!"#$ &'()*#'+ ,$(- ./01+ 2#$0"- .*"(3#0+ !" $%&%' (!

") 45)"6#' 7+ 89:;

,$#<(-3#' &$#0"=0 2>?@A B&

Sector:
Industry:
Energy
Integrated Oil and Gas
Recommendation:
Valuation:
HOLD
$50.68

Company Profile
British Petroleum was founded in 1908 and is
based out of London. BP is one of the worlds largest
crude oil and natural gas companies. The company
produces fuel, energy, lubricants for engines, and
petrochemicals all over the globe. BP has a substantial
minority interest in Russia's biggest oil company
Rosneft.

Economic and Industry Outlook
The overall outlook for the integrated oil & gas
sub-industry for the next 12 months is positive.
According to BPs 20-F report, energy demand is
expected to increase as much as 41% between 2012
and 2035. We look for integrateds to benefit from
superior earnings, cash flow and dividend quality.
U.S. Integrated oils continue to restructure and
downsize downstream operations, meaning the
operations that take place after production such as
refining crude oil and distributing by-products to the
retail level. Over the next five years project start-ups,
liquefied natural gas and natural gas growth, in Asia,
will drive growth. Global oil demand is expected to
rise 0.9 million barrels per day and 1.2 million barrels
per day for 2014 and 2015, according to the
International Energy Agency oil market report. Oil
production from countries outside the Organization of
the Petroleum Exporting Countries (OPEC) as
expected to rise 1.6 million barrels per day, as OPEC
production will remain around 3.07 mb/d. According
to the Energy Information Administration (EIA), total
natural gas production was 7.5% higher than it was this
time last year but is expected to rise nearly 5% in 2014
and 2% in 2015. Pricing projections from the EIA are
as follows:


Ratio Analysis
BP competes with four companies in its
industry Exxon-Mobil, Chevron, Horizons Enhanced,
and Imperial Oil. Analyzing the ratios between the
different companies successfully exposes each
companys individual strengths and weaknesses.
BPs current ratio is 1.33, which is leaning
towards a concerning ratio for the companys ability
handle its short-term liabilities with short-term assets.
Nevertheless, BPs Debt to Asset ratio is 37%, which
shows that the company has a lower degree of leverage
that results in less financial risk. A beta of 0.77 for BP
shows that it is less volatile than the market. BP is
stable with a lower Debt to Asset ratio, but it
consequently results in less financial gain as well,
which is why BP is operating at a 6.20% profit margin.

Financial Summary
BP has improved its financial situation
considerably since the Gulf oil spill crisis. BPs free
cash flows had been in considerable decline, due to the
considerable cleanup costs that it incurred. Though its
revenues have remained high, the company has had
large costs associated with the oil spill, even 5 years
after the fact. With the situation coming to an end, and
Stock Price $42.70
52 Week Range $41.30-$53.48
Average Volume 5,975,170
Market Capitalization 131.20B
P/E Ratio 11.67
Dividends per Share $2.34
S&P Credit Rating NR
Valuation Model Calculated Value
Dividend Growth $40.68
Holding Period Return $39.44
Market Multiples $61.64
Enterprise Value $60.97
Residual Value $70.03
Free Cash Flow $29.96
2012 2013 2014 2015
WTI Crude Oil 94.12 97.91 100.98 95.17
Brent Crude Oil 111.65 108.64 109.55 104.92
Gasoline 3.63 3.51 3.54 3.45
Diesel 3.97 3.92 3.93 3.88
Heating Oil 3.79 3.78 3.85 3.75
Natural Gas 10.69 10.31 11.24 11.85
Electricity 11.88 12.12 12.49 12.79
most litigation reaching its conclusion, the company
expects to improve its cash flow and profits over the
next several years. It remains in a
strong cash position
despite all of the legal and
environmental costs that it incurred.

Strengths and Opportunities
BPs largest strength deals with
the overall size of the company. BP
is ranked among the top energy
companies in the entire world, which
produces over 4.1 million barrels of
oil per day. Having such a strong
production on a wide scale allows
BP to have both a strong brand name
as well as a large geographical reach
to do business. By having a good
amount of strengths BP has also
opened the doors to having many opportunities. With
economies rising an increase in fuel and oil prices are a
prime opportunities for BP to raise profits. By having
large amounts of capital BP has allowed itself the
opportunity to invest in future businesses and
expanding to alternative energy

Weaknesses and Threats
With high upsides of the energy industry also
comes the risks within weaknesses and threats. BP has
experienced just how deadly a weakness can be to the
business during the famous BP oil spill. Events like
this and others create the largest weakness, which are
the costs of environmental hazards. The BP oil spill
cost over $40 billion dollars in total. The nature of
being within the oil industry also creates declines
within overall oil production. BP has also experienced
an increase in the threats as the world has progressed to
more safety. As time passes the number of
government regulations and environment regulations
grows. It is up to BP to abide by these regulations that
continue to threaten the company.

Valuation Models
Six pricing models were used to value BP:
dividend growth, holding period return, enterprise
value, market multiples, residual income, and free cash
flow. The data was obtained through use of
Bloomberg.
The dividend growth model yielded a value of
$40.69, which is lower than the firms current market
value, despite high forecasted growth in the firms
dividends over the next several years. The holding
period return was similarly lower than the stocks
current value, with a value of$39.44. However, both of
these models could potentially oversimplify BP as a
company. Though the firm projects strong dividend
growth over the next several years, it would be difficult
to encapsulate all of BPs activities within the
Integrated Oil & Gas sector.
The market multiples model had an estimated
value of $61.64. BP has strong competition in its
sector from large companies such as Exxon-Mobil
(XOM) and Chevron. The competitors in this sector
have an important impact on BP, as a firm can only
outperform its industry to a certain point. BP is valued
at $60.97 by the enterprise value model, which puts it
well above its current trading price. The firm
competes in an industry with a strong outlook. BP
benefits from the potential profits and growth
opportunities in the Energy industry.
The residual income model gave BP its highest
valuation, at $70.03. This model is largely based on
industry standards, and the energy sector has a positive
future outlook, so this is a large factor for BP. The
FCF model values BP at much lower, only $29.96, but
BP has had reduced free cash flows over the last
several years due to lingering litigation over the Gulf
oil spill. In addition, multiple estimates were used from
Bloomberg, which resulted in somewhat ambiguous
estimates for this model. All told, the average value
was $50.68, while the firm currently trades at $42.70.

Recommendation
BP equity has dropped substantially in value over
the last several months. However, based on our
models, it seems as though this has resulted in BP
being undervalued. Our models indicate that BP
should be trading around $50 per share; it actually
trades at $42.70 per share currently. Therefore, it
would be wise to hold BP for the time being, as
efficient markets should eventually result in price
appreciation, especially when factoring in a positive
industry outlook over the next 12 months.
BP XOM HES CVX IMO
Current Ratio 1.33 0.8 1.67 1.5 0.6
Inventory
Turnover
11.35 17.64 0.44 4.61 7.96
Net Profit Margin 6.20% 8.59% 17.14% 9.36% 8.59%
Debt-to-Assets 0.37 0.23 0.281 0.209 0.116
Return on Assets 18.90% 7.97% 8.80% 8.80% 7.31%
Total Asset
Turnover
1.24 1.26 0.571 0.902 0.913
Interest Coverage 29.75 6,413.33 7.96 2,192.50 72.1
DuPont Analysis
NI/S 6.20% 2.10% 17.14% 9.36% 8.59%
S/A 1.24 1.26 0.571 0.902 0.913
1/(1-D/A) 1.587 1.29 1.391 1.264 1.131
ROE 18.90% 19.57% 16.60% 15.00% 20.00%