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SampleGroupProject.pdf
Running head: BHP BILLITON
ACCT 6300 – Oil and Gas Accounting
Semester Year
Dr. Wei-Chih Chiang
Group Project
BHP Billiton
By: Group X:
Student 1
Student 2
Student 3
Student 4
BHP BILLITON Group X
2
EXECUTIVE SUMMARY
BHP Billiton is one of the world’s largest producers of major commodities with substantial
interests in oil and gas. The company is based in Australia but has an international consumer
base.
This report looks at the financial history and current financial position of BHP Billiton,
constructs an analysis, and then makes recommendations as to what the company can do to
improve its financial performance.
The financial data presented includes the horizontal and vertical common sized balance
sheets and income statements for the last three fiscal years (2010 through 2012), as well as an
analysis of this data. Financial ratios are then calculated for BHP Billiton, as well as energy-
specific ratios. An analysis is made from this data to evaluate the current and historical
financial health of the company. Recommendations are made to improve BHP’s financial
performance, based on the financial data. The main recommendations are that BHP raise its
cash and cash equivalents and decrease its operating costs. BHP has shown steady growth
over the last three years and the replacements of reserves have been greater than production.
However, some financial indicators show that the company is becoming less efficient and
cutting DD&A costs could help to improve the company’s lifting efficiency.
BHP BILLITON Group X
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TABLE OF CONTENTS
1.0 INTRODUCTION .......................................................................................................................... 4
2.0 NUMERICAL ANALYSIS – FINANCIAL STATEMENTS AND RATIOS ...................... 4
2.1 Vertical Common-Size Analysis ...................................................................................... 4
2.2 Horizontal Common-Size Analysis .................................................................................. 8
2.3 Financial Ratios .............................................................................................................. 11
2.4 Liquidity Ratios .............................................................................................................. 11
2.5 Profitability Ratios ......................................................................................................... 12
2.6 Financial Strength Ratios ............................................................................................... 13
2.7 Dividend Ratios .............................................................................................................. 14
2.8 Valuation Ratios ............................................................................................................. 15
3.0 Reserve Ratios .............................................................................................................................. 16
3.1 Reserve Replacement Ratios .......................................................................................... 16
3.2 Reserve Life Ratios ........................................................................................................ 16
3.3 Net Wells to Gross Wells Ratio ..................................................................................... 16
3.4 Average Reserves per Wells Ratio ................................................................................. 17
4.0 Reserve Cost Ratios ..................................................................................................................... 17
4.1 Finding Cost Ratios ........................................................................................................ 17
4.2 Lifting costs per BOE & DD&A per BOE ..................................................................... 18
5.0 Reserve Value Ratios ................................................................................................................... 18
5.1 Value of Proved Reserve Additions per BOE ................................................................ 18
5.2 Value Added Ratio ......................................................................................................... 19
6.0 CONCLUSIONS AND RECOMMENDATIONS .................................................................. 19
7.0 REFERENCES ............................................................................................................................. 20
8.0 APPENDIX ................................................................................................................................... 20
8.1 Income Statements for Fiscal Years 2010-2012 for BHP Billiton ................................. 20
8.2 Balance Sheets for Fiscal Years 2010-2012 for BHP Billiton ....................................... 21
BHP BILLITON Group X
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1.0 INTRODUCTION
BHP Billiton Group, headquartered in Melbourne, Australia, is a leading global resources
company that values sustainability, integrity, respect, performance, simplicity, and
accountability. The company specializes in discovery, acquisition, development, and marketing
of natural resources. BHP Billiton Limited is primarily listed on the Australian Securities
Exchange and London Stock Exchange and secondarily listed on the Johannesburg Stock
Exchange. They are also listed on the New York Stock Exchange. As of June 30, 2012, BHP
Billiton Group reported $72,226M of revenue and EBIT of $27,238M, a total of 310 and 139
gross and net wells respectively, as well as 363.2 million of barrels and developed petroleum
reserves. At a quick glance, the company is very financially stable with good future growth.
This report will analyze the financial statements for BHP Billiton over a period of three
years, from 2010 through 2012; including horizontal and vertical balance sheet and income
statement analyses, financial ratios, and energy specific ratios. Along with the computation of the
ratios, this report will also provide recommendations on ways to improve BHP’s financial
position.
2.0 NUMERICAL ANALYSIS – FINANCIAL STATEMENTS AND RATIOS
This section will look at the financial statements and ratios for BHP Billiton. The vertical and
horizontal common-size balance sheets and income statements will be presented for fiscal years
2010 through 2012. Financial ratios and energy-specific ratios are also calculated for the last
three years, and these will be used as a measure of each company’s performance in the analysis.
The financial statement information in this section has been compiled from BHP’s company
report for each applicable year.
2.1 Vertical Common-Size Analysis
The vertical common-size income statement and balance sheet analysis compares each
line item on a single year’s financial statement as a percentage of one line item; the base
amount. The base amount that we will use in the vertical common size analysis of BHP
Billiton is total assets for the balance sheets, and total revenues for the income statements.
By comparing three years of BHP Billiton’s financial statements, 2010 through 2012, we are
able to analyze the changes in the mixture of assets, liabilities and equity, and identify
changes in the mix of revenues and in the spending for different types of expenses.
i) Vertical Common-Size Balance Sheets for Fiscal 2010 – 2012 Below are the common size balance sheets for the fiscal year ending December 31st from
2010 through 2012. The values shown are as a percentage of total assets for that year. The
last column shows the average percentage over the three-year period.
BHP BILLITON Group X
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VERTICAL COMMON-SIZE ANALYSIS
BHP BILLITON GROUP -
BALANCE SHEET 2012 2011 2010
3-Yr
Average
ASSETS
Current assets
Cash and cash equivalents 3.70% 9.80% 14.02% 9.17%
Trade and other receivables 5.96% 7.96% 7.36% 7.10%
Other financial assets 0.22% 0.26% 0.33% 0.27%
Inventories 4.82% 5.98% 6.00% 5.60%
Assets held for sale 0.66% 0.00% 0.00% 0.22%
Current tax assets 0.11% 0.27% 0.21% 0.19%
Other 0.36% 0.30% 0.36% 0.34%
Total current assets 15.82% 24.56% 28.29% 22.89%
Non-current assets 0.00% 0.00% 0.00% 0.00%
Trade and other receivables 1.14% 2.03% 1.55% 1.58%
Other financial assets 1.46% 1.56% 1.70% 1.57%
Inventories 0.33% 0.35% 0.39% 0.36%
Property, plant and equipment 73.68% 66.02% 62.55% 67.42%
Intangible assets 3.95% 1.41% 0.77% 2.05%
Deferred tax assets 3.50% 3.88% 4.56% 3.98%
Other 0.12% 0.18% 0.19% 0.16%
Total non-current assets 84.18% 75.44% 71.71% 77.11%
Total assets 100.00% 100.00% 100.00% 100.00%
LIABILITIES
Current liabilities
Trade and other payables 9.30% 9.45% 7.28% 8.68%
Interest bearing liabilities 2.73% 3.42% 2.47% 2.87%
Liabilities held for sale 0.33% 0.00% 0.00% 0.11%
Other financial liabilities 0.15% 0.28% 0.58% 0.34%
Current tax payable 2.17% 3.59% 1.90% 2.55%
Provisions 2.15% 2.19% 2.14% 2.16%
Deferred income 0.19% 0.25% 0.33% 0.26%
Total current liabilities 17.04% 19.18% 14.68% 16.97%
Non-current liabilities
Trade and other payables 0.39% 0.54% 0.53% 0.49%
Interest bearing liabilities 19.18% 12.04% 15.28% 15.50%
Other financial liabilities 0.25% 0.08% 0.30% 0.21%
Deferred tax liabilities 4.09% 2.61% 4.86% 3.85%
Provisions 6.90% 9.03% 8.37% 8.10%
Deferred income 0.25% 0.42% 0.47% 0.38%
BHP BILLITON Group X
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Total non-current liabilities 31.06% 24.71% 29.80% 28.52%
Total liabilities 48.11% 43.88% 44.48% 45.49%
Net assets 51.89% 56.12% 55.52% 54.51%
EQUITY
Share capital – BHP Billiton Limited 0.92% 1.15% 1.38% 1.15%
Share capital – BHP Billiton Plc 0.83% 1.04% 1.26% 1.04%
Treasury shares -0.41% -0.61% -0.59% -0.54%
Reserves 1.48% 1.94% 2.15% 1.86%
Retained earnings 48.14% 51.62% 50.42% 50.06%
Total equity attributable to members
of BHP Billiton Group 50.95% 55.15% 54.61% 53.57%
Non-controlling interests 0.94% 0.96% 0.90% 0.94%
Total equity 51.89% 56.12% 55.52% 54.51%
ii) Vertical Common-Size Income Statements for Fiscal 2010 – 2012 Below are the common size income statements for the year ending December 31
st
from 2010 to 2012. The values are shown as a percentage of the total revenues for that
year. The last column shows the average percentage for the three-year period.
VERTICAL COMMON-SIZE
ANALYSIS
BHP BILLITON GROUP -
INCOME STATEMENT 2012 2011 2010 3-Yr Average
Revenue
Group production 95.18% 94.65% 91.28% 93.70%
Third party products 4.82% 5.35% 8.72% 6.30%
100.00% 100.00% 100.00% 100.00%
Other income 1.25% 0.74% 1.00% 1.00%
Expenses excluding net finance
costs -68.37% -56.39% -63.06% -62.61%
Profit from operations 32.89% 44.35% 37.94% 38.39%
Comprising: 0.00% 0.00% 0.00% 0.00%
Group production 32.71% 44.21% 37.73% 38.22%
Third party products 0.17% 0.14% 0.21% 0.17%
32.89% 44.35% 37.94% 38.39%
Financial income 0.31% 0.34% 0.41% 0.35%
Financial expenses -1.32% -1.12% -1.28% -1.24%
Net finance costs -1.01% -0.78% -0.87% -0.89%
Profit before taxation 31.87% 43.57% 37.07% 37.50%
Income tax expense -10.02% -9.03% -11.58% -10.21%
Royalty-related taxation (net of
income tax benefit) -0.35% -1.15% -0.85% -0.79%
BHP BILLITON Group X
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Total taxation expense -10.37% -10.19% -12.43% -11.00%
Profit after taxation 21.50% 33.38% 24.64% 26.51%
Attributable to non-controlling
interests 0.16% 0.42% 0.54% 0.37%
Attributable to members of BHP
Billiton Group 21.35% 32.96% 24.10% 26.14%
Earnings per ordinary share (basic)
(US cents) 0.40% 0.60% 0.43% 0.48%
Earnings per ordinary share (diluted)
(US cents) 0.40% 0.60% 0.43% 0.48%
Dividends per ordinary share – paid
during the period (US cents) 0.15% 0.13% 0.16% 0.15%
Dividends per ordinary share –
declared in respect of the period
(US cents)
0.16% 0.14% 0.16% 0.15%
For BHP Billiton, it can be seen from the common size balance sheets for fiscal 2010 to
fiscal 2012 that cash and cash equivalents have steadily decreased, from 14.02% to 3.70% total
assets over the three year period. Inventories have decreased from 6.00% in 2010 to 4.82% in
2012, but looking at the common size income statement shows that revenues have steadily
increased over the last three years, so the rate of inventory turnover must be high.
Though total current assets have decreased over the three-year period, total non-current assets
have increased, especially in PP&E (from 62.55% in 2010 to 73.68% in 2012), and this accounts
for the overall increase in total assets over the years. Total liabilities decreased from 2010 to
2011, from 44.48% to 43.88%, but then increased to 48.11% in 2012. This increase in liabilities
explains why the company has less cash in their pockets. Total equity increased in 2011 to
56.12% from 55.52% in 2010, and then decreased in 2012 to 51.89%. The biggest decrease in
equity was seen in the retained earnings.
The vertical common-size income statement shows that though revenue from third party
products has decreased from 8.72% to 4.82%, revenue from group production has increased from
91.28% to 95.18%. Since most of the revenue comes from group production, this proves a
significant increase in revenue. That said, even though the increased revenues from group
production outweigh the decreased revenue from third party products and other income, the total
profit from operations from 2011 to 2012 decreased by 11.46% due to the increase in revenue
expenses (excluding net finance costs). The profit after taxations was only 21.50% as compared
to the three-year average of 26.51%.
BHP BILLITON Group X
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2.2 Horizontal Common-Size Analysis
The horizontal common-size income statement and balance sheet analysis compares all
amounts to the same figures of a base year. The analysis measures each income statement
and balance sheet item as a percentage of the base year. This makes it easier to compare the
income statements and balance sheets for different years and see how the existing company is
trending over that period of time. In this analysis of BHP Billiton Petroleum we will be using
2010 as the base year for all analysis.
i) Horizontal Common-Size Balance Sheets for Fiscal 2010 – 2012 Below are the horizontal common size balance sheets for the fiscal year ending
December 31st from 2010 through 2012. The values shown are as a percentage of values for
2010. The last column shows the average percentage over the three-year period.
HORIZONTAL COMMON-SIZE ANALYSIS
BHP BILLITON GROUP - BALANCE SHEET 2012 2011 2010 3-Yr
Average
ASSETS
Current assets
Cash and cash equivalents 38.38% 80.96% 100.00% 73.11%
Trade and other receivables 117.74% 125.28% 100.00% 114.34%
Other financial assets 96.58% 90.41% 100.00% 95.66%
Inventories 116.85% 115.37% 100.00% 110.74%
Assets held for sale
Current tax assets 72.49% 144.44% 100.00% 105.64%
Other 145.63% 96.25% 100.00% 113.96%
Total current assets 81.37% 100.58% 100.00% 93.98%
Non-current assets
Trade and other receivables 106.81% 151.56% 100.00% 119.45%
Other financial assets 124.57% 106.09% 100.00% 110.22%
Inventories 123.62% 105.83% 100.00% 109.82%
Property, plant and equipment 171.38% 122.26% 100.00% 131.21%
Intangible assets 744.10% 211.94% 100.00% 352.01%
Deferred tax assets 111.65% 98.52% 100.00% 103.39%
Other 94.05% 111.90% 100.00% 101.98%
Total non-current assets 170.79% 121.85% 100.00% 130.88%
Total assets 145.49% 115.83% 100.00% 120.44%
LIABILITIES
Current liabilities
Trade and other payables 185.93% 150.35% 100.00% 145.43%
Interest bearing liabilities 161.16% 160.61% 100.00% 140.59%
Liabilities held for sale
BHP BILLITON Group X
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Other financial liabilities 39.14% 56.36% 100.00% 65.17%
Current tax payable 166.82% 219.17% 100.00% 162.00%
Provisions 146.60% 118.80% 100.00% 121.80%
Deferred income 86.85% 89.62% 100.00% 92.16%
Total current liabilities 168.95% 151.34% 100.00% 140.10%
Non-current liabilities
Trade and other payables 108.53% 118.34% 100.00% 108.96%
Interest bearing liabilities 182.71% 91.27% 100.00% 124.66%
Other financial liabilities 119.17% 29.70% 100.00% 82.96%
Deferred tax liabilities 122.38% 62.11% 100.00% 94.83%
Provisions 119.92% 125.02% 100.00% 114.98%
Deferred income 78.10% 102.14% 100.00% 93.41%
Total non-current liabilities 151.63% 96.02% 100.00% 115.88%
Total liabilities 157.35% 114.28% 100.00% 123.87%
Net assets 136.00% 117.08% 100.00% 117.69%
EQUITY
Share capital – BHP Billiton Limited 96.66% 96.41% 100.00% 97.69%
Share capital – BHP Billiton Plc 95.79% 95.88% 100.00% 97.22%
Treasury shares 101.52% 118.67% 100.00% 106.73%
Reserves 100.31% 104.98% 100.00% 101.77%
Retained earnings 138.92% 118.59% 100.00% 119.17%
Total equity attributable to members of BHP
Billiton Group 135.74% 116.97% 100.00% 117.57%
Non-controlling interests 151.12% 123.51% 100.00% 124.88%
Total equity 136.00% 117.08% 100.00% 117.69%
BHP Billiton Current Assets has overall decreased over the last three years by 18.63%.
Their cash and cash equivalents was $12,456 million in 2010, in 2011 it was decreased by 20%
to $10,084 and was reduced by more than half in 2012 to only $4,781 million. While there
inventories has increased by 16.85% over the same period. Their trade and other receivables
have also increased to $6,233 million dollars or 16.83% over the last three years.
BHP Billiton Non-Current Assets has increased by more than 70% over the last three
years. The most significant non-current asset class was their Property, plant and equipment class
which has grown from $ 55,576 million in 2010 to $95,247 million in 2012 an impressive
71.38%. The intangible assets increased more than 7 times since 2010 where it was $687 million
to $5,112 million in 2012. With the continued growth of their non-current assets has brought a
good total growth of 45.49% to their Assets.
The Total Liabilities for BHP Billiton has also grown overall for the last three years to
$62,188 million in 2012 from $39,523 million in 2010 which is a 57.35% increase in the total
liabilities. One of the largest growth liability types was the Trade and other payables which have
grown from $6,467 million in 2010 to $12,024 million in 2012. They also had an increase in
interest bearing liabilities, current tax liabilities. The Net assets show a 36% growth from 2010
of $49,329 million to $67,085 million in 2012.
BHP BILLITON Group X
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The Equity for BHP Billiton has also had a solid growth rate over the last three years of
36% from $49,329 million in 2010 to an impressive $67,085 million in 2012. The share capital
for BHP Billiton Limited and BHP Billiton PLC has remained constant along with treasury
shares and reserves. The largest growth on equity was the retained earnings.
ii) Horizontal Common-Size Income Statements for Fiscal 2010 – 2012 Below are the common size income statements for the year ending December 31
st
from 2010 to 2012. The values are shown as a percentage of the values for the year 2010.
The last column shows the average percentage for the three-year period.
HORIZONTAL COMMON-SIZE ANALYSIS
BHP BILLITON GROUP - INCOME
STATEMENT 2012 2011 2010
3-Yr
Average
Revenue
Group production 142.65% 140.90% 100.00% 127.85%
Third party products 75.55% 83.30% 100.00% 86.28%
136.80% 135.87% 100.00% 124.22%
Other income 171.59% 100.57% 100.00% 124.05%
Expenses excluding net finance costs 148.31% 121.50% 100.00% 123.27%
Profit from operations 118.58% 158.83% 100.00% 125.80%
Comprising:
Group production 118.60% 159.23% 100.00% 125.94%
Third party products 113.51% 88.29% 100.00% 100.60%
118.58% 158.83% 100.00% 125.80%
Financial income 104.65% 113.95% 100.00% 106.20%
Financial expenses 141.69% 119.58% 100.00% 120.43%
Net finance costs 159.04% 122.22% 100.00% 127.09%
Profit before taxation 117.63% 159.69% 100.00% 125.77%
Income tax expense 118.42% 106.04% 100.00% 108.15%
Royalty-related taxation (net of income
tax benefit) 55.88% 183.59% 100.00% 113.16%
Total taxation expense 114.12% 111.37% 100.00% 108.50%
Profit after taxation 119.39% 184.07% 100.00% 134.49%
Attributable to non-controlling interests 40.07% 103.83% 100.00% 81.30%
Attributable to members of BHP Billiton
Group 121.18% 185.88% 100.00% 135.69%
Earnings per ordinary share (basic) (US
cents) 126.68% 187.71% 100.00% 138.13%
Earnings per ordinary share (diluted) (US
cents) 126.60% 187.40% 100.00% 138.00%
BHP BILLITON Group X
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Dividends per ordinary share – paid
during the period (US cents) 132.53% 109.64% 100.00% 114.06%
Dividends per ordinary share – declared
in respect of the period (US cents) 128.74% 116.09% 100.00% 114.94%
BHP Billiton breaks out their revenues into Three different groups; the first on is the
Group production and since 2010 they have increased these revenues by 42.65% from $48,193
million to $68,747 million this is substantial revenue growth in the last 3 years. However, the
second source of revenue from Third party products has decreased by 24.45% over the last three
years from $4,605 million to $3,479 million even though this is a considerable decrease it only
reflects less than 5% of all revenues. The third revenue group is 'Other income' and they had
increased this revenue more than 70% over the last three years from $528 Million to $906
million.
The overall profit from Operations has increased by more than 25% for the last three
years. However the Group production had more than $8 billion decrease from year 2011 to 2012
it still was able to show an overall increase over the period of the last three years. The Third
party products showed a $23 million dollar increase over the same time period. The expenses
excluding net finance costs have also increased by 23.27% the last three years to $49,380
million.
The profit after taxation for the last three years from 2010, 2011, and 2012 was a respectable
19.39% increase from $13,009 million to $15,532 million in 2012.
2.3 Financial Ratios
There are many tools that may be used to evaluate a company; however one of the most
valuable tools is a financial ratio. This section will use ratios as a means to analyze the
financial statements of BHP over a three-year period. The reason why ratios are used is to
simple give a better understanding of the organizations financial health. The results of these
ratios will aid in planning, analysis of operation efficiency, goal setting, potential
investments and the evaluation of management performance.
2.4 Liquidity Ratios
Liquidity ratios analyze the efficiency with which a company is able to meet its short-
term obligations using assets that are readily converted into cash. The general rule is the
higher the value of the ratios, the better the company’s ability is at satisfying immediate
obligations.
Table 1: Liquidity Ratios
2012 2011 2010
Liquidity
Working capital (in millions) -1583 5542 12,092
Current ratio 0.93 1.28 1.93
Quick ratio 0.58 0.94 1.48
BHP BILLITON Group X
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As shown in Table 1, BHP’s working capital has declined rather drastically over
the last three years, going from 12,092million dollars to minus 1,583million dollars. This
is the equivalent of -54% in 2011 and -129% in 2012, which shows that BHP is incurring
more current liabilities than current assets. This means there is a possibility that BHP
may run into trouble paying back creditors in the short term, from further investigation of
the financial statements it appears that in 2012 BHP’s cash and cash equivalents reduced
by over 50% this may be the area that needs addressing.
Figure 1
Figure 1 shows a picture of how BHP’s current and quick ratios have declined
over the years. The difference between the current ratio and the quick ratio is that the
quick ratio is more conservative and omits inventory from the calculation and focuses on
the liquid assets. It is assumed that a company with a current or quick ratio that is less
than 1 would be unable to pay liabilities that may arise at that point. Based on the ratios
BHP seemed to have reached this point in 2011 when considering the quick ratio and in
2012 when considering the current ratio.
2.5 Profitability Ratios
The profitability ratios will give management and investors an idea of how
profitable BHP has been over the years. These ratios will assess BHP’s ability to generate
earnings as compared to expenses or costs incurred within a particular period; a higher
value compared with previous years will suggest the company is doing well.
Table 2 – Profitability Ratios
Profitability 2012 2011 2010
Return on assets 0.12 0.23 0.14
Return on Equity 0.23 0.41 0.26
Net Income to sales 0.21 0.33 0.24
0.00 0.50 1.00 1.50 2.00 2.50
Current ratio
Quick ratio
A Graph Showing the Quick & Current Ratio.
2010
2011
2012
BHP BILLITON Group X
13
Figure 2
Figure 2 indicates that 2011 was a good year for BHP. Its profitability ratios were
at the highest, indicating there was an improvement is the earnings compared to expenses
or costs from 2010 however this improve did not last to 2012. The net income to sales is
the same as profit margin it measures how much of the sales price the company actually
keeps in earnings. BHP was able to retain 24%, 33% and 21% in the years 2010, 2011
and 2012 respectively. Ideally there should be a gradual progression in the values but the
35% drop may be attributed to the fall in revenues. BHP should seek ways to improve on
sales but at the same time streamlining on it costs. Return on Equity measures
profitability in light of how effective the company has turned into profit the money
invested by shareholders. BHP has generated profits based on shareholders’ investment
of 26%, 41% and 23% in years 2010, 2011 and 2012 respectively. These values should be
an improvement on previous years; with these kinds of results investors may be deterred
or just pull out. Great Northern Iron Ore Properties is currently the industry’s leader is the
area of ROE, with an impressive 155.27% ROE ratio, this shows that BHP has work to
do in this area of profitability. Next ratio to consider is Return on Asset (ROA); this is a
measurement of how effective management is at generating profit from its assets. BHP’s
results are 14%, 23% and 12% for 2010, 2011 and 2012 respectively. Unfortunately in
2012 BHP preformed worse in generating earnings for assets than it did in 2010, this is
suggests that BHP can improve on their investments decisions.
2.6 Financial Strength Ratios
Another set of metric to be reviewed are those in Table 3, the financial strength
ratios. The times interest earned measured in units of times per year, measures how well
the company is able to meet its debt obligations. It the case of BHP the results are 44.33,
79.36 and 134.06 times per year in 2010, 2011 and 2012 respectively. Although there is a
gradual increase in the values showing that BHP is able to sustain earnings, it should also
be noted that a high ratio could suggest that BHP has an undesirable lack of debt; it needs
to use these earnings to reinvest. EBITDA is an acronym for Earnings Before Interest,
Taxes, Depreciation and Amortization; it indicates the company’s operational
0.00 0.05 0.10 0.15 0.20 0.25 0.30 0.35 0.40 0.45
Return on assets
Return on Equity
Net Income to sales
A Graph showing the Profitability Ratios.
2010
2011
2012
BHP BILLITON Group X
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profitability performance. In the case of BHP its EBITDA escalated between the years
2010 to 2011 by about 60%, while in 2012 the ratio declined by 26%.
Table 3
Financial strength ratios 2012 2011 2010
Times interest earned 134.06 79.36 44.33
EBITDA 23022 31255 19572
Long-term debt/equity 0.60 0.44 0.54
Cash flow from operations to sales 0.34 0.42 0.32
Figure 3
Cash flow from operations to sales compares the cash flow to sales; it gives
investor an indication of the company’s ability to convert sales into cash. BHP did best in
2011 at converting sales into cash (42 cents for every dollar, 10 cents more than 2010), in
2012 BHP was able to convert 34 cents in every sales dollar to cash flow. In order to
improve the cash flow from operations to sales annually, BHP will need to improve on
generating cash through change of credit policy, reviewing bad debts, improving in
special payment plans etc. Long-term debt to equity ratio indicates a company’s leverage;
a company with a high ratio is seen as risky. BHP’s leverage was lowest in 2011 at 44%
but highest in 2012 at 60% (shown in Figure 3) a company with higher ratios suggests
that it has more liabilities than equity.
2.7 Dividend Ratios
The dividend payout ratio indicates the percentage of the earnings that is paid to
the shareholder in form of dividend. Investors or shareholders expect that this ratio
increases over the years or remain consistent. BHP’s dividend payout ratio appears to
have increased in 2012 from 2011 by 77% this shows that BHP is using earnings to
support dividend payments. Although this is good for the investors, BHP should not have
increased its dividend payout in 2012 because of its current financial challenges.
Dividend yield is similar to the dividend payout; however this ratio measures how much
the company pays out in dividend relative to the share price (Investopedia). Table 4
0.00 0.20 0.40 0.60 0.80
Long-term debt/equity
Cash flow from operations to sales
A Graph Showing Cash Flow/Sales &
Long-term Debt/Equity
2010
2011
2012
BHP BILLITON Group X
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shows that the dividend yield stayed at 1% for 2010 and 2011 however it increased to 2%
in 2012. This is a good indication for current and prospective investors it shows that they
are getting more money for what they invested.
Table 4
Dividend ratios 2012 2011 2010
Dividend Payout 0.385 0.218 0.385
Dividend Yield 0.02 0.01 0.01
2.8 Valuation Ratios
Table 5
Valuation ratios 2012 2011 2010
Price to book value 0.0010 0.0016 0.0012
Cash flow per share ratio 9.12 11.24 6.05
Price/earning ratio 21.89 20.86 25.03
Price/cash flow ratio 6.93 7.92 9.43
The next set of ratios in Table 5 will give some inclination to how the company is
valued. The price to book value may be used as a means to compare the share price to
that of the book value. It is no surprise to see that in the past three years BHP had the
highest price to book value in 2011with 0.16% and its lowest in 2012 with 0.10%. A low
price to book value may suggest that the stocks are undervalued or it could also indicate
some problems with the company. In this case the assumption made is that the shares
may be undervalued, as BHP seems to have struggled in 2012, also because the
difference between 0.16% and 0.10% is marginal. Cash flow per share ratio represents a
measure of the financial strength of the company, this measure is important as it takes
into consideration BHP’s ability to generate cash. Results are 9.12 for year 2012, 11.24
for year 2011 and 6.05 for year 2010. Although the cash flow per share dropped by 19%
in 2012, it did not fall below year 2010’s ratio. In order to improve on the cash flow per
share BHP should find always to bring in cash through operations this may mean
reducing credit sales, advertising more to draw new clients and aggressive sales etc.
Investopedia explains Price to earnings (P/E) ratio as “a valuation ratio of a company's
current share price compared to its per-share earnings”. In 2010 the P/E ratio was at
25.03, this high value would indicate that investors will be expecting a higher earnings
growth in the future, in year 2011 the P/E ratio dropped to 20.86 but rose to 21.89 in
2012. It should be noted that a high P/E ratio could also be viewed as risky compared to a
lower P/E, and some research states that firms with lower P/E ratio have outperformed
the market. BHP should aim to maintain a more consistent P/E ratio. Lastly the price to
cash flow (P/CF) ratio, this ratio compares the market value of a firm with the cash flow.
The general rule is that a smaller value ratio is preferred; it suggests that a firm is
generating adequate cash flows that are not yet properly considered in the current share
price. Over the last three years BHP has seen a gradual decline in the P/CF, 9.43, 7.92
and 6.93 in the years 2010, 2011 and 2012 respectively.
BHP BILLITON Group X
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3.0 Reserve Ratios
Reserve ratios are key performance measurements used to determine a company’s ability
to replace production and its ability to continue operations. There are several ratios from
basic reserve replacement ratios to more complex ones.
3.1 Reserve Replacement Ratios
Comparing BHP Billiton’s reserve replacement ratios with and without revisions,
it appears the reserve replacement ratios with revisions are much more favorable as it is
replenishing its reserves at a rate greater than its rate of production. In 2010 and 2011,
BHP is replacing its reserves at almost the rate of production but in 2012, the company is
replenishing its reserves at almost one and a half times its production rate. The reserve
replacement ratios without revisions are rather low since its production rate is greater
than the replacement rate.
3.2 Reserve Life Ratios
“The reserve life ratio is used to approximate or measure the number of years that
production could continue at the current rate if no new reserves were added” (Wright &
Gallun p.707).
BHP BILLITON GROUP - RESERVE RATIOS 2012 2011 2010
Reserve Life Ratios - Developed Oil, Condensate, Natural Gas and NGL Reserves
Reserve Life Ratios - Proved Developed 3.99 4.41 4.54
Reserve Life Ratios - Proved Undeveloped 4.05 4.34 4.17
The reserve life ratios above indicate that BHP can continue production for a little
over 4 years at the current rate if the company decides not to add any new reserves. The
number of years seems to be diminishing little by little every year for both proved
developed and proved undeveloped reserves.
3.3 Net Wells to Gross Wells Ratio
The text defines gross wells as wells in which the company has any working interest
while net wells is defined as the net interest in the wells.
BHP BILLITON GROUP 2012 2011 2010
Net Wells to Gross Ratios
Net to Gross Wells
BHP BILLITON GROUP - RESERVE RATIOS 2012 2011 2010
Reserve Replacement Ratios - Proved Developed Oil, Condensate, Natural Gas and
NGL Reserves
Reserve Replacement Ratio 0.311 0.277 0.549
Reserve Replacement Ratio with Revisions 1.445 1.152 1.081
BHP BILLITON Group X
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Crude Oil Wells 2.11 2.17 2.14
Natural Gas Wells 3.27 4.22 2.57
Total Wells 3.15 3.82 2.27
The above table represents the net to gross wells calculations. These ratios
represent a gauge of future profitability for the company. These high ratios indicate that
BHP Billiton owns a large working interest in their wells which also points to the
likelihood that BHP is an operator who has a greater influence in operations.
3.4 Average Reserves per Wells Ratio
BHP BILLITON GROUP 2012 2011 2010
Average Reserves per Well Ratio
Developed
440,746.12
744,067.80
2,276,265.82
Undeveloped
447,674.42
732,944.92
2,095,253.16
Average Daily Production per well -
Proved Developed Oil, Condensate
302.910
462.619
1,375.1
As seen above in BHP’s high averages of developed and undeveloped reserves
per well, we can conclude that the company can produce their reserves more efficiently
and profitably. This is also a good indication for the company’s future profitability. The
average daily production per well ratio shows the company’s efficiency. Once again,
these calculations result in very high averages indicating BHP is a very efficient
production company.
4.0 Reserve Cost Ratios
Reserve cost ratios compare costs and reserves. Since BHP is involved in both oil
and gas reserves, the cost ratios are computed by converting the reserves to BOE, which
is a common unit of measure based on energy content (Wright & Gallun p. 711).
4.1 Finding Cost Ratios
BHP BILLITON GROUP - RESERVE
COST RATIOS
2012 2011 2010
formula 1
Finding Costs/ BOE without revisions 34.754 32.297 13.012
Finding Costs/ BOE with revisions 4.310 4.208 5.681
formula 2
Finding Costs/ BOE without revisions 57.135 57.711 319.159
Finding Costs/ BOE with revisions 41.039 43.722 139.339
formula 3
BHP BILLITON Group X
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Finding Costs/ BOE with revisions 23.722 12.784 16.892
The first formula takes the exploration and drilling costs and divide by reserve
extensions and discoveries excluding and including revisions. The second formula adds
the costs of proved properties to exploration and drilling costs and divides it by reserve
extensions and discoveries plus purchased reserves in place. Again one calculation
includes revisions and one does not. The last and final formula takes all exploration
costs, exploratory and development drilling costs, and proved and unproved property
acquisition costs and divides it by all reserve additions including revisions in previous
estimates.
4.2 Lifting costs per BOE & DD&A per BOE
BHP BILLITON GROUP - LIFTING
COSTS PER BOE
2012 2011 2010
Lifting Cost per BOE 10.003 7.366 6.792
DD&A per BOE 26.486 12.385 12.538
Lifting costs per BOE is a performance indicator. To calculate lifting costs per
BOE, you must divide the total annual lifting costs by the annual production (BOE). This
is a measure used to evaluate the extent to which a company is controlling its operating
costs and how efficiently the company is getting oil and gas out of the ground (Wright &
Gallun P. 716). From the table above, it appears that BHP is becoming less effective at
lifting the oil and gas out of the ground as the years pass.
DD&A refers to historical cost of finding and developing reserves and can affect current
profitability. To compute, take the total annual depreciation, depletion, and amortization
cost and divide by annual production in BOE.
5.0 Reserve Value Ratios
5.1 Value of Proved Reserve Additions per BOE
BHP BILLITON GROUP - RESERVE VALUE
RATIOS 2012 2011 2010
Value of proved reserve additions/ BOE (without
revisions)
13.324
19.344
15.786
Value of proved reserve additions/ BOE (with revisions)
(7.229)
20.327
23.854
Value of proved reserve additions/ BOE (without
revisions)
9.513
4.211
15.786
Value of proved reserve additions/ BOE (with revisions) 3.438 8.038 23.854
Value of proved reserve additions per BOE assists in determining the well value.
The first set of measurements was derived from diving changes due to extensions,
discoveries, and improved recovery by reserve extensions and discoveries and improved
recovery, one with revisions and one without. The calculations without revisions had
slight fluctuations from year to year. The calculations with revisions showed slight
BHP BILLITON Group X
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change from 2010 to 2011, but 2012 appear to have taken a nosedive. The second set of
measure take the changes due to extensions, discoveries, and improved recovery plus
changes due to purchases of reserves in place and divide it by reserve extensions and
discoveries, improved recovery, and purchases of reserve in place. When incorporating
revisions to the second formula, you must add changes due to revisions in estimate to the
numerator and the denominator becomes all reserve additions including revisions in
previous estimates. The trend for both seems very sporadic and unstable.
5.2 Value Added Ratio
BHP BILLITON GROUP - VALUE
ADDED RATIO
2012 2011 2010
Finding Costs/ BOE
23.722
12.784
16.892
Value added ratio
0.14
0.63
1.41
The value added ratio compares the cost of finding reserves with the value added
by those reserves (Wright & Gallun p. 722). BHP Billiton’s value added ratios are rather
low signaling the company may not be adding maximum reserve values with minimum
finding costs. 2010 was the strongest year and 2012 is the weakest in terms of value
adding.
6.0 CONCLUSIONS AND RECOMMENDATIONS
Our recommendations are based on both the financial ratios and both of the horizontal
and the vertical analyses of BHP Billiton. BHP’s liquidity ratio shows a steady decline in
both the current ratio and the quick ratio which helps indicate the company’s ability to pay
their immediate obligations. Our first recommendation for the company is to raise its cash
and cash equivalents since it has depleted by 50% since 2010, while the company actively
reduced their current liabilities. BHP’s Return On Equity (ROE) has gone done since 2010
however, with a 23% return rate, which by industry standards, is acceptable. The Return On
Assets (ROA) also declined since 2010 to 12% and was below the industry average. BHP
needs to decrease its operating cost to help improve the ROA. The financial strength of the
company is indicated by times interest earned EBITDA and shows that it has had steady
growth over the last three years.
The reserve ratio is a key performance indicator used to determine a company’s ability to
replace production and its ability to continue operations. Over the past three years it seems
that BHP’s replacement of reserves have been greater than its production, so it appears that
the company has more than four years of production of reserves, which is a positive sign.
BHP’s net wells to gross wells ratio is high and indicates that the company owns a large
working interest in its wells and who has a greater influence in operations. The lifting cost
ratio over the last three years indicates that the company is becoming less efficient and we
recommend cutting their DD&A costs while improving their lifting efficiency.
BHP BILLITON Group X
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7.0 REFERENCES
BHP Billiton | A leading global resources company. (n.d.). Retrieved from http://www.bhpbilliton.com/home/Pages/default.aspx
Financial Analysis Software | Financial Analysis | Financial Statements | Current Ratio | Financial Ratio | ReadyRatios.com. (n.d.). Retrieved July 2013, from
http://www.readyratios.com
Investopedia - Educating the world about finance. (n.d.). Retrieved July 2013, from http://www.investopedia.com
Wright, C. J., & Gallun, R. A. (2008). Fundamentals of oil & gas accounting. Tulsa, Okla: PennWell.
8.0 APPENDIX
8.1 Income Statements for Fiscal Years 2010-2012 for BHP Billiton
BHP BILLITON GROUP - INCOME
STATEMENT
2012 2011 2010
US$M US$M US$M
Revenue
Group production 68,747 67,903 48,193
Third party products 3,479 3,836 4,605
72,226 71,739 52,798
Other income 906 531 528
Expenses excluding net finance costs (49,380) (40,454) (33,295)
Profit from operations 23,752 31,816 20,031
Comprising:
Group production 23,626 31,718 19,920
Third party products 126 98 111
23,752 31,816 20,031
Financial income 225 245 215
Financial expenses (955) (806) (674)
Net finance costs (730) (561) (459)
Profit before taxation 23,022 31,255 19,572
Income tax expense (7,238) (6,481) (6,112)
Royalty-related taxation (net of income tax benefit) (252) (828) (451)
Total taxation expense (7,490) (7,309) (6,563)
Profit after taxation 15,532 23,946 13,009
Attributable to non-controlling interests 115 298 287
Attributable to members of BHP Billiton Group 15,417 23,648 12,722
Earnings per ordinary share (basic) (US cents) 289.6 429.1 228.6
Earnings per ordinary share (diluted) (US cents) 288.4 426.9 227.8
Dividends per ordinary share – paid during the period 110.0 91.0 83.0
BHP BILLITON Group X
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(US cents)
Dividends per ordinary share – declared in respect of
the period (US cents)
112.0 101.0 87.0
8.2 Balance Sheets for Fiscal Years 2010-2012 for BHP Billiton
BHP BILLITON GROUP - BALANCE SHEET 2012 2011 2010
US$M US$M US$M
ASSETS
Current assets
Cash and cash equivalents 4,781 10,084 12,456
Trade and other receivables 7,704 8,197 6,543
Other financial assets 282 264 292
Inventories 6,233 6,154 5,334
Assets held for sale 848 -
Current tax assets 137 273 189
Other 466 308 320
Total current assets 20,451 25,280 25,134
Non-current assets
Trade and other receivables 1,475 2,093 1,381
Other financial assets 1,881 1,602 1,510
Inventories 424 363 343
Property, plant and equipment 95,247 67,945 55,576
Intangible assets 5,112 1,456 687
Deferred tax assets 4,525 3,993 4,053
Other 158 188 168
Total non-current assets 108,822 77,640 63,718
Total assets 129,273 102,920 88,852
LIABILITIES
Current liabilities
Trade and other payables 12,024 9,723 6,467
Interest bearing liabilities 3,531 3,519 2,191
Liabilities held for sale 433 -
Other financial liabilities 200 288 511
Current tax payable 2,811 3,693 1,685
Provisions 2,784 2,256 1,899
Deferred income 251 259 289
Total current liabilities 22,034 19,738 13,042
Non-current liabilities
Trade and other payables 509 555 469
Interest bearing liabilities 24,799 12,388 13,573
BHP BILLITON Group X
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Other financial liabilities 317 79 266
Deferred tax liabilities 5,287 2,683 4,320
Provisions 8,914 9,293 7,433
Deferred income 328 429 420
Total non-current liabilities 40,154 25,427 26,481
Total liabilities 62,188 45,165 39,523
Net assets 67,085 57,755 49,329
EQUITY
Share capital – BHP Billiton Limited 1,186 1,183 1,227
Share capital – BHP Billiton Plc 1,069 1,070 1,116
Treasury shares (533) (623) (525)
Reserves 1,912 2,001 1,906
Retained earnings 62,236 53,131 44,801
Total equity attributable to members of BHP
Billiton Group
65,870 56,762 48,525
Non-controlling interests 1,215 993 804
Total equity 67,085 57,755 49,329
