for return. BP needs to grow its operating cash flow to further recover from the 2010 gulf spill, which they will in turn use for increased investment and to provide shareholders a better return on investment. Lastly, they commit to a strengthened balance sheet that indicates a healthier, more successful company.
An interesting business initiative that BP continues to focus more effort is represented by international partnerships. These partnerships have the dual positive impact of giving BP access to new resources, while also providing greater reach to connect with new customers. In BP’s 2011 annual report, two such relationships are highlighted that connect BP to two of the world’s fastest growing economies. One is with Reliance Industries in India, while another is with Rosneft in Russia. Such ventures are not without risk, but the potential gain is highly significant for the corporation. Unfortunately, such risk was highlighted recently when Russia moved to minimize BP’s influence on its government controlled oil company. According to an article called “BP sells out in Russia”, this type of situation has been a recurring theme within Russia, where its government welcomes foreign investment, and then acts to minimize its influence within years by reasserting control. BP can take comfort in the fact that it will retain a minority stake in the company, while also providing $19 billion in dividends to its shareholders.
- Evaluate its strategy in light of your analysis. What would you recommend for the future? It is understandable that a public company should remain highly cognizant of its obligation to shareholders, and that much of its efforts toward marketing and strategy would tie to this key customer group. Given that a company must serve this customer above all others, its defined ten point strategic plan is logical and would likely be well received by the audience that it serves.
A concern for the future also relates to this strategic vision. According to the article by Bryant and Hunter, BP has a history of claiming publicly that they were focused on safety when inside the company it is apparent that they were much more concerned about cost control. This record can be further reinforced by how they have handled public interactions and publicity, which during the gulf oil spill was represented by a series of missteps that further reinforced a negative image as a company who cared about money and business, not people and the environment. A concern about this ten point plan is how heavily it is weighted toward financial metrics. Of the ten points contained, five address financial metrics while only one calls for a focus on safety. Given how a single accident caused billions of dollars of lost wealth for the company, hopefully the company and its shareholders has realized that there is no additional operational cost tied to safety that is more costly than a company’s reputation. It may become necessary to shift the corporate culture towards safety in order to effectively address this challenge.
Another recommendation for the company would be to stake out more environmental and community interest claims through its marketing effort in order to more effectively manage its external reputation. Given its long history of innovation and contributions to everything from the environment to patriotism during wartime, BP would be well served to go back to its roots through marketing in order to overcome the reputation it has established for itself in more recent years.
“BP Sells Out in Russia.” WSJ.com. 22 Oct. 2012. Web. 31 Jan. 2013.
British Petroleum. 2011 Annual Report. Web. 31 Jan. 2013.
Bryant, Murphy and Hunter, Trevor. “BP and Public Issues Management.” Iveybusinessjournal.com. Sept./Oct. (2010). n. pag. Web. 31 Jan. 2013.
Fowler, Tom. “BP Blocked from Deals.” WSJ.com. 28 Nov. 2012. Web. 31 Jan. 2013.
Scheer, Roddy and Moss, Doug. “BP Drilling Disaster Plus 2 Years: is the Gulf of Mexico Healthy Again?” Scientificamerican.com. 2 Sept. 2012. Web. 31 Jan. 2013.
Team, Trefis. “Gulf Spill Settlement Could Save BP Billions in the Long Run.” Forbes.com. 2 Jul. 2012. Web. 31 Jan. 2013.