Company Valuation Report for Bp

Topics: Financial ratio, Financial ratios, Time value of money Pages: 77 (20308 words) Published: March 4, 2013
BAFI 1045 Investment | Company Valuation Report

BAFI 1045 Investment Group Assignment | Company Valuation Report | BP


Executive Summary
BP p.l.c. is an energy company with an upstream business of extracting crude oil and downstream business of providing processed energy to companies. It is listed in both the New York Stock Exchange (NYSE) based in the United States of America and the London Stock Exchange (LSE). BP is based in London and they carry out oil prospecting extraction and retail its product in more than 70 countries. Out of the companies operating in the oil industry, the biggest two competitor of BP is ExxonMobil and Chevron. ExxonMobil and Chevron are chosen due to their similarities to BP and they are ranked top two major oil companies among the oil industry. In our report, we have that the identified major issues affecting BP’s financial activities during the past five years are namely: • • • Gulf of Mexico Oil Spill Global Financial Crisis Global Demand of Natural Gas Consumption

A computation of DuPont ROE between BP, Chevron and ExxonMobil was analyzed and it was noted that BP’s ROE is generally lower than ExxonMobil and Chevron over the years. Based on the computation, various assumptions and limitations, the intrinsic value of BP’s share price was examined and estimated with five models, • • • • • Dividend Valuation Model Free Cash Flow to Equity Model Price/Earnings Ratio Model Price/Book Value Model Net Tangible Asset Backing Model

This report is based on the BP’s annual report from year 2007 to 2011 and the data are last updated on 16th March 2012. With the relevant findings and analysis examined, our group has decided to go with a BUY decision at the time of valuation 2

BAFI 1045 Investment Group Assignment | Company Valuation Report | BP


Table of Contents
Executive Summary 1. Introduction to the BP 2. Current Issues 2.1 Gulf of Mexico Oil Spill 2.2 Global Financial Crisis 2.3 Global Demand of Natural Gas Consumption 3. Financial Analysis 3.1 Recent Financial Performance 3.2 DuPont Analysis 3.2.1 Importance of ROE 3.2.2 ROE Analysis 3.2.3 Profit Margin Analysis 3.2.4 Total Asset Turnover 3.2.5 Financial Leverage Analysis 3.3 Determining Required Rate of Return 3.3.1 Beta 3.3.2 Risk-Free Rate 3.3.3 Market Risk Premium 3.3.4 Capital Asset Pricing Model (CAPM) 4. Valuation Analysis 4.1 Dividend Discount Model (DDM) 4.1.1 Dividend Forecast 4.1.2 Intrinsic Share Price 4.1.3 Sensitivity Analysis 4.1.3 Evaluation of DDM 4.2 Free Cash Flow to Equity (FCFE) 4.2 Present Value of Free Cash Flow to Equity (FCFE) 4.2.2 Forecasted FCFE Growth Rates 4.2.3 Intrinsic Share Price 4.2.4 Sensitivity Analysis 4.3 Price-Earnings Ratio 4.3.1 Price-Earnings Ratio Model 2 5 6 6 7 8 9 9 10 10 13 14 15 16 17 17 18 18 18 19 19 19 22 23 24 25 25 27 28 28 29 30 3

BAFI 1045 Investment Group Assignment | Company Valuation Report | BP


4.3.2 Price Earnings Ratio Model Valuation 4.3.3 Evaluation of P/E Model 4.3.4 Sensitivity Analysis 4.4 Price/Book Value Ratio 4.4.1 P/BV Ratio Comparison 4.4.2 Evaluation of P/BV Model 4.4.2 Sensitivity Analysis 4.5 Net Tangible Asset Backing Model 4.5.1 NTAB Model Comparison 4.5.2 Evaluation of the NTAB Model 5. Conclusion Appendix A Appendix B Appendix C Appendix D Appendix E Appendix F Reference List

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BAFI 1045 Investment Group Assignment | Company Valuation Report | BP


1. Introduction to the BP
BP is a global energy group that resulted from the mergers and acquisitions of several companies. BP is ranked 118th in Platts Top 250 Global Energy Company Rankings according to financial performance measured by revenues, asset worth, profits and return on investments (Platts 2011). Under its umbrella, the BP group extracts, ships, manufactures, retails oil and its related products under core brand names of BP, ARAL, ARCO and Castrol. It has ventured into the convenience retail store...
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