Bp Vs Tullow Oil Essay

3371 words - 14 pages

Industry Background

1.1 Oil and Gas Industry Background

Nowadays oil and gas are the world’s primary fuel source. The Oil and Gas industry involves different stages which are: exploration, production, refining, transportation and storage, marketing and distribution. (Yahoo Finance, 2007)

The exploration and production industries (E&P) are very diverse and fragmented (Library of Congress, 2007). The processes of exploration include many uncertainties[1] which depend on geological technology (BP Annual Report, 2006). The cost of a failed exploration, which consists of geological studies and a dry well, can vary from $5 million to $20 million per exploration site (Dickens and Lohrenz, ...view middle of the document...

Since 2004 BP has not undertaken any major acquisition (BP Annual Report, 2006).

1.3 Tullow Oil Plc Background

Tullow Oil Plc (Tullow) was founded in Ireland in 1985 (Tullow website, 2007). Tullow belongs exclusively to the E&P sector. The company has activities in 15 countries which are located in Europe, Asia, South America and Asia. Around 250 are employed by Tullow worldwide (Tullow Annual Report, 2006). In 2006 the company conducted a horizontal[5] acquisition of Hardman Resources Ltd which also belongs to the E&P sector. The total amount paid was £595m. (Tullow Annual Report, 2006). Table 1 below shows key statistics for both BP and Tullow.

Table 1: BP Plc and Tullow Oil Plc key figures.

|BP Plc | |Tullow Oil Plc |
|Data |Unit |2006 |2005 |% |

Capital Structure of Tullow Oil and BP (Similarities and Differences).

Arnold (2005) describes capital structure as “… the proportion of the firm’s capital which is equity or debt” (p. G:5). A closer look at BP’s and Tullow’s financial statements allows an understanding of the individual companies’ capital structure. The first analysis is shown in figure 1 – comparing long-term debt to the capital employed[8] by both companies.

Figure 1: Comparing Long term Debt Vs Capital Employed

[pic]

Source: Thomson One Banker (2006)

The proportion of long term debt in respect of capital employed has decreased for both companies. However, BP went from around 15% in 2002 to 10% in 2006. Meanwhile, Tullow showed the same trend but with a higher absolute change from around 40% to 20% over the same period. Another important ratio when looking at capital structure is shown below.[9] Figure 2 shows the value and time trend of this indicator over a period of five years.

Figure 2: All Borrowings divided by All Borrowings plus Equity

[pic]

Source: Thomson One Banker (2006)

Both companies now have almost the same level of gearing – at 20%. However, retaining this level of debt (BP) over the period analysed and at the same time decreasing the levels of long-term debt implies that especially BP relied heavily on short term debt as is show in the Figure 3.

Figure 3: Short and long term debt proportion

[pic][pic]

Source: Thomson One Banker (2006)

In 2006, short term debt was 4% and 54% of the total borrowing for Tullow and BP respectively. Arnold (2005) states that “...relying too heavily on short-term debt can lead to difficulties [...]” (p.965). However, Hutchison (1995) adds that “the maturity structure of assets and liabilities can diverge” (p. 265). To identify possible financial problems for Tullow and BP the interest cover ratio is a useful tool (Arnold, 2005). Table 2 below shows the interest cover.

Table 2: Interest...

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