BP p.l.c.

Moat: 1/5

Understandability: 3/5

Balance Sheet Health: 4/5

BP is a global oil and gas company with a substantial presence in exploration, production, refining, and marketing of energy products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

BP, one of the world’s largest oil and gas companies, faces a complex competitive landscape with limited pricing power, low returns on capital, and high sensitivity to commodity price fluctuations.

Business Overview

BP’s operations span the entire value chain of the oil and gas industry, including:

Exploration and production: This segment focuses on the search for new oil and gas reserves and their extraction. BP operates in diverse regions, including deep water and shale basins. However, the recent trend for the industry is a decrease in oil and gas production.
Refining: This segment refines crude oil into gasoline, diesel, jet fuel, and other petroleum-based products. BP is one of the largest refiners in the world and has multiple sites in various countries.
Marketing: This segment involves the retail sales of gasoline, diesel, and other refined products. BP has a significant presence in retail and operates a network of service stations and convenience stores.
Low Carbon: This segment focuses on the development of renewable energy assets, such as solar, wind, and bioenergy, as well as carbon capture and storage technology.

In recent years, BP has committed to a strategic shift towards renewable energy and a reduced reliance on fossil fuels. This transition includes substantial investments in solar, wind, and bioenergy while gradually reducing investments in the upstream oil and gas sector.

Industry and Competitive Landscape

The oil and gas industry is highly cyclical and commodity-driven, with profitability heavily influenced by fluctuations in crude oil and natural gas prices.

While industry giants like Exxon Mobil, Chevron, Shell, and Total compete directly with BP in most areas of operation, national oil companies also have a big presence in the market.

Competition: Fierce competition exists in all parts of the value chain, from exploration and production to refining and marketing. Barriers to entry are relatively high, due to the enormous capital requirements for new projects.
Commodity Pricing: The price of crude oil and natural gas, which is driven by global supply and demand, is the single largest factor in profitability. Economic downturns, unexpected production fluctuations, and shifts in demand patterns can cause rapid swings in both oil and gas prices. This means BP has very little control over its realized prices.
Demand: The demand for crude oil is expected to decline due to increased adoption of renewable energy sources. However, given the amount of oil needed to power transport for example, this decline is likely going to be gradual. Demand for natural gas is expected to remain somewhat constant due to its growing role as a more eco-friendly source of power, while the demand for refined products will depend on the economy and adoption of electric vehicles.

Financial Analysis

BP’s financial performance is closely tied to crude oil prices. Key financial data for BP’s operating performance is broken down in two broad groups: Oil production & Operations, and Gas & Low carbon energy.

Revenue: Revenues are highly sensitive to commodity prices, as their product is mostly undifferentiated. In the most recent quarter, the underlying RC profit in the customer and products segment was $2.530 million dollars, while the underlying profit from gas and low carbon energy segments was $2.255 million dollars, and the combined total was $7.648 million. The profit from these two segments is driven by market prices and the volume of goods delivered. In general, the higher the oil and gas prices, the higher the company’s revenue will be.
Margins: Margins vary widely across different parts of BP’s business, with integrated oil and gas companies often having the highest margins and refining having lower margins. The more recent trend for the industry as a whole is a decrease in margins for the upstream segment.
Profitability: BP’s earnings tend to fluctuate with oil prices. The company’s ability to generate profit also depends on its operational efficiency and cost controls.
Debt: BP maintains an overall solid financial position, with manageable levels of debt. Its cash flow from operations gives it more flexibility in terms of borrowing.

It’s worth noting that because the company is extremely big and diversified, some of its segments have an economic moat while others don’t. This means that focusing on the overall business performance is misleading, and it’s more important to understand the performance of the individual divisions and the overall capital allocation.

Moat Assessment: 1/5

BP’s economic moat is weak for several reasons. While it is the largest company by revenue in the oil and gas industry, it is susceptible to low prices and high competition. It operates in a commoditized space that offers few avenues for differentiation, and the oil and gas industry has very high capital requirements that put even the big companies at a significant risk.

Limited Pricing Power: As a commodity-producer, BP has very little influence over the price of its products, so fluctuations in market prices severely influence profitability.
High Cyclicality: The oil and gas industry is highly cyclical and prone to market sentiment. The demand and pricing of its products have huge swings with economic changes, and these swings are nearly impossible to predict.
Competition: The company operates in a very competitive market and faces competition from other global players and state-owned oil companies, which reduces the company’s control over prices and margins.
Threat of Substitution: As alternative energy sources become more cost-competitive, the demand for oil and gas products may drop, reducing the company’s returns.
Heavy Dependence on Commodity Prices: The company’s profitability is closely tied to the prices of oil and natural gas and has a major downside impact if prices decline.
Difficulty in Diversifying: Oil and gas companies have tried for decades to expand into other markets but have failed miserably in most attempts. The skills and resources needed to find oil are very different from building and expanding in other segments.
Lack of Competitive Advantage: In order to have a durable moat a company has to have something unique that others can’t easily copy, and with the current trends of the industry, this is something that BP doesn’t have.

The shift toward cleaner energy has created a situation in which new fossil-fuel projects require massive investments that might have extremely limited return periods. Companies have to now balance risk vs reward in a way that did not require their attention before, and that means that companies with a large portfolio of assets can be worse off than younger, smaller companies.

Risks to the Business

Political Instability: The regions in which BP operates can suffer political and social unrest, which could jeopardize existing infrastructure and new projects.
Demand Decline: An accelerated adoption of electric vehicles and other renewable energy sources could cause a faster-than-expected drop in the demand for oil, which would lead to lower prices and profitability.
Geopolitical Risks: Being an international oil and gas company means being susceptible to geopolitical conflict, including terrorism and wars. This increases both short term and long term risk.
Environmental Risks: Spills and accidents can lead to liabilities and fines, impacting the business and its image.
Policy Changes: Tariffs, taxes, regulation, and mandates can come to shape or even destroy the whole economics of the business. These types of policies are more relevant for commodity companies, since they can directly impact their profit margins.

Resilience and Financial Outlook

Despite these risks, BP has significant strengths that provide it with some resilience:

Diversified Operations: The company’s wide array of assets across the entire value chain helps it remain competitive even when some segments are lagging.
Experience and Expertise: The company has a long track record in the energy industry and a long list of experienced employees.
Financial Strength: As demonstrated by its financial reports, the company has a significant amount of cash.

The management has taken a proactive stance on investing in renewable energy, although this will not offer returns in the near future. The company is currently allocating up to 30% of its capital to its lower-carbon and renewables division, while at the same time looking to pay back share holders through dividends and buybacks. The long-term success will mostly depend on their ability to adapt. BP’s future financial performance is likely to reflect its success in managing the energy transition while maintaining profitability. In the past few years, the management has been consistently pushing for better profitability and a lower cost structure.

Understandability: 3/5

While the basic operations of BP are relatively straightforward, its sheer size, global scale, and the complexity of its supply chain make it moderately difficult to fully grasp. The financial reporting is complex and has several non-recurring and adjusted items.

Balance Sheet Health: 4/5

BP’s balance sheet is generally healthy. The company has a manageable amount of debt, strong cash flows, and a good history of repaying long term obligations. However, the company is still vulnerable to large swings and uncertainties related to the price of oil, which is extremely difficult to forecast.

The Essays of Warren Buffett: Lessons for Corporate America | Moat: N/A | Understandability: 3 / 5 | Balance Sheet Health: N/A

A compilation of Warren Buffett’s writings, reflecting his views on corporate governance, finance, investing, accounting, and taxation.

Business Overview

This isn’t a company but a compilation of essays by the legendary investor, Warren Buffett. His writings touch a wide range of topics, but they all converge at his core philosophy which is that investing is more of an art and a business than a mathematical exercise. The book is structured into several parts, and touches on the most important aspects to consider when evaluating and owning a company.

This collection of essays, selected, arranged, and introduced by Lawrence A. Cunningham, is divided into six major categories:

Corporate Governance: Buffett outlines the importance of management and boards acting as stewards of shareholder capital and the responsibilities associated. He also emphasizes the importance of aligning the incentives of managers with those of the shareholders.
Corporate Finance and Investing: This section explores Warren Buffett’s views on the stock market, arbitrage opportunities, the importance of valuing businesses, and a range of investing strategies. Buffett stresses that the market is not always efficient. He also recommends a “value” investing style that focuses on long-term outlooks and not short term speculative gains.
Common Stock: Buffett expresses his preference for investing in high-quality companies, his views on stock splits and re-capitalization strategies, and provides an overview of why he prefers long term investing over day trading. He also shows why “share-price performance” is not a good indicator of a company’s overall performance.
Mergers and Acquisitions: This section goes over Warren Buffett’s views on acquisitions and his skepticism about companies paying too high a premium for acquisitions. It also touches upon the benefits of sensible stock repurchases as a method to return value to shareholders.
Accounting and Taxation: He criticizes the accounting techniques that enable businesses to show “enhanced” earnings without an increase in cash flow. He also writes about the limitations of standard accounting principles, while at the same time acknowledging their use, but within an investor’s ability to critically analyze and interpret the information.
Commentary on Portfolio Management: Buffett shares how he handles his own portfolio, and shows why diversification is not a good idea if you understand the business and its potential well. He also warns that people should not expect results that outperform the market by simply following a specific “investment advice,” as they should be doing their own research before making an investment decision.

Industry and Competitive Landscape

There is no industry or competitive landscape involved in this analysis. This book serves as guide on how to approach those analyses and create investment decisions using the core principles of value investing.

Warren Buffett offers some valuable insights on the most important characteristics when choosing a good business to invest in. These are: a clear vision, well defined goals, good ethics and integrity, long-term management plans, a robust competitive advantage that is not only visible but also defendable, and a high quality product or service. The book also serves as a compendium for most common errors when choosing investment decisions.

Financial Analysis

Since the book does not contain financial data, a proper financial analysis is not possible.

This is not a book that requires numerical analysis but rather more of a theoretical study. The main goal is to provide readers with an in-depth view into Warren Buffett’s philosophy and framework for understanding, valuing, and choosing investment decisions.

Moat Assessment: N/A

This book does not have any moats. It serves more as guide on how to identify companies with wide and durable moats.

Risks to the Business

The main risk to any investment that follows Warren Buffett’s investment guidelines will come from the human element. When making a choice on a company for investment, investors have to do their best to assess the human aspect of the company and its management, as bad decisions and immoral behavior from them can damage a business in the long term. Warren Buffett emphasizes that a margin of safety is needed before making any investment, so that any downside risk can be mitigated and the investors can be protected from losses. In general, the book can be said to advocate for minimizing risk while maximizing reward.

Resilience and Financial Outlook

This book serves as a framework on how to handle and analyze future investments, and there for the advice contained in the book will be timeless. The overall aim of the book is to offer guidance to readers looking to make intelligent, rather than speculative, investment decisions. The principles for doing so, are expected to maintain their validity and relevance for many years to come.

Understandability: 3/5

Buffett’s writing style is accessible and straightforward, making it relatively easy for most readers to understand the core principles. However, several essays deal with intricate concepts and some advanced terms, such as convertible bonds, warrants, or the financial structures of big businesses. This makes the overall book moderately difficult to understand fully. As with any literature, reading this book once is not enough to capture all of its meanings.

Balance Sheet Health: N/A

This is a compilation of essays and does not contain a balance sheet.

The Little Book That Builds Wealth | Moat: N/A | Understandability: 2 / 5 | Balance Sheet Health: N/A

This book provides a practical guide to identifying companies with durable competitive advantages and using this knowledge to make investment decisions.

Business Overview

Pat Dorsey, the author, explains how companies with “economic moats” can achieve long-term success. He also discusses the different sources of economic moats.

The core concepts discussed in the book include:

Economic Moats: A “moat” is a company’s sustainable competitive advantage, much like how moats around medieval castles kept enemies at bay. This concept, popularised by Warren Buffett, is at the center of this book, and the book aims to help you identify those moats in the modern world. These moats allow companies to generate above-average returns on capital for long stretches of time.
Mistaken Moats: Not all apparent advantages are true moats. The author discusses examples such as great products, strong market share, great execution, and even great management that are commonly mistaken as moats, but don’t provide any long-term competitive edge.
Intangible Assets: Brands, patents, and regulatory licenses can be powerful sources of economic moats, if they increase the consumers willingness to pay for a given product or service, as well as increasing customer captivity.
Switching Costs: If customers are unwilling to switch to a competing service or product because the cost of doing so is significant for them (whether it’s monetary or time cost), then the company enjoys an advantage that gives it some pricing power.
Network Effects: The value of a product or service increases with the number of users, and the most valuable of these are network based products. These types of competitive advantages are almost always exclusive to companies based on sharing information or connecting users.
Cost Advantage: Some companies have structural low-cost advantages due to better production processes, better locations, or unique assets, which allow them to offer goods or services for a lower cost than their competition.

The most important difference that Dorsey draws between good and great businesses is that a truly great company needs to have some sustainable competitive advantage over its competitors that is difficult to replicate.

Industry and Competitive Landscape

This book offers practical guidance to investors when choosing individual businesses for their portfolios.

The book discusses several examples from different industries to show the various forms of moats that may exist within a company.

Competitive advantage: All the chapters point at specific factors that can provide companies with a competitive advantage. Those are: Brands, patents, regulatory licenses, switching costs, network effect, cost advantages.
Pricing power: Companies with a moat usually also gain pricing power, as they are able to exert influence on how much their product or services will be sold for.
Sustainability: The main concept that ties everything together is that a moat is a “sustainable” competitive advantage. This means it should be able to protect a company’s profits for a long time, even when facing new competition.

Financial Analysis

Since the book does not contain specific financial data, a proper financial analysis is not possible.

The book, however, uses concepts such as ROIC to evaluate how well a company is managing its assets, and also to measure the “profitability” of a business. The book stresses the importance of profitability as a core element of any competitive advantage.

Moat Assessment: N/A

This book does not have any moats. It serves more as a guide on how to identify and choose companies with wide and durable moats.

Risks to the Business

The main risk to any investment decision is human nature. The author emphasizes throughout the book the importance of being able to correctly assess the moats of a company, and choosing businesses based on facts and a clear objective assessment, rather than by following the latest popular trend or “hype”. The core risk, according to the book, is choosing investments without having a good fundamental understanding, and ignoring the importance of moats and competitive advantage.

Resilience and Financial Outlook

The concepts for long term value creation presented in this book are expected to be as relevant today as they will be in the future. The overall aim of the book is to provide guidance to investors, helping them make better investment decisions, and avoid many of the common errors present in the stock market. Although some business environments will fluctuate, the fundamentals of a solid moat that is able to generate long term, sustainable, returns should be able to survive throughout the changing business landscape.

Understandability: 2/5

The book presents somewhat complex concepts and explains them well, using clear and simple language to convey the ideas. The text also makes effective use of practical examples that improve the understandability of the abstract ideas. The author also manages to make a deep analysis of complicated topics while still keeping it reasonably short and straightforward.

Balance Sheet Health: N/A

This is a book, and it does not contain a balance sheet.

Valuation, Measuring and Managing the Value of Companies | Moat: N/A | Understandability: 5 / 5 | Balance Sheet Health: N/A

A comprehensive guide to corporate valuation, covering a variety of techniques, from discounted cash flow to multiples, with the aim of helping companies make better strategic decisions and manage their finances efficiently.

Business Overview

This is not a business, but rather a textbook that covers in detail all the steps and elements necessary to do a full valuation for public companies. The fifth edition of the book comes from the leading consulting firm McKinsey and Company.

This book is a comprehensive guide on corporate valuation, split into six major categories:

Part One: Foundations of Value: The initial chapters focus on fundamental principles. It explains why value matters, explores the factors behind value creation, how expectations influence value, and the importance of return on invested capital and revenue growth.
Part Two: Core Valuation Techniques: This part focuses on how to use discounted cash flow (DCF) methods, how to analyze financial statements and forecast performance, estimate continuing value, and estimate the cost of capital and calculating it using WACC (Weighted Average Cost of Capital).
Part Three: Intrinsic Value and the Stock Market: This part explores the intrinsic value of businesses, and how market prices are influenced by the underlying economic fundamentals. Also, it delves into market efficiency, mispricing, and how investors affect market dynamics.
Part Four: Managing for Value: Here the focus is on the practical use of valuation principles and how they can help in making business and strategic decisions. It provides guidance on strategic choices (such as acquisitions and divestitures), as well as on investor communications, and shows what measures are important to improve operations and create value.
Part Five: Advanced Valuation Issues: This includes an analysis of several advanced topics on valuation, including how to factor in taxes, pensions, inflation, and foreign currencies in a proper manner, offering several real-world case-studies.
Part Six: Special Situations: This section explores valuation methods tailored to different types of companies, including high-growth companies, firms in emerging markets, cyclical companies, and financial institutions.

The overall objective is to make valuation a key element that informs managerial decisions, and to do so in a systematic and structured manner. This is why all the concepts are tied together through the key value driver formula, which summarizes the essence of corporate valuation.

Industry and Competitive Landscape

This book focuses on providing a methodology for valuation that can be applied in any industry. It does not analyze any specific companies, so there isn’t a competitive landscape that is relevant for its analysis.

Financial Analysis

Since this is a textbook, and not a company, there is no financial analysis to be made. The book relies heavily on examples of real companies in all the chapters to demonstrate the concepts that it’s trying to convey.

Moat Assessment: N/A

This is a textbook and does not have a moat. The knowledge offered by this book however, can help identify and understand competitive advantages that may provide a company with a durable economic moat.

Risks to the Business

The main risk for the book is that future research may challenge some of the methods described. Also, accounting regulations and standards change overtime, which may make the content slightly out of date, requiring revisions. Despite all, the value of the concepts and the overall approach to valuation presented in the book are expected to be timeless, and provide a robust methodology that can be adapted as needed.

Resilience and Financial Outlook

This book is used by several universities as their textbook for a valuation course, and it is aimed towards providing a more robust financial literacy. This aim is likely to make the book relevant for many years to come, as financial analysis is a cornerstone for any business and investment activities.

Understandability: 5/5

This book is very theoretical and complex, and a lot of effort was made to go over the concepts step by step in a clear manner. It requires some prior knowledge of accounting and corporate finance to fully understand all the content. This makes it a hard read for someone that is not familiar with these topics.

Balance Sheet Health: N/A

This is a textbook, and therefore has no balance sheet.