BP Amoco
First of the "big uglys"

by Brian Graney (TMFPanic@aol.com)

Atlanta, GA (Feb. 9, 1999) -- Company number three on our oil and gas hit list is BP Amoco (NYSE: BPA).

Description: BP Amoco is the first integrated oil and gas firm on our list and also one of the biggest energy companies in the world. Actually, the company is one of the three so-called "super-majors" along with Royal Dutch/Shell Group and Exxon Mobil, which are heads and tails above the other majors in terms of annual revenues, market capitalization, and reserves.

BP traces its history all the way back to 1901 when British businessman William Knox D'Arcy first won a concession to explore for oil in Persia (now Iran). He eventually struck oil in 1908, ushering in the Middle East's emergence as an oil and gas powerhouse in the process. D'Arcy's company was originally incorporated as Anglo-Persian Oil Co. and adopted the British Petroleum (or BP) name in 1954. The British government acquired a majority stake in the company in 1914, but its holdings were whittled down over the years and were effectively sold-off during the fateful month of October 1987 (talk about bad market timing!)

Amoco, on the other hand, was founded in 1889 and represented a chunk of John D. Rockefeller's old Standard Oil trust. After the trust was broken-up by the U.S. government in 1911, the company did business as Standard Oil Co. of Indiana for the next 74 years, finally changing its name to Amoco in 1985. Last December, BP acquired Amoco for $61.7 billion in stock and assumed debt, forming an industry giant with $108 billion in combined 1997 revenues and operations in 100 countries.

BP Amoco has estimated reserves of 15 billion barrels of oil equivalent (BOE) and daily production in the neighborhood of 3 million BOE, which is split 65% oil and 35% gas. All told, the firm operates 27,000 service stations around the world, 15,500 of which are located in the U.S. (These numbers exclude recent merger-related divestitures in the U.S. and can be found at the firm's user-friendly website.) The company also owns or has interests in 18 international refineries, owns or operates 23,000 miles of pipelines, and has a leading worldwide chemicals business with $13 billion in annual revenues. Anyway you cut it, this company is a big ugly, borrowing a line from the great retired sportscaster Keith Jackson.

As a result of the merger, BP Amoco is planning to realize $2 billion in additional pre-tax income through synergies by 2001 and is linking management's compensation to how well they deliver the goods on their stated performance goals.

Financials: As this is a preliminary overview, we will only focus on the following key elements: How is the company valued by the market? How profitable are its chosen operations? How does the company finance its operations? And what does management do with the money that it earns? (All four of these items will require some informed guesstimates on our part. We'll do our best. More accurate information should be available when the company reports its first set of combined quarterly results next week.)

Valuation: BP Amoco's current market capitalization is $141 billion, which is found by multiplying the company's share price of $87 1/2 by the 1.61 billion shares outstanding. The shares we're using are traded on the New York Stock Exchange as American depositary shares (ADS) and each one represents six British ordinary shares.

Enterprise value (market capitalization + long-term debt - cash and equivalents) is a bit tougher to figure out. Adding back $5.33 billion in BP debt at the end of 1997 and $4.96 billion in assumed Amoco debt under the merger gives us $151.3 billion. Subtracting BP's ending 1997 cash of $188 million and the $122 million in cash laying on Amoco's balance sheet in its latest 10-Q brings us to $151 billion. This might not be exactly accurate, but it's probably in the ballpark and suggests an EV/sales ratio of 1.4, using the $108 billion in combined 1997 revenues cited above.

BP Amoco currently trades at 27 times fiscal 1998 earnings estimates of $3.22 per share and 24 times 1999 estimates of $3.65. The five-year estimated earnings growth rate is 18.3%, according to IBES.

Profitability: BP's net profit margin (net income divided by revenues), excluding special charges, came in at 5.7% in 1997 -- pretty much were it has been over the past three years. In contrast, Amoco's 1997 net profit margins rolled in at 8.5%.

Why are we including net profit margins? We're not sure how relevant these figures are to our overall analysis of the various integrated oil and gas firms, to be honest. But since this is an overview, we are going to use profit margins as a relative gauge for comparing companies. As we look at the integrated firms in more detail later, we will place a larger emphasis on examining the margins of the majors' respective business areas, such as upstream, downstream, and chemicals. For now, net profit margins will do.

The common industry profitability measure that we have adopted is return on capital employed (ROCE), which is after-tax operating earnings divided by the sum of shareholders' equity plus debt. In 1997, we calculate that BP turned in ROCE of 14% and Amoco brought home a figure of 13%. (The companies themselves may report different numbers for ROCE than what we've derived. That's okay. We're trying to standardize things, however.) The combination of the two companies probably won't change the overall ROCE figures too much, in our estimation. If anything, synergies might allow ROCE to rise a bit in the years ahead.

Leverage and Use of Cash Flow: These two items can't accurately be determined for the new BP Amoco quite yet: the combined financial statements are needed to determine a debt-to-capitalization ratio and an operating track record is needed to determine how well the company is allocating its cash flow. We even must estimate the stock's current dividend yield, which is 3.43%. This number will fluctuate with changes in the pound-to-dollar currency conversion rate.

However, in a presentation to analysts last April, BP Group Chief Executive Sir John Browne said BP's goal was to grow net income by $2 billion by 2002 while keeping net debt within 15% of 1997 levels and net capital expenditures within 5% of prior levels. The Amoco acquisition will change those parameters a bit (to understate), but Sir John's strict fiscal management objectives are exactly the kinds of things we like to see from top management.

The Snapshot for BP Amoco: Click here for a neat, yet incomplete, post-merger run-down.

Conclusion: This overview, despite probably being too long in our editors' eyes, is just the tip of the iceberg for this company. We're anxious to get our hands on some combined results from the firm in the coming weeks and do some more analysis. On first look it already makes our second round, but we need to wait for more numbers before we can dig deeper.

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