Financial Analysis of Shell Plc and Bp Plc

Introduction

Some financial outrages have put corporate governance in the business spotlight. Basically, the issues and interest in the subject corporate finance can be traced back at least to the eighteenth century and economists such as Adam Smith. Certainly, there is probably little new in the existing debate involving to financial negligence, except for the range of the financial and economic consequences which replicate the greater importance of finance in the current economy. The purpose of this paper is to examine the economic and financial context of corporate governance of two UK oil companies i.e. Shell Plc and BP Plc. Basically, corporate governance has significant implications for the performance of the financial sector and, by addition, the economy as whole. Well-organised resource allocation is supported by strapping shareholder control rights, which assists investment in fresh development actions and confines the scope for corporate over-investment. Apparently, investment decisions are further linked to corporate governance insofar as investors prefer to invest in appropriately supervised corporations and be apt to avoid investing in ambiguous environments. In this way, the investor assurance created by sound corporate governance provisions and the security of minority shareholders encourages the financial market progress by encouraging share ownership and capable capital allocation across firms. Transparent financial reporting is necessary to sending efficient corporate governance.

For the last several years, the business industry in UK have seen the rapid growth of the number of firms offering financial situation analysis services even though we are currently in the stage of global financial crisis. Anyway, this serves as a proof that more and more organisations are realising the importance the analysis of their financial situation in order to keep up with the demands of the business world.

Background of Companies

British Petroleum (BP) Plc[1]

BP is one of Britain's biggest companies and one of the world's largest oil and petrochemicals groups. William Knox D'Arcy, the company's founder, believed that oil deposits were to found in Iran so in the company's first six decades, its prime focus lay in the Middle East. But from the late 1960s the center of gravity shifted westwards, towards the USA and Britain itself. Oil exploration and production account for 20 percent of BP's revenues. In 2005, the firm reported a turnover of $262 billion and by December of the same year, they have 96,200 employees working for the organization. Lord John Browne is the Chief Executive Officer of BP as of the moment. The recent 2003 merger with the Alfa Access Renova group creating the TNK-BP tie-up and the not-so-recent 1998 acquisition of the Amoco Corporation oil company has provided the groundwork for BP's strategy in the Russian territory. As with any business deal, there have been debates on the economic rationale of the TNK-BP and Amoco deal, and Browne has been quick in justifying them.

Shell Plc.[2]

In UK, Shell best known for its activities of oil exploration as well as its services to all its customers. In addition, Shell provided employment for 9000 people within the UK per year, investment and tax revenue. Shell plc provides energy for millions of people in the UK for both heating and powering purposes, operating 25% of the UK's oil and gas supply and 16% of the petrol and diesel.

As a multinational company who supplies petroleum products, they much get analyzed regularly by a group of financial analysts. Focusing on the financial statements for the years 2006 and 2007, they measure the viability of Shell plc, this is done by concentrating on the key ratios such as net profit margin, gross profit margin, return on capital employed as well as the current and acid ratios.

Discussions

Any business organisation fundamentally exists because it has certain responsibilities to fulfil for the people in the community as well as the various entities comprising it. The organisation has its human entity ranging from the staff, to the managers, board of directors, stakeholders, suppliers and so forth. All these groups have their own set of functions that contribute to the determination of the business goals, the delivery mechanisms of goods and services, and the operational patterns within the organisation. Furthermore, business organisations are part of the larger society where the markets and consumers are targeted and derived. The complexity of the internal and external surroundings of the business necessitates crucial deliberations and decisions in order to ensure the effective and continuous affairs of the organisation. The overall management of the internal and external affairs of the organisation is what basically forms corporate governance.

The Organisation for Economic Cooperation and Development (2009) defined "Corporate Governance" as the framework that directs and controls business organisations. The structure of corporate governance details the distribution of rights and the division of responsibilities among the different members of the corporation, including the board of directors, managers, staff, shareholders and stakeholders, and delineates the policies and processes for formulating decisions on matters of corporate affairs. It also provides the structure for the corporate objectives to be put in place, the means of fulfilling those objectives, and manners of evaluating corporate performance (cited in Encogov 2009).

As part of development in corporate finance, determining an appropriate value for the target company is important. Valuation is the process of calculating the value of an asset (liability). The value is the price of the asset (liability) times the quantity held. Valuations are required in many contexts including finance, property management and the antiques industry.

Generally speaking in advanced economies the valuation rests on some estimate of current price, or estimated fair price now, rather than book value i.e. book price (the latter being the acquisition cost of the asset or liability, or the depreciated book value, rather than it's value now).

In a business industry, valuations are required for all financial assets (liabilities), for various reasons including tax, regulatory and accounting (including reporting to owners and stakeholders). The valuations are as of specified dates e.g. the end of the accounting quarter or year. They may alternatively be mark-to-market (estimates of the current value of assets {liabilities} as of this minute or this day) for the purposes of managing portfolios and associated financial risk (Luehrman, 1999).