Corporate and Enterprise risk at BP
BP plc is one of the worlds leading oil companies on the basis of market capitalisation and proved reserves. It is a global group, with interests and activities which cover three main business segments of Exploration and Production, Refining and Marketing and Gas, Power and Renewables. BP has total assets of $217,601million and total revenues of $270,602million with the majority of their revenues ($) coming from its refining and marketing business and the majority of their profits ($) from Exploration and Production. In this report we will evaluate BP’s risk profile by examining BP’s main risk sources and risk management policies. In the process this report will highlight BP’s risk management failures, risk financing structure and come up with our own solutions for how BP can incorporate Enterprise Risk Management in its risk function.
As a leading multinational group BP is exposed, and exposes its employees to a large number of risks which vary in probability and severity, in the following few pages this report will outline the major Financial, Operational and Non financial risks that BP faces and explain briefly what can happen and how.
Oil price risk:
Сov(X,Y) = ∑(xi-y)(xi-y)ρ = Сov(X,Y)__
N -1 Std(X).Std(Y)
Where X is BP’s share price and Y is crude oil price.
Over the last 5 years the correlation coefficient between the price of crude oil and BP’s share price was 0.875467, which signifies a strong positive correlation between crude oil and share price as expected. Oil prices have risen dramatically of late but this has not been matched with increases in share price. This is mainly due to BP’s profits being down 45% as a result of lower oil and gas production, lower profits from refining and asset disposals. This has results in a correlation coefficient of -0.143. We can therefore argue that had it not been for the rising oil prices then BP’s share price would have faired a lot worse.
Liquidity risk is the risk stemming from the lack of marketability of an investment that cannot be bought or sold quickly enough to prevent or minimize a loss.
Current ratio :
_Current assets_¬_ 1.0530.999
Liquidity ratio :
Current assets – stock1.0120.965
The calculations infer that the company is at dangerously low levels
Foreign exchange translation exposure:
Foreign exchange currency exposure has a significant effect on a companies operations and trading activities.
The bulk of BP’s exposure to FX risk comprises of its investments in companies different to its base currency, the US$, and subsequently its foreign currency borrowings. The diagram below gives an overview of the make-up of companies that BP has a vestige interest in:
Investments in companies ($) In millions???
United Kingdom = 17US= 15
Australia /New Zealand = 5 Africa = 1
EU = 7Asia = 1
SubsidiariesJointly controlled entities Associates
As clearly shown, BP has many subsidiaries in the UK and Euro area, which highlights its FX exposure as transfers in capital must be converted. Subsidiaries are an important component here, as by definition, an investing company must own a large proportion of the subsidiaries share capital and thus a FX risk is generated here. As noted earlier BP’s major product, oil, is priced internationally in US dollars, and hence any currency arising from international transactions poses a risk of this nature.
Similarly, BP’s foreign borrowing exposure totalled $957m (31 Dec 06), of which $901m was not swapped. This total comprised of: