Introduction
Shell PLC started its operations in 1907 in the United Kingdom. It has its headquarters in the Netherlands. It mainly deals with oil and gas with the principal products being petrochemicals, natural gas, and petroleum. As a public company, it registered its primary listing on London Stock Exchange. Its secondary listing is on the New York Stock Exchange and Euronext Amsterdam.
BP PLC started its operations in 1908 as Anglo-Persian Oil Company. It has its headquarters in London and is an important world player in oil and gas. The key products include petroleum, natural gas, aviation fuel, petrochemical and motor fuels. It did its primary listing on the London Stock Exchange while its secondary listing is on the New York Stock Exchange and Frankfurt Stock Exchange. It increased its operations to more than eighty countries by the end of 2013. Daily production stood at 3.2 million barrels.
Industry Trends
Over the last decade, there have been fluctuations in the industry trends. There had been expectations for the past ten years that the
prices of oil per barrel would rise to $110. However, this did not happen. Previously the demand had been more than the supply. It caused the oil companies to increase their production capacities, and this helped to stabilize the market. The price per barrel kept on dropping because of the increased supply. Currently, the price per barrel is $ 43, and there are indications that it might drop further.
There are fears that the oil producing companies might lack storage space because of the oil surplus in the market. The introduction and increased use of renewable energy are also contributing to the problems the oil companies are experiencing. As a result, the two companies had to find a way to cut down the cost so that they can protect the Shareholder’s value and maintain profitability.
The management of BP PLC had downsized and about 550 employees were affected. The company reduced its annual spending by about $ 23 billion. Shell PLC laid off more than 600 employees in the United States. It also did the same in the other regions. They also announced a major restructuring to save more than $800 million. It is notable that industry trends significantly affected the financial performance of the two companies. The oil and gas industry is quite competitive and involves the main actors in the world. When it comes to sales, Exxon Mobil ranks the highest among the top ten companies. Royal Dutch Shell comes second. The third best business when it comes to sales is BP PLC.
Importance and Objective of the Study
The ratio analysis is necessary because it helps to understand the company’s financial health. To make an investment decision, one
needs to understand the business’s records by breaking them down into simple figures. The objective of the study is to analyze the financial performance of Shell PLC and BP PLC, provide a comprehensive comparison report, and make an analyzed recommendation.
Ratio Analysis
The analysis of the financial statements helps an investor to make an informed decision. The ratios break down the data and
provide an avenue for one to gauge the financial strengths and weaknesses of the company. The ratios would focus on the profitability, efficiency, liquidity, the gearing level, and the market values. The two companies’ ratios would provide a better reference point to establish their stability.
Liquidity Ratios
Liquidity ratios provide evidence that helps the investor to know if a company can meet its current short-term obligations using its
current assets. A financially healthy company can comply with its short-term obligations using its current and liquid assets. It is the availability of cash to meet short-term liabilities. The company should not have very high or very low ratios because it would be detrimental. The Current ratios for BP PLC are higher than Shell PLC. Their values are greater than one and hence the two can meet current obligations using the current assets. Their quick ratios portrayed a general increase over the period. But both of them had less than one ratios and, therefore, can not meet their current obligations using their liquid assets.
Shell and BP Liquid Ratios
Leverage Ratios
Leverage ratio gives information on the extent of debt exposure. Having a high or low leverage ratio is potentially dangerous to the organization. The two companies’ leverage ratios fluctuated over the period. However, BP has a higher total debt ratio than its partner. The interest coverage ratio shows long-term solvency and hence the ability to service the long-term debt. There is a direct relationship between the operating profit and interest coverage ratio. Both companies had a decline in their interest coverage ratios because of the drop in the operating profit and the increase of debt. But Shell PLC has a higher solvency than BP PLC. It would be advisable for an investor to choose Shell PLC over BP PLC.
Shell
2010
2011
2012
2013
2014
Interest Coverage
–
–
–
60.14
16.7
Total Debt Ratio
0.23
0.18
0.16
0.2
0.22
BP
Interest Coverage
-3.12
32.17
17.72
11.67
5.31
Total Debt Ratio
0.32
0.32
0.33
0.32
0.41
Asset Management Ratios
Efficiency ratios deal with the internal operations of the company. They show how a company makes good use of its resources to generate sales and income. The Receivable turnover for the two companies grew in the mentioned season. There was a decline in 2014. An increase in the receivables turnover shows an improvement in the collections of debt. The asset turnover ratio gives information on how the two companies use assets to generate sales revenue. A high-efficiency level shows a high profitability level. Both companies had relatively equal levels of efficiency, but BP PLC would be a be a preferable company to for investors because it has a higher level of efficiency than Shell PLC.
Shell
2010
2011
2012
2013
2014
Receivables Turnover
5.84
6.48
8.05
11.59
8.84
Asset Turnover
1.23
1.45
1.37
1.28
1.21
BP
Receivables Turnover
9.16
9.65
11.17
12.04
10.12
Asset Turnover
1.19
1.37
1.31
1.31
1.22
Profitability Ratios
They depict the earning potential of a company. They also show the ability to make a profit in both the long term and the short term. The Net Profit Margin gives information on the capacity to control the cost of running the business. It includes pricing criteria to make a profit. The Return on Equity shows the profit generation from the unit of shareholders funds. The drop in profitability of BP is a result of penalties because of the oil spill. The two companies are having difficulties in trying to make a profit because of the industry trends. However, Shell PLC is more profitable than BP PLC and hence an investor would prefer Shell PLC over its partner.
Shell
2010
2011
2012
2013
2014
Net Margin %
5.32
6.38
5.52
3.56
3.45
Return on Equity %
14.15
19.47
14.86
8.88
8.45
BP
Net Margin %
-1.23
6.65
2.98
5.92
1.05
Return on Equity %
-3.78
24.9
10.08
18.93
3.14
Market Value Ratios
Shell
2010
2011
2012
2013
2014
Price/ Earnings
10.2
7.4
8.1
13.7
14.2
Price/Sales
0.5
0.5
0.4
0.5
0.5
BP
Price/ Earnings
–
5.3
11.5
6.6
31.1
Price/Sales
0.5
0.4
0.3
0.4
0.3
Conclusion
The study focused on ratio analysis of BP PLC and Shell PLC. The two companies have good records in terms of their current assets. They only experience problems if they need the use of quick assets. BP PLC has higher liquidity levels than Shell PLC. Shell PLC has low leverage levels and hence the potential to grow in the future. It also has a higher solvency level than BP PLC. Shell PLC has higher profitability levels than BP PLC. The market-based ratios show that the Shell PLC investors should expect to earn more on their shares than the shareholders of BP PLC. Shell PLC has a steady and high performance. Despite the challenges facing the gas and oil industry, investors are safe investing in Shell PLC.