Back in July, we discussed how much progress BP seemed to be making with safety (See “BP’s Safety Warning Signs,” July 11). From 2005 through 2009, the company went from the worst record among the majors to about the best in terms of injuries, deaths, and spills. But, of course, those measures didn’t capture the grave risks hidden below the surface at BP (See “Why, Tony, why?” August 8).
The Macondo well disaster in April 2010 was the shocking result, but since then BP has stopped the leak and made a lot of progress cleaning up the damage, paying claims, and strengthening its finances. Between the end of December 2009 and June 2010, it built up reserves of cash and un-borrowed revolving credits from $13.3 billion to $24.3 billion. From the first half of 2009 to the first half of 2010, it cut capital spending and dividends from $15.3 billion to $11.2 billion.
And it improved cash flow from operating activities from $12.3 billion to $14.4 billion, in spite of $12.5 billion in payments for the Gulf of Mexico oil spill. We don’t question BP’s gains in liquidity or its cash savings from capital spending and dividend cuts. But we think the reported improvement in cash flow from operations is misleading.
For BP, a big source of cash in the first half of 2010 was a $10.3 billion increase in “trade and other payables.” Some $8.3 billion of that is related to the oil spill, but that means $2.0 billion probably is from an increase trade payables. Almost all of BP’s operating cash flow gains were from delaying payments to suppliers, and that’s not a sustainable source of cash.
Once again, the progress in a key measure at BP is more apparent than real. We think the lesson for risk analysts is, as always, not to take things at face value. The trend may seem to be improving, but unless you understand what’s driving the trend you can never really be sure.
Just as I thought and very helpful for my accounting coursework- you are to be referenced Tim
BP has said that safety would be the sole criterion for rewarding employee performance in its operating business for the 4th quarter, but not necessarily beyond that (a full review of the bonus criteria is pending). BP certainly had a problem with its safety culture, but is this one-time bonus plan the right fix? Safety is a long-term concern that should be a part of the bonus plan every quarter.
I dont fully understand the analysis and the basis for the conclusion that operating cash flow increased due to an increase in trade payables, primarily relating the gulf spill.
On the simplified basis that operating cash flow equals EBITDA +/- working capital movemenet, an increase in op cash flow can result from increased EBITDA and/or a positive working capital inflow. Assuming that EBITDA had already been reduced by the amount of the oil spill costs, the fact that these hadnt been paid out but instead remained as trade creditors shouldnt increase cash flow, unless of course they’re treated as exceptionals and excluded from the definition of operating cash flow? Am I missing something?