As a part of our MLA2 International Finance Analysis, for our assessment we are required to complete this report project on financial analysis of two competing companies with the purpose of finding which company is the best to invest. We decided to choose oil and gas industry because most world top 10 companies by profit and revenue are from this industry and its much related with our home country, Malaysia. At first we want to pit PETRONAS, a Malaysian oil company with BP but it’s not possible because PETRONAS is a national owned company and not public listed. Thus we change to BP against SHELL.
The material has been compiled from various online sources, mostly from the company’s website itself for the company annual report and financial statement review, as well from finance websites for share performance, market and industry related. We hope this report will be beneficial to those reading it and especially to Ms. Grotenrath in her decision making the right investment.
We hereby take this opportunity to put on records our sincere thanks to Mr. Matthias Eschweiler under the light of whose able to guidance, we able to complete this project in an effective and successful manner Last but not the least, we would like to thank all those concerned people who have directly or indirectly contributed in the completion of this entire report project
1.0 INTRODUCTION The petroleum industry or oil & gas industry includes the global processes of exploration, extraction, refining, transporting (often by oil tankers and pipelines), and marketing petroleum products.
The largest volume products of the industry are fuel oil and gasoline (petrol). Petroleum is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, and plastics. The industry is usually divided into three major components: upstream, midstream and downstream. Midstream operations are usually included in the downstream category. Petroleum is vital to many industries, and is of importance to the maintenance of industrial civilization itself, and thus is a critical concern for many nations. Oil accounts for a large percentage of the world’s energy consumption, ranging from a low of 32% for Europe and Asia, up to a high of 53% for the Middle East. Other geographic regions’ consumption patterns are as follows: South and Central America (44%), Africa (41%), and North America (40%).
The world consumes 30 billion barrels (4.8 km³) of oil per year, with developed nations being the largest consumers. The United States consumed 25% of the oil produced in 2007. The production, distribution, refining, and retailing of petroleum taken as a whole represents the world's largest industry in terms of dollar value. Supermajor is a name commonly used to describe the world's five largest publicly owned oil and gas companies.Trading under various names around the world, the supermajors are considered to be: BP p.l.c. (United Kingdom)Chevron Corporation (United States)ExxonMobil Corporation (United States)Royal Dutch Shell plc (Netherlands and United Kingdom)Total S.A. (France)
As a group, the supermajors control about 6% of global oil and gas reserves with the largest supermajor, ExxonMobil, ranked 14th. Conversely, 88% of global oil and gas reserves are controlled by state-owned oil companies, primarily located in the Middle East. Petroleum supermajors are sometimes collectively referred to as "Big Oil", a term used to describe the individual and collective economic power of the largest oil and gas producers, and their perceived influence on politics, particularly in the United States.
Big Oil is often associated with the Energy Lobby. Usually used to represent the industry as a whole in a pejorative or derogatory manner, "Big Oil" has come to encompass the enormous impact crude oil exerts over first-world industrial society. The term is also utilized to discuss the consumer relationship with oil production and petroleum use, as consumers in the United States and Europe tend to respond to petroleum price spikes by purchasing vehicles with greater fuel efficiency during these periods.
2.0 COMPANY DESCRIPTIONS
2.1 SHELL Royal Dutch Shell plc commonly known as Shell, founded in 1907 is a global oil and gas company headquartered in The Hague, Netherlands and with its registered office in London, United Kingdom. It is the fifth-largest company in the world (and the second-largest energy company) according to a composite measure by Forbes magazine and one of the six oil and gas "supermajors".
It is vertically integrated and is active in every area of the oil and gas industry, including exploration and production, refining, distribution and marketing, petrochemicals, power generation and trading. It also has major renewable energy activities, including in biofuels, hydrogen, solar and wind power. Shell has operations in over 90 countries, produces around 3.1 million barrels of oil equivalent per day and has 44,000 service stations worldwide.
Shell Oil Company, its subsidiary in the United States, is one of its largest businesses. In 2010 Shell revenue is US$ 368.056 billion, operating income US$ 35.344 billion, profit US$ 20.474 billion, total assets US$ 322.560 billion, total equity US$ 148.013 billion and employees 97,000
2.2 BP BP plc is a global oil and gas company headquartered in London, United Kingdom. The name "BP" derives from the initials of one of the company's former legal names, British Petroleum. It is the third-largest energy company and fourth-largest company in the world measured by revenues and one of the six oil and gas "supermajors".
It is vertically-integrated and is active in every area of the oil and gas industry, including exploration and production, refining, distribution and marketing, petrochemicals, power generation and trading. It also has major renewable energy activities, including in biofuels, hydrogen, solar and wind power.
BP has operations in over 80 countries, produces around 3.8 million barrels of oil equivalent per day and has 22,400 service stations worldwide. Its largest division is BP America, which is the biggest producer of oil and gas in the United States and is headquartered in Houston, Texas. As at 31 December 2010 BP had total proven commercial reserves of 18.07 billion barrels of oil equivalent. BP's track record of corporate social responsibility has been mixed.
The company has been involved in a number of major environmental and safety incidents and received criticism for its political influence. However, in 1997 it became the first major oil company to publicly acknowledge the need to take steps against climate change, and in that year established a company-wide target to reduce its emissions of greenhouse gases. BP currently invests over $1 billion per year in the development of renewable energy sources, and has committed to spend $8 billion on renewables in the 2005 to 2015 period In 2010 BP revenue is US$308.9 billion, operating income US$ -3.7 billion, net income US$-3.3 billion, total assets US$272.2 billion, total equity US$94.98 billion and employees 79,700.
3.0 PROBLEM DEFINITION
3.1 Research Problem To recommend the better choice for an investment to Ms Grotenrath who wants to invest € 20,000 for 5-10 years. Ms Grotenrath wants to increase the invested amount to €30,000 because she is planning a trip around the world. She is risk averse and is therefore looking for a relatively safe investment.
3.2 Project Objective The basic objective of doing this report project is to analyze the financial statements of BP and SHELL, analyze environment in which it is operating and evaluate its performance over the last three years and compare both company performance. Hence a thorough environment industry & company analysis is done to understand the external factors influencing the company. The financial report analyses and interprets using tools like comparative, common size and ratio analysis. Using these tools the performance of the company over the last three years is evaluated. Based on the two company analysis, a recommendation is made for Ms. Grotenrath investment.
3.3 Research Question Analyze the two most recent annual reports (2009, 2010) of two competing (i.e. companies acting in the same industry) reporting under IFRS (International Financial Reporting Standards) regarding strategy and financials. That is the case for companies that are listed at a European stock exchange. Research trends in the market environment and share performance.
4.0 PEST ANALYSIS
A relevant model for external analysis is PEST. This model appraises the external factors that can affect the organization’s goal in four different aspects namely, Political, Economical, Social and Technological.
In the perspective of political appraisal, it can be said that oil has been a very important commodity in a country’s economy in which vast number of industries have been very dependent on crude oil such as the energy sector and the logistics sector. According to About.com, 96% of transportation relies on oil, 43% of industrial product, 21% of residential and commercial and only 3% of electric power.
Bearing that in mind, most countries have protected their oil reserves in their land by claiming legal ownership over them, therefore regulations pass by the political system in a country can have a significant effect on the company’s operations. Regulations may include taxation, royalty or environmental legislations such as National Environmental policy Act 1969 and Clean Air Act in the United States. As both BP and PETRONAS operate in various countries they would need to pay close attention to the political climate in all the countries they have an interest in to protect their investments. Other regulations may include those explicitly enforced by the stock exchange of which both companies’ shares are listed.
Meanwhile, in terms of economical analysis, this can refer to appraisal of market conditions. As both companies do not set the prices of crude oil sold especially with contractual agreements, they rely on pricing agencies such as Reuters and Platts to determine the price at a particular time.
This is done in general, by the theory of supply and demand. Since, the market determines prices of crude oil, the company will need to pay more attention to other important factors such as interest rates, inflation and not to mention exchange rates since both companies operate internationally. Fluctuations of exchange rate may mean that the profitability of companies will be affected affected or and intended investment being canceled.
Moreover, in terms of social aspect, this maybe focused at the behavior of the society in which both companies operate. It can be said that certain societies are well informed and powerful, making them key stakeholder, that they are able to demand certain actions upon companies.
Failure to do so would result in continuous lobbying to the politicians, demonstrations as well as big scale boycotting of the organisation’s products. Relating this in the context of the oil and gas industry, consumers demand that alternative energy is rigorously researched and explored, at the same time promoting structured corporate social responsibility. This has also increased transparency of companies, to include additional voluntary report such as the social responsibility report as part of the company’s annual report.
Last but not least, comes the appraisal of technological aspect. We are all aware of the beneficial of highly complexed technologies on the human’s life. It can also be said to the oil and gas industries in which revolutionized machines have made possible explorations in dangerous oceans, increase personal and process safety as well as increasing production efficiency rate. Being a capital-intensive industry, research and development is seen to be a key activity in the industry. Any new innovative technology that could improve business operations would therefore be certainly welcomed.
5.0 SWOT ANALYSIS
Another model to appraise an organization is the SWOT analysis. SWOT is the acronym for Strengths, Weaknesses, Opportunities and Threats.
In the context of BP, being ranked 3rd largest energy company in the world has certainly many perks. BP, an integrated oil company operates with an established network throughout the world, which means it does not necessarily need to rely on other companies to complete its products. Also, being an established and international known oil company makes it easier to win contracts to undertake complicated projects especially explorations in dangerous oceans.
However, primary weakness can be that BP has been involved in various significant accidents regarding its operations. This highlights weak management and low awareness of importance of safety. Investigations have found out that BP’s process safety have been very poor. Prudhoe Bay oil spill, Texas City chemical leak, Deepwater Horizon oil spill to name a few.
The most recent one, Deepwater Horizon oil spill made history being the biggest oil spill and also swiping a large wealth from the shareholders of the company. Assets had to be sold off to raise funds to pay off liability relating to the issue. This has certainly been a big issue to be resolved by the management team which needs to address the issue of process safety rather than personal safety which they have been putting much emphasize on to try resolve previous incidents.
Opportunities in the context of exploration and production or upstream activities are restricted to the amount of available oil reserves available in the world. Since, other oil companies are already utilizing most rich oil reserves, there have been an every increase demand for the search and use of alternative energy. BP has invested heavily in this part through research and development, which can hopefully turn feasible and usable in the near future.
Threat have been surrounding BP oil spill in the Gulf of Mexico. The question of how much exactly is the liability still remains a puzzle however, a fund has been created to anticipate for those seeable liabilities, currently stood at $20billion.
The fund, which currently may not be enough, would not just destroy a big chunk of the company’s wealth but create a negative image among not just the local society but the international consumers who use BP products as well. Furthermore, there have also been various litigation battles with its partners, the contractors who are also involved in the oil spill such as Halliburton and Transocean to share to a certain extent liability of the incident. This might affect their relationships in the future and also deter from other oil and gas service providers from working with BP.
In the context of Royal Dutch Shell (RDS), having international presence in so many countries would ensure it continued operations in decades with respect to exploration activities. It is also been regarded as one of the ‘supermajors’, ranked as the 2nd largest energy company. Even though supermajors only control 6% of the world’s oil and gas reserves, their presence is still relevant as state owned oil companies would require their financial as well as operational aid, for example, through production sharing contract agreements to develop an oil platform. RDS has also diversified into fuel cards and credit cards, which spreads risks relating to the company.
To add to that, the company appreciates and understand the increasing concern over ecological issues, which forced the company to initiate researches into alternative, energy sources such as biofuels, solar and wind power. This is also an example of diversification, which reduces the magnitude of risks the company faces in the oil and gas industry.
Weaknesses associated with RDS includes social backlash regarding some part of its operation. This includes the technique to remove unwanted by-products from its operations by flaring and burning gases on extracting sites, which is considered as environmentally unfriendly. Furthermore, RDS strongly operates in high-risk countries such as Nigeria, which has politically unstable climate of which may jeopardies the company’s operation and the security of its staff. If this threat increase the company may consider withdrawing from this country, which therefore compromise the ability to meet production targets.
With respect to opportunity, RDS is actively engage in discovery of new reserves of oil and gas throughout the world, which has proven to be successful, not to mention operating in areas which have been too risky to enter before such as Iraq which is rich in oil and gas reserves. As said earlier, RDS has invested heavily in alternative energy and this might open up new markets. To counter arguments and criticism against its unfriendly environmental policies, RDS has undertaken dialogues with environmental pressure groups, which creates beneficial relationships between those two parties.
As to the threat surrounding the organization, fuel prices have always been volatile especially in recent months; this can potentially affect the profitability of the company adversely. The political issues in some region such, as Nigeria remains a threat. It is reported that a court has ordered the company to surrender a site on the Niger site to a local ownership. The question clouds over whether other sites or operations of the company will be affected as well. Last but not least, an issue, which may affect other companies as well, is the likelihood of another economics crisis that is forecasted to occur in the near future.
6.0 FINANCIAL ANALYSIS
6.1 Pyramid Of Key Ratios Operating return on equity Financial Leverage Multiplier Return on Capital Employed Balance Sheet| Shareholder’s fundOwners’ paid up capitalOrdinary shares & reservesLong term liabilitiesDebenturesLoansCurrent liabilitiesCreditorsAccruals| Fixed assets:VehiclesMachineryBuildingLandCurrent assetsCashDebtorsPrepaymentsInventory|
Capital employed ÷ shareholders’ fund
Total liabilities + shareholder’s fund
Current + Long-term liabilites liabilites
Asset turnoverxNet profit margin|
Sales ÷ capital employedFixed assets + Current assets| Earnings before ÷ Salesinterst & tax|
Income Statement| SalesLess: Cost of Goods soldGross profitLess: overheadsEarnings before interest & taxInterestTaxNet income| XX(XX)XX(XX)XX(XX)(XX) XX |
6.2 Profitability Ratio
ROYAL DUTCH SHELL| ROACE (Return on net asset / Capital employment)[Net profit before interest and tax / TA-CL] x 100%| 11.57%| ROE (return on equity)[Net profit after interest and tax / Equity] x 100%| [$20,474m / $148,013m ] x 100%= 13.83%| Gross Profit Margin[ Gross Profit / Sales ] x 100%| [$78,422m / $368,056m] x 100%=21.31%| Net Profit Margin[ Net Profit / Sales ] x 100%| [ $35,344 m / $368,056m ] x 100%=$9.60%| Net Assets Turnover[ Sales / Total Assets – Current Liabilities]| [ $368,056m / ($322,560m – $100,522m)]=1.74 times|
BP| ROACE (Return on net asset / Capital employment)[Net profit before interest and tax / TA-CL] x 100%| [-$3,702m/ ($272,262m - $83,879m)]x 100%=-1.96% | ROE (return on equity)[Net profit after interest and tax / Equity] x 100%| (-$3,324m / $94,987m) x 100%=-3.499%| Gross Profit Margin[ Gross Profit / Sales ] x 100%| [($297,107m – $286,070m) / $297,107m ] x 100%=3.71%| Net Profit Margin[ Net Profit / Sales ] x 100%| [$-4,825m / $297,107m] x 100%=-1.62%|
6.3 Activity ratios
ROYAL DUTCH SHELL| Net Assets Turnover[ Sales / Total Assets – Current Liabilities]| $297,107m / ($272,262m - $83,879m)=1.577 times| Stocks Holding Period[ Stocks held / Stocks used ] x 365 days| n/A| Debtor Collection Period[ Trade debtors / Credit sales ] x 365 days| [ $37,436m / $368,056m] x 365 days= 37.12 days| Creditor Payment Period[ Trade creditors / Credit purchase ] x 365 days| [ $34,476m / $283,176m] x 365 days= 44.44 days|
BP| Net Assets Turnover[ Sales / Total Assets – Current Liabilities]| $297,107m / ($272,262m - $83,879m)=1.577 times| Stocks Holding Period[ Stocks held / Stocks used ] x 365 days| n/A| Debtor Collection Period[ Trade debtors / Credit sales ] x 365 days| [ $36,549m / $297,107m] x 365days=44.90 days| Creditor Payment Period[ Trade creditors / Credit sales ] x 365 days| [ $46,329m / $297,107m ] x 365 days= 56.92 days|
6.4 Liquidity Ratios
ROYAL DUTCH SHELL| Current Ratios[ Current assets /Current liabilities ]| [ $112,894m / $100,522m ]=1.12 times| Quick Assets Ratios[(Current assets – Inventories) / Current liabilities ] | [ ( $112, 894m – $29,348m ) / $100,522m ]=0.83 times| No Credit Period[ Cash / Average daily cash running cost]| n/A|
BP| Current Ratios[ Current assets / Current liabilities ]| [ $89,725m / $82,823m ]=1.08 : 1| Quick Assets Ratios[ Liquid assets / Current liabilities ]| [ $89,725m – $22,605m] / $82,832m =0.81 : 1| No Credit Period[ Cash / Average daily cash running cost]| n/A|
6.5 Gearing Ratios
ROYAL DUTCH SHELL| Debt To Equity[ Total debt / Total equity ]| [ $30,888m / $149,780m]=0.206| Time Interest Covered[PBIT / Interest charges]| [ $37,372m / $2,431m]=15.37 times|
BP| Debt To Equity[ Total debt / Total equity ]| $25,864m / 95,891m=0.21| Time Interest Covered[PBIT / Interest charges]| [-3,702m / 1,170m]=-3.16 times|
6.6 Investors Ratios
ROYAL DUTCH SHELL| Earning Per Share[ Profit after tax / No. of ordeinary shares]| 3.28| Price Earning Ratios[ Current market price per share / EPS]| [$66.78 / $3.28]= 20.36| Dividend Yield[ Dividend per share / Current market price per share]| [ $1.68 / $ 66.68]=0.025| Dividend Cover[ Profit after interest and tax / Total dividend ]| [ $20,474 m / $9,979m ]= 2.05|
BP| Earning Per Share[ Profit after tax / No. of os]| (19.81 cents)| Price Earning Ratios[ Current market price per share / EPS]| [$42.52 / $0.1981]= 214.64| Dividend Yield[ Dividend per share / Current market price per share]| [$0.14 / $42.52]= 0.003 | Dividend Cover[ Profit after tax and interest / Total dividend ]| [-$3324 / $2,627m]= -1.265|
6.7 Return Over Period
Return over period = Dividend yield + Capital gain/loss| ROYAL DUTCH SHELL0.025 + [($66.78 - $66.01) / $60.11]= 0.136| BP0.204 + [($42.52 – $55.30) / $55.30]= -0.027|
6.8 Altman Z score.
Formula T1 = Working Capital / Total Assets T2 = Retained Earnings / Total Assets T3 = Earnings Before Interest and Taxes / Total Assets T4 = Market Value of Equity / Total Liabilities T5 = Sales/ Total Assets
Z Score Bankruptcy Model: Z = 1.2T1 + 1.4T2 + 3.3T3 + 0.6T4 + .999T5
Zones of Discrimination: Z > 2.99 -“Safe” Zones 1.81 < Z < 2.99 -“Grey” Zones Z < 1.81 -“Distress” Zones
Royal Dutch Shell
T1 = working capital/total assets (Current Assets-Current liabilities)/total assets (11,728-927)/214,140 =0.05043 T2=Retained earnings/total assets =11,142/214,140 =0.0520 T3= Earnings before interest and taxes/Total assets =14,323/214,140 =0.06689 T4= Market value of Equity/Total liabilities =140,320+225,140/77,228 =4.7322
T5=Sales/Total Assets =14,345/214,140 =0.06670
Z-Score = 1.2(0.05043) + 1.4(0.0520) + 3.3(0.06689) + 0.6(4.7322) + .999(0.06670)
=0.06052 + 0.0728 + 0.2207 + 2.8393 + 0.06663 =3.2600
T1= Working capital/total assets =89,725-82,832/89,725
=0.07682 T2= Retained earnings/total assets =89,804/89,725 =1.0009 T3=Earnings before interest and taxes/total assets =-3,324/89,725 =-0.03705 T4=Market value of equity/total liabilities =132,930+85,520/176,371 =1.2386 T5=Sales/Total Assets =-3,324/89,725 =-0.0370
Z-Score= 1.2(0.07682) + 1.4(1.0009) + 3.3(-0.03705) + 0.6(1.2386) + .999(-0.0370)
=0.09218 + 1.4013 - 0.1222 + 0.7432 – 0.03696
7.0 INTER COMPARISON
| 2010| 2009| 2008| Royal Dutch Shell (Shell)| Revenue| 368,056| 278,188| 458,361| Total Revenue| 378,152| 285,129| 470,940| Income before interest and taxes| 35,344| 21,020| 50,820| Income after taxes| 20,474| 12,718| 26,476| British Petroleum (BP)| Revenue| 297,107| 239,272| 361,143| Total revenue| 308,928| 246,138| 367,053| Income before interest and taxes| (3702)| 26,426| 35,239| Income after taxes| (3324)| 16,759| 21,666|
Regarding their revenue, we can see that both of the company do well in their previous years. And we can see an increase in both companies in 2010 compare to 2009. We can see some drastic decrease in year 2009 between 2008. This is due to economic crisis and had affected both of the company. In term of income before interest and taxes and income after taxes, we can see that BP had incur loss in year 2010. This is due to the Gulf in Mexico oil spill incident on 2o April 2010.
BP have to take responsibility of the incidents and they have to incur lots of expenses. That resulting the loss in BP in 2010 but it does not mean that the company is not worth to invest. As we can see, its revenue still increasing and we believe that BP well get back in track before we realize it. To compare the sustainability of the company, it is very important for the investor to look at the performance of the company not only base on the revenue and profit their earn, but also in other terms. We will compare the ratio that are important for the investor to know so that they can make decision on which are more dynamic.
7.1 Royal Dutch Shell
| 2010| 2009| ROE (return on equity)[Net profit after interest and tax / Equity] x 100%| [$20,474m / $148,013m ] x 100%= 13.83%| [$12,718m/$136,431m] x 100%=9.32%| Net Profit Margin[ Net Profit / Sales ] x 100%| [ $35,344 m / $368,056m ] x 100%=$9.60%| [$21,020m /$278,188m] x 100%=$7.556%| Net Assets Turnover[ Sales / Total Assets – Current Liabilities]| [ $368,056m / ($322,560m – $100,522m)]=1.74 times| [$278,188m / ($292,181m - $84,789m)]=1.34 times|
Debt To Equity[ Total debt / Total equity ]| [ $30,888m / $149,780m]=0.206| [$25,314m / $138,135m]=0.1833| Earning Per Share[ Profit after tax / No. of ordinary shares]| 3.28| 2.04| Price Earning Ratios[ Current market price per share / EPS]| [$66.78 / $3.28]= 20.36| [$60.11 / $2.04]=29.466| Dividend Yield[ Dividend per share / Current market price per share]| [ $1.68 / $ 66.78]=0.025| [$1.68 / $60.11]=0.0279| Dividend Cover[ Profit after interest and tax / Total dividend ]| [ $20,474 m / $9,979m ]= 2.05| [$12,718m /$10,717m]=1.1867 |
We can see that overall of the company performance in year 2010 is better than in year 2009. There is an increase in ROE, Net Profit Margin, Net Assets turnover and Debt to Equity. However, they had been slightly decrease in term of Price Earning Ratio and dividend yield. The return that company will pay back to investor seem slightly decrease but this is mat due to the company want to keep the money in the company so that the company may invest in the future. But in summary, we can say that the performance of Royal Dutch Shell are quite satisfying.
7.2 British Petroleum
| 2010| 2009| ROE (return on equity)[Net profit after interest and tax / Equity] x 100%| (-$3,324m / $94,987m) x 100%=-3.499%| [$16,759m / $101,613m] x 100%=16.493%| Net Profit Margin[ Net Profit / Sales ] x 100%| [$-3,702 m / $297,107m] x 100%=-1.24%| [$26,426m / $239,272m] x 100%=11.044%| Net Assets Turnover[ Sales / Total Assets – Current Liabilities]| $297,107m / ($272,262m - $83,879m)=1.577 times| [$239,272m / ($235,968m - $59,320m)]=1.355 times| Debt To Equity[ Total debt / Total equity ]| [ $25,864m / 95,891m]=0.2697| [$26,161m / $102,113]=0.2562 | Earning Per Share[ Profit after tax / No. of os]| (19.81 cents)| 88.49 cents| Price Earning Ratios[ Current market price per share / EPS]| [$42.52 / $0.1981]= 214.64| [$46.85 / $0.8849]=52.94| Dividend Yield[ Dividend per share / Current market price per share]| [$0.14 / $42.52]= 0.00329 | [$0.56 / $46.86]=0.012| Dividend Cover[ Profit after tax and interest / Total dividend ]| [-$3324 / $2,627m]= -1.265| [$16,759m / $10,483m]=1.599|
The oil spill in Gulf of Mexico had quite an effect on the company performance. We can see the ROE and Net profit Margin give a negative number as the company suffer loss in year 2010 compare to year 2009 where the company show quite a strong number in term of ROE and Net Profit Margin. The Net Asset Turnover in year 2010 had increase compare to 2009 due to the increase in sales in 2010. Earning per Share, dividend yield and dividend cover had decrease compare to year 2009. This show that the return that the company can give to investors had slightly decreased. But overall, the decrease in company performance is due to the special incident that occur in 2010.
8.0 INDUSTRY COMPARISON
Ratio| Price earning ratio| ROE %| Dividend Yield %| Net profit Margin %| Industry Average ratio (major integrated oil and gas)| 10.20| 18.10| 3.39| 7.90| Royal Dutch Shell- 2010| 20.36| 13.83%| 0.025| $9.60%| 2009| 29.466| 9.32%| 0.0279| $7.556%|
British Petroleum- 2010| 214.64| -3.499%| 0.00329| -1.24%| 2009| 52.94| 16.493%| 0.012| 11.044%|
In comparing the performance of this both company with the industry, we can see that both of this company is inferior to the industry trend. But the Royal Dutch Shell has show a positive figure in their net profit margin in year 2010. The net profit margin on that year is slightly higher than the average industry. But regarding their price earning ratio, it seems that both on the company had show a rather higher figure than the average industry price earning ratio.
9.0 CONCLUSION & RECOMMENDATION
9.1 Conclusion Base on the performance of both company, we had concluded that Royal Dutch Shell are better than the British Petroleum. This conclusion was made base on the financial analysis ratio that been done before. Shell deem to be more effective in way they using their assets to generate profit base on profitability ratio. And also base on activity ratio, we can also said that Shell is more efficient than BP in term of efficiency in using assets to generate profit. And also, Shell are more superior in term of ability to meet short term and long term financial obligations.
Thus making Shell more competitive than BP. But we must remember that the poor performance in BP in year 2010 is prior to the incidents of oil spill in Gulf of Mexico. This incident had cause BP suffer quite a loss thus reducing their profitability in year 2010.
9.2 Recommendation Say Ms Grotenrath purchase $20,000 worth of Royal Dutch Shell today, it is highly probable that she will receive more than $30,000 when she sells it back to stock exchange in minimum of 7 years which is based on the stock performance of the company in the London Stock Exchange. It was reported that the stock closed at $46.19 on 1st December 2005 and closed at $63.70 on 1st Dec 2010. That is a return of around 38% in 5 years. We remain optimistic regarding its future earning as there is a lot opportunity available to the company.
So we recommend that Ms Grotenrath to invest in Royal Dutch Shell rather than British Petroleum because it is more safe to invest in Shell. Although it seem that BP performance in past are better, but it take times for BP to gain the momentum back. And since Ms Grotenrath want to invest in less than 10 years, it far better to her to invest in Shell. And also, it put her in less risk associate since Shell are more competent than BP nowadays. And Shell also have taken a considerable task to avoid the incident that occur in BP to them. Thus creating more safer environment to invest in Shell.
1. Royal Dutch Shell Annual Report and Form 20-F For The Year Ended 3 December 2011 2. Royal Dutch Shell Annual Report and Form 20-F For The Year Ended 3 December 2010 3. Royal Dutch Shell Annual Report and Form 20-F For The Year Ended 3 December 2009 4. BP Annual Report and Form 20-F 2011
5. BP Annual Report and Form 20-F 2010 6. BP Annual Report and Form 20-F 2009