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Tuesday, August 2, 2011

Can the BP oil disaster prove fruitful for The Bahamas?

The oil exploration debate in The Bahamas is starting to take shape in a very open way. The Minister for The Environment, who is responsible for the country's natural resources, has stated clearly that more analysis is needed before oil exploration is to be taken seriously in The Bahamas.

During the last administration of The Progressive Liberal Party, 2002 to 2007, the Natural Gas/LNG (not exactly crude oil, but a natural resource for energy) was an issue of great contention, the main point being protecting the environment. The second issue has been a national security concern, garnering cooperation from abroad and finding a way to secure the investments from natural or manmade occurrences, which could be disastrous to the environment in addition to it destabilizing a country.

The Bahamas Petroleum Company PLC's company profile page states that it has a license to explore for oil in The Bahamas and wishes to start as early as 2012. Their profile also states that the company has, between the years 1947 and 1986, drilled for oil in onshore and shallow water areas in The Bahamas and that their license has provided them the ability to do so, even though they have not drilled for oil in the last 20 years.

British Petroleum (BP) on the other hand has been in the business of oil exploration for a number of years. A good part of BP's business model has been oil exploration and refining with oil retail second. Comparing them with the other oil company, also known as the "Big 6", they have a smaller market share than all but four out of that group.

This makes the case for BP’s “Deepwater Oil Spill” in 2010 interesting, when looking into BP’s operations model and financial performance compared to that of other oil companies.

BP's average Return on Assets (ROA) when compared to Chevron and Exxon Mobil is nestled at the midpoint between the other companies during the years 2008 to 2010.

There's nothing startling about BP's Return on Equity (ROE) ratios for the same period either, as the numbers appear too vague if we wish to make a case that BP was paying out more money to equity than it was putting back into assets over the same period of time compared to the other companies on a pound for pound basis, with it being un-assessed by duration and intangible variables that can skew ratios through virtue of the net income and expenses payable at any point and time that may affect assets.

What's interesting with this however, is when we subtract ROA over ROE for the same period it tells a different story. BP's ROA over ROE gives us a better insight into how BP was spending its money on assets compared to equity.

While BP's ROA over ROE was less than Exxon and slightly more than Chevron, BP is larger than Chevron in market capitalization and global reach. In addition with Exxon having a negative ROA over ROE and was pumping more money into equity over assets between 2008 to 2010, both Exxon and BP had negative ROA over ROE figures.

All of this matters because ROA shows you how much money a company puts back into its company’s operations at the very first glance. When you subtract ROA from ROE, you have more of an idea of not how much a company puts back into assets, but more importantly how much money a company puts back into assets pound for pound compared to other companies in the same industry, as it eliminates the size and capitalization issue as we have with the oil behemoth Exxon. ROA also matters if a company’s business model is more capital intensive than other companies in the same industry per dollar value compared to other business operations, for example oil retail vs. oil exploration; oil transportation vs. oil refining, and so on and so forth.

It must be noted that while all oil companies mentioned had recent oil spills from mid 2010 up to 2011, BP’s oil spill was much larger by tonnage, which can be attributed to their business model as well as their size, scope and capitalization, relative to the spill’s geographical location- which may have been dictated by all of the factors of their industry and what they were allowed to endeavour in the oil market.

The numbers suggest, among other things, that the larger size tonnage spill is correlated to the company’s size and capitalization and then the ratio of ROA over ROE for each company respectively. While Exxon had more individual oil spills than all of the other companies mentioned, but because of their size, scope and extreme market capitalization, they were able to contain these spills in addition to having the capacity to minimize the fall out more so than BP.

Let’s take for another example the Talmadge Oil Spill that Enbridge Energy was responsible for in 2010, which produced a tonnage spill of nearly 3,500 tonnes, we have to not only look into company financials to see if a disaster could be averted by alerting the public to the company’s performance, but also to the issue of timely mandatory reporting of financials, to assist analysts and persons who have vested interest in these matters with regard to dealing with issues before they become disasters. In fact, aside from BP, the ratio of tonnage spill to revenue for Enbridge is significant and speaks to their business model, size scope and market capitalization in addition to their ROA and ROE performance indicators.

As with Enbridge, their reporting structure is not as strict as BP or the American-International oil companies. But from what we have examined, Enbridge has a negative ROA over ROE over the period of the last several years up until their last open financial report of record, produced in 2005 as reported by Hoovers. Digging a little deeper into the Enbridge financial information on their company website, they have up very basic reports for 2009 and 2010, which states that they have spent more money on company assets and operational equipment over those last two years, but when we calculate the ratios, they have the lowest ROA and also display negative ROA’s over ROE’s over the course of all the years recorded.

Enbridge, by far, is considerably smaller company by capitalization than any of the other Big 6 Oil companies mentioned. They are not intensively involved in the retail side of the oil and natural gas business- as is BP to some extent compared to Exxon and Chevron- with Enbridge being more focused on the exploration and wholesale distribution of crude oil, oil bi-products and natural gas.

This leads me to believe that as The Bahamas moves forward with oil and natural gas exploration, four key things must be essential to protecting the environment and preventing a major disaster:

1. The security of investments from man-made or natural disasters;

2. The business model, size, scope and market capitalization of any oil company in The Bahamas must be adequately categorized in relation to its financial performance and its projections on the possible returns on assets and equity;

3. Accurate and timely reporting of any oil company’s financial and investment information; and

4. Necessary legislation and regulations that curb the overcompensation of equity.

What happened to the Gulf Coast by virtue of this disaster and also what happened to BP's reputation by the Deepwater Oil Spill of 2010 is something that can be avoided in The Bahamas if we look carefully into the factors outlined in this article and then some.
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