BP Biofuels Strategy by Martina Petkova

BP BIOFUELS STRATEGY Integrated Management Project

Martina Petkova HB49 | 19705618 HENLEY BUSINESS SCHOOL University of Reading

TABLE OF CONTENTS

EXECUTIVE SUMMARY

II. INTRODUCTION

1. 2.

3 4

III. 1. 2. 3. 4. 5.

ABOUT BP PLC CURRENT STRATEGY ON ALTERNATIVE ENERGY BP ANALYSIS EXTERNAL ANALYSIS INTERNAL ANALYSIS INTERNATIONAL BUSINESS FACTORS UNIQUE COMPETING SPACE STRATEGIC OPPORTUNITY

IV. STRATEGY FORMATION 1. 2.

GROWTH STRATEGY AND INNOVATION STRATEGIC OPTIONS EVALUATION

V. CORPORATE FINANCE: VALUATION 1. 2.

BASE VALUATION SCENARIO ANALYSIS

VI. BP CORPORATE GOVERNANCE 1. 2.

OVERVIEW AND ASSESSMENT STRATEGY RISK AND MITIGATION

5 5 7 9 10 13 15 15 18 22 22 28 29 29 31

VII. RECOMMENDATION AND IMPLICATIONS

VIII. APPENDICES

IX. REFERENCES

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I. EXECUTIVE SUMMARY BP Plc, a Multinational Enterprise headquartered in the UK and one of the 6 oil “supermajors”, is being driven by both external and internal factors to re-evaluate its strategy on alternative energy. Increasing requirements on multiple industries to reduce CO2 emissions, as well as BP’s specific history related to its business’s impact on the environment, are pushing the company to take assertive actions in developing products with lower carbon footprint. In addition, the finites of oil reserves and the power shift to the Middle East in the oil industry will weaken BP’s position as an industry leader in the next few decades. BP is therefore under pressure to research and develop alternative energy options, in order to secure its future position in the market. While BP has established a science centre in San Diego, specialising in the development of 3 types of biofuels in Brazil, its current strategy is to build this into a licensing business. Deeper research into industry trends, examined through a number of academic models, highlights a strategic opportunity for BP to expand its biofuels portfolio by investing in aviation biofuel development, and jatropha in particular – which out of all examined options is both economically viable and in alignment with BP’s culture and generic structure. Directing its attention to the aviation industry in this early stage of biofuels development, will secure a solid customer base and market niche for BP in the next few decades while the fossil fuel industry will face turbulence. BP had to step away from a jatropha project in 2009 as it was not economically viable at the time. 5 years later, significant progress has been made in the development of jatropha-based biofuel, predominantly by small and medium sized enterprises. In order to minimise risk of a potential investment, the advised course of action would be an acquisition of an existing company with specialty knowledge and experience in this particular niche. Following a research into potential companies, a privately held SME called SG Biofuels has been identified as most suitable due to a number of factors: 1. 2. 3. 4.

History: Successful jatropha projects. Expertise: Highly skilled science team. Customer base: Partnership with a leading aircraft manufacturer, Airbus. Alignment with BP: San Diego based company performing research in Brazil.

As SG Biofuels is a privately held company and therefore no financial information is publicly available, the viability of a potential investment has been assessed through a valuation of a similar but publicly held company, operating in the same industry. The application of a number of valuation and assessment techniques confirms this investment as highly profitable. The key risks identified with a potential acquisition, associated mainly with the uncertainty resulting from the research-and-development nature of the biofuels sector, can be minimised by BP via Corporate Governance measures allowing a resilient and symbiotic environment for its science teams.

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II. INTRODUCTION 1. About BP plc BP plc is a Multinational Enterprise (MNE), operating in the oil, gas and energy industry since 1909. As one of the 6 oil and gas “supermajors” (Big Oil), BP is a vertically integrated company and has a dedicated business segment matching each area of the industry, the key ones being:  Upstream – Exploration and Production  Downstream - Refining and Marketing  Integrated Supply and Trading The company’s main products are petroleum, aviation fuel, motor fuel, natural gas and petrochemicals. Headquartered in London, the UK, BP operates globally, across all continents and in over 80 countries. An overview of the company’s main business operations broken down by location can be found below: Location Business Europe North Sea - Drilling operations London - Trading functions United Kingdom Hull - petrochemicals plant 1000+ retail service stations Research and Development Netherlands Rotterdam - oil refinery Norway North Sea - Drilling operations Americas Gulf of Mexico - exploration and production Alaska - exploration and production Natural Gas exploration and production Whiting, Toledo and Cherry Point - oil refineries Texas, Decatur and Cooper River United States petrochemical plants 7000+ retail service stations 16 wind farms San Diego - biofuels technology research and development centre Crude oil purchases for refining Canada Oil sands holdings Trinidad and Tobago Oil and gas exploration and production Oil and gas exploration and production Brazil Onshore processing of oil and gas Biofuel production facilities Africa Egypt Oil and gas exploration and production Angola Oil exploration and production Asia Russia Holding stake in Rosneft South China Deepwater exploration India Oil and gas exploration and production Indonesia Liquefied natural gas production Iraq Oil exploration and production Oil and gas exploration and production Azerbaijan Pipeline operations Australia Oil refining

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For the purpose of this project, the focus of the ensuing analysis will be predominantly on BP’s operations in the alternative energy sector. 2. Current Strategy on Alternative Energy BP was the first MNE in the oil & gas industry to publicly acknowledge climate change (1997), and the fact that urgent action is required to address global warming (2002). In 2005 BP announced an $8bn investment in researching and developing renewable energy and over the next years explored multiple options with the following results:  Hydrogen energy BP assessed this as a large scale capital investment business which would require over 20 years to develop properly. As this was not viewed as a suitable strategic option for BP at this point in time, BP sold off their hydrogen energy business to a venture and stepped out.  Solar energy Solar energy has been struggling with a profitability challenge, resulting in companies stepping out of the industry. To compound this problem, China is building and flooding the market with lower-grade solar panels of lower cost which has led to a high degree of market consolidation. After exploring different routes, BP found themselves unable to compete with China on the solar energy market so it sold off its solar energy business and stepped out.  Wind energy Wind energy was assessed as aligning nicely with developing future fields in BP and was kept as a business within the corporation. Currently BP owns and operates wind power facilities with interests in 16 wind farms in the US.  Biofuels Biofuels fit into the transportation industry and are therefore in close alignment with BP’s business. One of the options which BP considered but abandoned was a joint venture with D1 Oils on growing and developing jatropha trees into feedstock for biofuels. In 2009 BP sold off its part of the venture because the business was assessed as unsustainable at the time. After exploring multiple options in this area BP has decided to focus on the development of the following 3: Sugarcane to ethanol conversion; Cellulosic biofuels; Biobutanol. The generic direction of BP’s Alternative energy strategy is summarized in Figure 1.

Wind Energy

Refocused business development in the US

Expand globally

Biofuels

Focus research and development on 3 types

Build into a global licensing business Figure 1

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As a generic observation of the Alternative energy industry over the past years, significant investments were made in exploring as many options as possible. However as many of them proved to have scalability and profitability challenges, and combined with the recent financial crash, MNEs have switched from developing a large portfolio of projects to more focused areas of research and production of renewables. BP in particular has placed its attention in 2 areas – wind and biofuels, with the strategic intent to expand globally mainly by licensing to other companies.

III.BP ANALYSIS 1. External Analysis The following PESTEL analysis provides an overview of BP’s external environment.

Political

Economical

Social

PESTEL EUROPE Ukraine crisis - apart from the overall business implications (investments in Russia are currently risky), the political situation in Ukraine puts BP in an even more unstable position due to the recently agreed partnership between BP and Rosneft. Scotland independence vote – The pending vote adds a sense of instability due to BP's business in the North Sea. If Scotland becomes an independent state and gains jurisdiction to the North Sea areas it expects, BP will have to pay taxes to the new Scottish government which are likely to be higher than the current ones being paid to the UK government. AMERICA Obama's administration still wants to be seen as unforgiving of BP after the oil spill in the Gulf of Mexico, so despite BP's business operations in the region, they are still in and will remain in an unfavourable position with the US government. BP's current position is not as strong as it was prior to the Gulf of Mexico oil spill in 2010. While they're still operating at a large profit, they have experienced 2 major hits from an economical perspective which have impacted their profitability significantly: 1. Due to increasing drilling costs the oil industry has generally seen a decrease in profits even though sales are consistent which has impacted all major players, including BP. 2. In addition to the generic industry issue described in point 1, BP have suffered further losses due to the legal penalties following the Gulf of Mexico oil spill in 2010. BP have had to sell a significant amount of assets in order to meet the penalty costs, and recent calculations show that this cost will continue to grow. From a socio-demographic perspective BP is in a weak position due to 2 reasons: * Growing environmental awareness in Western countries over the past decade, which has resulted in negative reputation for companies in the oil industry. * After the Gulf of Mexico oil spill in 2010, and the Texas explosion in 2005, BP have suffered a significant reputational impact not only due to environmental concerns, but also due to

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perceived poor workplace health and safety conditions.

Technological

Environmental

Legal

From a technological perspective, BP operates with a large, diverse and mostly modern infrastructure. BP is open to investing in resilient and stable technology, in order to maintain their business and meet local and international standards. In an era when environmental awareness is being assigned ever-growing importance, BP faces external pressures to demonstrate environmental responsibility in the way it conducts their business. The major oil spill in the Gulf of Mexico 4 years ago had and continues to have significant impact on BP's reputation in this area. Legislation plays a significant role in the oil industry, due to the fact that in order for a company to drill, transport, or sell oil it needs to establish partnership with power structures within each separate country, and is still entirely dependent on the legislation in the particular area. Recent examples where this has had impact on BP: * US government disallowed BP to perform any drilling operations on its territory after the Gulf of Mexico oil spill - this measure was only just lifted, after having been in place for a few years. * UK government declined a recent tax relief request from BP regarding a bio-fuel generation plan, leading to BP having to step out of the project entirely as it would have not been economically viable.

The above overview highlights a few significant issues which need to be addressed by BP in their long-term strategy planning. 1. The Oil industry is currently in a weaker than usual state, and despite current efforts to locate new drilling locations experts forecast that the power in this industry will shift to Eastern countries in the next few decades (Qatar, Saudi Arabia etc.). Further prognoses show that new drilling plans over the next decade might cost the industry $1.1 Trillion as companies explore new locations which might prove it difficult to break even (â&#x20AC;&#x153;Oil Industry Risks $1.1 Trillion of Investor Cashâ&#x20AC;?, Bloomberg). This makes it imperative for the Western oil companies to either find a way to remain in a dominant position or build resiliency by expanding their portfolio of products. Given the limited supply of oil worldwide, the latter option needs to be explored in-depth. 2. Building on the previous point, as a century-old company BP needs to think about maintaining its strong position in the energy market decades ahead in the future, when our combined dependency on oil will have changed drastically. 3. As an oil company BP is seen as, and considers itself, responsible for the environment. It should therefore work towards gradually moving in a direction where its business and products are as minimally damaging to the environment as possible. 4. BP's reputation is still suffering from the Gulf of Mexico oil spill 4 years ago - an issue which will be easily repaired if the company is seen as being as active as possible in the alternative energy area.

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5. Building on points 3 and 4, and the aviation industry being one of Big Oil’s top customers, BP should recognize the pressure which aircraft manufacturers and airlines are facing to meet the demands to decrease carbon emissions, and to be seen as environmentally friendly in the way they conduct their business. 2. Internal Analysis The following extract from the International Energy Agency’s “World Energy Outlook” from 2013 is key to build a prognosis of how Oil Exploration – one of BP’s key capabilities, will be placed in the next few decades: “The Middle East, the only large source of low-cost oil, remains at the centre of the longer-term oil outlook. (…) By the mid-2020s, non-OPEC production starts to fall back and countries in the Middle East provide most of the increase in global supply. Overall, national oil companies and their host governments control some 80% of the world’s proven-plus-probable oil reserves.” (“World Energy Outlook 2013”, IEA). An evaluation by the Institute of Mechanical Engineers summarizes experts’ prognoses that oil is expected to run out in approximately 40 years, and that about two thirds of oil reserves are in the Middle East, where they are controlled and operated by governments and national companies (“When will oil run out”, Institute of Mechanical Engineers). In summary, BP’s current core capability will become unreliable and eventually obsolete in the next few decades. This has been recognized in BP’s Energy Outlook for 2035, where oil has been described as the slowest growing area: “Among fossil fuels, gas is the fastest growing (1.9% p.a.) and the only one to grow more rapidly than total energy. Oil (0.8% p.a.) shows the slowest growth, with coal (1.1% p.a.) only slightly ahead.” (BP Energy Outlook 2035) In contrast, expert evaluations show that renewables will be the fastest growing area of the energy sector in the next 20 years. BP envision that “All fuels show growth over the forecast period, with the fastest growth seen in renewables (6.4% p.a.).”, and “Among non-fossil fuels, renewables (including biofuels) gain share rapidly, from around 2% today to 7% by 2035, while hydro and nuclear remain fairly flat. Renewables overtake nuclear in 2025, and by 2035 they match hydro.” (BP Energy Outlook 2035). This prognosis is confirmed by the International Energy Agency, which also places Brazil as a key player in the biofuels sector in 20 years: “In the transport sector, Brazil is already the world’s second largest producer of biofuels and its production, mainly as sugarcane ethanol, more than triples. Suitable cultivation areas are more than sufficient to accommodate this increase without encroaching on environmentally sensitive areas. By 2035, Brazilian biofuels meet almost one-third of domestic demand for road-transport fuel and its net exports account for about 40% of world biofuels trade.” (“World Energy Outlook 2013”, IEA). By taking the Portfolio approach to Capabilities management (Birchall and Tovstiga, 2005), and applying it to the energy outlook analyses referenced above, it becomes immediately obvious what should BP’s the next steps be from a strategic perspective (Figure 2).

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STRONG

within 20 years

Biofuels

Oil Exploration

within 50 years

Competitive Position (degree of control)

WEAK Emerging

Pacing

Key/ Core

Obsolete

Competitive Impact (maturity of capability)

Figure 2 (Adapted from Birchall and Tovstiga, 2005)

While oil is BPâ&#x20AC;&#x2122;s current core Capability, in 40 to 50 years it will move into the Obsolete section. Biofuels however, globally will move into the Pacing section in 20 years, and BP is set up to take advantage of this trend as it already has focused on biofuels research and development. Key conclusion from the Portfolio view of these capabilities, is that BP should be more aggressive in trying to turn biofuels into a pacing and then core capability, as opposed to continuing to make investments with decreasing return in a capability which will inevitably become obsolete.

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Is the ORGANISATION set up to exploit it?

Yes

Sustained Competitive Advantage

Oil

Temporary Competitive Advantage

Biofuels

I Is it easily IMITATED?

Yes

R Is it RARE?

Competitive Parity

Yes

V Is the resource or capability VALUABLE?

Competitive Irrelevance

Figure 3 (Based on Barney & Hesterley, 2006) The VRIO Framework in Figure 3 (Barney and Hesterley, 2006) confirms this view, as it highlights the following facts: 

While BP is investing in Biofuels, it is still not set up to exploit this capability in its business so currently Biofuels hold only Temporary competitive advantage.



Oil is provides Sustained competitive advantage, but as reserves run out and drilling prices climb, BP’s ability to exploit this resource will decrease and eventually disappear – proving that the competitive advantage provided by oil is only temporary.



If BP focuses on developing its ability to exploit biofuels and turn this capability into a strong business, it could provide Sustained competitive advantage. The fact that BP has positioned its sugarcane-ethanol development business in Brazil (the future leader in this area) already puts the company in an advantageous place.

The above analysis of BP’s internal basis of competitiveness shows that despite its current strong position in the energy industry, the firm needs to be taking specific and strong measures in the biofuels sector, in order to ensure that it maintains its leading role in the next decades. 3. International Business Factors BP as a Multinational Enterprise (MNE) operates across 80+ countries, but has focused its Alternative energy R&D business in 2 countries: the USA and Brazil, with the intention to expand to other parts of the world once it fully develops its target products. This arrangement provides BP with a competitive edge due to Brazil’s increasingly strong position as world leader in biofuels production, combined with the fact that the US’s

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status as regional leader allows for a favourable environment to locate the science R&D laboratory in. Despite this advantage, the challenges introduced by the cultural and background differences should not be ignored. Brazil Business

Biofuels development plants

Main goal

Operational efficiency and hitting performance target

US Global Technology Centre in San Diego, 100 scientists developing technology to create new molecules Long-term technology improvement

Challenges: i.

Biofuels industry in Brazil is 30-40 years old, built by family-owned businesses so external influences are not successful in adjusting the already established culture and processes.

ii.

Bringing in new technology is very hard - only adjustments to existing technology have been possible.

iii.

Investments always tend to be directed to short-term (operating efficiency) rather than long-term pay-off (technology improvement).

Looking at BP’s culture at an institutional level [(“national (or group) culture embodied in institutions (government, education and economic institutions as well as in business organisations)” (Henley Business School, 2013)], it holds the mentality and values of a global corporation which has been successfully operating in the oil industry for over a century. Naturally there is a clash with the culture in Brazil, which originates from a smaller-sized, family-centred business models. This cultural diversity has introduced a challenge in BP in being able to balance between short-term and long-term investments. 4. Unique Competing Space The analysis of BP’s external and internal environment and basis of competitiveness provides significant insight into how the company’s Unique Competing Space will be impacted and how it can be expanded within the new context taking shape in the energy industry. This can be best reviewed by examining the 3 Strategic boundary conditions (Figure 4, Tovstiga, 2013) which correspond with the Unique Competing Space.

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Figure 4 (Tovstiga, 2013) Strategic boundary 1 – The line of demarcation This line will turn into a major pressure point for BP in the next few decades due to the following reasons: 

The power in the oil industry will shift towards the Middle East countries, who will have increasing offerings whereby BP and its Western competitors will struggle to keep up.



BP’s main competitors (‘Big Oil’ companies: Chevron, Exxon, Royal Dutch Shell) are all investing in biofuels and renewables research. Like BP, Shell is also working on sugarcane ethanol in Brazil. At this point, BP does not have a competitive advantage in the biofuels sector and its position could even weaken if its competitors increase their role in this area.



Multiple smaller companies are focusing entirely on renewables and biofuels, and therefore constitute a completely separate and independent competitor to BP and other Big Oil companies.

Strategic boundary 2 – The customer interface While this has been a fairly stable interface in the past, it now has a very dynamic nature. Aircraft manufacturers, airlines, and car manufacturers – a key customer group in the oil industry, are under tremendous pressure by governments to reduce carbon emissions. The aviation industry in particular is responsible for “2% of all humaninduced carbon dioxide (CO2) emissions” and “12% of CO2 from all transport sources” (Air Transport Action Group Facts and Figures, 2014), and is therefore subjected to rigid requirements to reduce its carbon footprint. Its reliance on sustainable biofuels is

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increasing rapidly. Since 2008 a number of demonstration and commercial flights powered by biofuels have taken place, predominantly operated on aircrafts from the 2 world-leading manufacturers Boeing and Airbus, and using mostly biofuels generated from either algae, jatropha or Camelina. Both Boeing and Airbus have their own programs dedicated to biofuels research. The biofuels market is clearly an area where BP as an energy company will aim for a leading role. Strategic boundary 3 – The internal threshold This area representing “the firm’s stock of resources – both of tangible and intangible kind” (Henley Business School, 2013), highlights the following items which were established in the Internal analysis section: 

Oil reserves are running out, impacting significantly BP’s internal basis of competitiveness.



BP has focused on biofuels development, which it wants to build into a licensing business: plants in Brazil and technology centre in San Diego.

Bearing in mind that “those resources that are relevant to the firm’s unique competing space must be appropriately bundled, configured and mobilised across the internal threshold marked ‘3’ in such a way that they become competitively relevant to the firm”. (Henley Business School, 2013), BP needs to consider how is best to develop further the resources it already has in place. This closer look at BP’s strategic boundary conditions allows for the following insight, as depicted in Figure 5.

Industry/ market context Competitor offerings Customer needs

Biofuels Focus on renewables

1 3

UCS Biofuels

Oil reserves out

Own competitive basis Macro-economic context

Figure 5 (Adapted from Tovstiga, 2013) 

Due to the finiteness of oil reserves, and the pressures to reduce carbon emissions, both Big Oil companies and leading Aircraft manufacturers are focusing on biofuels.

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

Customer needs will inevitably shift towards biofuels, however due to the increasing competition and the early stage of biofuels research and development, it is currently unclear whether BP will be able to meet these needs.



BP therefore has to secure and strengthen its position as aviation fuel supplier, by not only researching biofuels, but also maintaining customer intimacy and partnership in the process.



Despite the increasing competition in the renewables sector, BP has a number of advantages which it should fully explore in order to expand its Unique Competing Space.

5. Strategic Opportunity Multiple factors at work in the energy industry put BP in a position to-rethink its approach to the Alternative energy sector and consider what opportunities can be seized. While BP’s current plan is to develop 3 types of biofuels (Sugarcane ethanol, Cellulosic biofuels and Biobutanol) and build them into a licensing business, the external, internal and UCS analysis shows that in order for BP to secure its leading position in the energy industry it should consider a more assertive approach. In this early stage of biofuels development, while BP is still one of the key players in the oil industry, the organisation should explore its strong customer base and look into developing products which it can integrate directly into the existing transport industry. BP can take this approach out of the position of strength it currently holds, whereby a licensing business will be a key part of its strategy but not the main goal. By applying the Value Proposition Framework (Drucker, 1994) to BP’s values, resources and current opportunities and treats it is easy to articulate what direction should the company’s strategic intent take (Figure 6).

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WHY focus on biofuels? (Values) * BP sees itself as an "energy company" rather than an "oil company". * BP has formally recognized climate change and its own responsibility to maintain environmental safety * BP as a major player in the oil industry for the past century has a large customer base, unique experience and wide knowledge which can be applied in the expansion of its portfolio with biofuels.

WHERE can BP make a difference? Opportunity: Aircraft manufacturers are under pressure to develop aviation fuel with reduced carbon emissions. Aviation industry is one of the main customers for oil companies. Threat: If the aviation industry makes a break-through in biofuels, any energy company who cannot play into this market will suffer a significant set-back especially in any future business relationships with its customers in the aviation area. Opportunity: BP as an oil/ energy company to align its strategy closely with the aviation industry in order to build an early partnership and continue to maintain a close relationship in the long-term.

Value Proposition

SRATEGIC INTENT Focus on aviation biofuels development.

HOW can BP make a difference? * Established biofuels research and development facilities and operations in Brazil. * Biofuels Technology laboratory in San Diego. * Pre-existing relationship with aviation industry.

Figure 6 (Adapted from Drucker, 1994) The analysis in this section leads to the following insights: o

BP and its customers are under pressure to reduce carbon emissions.

The aviation industry is the main contributor for carbon emissions, and also one of BPâ&#x20AC;&#x2122;s main customers.

BP already has focused on biofuels development, but only aims to build a licensing business by researching 3 types of biofuels in isolation.

In view of these factors, BP has a strategic opportunity to gain territory in the fastgrowing renewables industry by focusing its effort specifically on aviation biofuel, by moving from isolated research to an approach which is aiming to a more direct collaboration with the aviation industry.

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IV. STRATEGY FORMATION 1. Growth Strategy and Innovation Porter’s Generic Strategies model (Figure 7, Porter, 1985) confirms the insights established in the analysis in Section III.

Figure 7 (Porter, 1985) The current dynamics of the oil industry do not allow for a Cost Leadership nor Differentiation approach to be undertaken by BP. The fact that drilling costs keep increasing, combined with the power shift towards the Middle East, renders a strategy towards Cost Leadership fairly unsustainable. Biofuels and any renewable energies are still in a Research and Development stage, so at this point it is very early to build a strategy based on low cost. The same logic applies for a potential Differentiation strategy: the oil industry is at a very late stage and the alternative energy industry is at a too early stage to develop a differentiation strategy towards all customers. It would therefore be preferable if BP invests in a Differentiation Focus approach, whereby it would direct a high-quality product at “a narrow market segment (niche)” (Henley Business School, 2013). Considering the external and internal circumstances of BP, along with the 3 Strategic Boundary conditions, this approach can be materialised by focusing BP’s biofuels business on aviation. Once BP builds a strong position in this niche it would then be able to eventually move to a full Differentiation strategy. There are a few factors to be considered in this approach:  The 3 types of biofuels which BP is currently researching have not been tested on any demonstration or commercial flights yet.  While many biofuels combinations have been tested already, the 3 main types which have been included in the largest number of flights are: algae, jatropha and camelina. (Appendix 1)  These are the main biofuel types which are currently being explored by aircraft manufacturers as well.

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 The current view in the aviation industry is that sustainable aviation fuel with reduced carbon emissions can be developed through a combination of fuels – starting with a fossil fuels-plus-biofuels combination, and then gradually moving towards a cleaner mix. Based on these factors, BP’s next strategic priority would be to ensure it plays an active role in the research, development and flight testing of at least 1 of the main 3 types which have been heavily tested by aircraft manufacturers over the past years: algae, jatropha and camelina. BP’s exceptional knowledge of and experience with fossil fuels will enable smarter combinations between fossil fuels and biofuels for aviation purposes, as in the past this type of research has been done in isolation rather than having been brought under 1 umbrella with existing fossil fuel businesses.

Figure 8 (Adapted from Ansoff, 1988) Looking at Ansoff’s (1988) Growth Strategies presented in Figure 8, BP falls in the Diversification category because: 

The desired product (sustainable aviation biofuels) is still under development, i.e. not existing yet.



The market is not existing yet either, despite the enormous demand. Since the product is not yet developed, aircraft has not been fully adapted – this will need

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to be a symbiotic synchronized process between the biofuels suppliers and the aircraft manufacturers, before the market sets into a stable state. At this point in time, a biofuels supplier who works directly with aircraft manufacturers has the potential to influence the industry and the future nature of the market. Diversification “may entail a high level of resources and risk, but can be successful when directed at niche markets, or accompanied by a high level of innovation” (Ansoff, 1965). By focusing on innovation (biofuels) and a niche market (aviation), BP as an energy supplier will secure a strong position in what promises to be a turbulent future for the industry. With this in mind, out of the multiple Diversification strategies available for organizations – “vertical, horizontal and conglomerate (Henley Business School, 2013), the most fitting one will be the vertical Backward integration option, whereby “the development into activities concerned with the inputs into the company’s current business.” (Henley Business School, 2013). As outlined multiple times, in this unique worldwide situation concerning alternative energy, companies like BP need to expand its portfolio in order to play an active role in building a future market and setting the standards. The above analysis is further nuanced by the “Strategic Innovation” Elective Pathway (Henley Business School, 2012) which helps further with the assessment of BP’s strategic opportunities. The ambidextrous perspective defended by Birchall and Tovstiga (2005) argues that sustainable Strategic Innovation builds a bridge between the existing capabilities of a company and the “revolutionary and exploratory efforts in competitive environments compounded by emerging markets and emerging technologies” (Henley Business School, 2012). The accent is on the exploratory approach, which aims at developing the emergent competitiveness via experimentation, but this needs to be supported by the existing knowledge and capabilities of the company. It also “requires managing internally contradictory structures, processes, capabilities and organisational cultures” (Birchall & Tovstiga, 2005). With BP’s century-long experience in the energy industry, and current interest in biofuels, it has the potential to bridge its exploitive (current) and exploratory innovation into a sustainable strategy. However a risk is introduced by the fact that BP’s focus has always been predominantly on fossil fuels and therefore the entire organisation has been structured around a market which is now shifting in an entirely new direction and will become extinct in a few decades. “Despite the changing context, many organisations are still structured according to late nineteenth–early twentieth century organisational models that are based on assumptions that are long since obsolete” (Henley Business School, 2012). Since the energy industry is being completely re-shaped due to multiple factors, BP should recognise the fact that its current organisational structure and even culture might not be suited for the emerging new reality, and take specific measures to address this challenge before it becomes an obstacle.

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Figure 9 (Henley Business School, 2012) Another aspect which should be taken into consideration is that exploratory innovation is hard to measure, and in BPâ&#x20AC;&#x2122;s case where the direction is towards research and development of a product which is not existing yet, it is implied that financial returns on investment will not be immediate and therefore financial measurement of the strategic innovation will not be applicable in the first years. A robust measurement process will need to be developed in collaboration between BP and aircraft manufacturers and should be based on improved efficiency and functionality of flights powered by biofuels. This analysis shows that BPâ&#x20AC;&#x2122;s strategic opportunity is to look into Innovation in the form of Forward Integration Diversification (Ansoff, 1965), in particular developing a new product targeted at a specific, emerging market niche: aviation biofuels. BP should however recognise the main risks associated with this strategic opportunity and take measures to minimise them: 1) its organisational structure and culture built predominantly around the oil market; 2) the unforeseeable specifics of return on investment and measurement of the strategic innovation. 2. Strategic Options Evaluation Building on the analysis from the sections above, the next step is to evaluate which one of the 3 main biofuel types being explored by aircraft manufacturers (Algae, Jatropha, and Camelina) will have the strongest and most positive strategic impact on BPâ&#x20AC;&#x2122;s future. A closer look at each option, broken down by key criteria for each type follows, with assigned Red-Amber-Green scoring. Further information on the sources of this data can be found in Appendix II.

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Criteria

Jatropha

Camelina

Medium abundant and high resistance to draught and pests, grows in tropical and sub-tropical regions.

Medium - can be grown in regions with colder climate.

High capital and operating cost

Very low operational and maintenance cost for oil extraction

Low input reduces overall cost

Very low

Low

over 50%

60%

80%

Commercial viability

Very low - 25 years away

Medium to High - most viable when seeds are cultivated on larger scale. Yields improving over the past years.

Medium currently being researched

Potential market

Multiple companies produce algae biofuels, however due to the limited commercial viability this option has been abandoned by BP's competitor Exxon and one of the 2 main aircraft manufacturers: Boeing.

Extensive research in Asia. Recently organised multi-investor project in Brazil - backed by one of the 2 main aircraft manufacturers: Airbus.

Currently being used by US Navy and Air Force, in Montana. Dutch company Waterland to research in Fukushima Prefecture (Japan).

Resource accessibility

Cost

Environmental impact of production Net-carbon emissions reduction of biofuel

Algae High comparable ease of growth, e.g. on land unsuitable for crops growth, and even wasteland.

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A number of these factors are relative to BP’s particular position and background, and while one option might appear preferable to another at this initial overview, it is imperative to filter the above analysis specifically through a strategic lens. Thomson and Martin’s Appropriateness-Feasibility-Desirability Framework (2010) helps in identifying the key strategic criteria for BP against which all 3 options can be assessed. Appropriateness: Since BP’s goal is to remain a leader in the energy industry the 2 most important factors will be Strategic Impact and Mission & Objectives, as this is ultimately the deciding criteria on whether it is worth to pursue the particular option or not. As BP operates a large and complex business while not being able to freely invest in just any possibility for a biofuel, it is essential that it chooses an option which already matches the existing culture and can be enhanced by BP’s existing capabilities and resources – therefore Simplicity is also of key importance. Feasibility: With oil reserves running out, multiple companies of larger and smaller scare undertake fierce research of biofuel options – any future breakthrough in this area will shape the industry for a long period of time. For BP to invest in a particular strategic option, it must provide competitive advantage, preferably even at the current early research and development stage. It is also essential for the particular biofuel type to be accessible to BP, in terms of growth and production – therefore Resource Availability is a factor carrying significant weighting. Lastly, building on the importance assigned to Simplicity above, Change & Implementation is vital for BP as it needs to be able to be able to build its strategy with precision into a niche market from the position of a large and complex multinational organisation. Desirability: Investing in a biofuel research and development endeavour carries significant risks due to the current unpredictability of the industry, so it is imperative for BP to assess what risks are associated with each particular option. More importantly, expected returns should be assessed as well – as it is already recognized that any option is unpredictable to a large extent and carries risks, from a strategic perspective BP should evaluate which option has the best Expected Returns to Risk ratio. Following the pattern to consider which option is most simple to implement, Synergy is a vital factor as it highlights how the different options would fit in the complexity of BP’s organisational culture. “The AFD framework can be converted to a semi-quantitative evaluation scheme by introducing weightings (for example, on a scale of 1 to 5; 5 most important) to each of the criteria and scoring each option (similarly on a scale of 1 to 5) accordingly” (Henley Business School, 2013). Following the selection of criteria, the 3 options can be evaluated with the following weighting and scoring:

Page | 20

Criteria Appropriateness Strategic Impact Mission & Objectives Simplicity Feasibility Competitive Advantage Resource Availability Change & Implementation Desirability Risk Expected returns Synergy

Weighting (1-5)

Option 1 Algae Score (1-5)

Option 2 Jatropha Score (1-5)

Option 3 Camelina Score (1-5)

5 4 3

2 3 4

5 4 5

4 4 3

5 4 3

3 5 3

5 4 5

5 3 2

4 5 3

2 2 3 105

3 4 5 159

5 4 3 137

Scores

(Adapted from Thomson and Martin, 2010) Strategic Impact: Due to the fact that Algae will only be economically viable in approximately 25 years, and it was dropped as a research field by both Exxon and Boeing, it is expected to have a low strategic impact for BP. Camelina on the other hand is very promising due to its extensive use by the US Navy and Air force, however the fact that this niche is dominated by local companies working directly with the US Navy and Air force, presents significant barriers to entry for BP. Therefore Camelina as an option has a lower scoring than Jatropha, which is being supported and tested by Airbus – an existing customer of BP. Mission & Objectives: BP’s mission statement includes “We find, develop and produce essential sources of energy. We turn these sources into products that people need everywhere. The world needs energy and this need is growing. This energy will be in many forms” (“Our Values, BP), which is in close alignment with a potential investment in another biofuel research and development type, and matches all 3 of the main Strategic options. In addition however, one of BP’s main objectives is to make impactful but sensible investments, especially considering the current expenses linked to the Gulf of Mexico oil spill and the $8 billion investment in alternative energy research from years ago which did not bring significant returns. For this reason Algae receives a lower scoring due to the higher operating and capital cost and low economic viability. Simplicity: Algae can be grown on any type of land, but the associated costs reduce its appeal. Camelina can only be grown in regions with colder climate, while jatropha can only be grown in tropical and sub-tropical regions and is currently being researched as part of a multi-investor project in Brazil, in cooperation with Airbus. Since BP is already researching biofuels in Brazil, it will be simpler to expand its portfolio with Jatropha rather than Camelina. Competitive Advantage: Due to the reasons outlined above, Jatropha and Camelina would have a larger competitive advantage compared to Algae.

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Resource Availability and Change & Implementation: Explained in the Simplicity section. Camelina research in the US currently dominated by the US Navy and Air Force, Algae would need to be developed from scratch by BP, and Jatropha is already being researched in Brazil where BP has a biofuels R&D business. Risk: Algae carries high risk due to its low commercial viability. Camelina carriers comparatively lower risk due to the US Navy’s and Air Force’s commitment to use aviation fuel with 50% camelina-based mix by 2016. Medium risk assigned to Jatropha as it is still in a research and development stage, but yields have been increasing over the past years and it is supported by Airbus. Expected returns: If developed to a sustainable aviation fuel, both Camelina and Jatropha will have high returns on investment. As already mentioned, Algae has low commercial viability. Synergy: Jatropha indisputably receives highest scoring against this criteria for a few reasons: 

One of the largest Jatropha R&D activities is backed by one of the main aircraft manufacturers: Airbus (existing customer of BP).



This activity is also located in Brazil, as are BP’s existing biofuels plants.

Looking at the finalised Score, but also deeper into the complexities of all 3 options, Jatropha is the best Strategic option for BP considering not only the specifics of the company, but also the number of factors at play in the industry. BP has the following alternatives in approaching an expansion of its portfolio with Jatropha-based aviation fuel: 

Build a Research and Development capability in-house.



Consider a partnership with an existing company which specialises in jatropha biofuel production.

These options will be examined and assessed in the next section.

V. CORPORATE FINANCE: VALUATION 1. Base Valuation Following the analysis from Section IV, a Strategic opportunity was identified for BP in investing in jatropha-based aviation fuel. In pursuing this strategy, BP can choose from the following 3 options: A. Build a Research and Development Capability in-house. Since BP already has experience in jatropha research as part of a Venture, which it had to step away from due to the complexities associated with this particular plant, it would be more sensible for BP to absorb an already existing company which has developed expertise in this area. B. Acquire an existing company specialising in jatropha-based biofuel and invest in its re-structuring and re-shaping of its strategy in order for to align with BP’s generic strategy.

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C. Acquire a company which is already aligned with BP’s long term strategic goals, in order to minimise effort in re-structuring and re-shaping. Out of the 3 options, Option C is the most desirable one as it involves lower risk and investment compared to the other 2. The research on jatropha in Section IV has highlighted an existing company which matches the description in Option C – SG Biofuels, a San Diego located company, specialising in jatropha research and development in Brazil, and with an existing partnership established with one of the world-leading aircraft manufacturers – Airbus. The financial valuation in this section will therefore be based on Option C: Acquisition of SG Biofuels. Further background information can be found in Appendix III. The company however is a privately held company and therefore no financial information is publically available for valuation. In an attempt to reach an approximate view of the company’s value, a similar company in the same industry will be evaluated. After reviewing a multitude of companies, Verenium Corporation has been selected for the following reasons:  It is a SME in the biotechnology industry, specialising in research and development of new greener and more cost-effective technologies for the biofuels and food market. SG Biofuels differs from Verenium Corporation in this aspect with the fact that it specialises in jatropha only.  It is a US-based company (identically to SG Biofuels, based in San Diego), so any tax related information would be applicable to both companies.  Identically to SG Biofuels, it showed significant progress in its research during the past few years, so an assumption can be made that both companies have comparable growth.  Verenium Corporation was acquired by a European Chemical giant (BASF) in October 2013 – proving the view that an acquisition of this type of company provides promising prospects for larger companies already in the industry. The first step in a company valuation is to identify the key value drivers. The Shareholder Value Analysis, which “follows the financial economic theory of the value of the firm which has been in existence for many years” (Henley Business School, 2012), allows for an in-depth long term view of a company’s value and how sensitive it is to different factors. The following calculations need to be made for Verenium Corporation in order to complete the SVA tool (Figure 10). These are based on financial data available in Osiris, which can also be found as follows: Appendix IV – Balance Sheet Appendix V – Income Statement Appendix VI – Cash Flow Statement Appendix VII – Stock Price Data

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Sales Growth Rate Revenue for the 5-year period between 2008 and 2012. Year Sales (th) SGR

2012 51171 -6%

2011 61267 17%

2010 52073 6%

2009 48819 -14%

2008 56845 34%

Operational Profit Margin Year SGR OPM

2012 -6% 32%

2011 17% 9%

2010 6% -46%

2009 -14% -13%

2008 34% -61%

Cash Tax Rate This data is only available for the past 3 years so an average can used: 11.7% Year Operating Income Income Tax Cash Tax Rate

2012 18495 226 1.22%

2011 5262 -368 -6.99%

2010 -23914 -9748 40.76%

2009 -34640 0 0.00

2008 -36754 0 0.00

Year

2012

2011

2010

2009

2008

Stock

5311

6323

5316

2586

2432

Debtors Creditors

10677 -7573

11471 -8543

6848 -8631

6842 -4690

9811 -15921

Working Capital

8415

9251

3533

4738

-3678

Year

2012

2011

2010

2009

2008

Fixed Assets Accumulated Depreciation

37474

19320

9110

121348

132744

-26448

-24257

-24101

-23404

-74023

Long Term Debt

-22020

-7135

-88011

-105756

-139228

Fixed Capital

-10994

-12072

-103002

-7812

-80507

IFCI/IWCI Working Capital Calculation

Fixed Capital Calculation

As of 2012 the IWCI will be calculated as follows: [(WC2012 â&#x20AC;&#x201C; WC2011)/ (SR2012-SR2011)]*100= [(8415-9251)/ (51171-61267)]*100 = (-836)/ (-10097)*100 = 0.8%

Page | 24

Depreciation (% of sales) Depreciation / Sales = 2195/51171 = 4.2% Moving onto the WACC calculation, the following values are being used: Equity/ Market Capitalisation = 51 026 000 (Osiris Stock Price) Total Debt = 46 881 000 (Osiris BS) Cost of borrowing % = (Annual Interest Payment/ Total Interest Bearing Debt)*100 = (2086/46881)*100 = 4.4% The Risk Free Rate % is derived from the ten year US treasury rate (US Treasury Website, see References) = 2.6% Equity Premium % = Total Return on Stocks – Risk Free Rate Total Return on Stocks: Earnings per Share 2012/ Stock Price 2012 = 1.43 / 28m = 5.1% Equity Premium = 5.1 – 2.6 = 2.5% Beta – 1.08 from Stock Osiris

SVA valuation method: estimating the Discounted Free Cash Flow to the Firm (DFCFF) Value Drivers

Planning period 1 2

Sales Growth Rate (SGR%)5.4% 5.4% Operating Profit Margin (OPM 20.5% % sales)20.5% Cash Tax Rate (CTR % of OPM) 11.7% 11.7% IFCI (% incr sales) 0.8% 0.8% IWCI (% incr sales) 0.8% 0.8% Weighted Average Cost of 4.63% Capital 4.63% Depreciation (% of sale) 4.2% 4.2% RFCI (= depr) 4.2% 4.2%

Terminal value Steady state

5.4% 20.5% 11.7% 0.8% 0.8% 4.63% 4.2% 4.2%

0.0% 5.1% 0.0% 0.0% 0.0% 5.10% 0.0% 0.0%

Growth in perpetuity Inputs

0.0% WACC calculator

Sales prior year 51,171.0 Equity/Market Cap Cash and marketable securities 34,875.0 Total debt Market Value of Debt 46,881.0 Cost of borrowing % Value of management stock 0.0 options on-the-money Cash Tax Rate % Number of shares outsdanding 0.00(mill) Risk free rate % Equity premium % Beta Corporate Value 144632.3 Share price NA WACC

Sensitivity analysis* 51026.0 46881.0 4.4% 11.7% 2.6% 2.5% 1.08 4.63%

SGR OPM CTR IFCI IWCI WACC

Impact -3.9% -10.9% -0.9% 0.0% 0.0% -3.4%

* 10% adverse change of each Value Driver at a time

Figure 10

Assumptions made in this SVA calculation: 1. Since this Operating Profit Margin has drastically been improving over the past 2 years, the 5 year average (-15%) will not adequately inform the future trend. It would therefore be more applicable to use an average of 2012 and 2011 for the SVA calculation: 20.47%. 2. The Sales Growth Rate 5-year average is 7.6% but in order to be aligned with the OPM assumptions, the average of the last 2 years (2012 and 2011) will be used: 5.4%.

Page | 25

3. Sales Growth will remain consistent over the next 10 years at 5.4%. It must be noted that any breakthrough in the researches being performed by the company will immediately lead to a Sales spike, and for this reason past performance does not necessarily inform the future. However, for the purpose of this valuation focused on the next decade, we are estimating a Sales Growth Rate consistent with the last few years. 4. Same assumption made for Operating Profit Margin. 5. Since the valuation of Verenium Corporation is used to aid the valuation of SG Biofuels (privately held company), the number of shares has been set at 1. In reality Verenium Corporation had 12+million outstanding when it was acquired. 6. The Terminal Value of the Sales Growth Rate and Cash Tax rate is set as 0%, as an assumption is made that this rate will be steady. 7. Another assumption is made for the Operating Profit Margin’s Terminal value as being equal to the WACC value. Result from the SVA calculation:

Cumulative Present Value of Free Cash Flows + Present Value of Terminal Value = Business Value + Cash and Marketable Securities - Market Value of Debt = Corporate Value

USD (th) 96023.5 60614.7 156638 34875 46881 144632

The estimated corporate value of the Verenium Corporation using the Discounted Cash Flow method is $144m. In order to enhance this analysis, the company will also need to be valued through a SME valuation lens (“Valuation of SMEs” Elective Pathway, Henley Business School), in order to ensure that a realistic number is arrived at. Out of the 3 valuation options (The Asset approach, The Market approach, and The Income approach) the most suitable one will be The Market Approach as it takes into consideration the context in which the firm operates, instead of only its internal performance. Since the biofuels market is very changeable at the moment, any firm in this industry will be heavily impacted by external circumstances. The Weighted valuation multiples method allows for an overview of the optimistic, pessimistic and average scenarios presented by the market. Using Verenium Corporation’s financial data published in Osiris (see Appendix VII), the following value of the company can be estimated according to each multiple:

Valuation Multiple Price / Earnings Price/ Book Value Price/ Cash Flow PEG EV/ Shareholder Funds EV/ EBITDA

Weighted Multiple 2.41 1.25 1.35 0.97 0.90 1.66

Basis 18495 30653 18213 25816 30653 23921

Estimated Value (th) 44572.95 38316.25 24587.55 25041.52 27587.7 39708.86

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The value varies between $24m and $44m depending on the different ratios. What needs to be taken into consideration when applying this cut-and-dry approach, is the fact that this assessment needs to be placed in context, by viewing the specific “attributes” (Henley Business School, 2012) of the company. By adapting the “Attributes of business: effect on valuation multiple” table (Figure 11, Henley Business School, 2012), a score of H (high) or L (low) can be assigned against each attribute in order to provide clarity in determining whether a higher or lower multiple should be used in a company’s valuation.

Attributes which justify a higher multiple within the range A consistent historical record of growth and profitability Substantial hard asset value Owner retirement Stable management team in place Long-term quality employees and customers A broad, diverse customer base

Mark (H/L) H H L H H H

Apparent competitive advantages

Proprietary or exclusive products

Obvious opportunity for growth and/or obviously underperforming Desirable location A high-demand enterprise (manufacturing, distribution, or business-to-business service)

H H H

Attributes which justify a lower multiple within the range An inconsistent record of historical profitability Little if any hard asset value Owner critical to operations, professional practices, or consulting Few employees or a high employee turnover Small customer base A few customers accounting for substantial percentage of revenue No apparent barrier for completion to enter the business No clear opportunity for growth and/or improvement in operations Questionable financial records Undesirable location A low demand enterprise (retail, bar, restaurant, or personal services) Figure 11

Out of 11 attributes, Verenium Corporation (and by extension SG Biofuels, based on known information) scores “High” on 10 and “Low” on 1. The only attribute assigned a low score is connected to the current owner’s involvement in the management of the company – which is an easy obstacle to overcome with the correct measures in place.

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Based on this assessment, if the valuation is calculated again using higher valuation multiples, the result is significantly higher – varying between $60m and $73m. Valuation Multiple Price / Earnings Price/ Book Value Price/ Cash Flow PEG EV/ Shareholder Funds EV/ EBITDA

High Multiple 3.97 2.36 3.5 2.5 N/A 2.5

Basis 18495 30653 18213 25816 30653 23921

Estimated Value (th) 73425.15 72341.08 63745.5 64540 N/A 59802.5

This optimistic view is supported by the formal US Industry/ Sector valuation prepared by S&P Capital IQ, Bloomberg and the Fed (Fernandez, 2001). According to the latest estimates, published in January 2014, the Biotechnology sector will experience a 32.27% growth in the next 5 years. 2. Scenario Analysis Scenario Analysis allows for looking “at different but consistent combinations of variables” (Brealey, Myers and Allen, 2011) in order to minimise any uncertainties related to an investment. For the purpose of evaluating the future of an investment in a market which is still emerging, such as the biofuels sector, a more sophisticated approach is required. The Sensitivity Analysis data in the SVA tool is allowing an estimation of the impact on the corporate value of Verenium Corporation if any of the projected variables were to change by 10% in either a positive or negative direction. Variable Sales Growth Rate Operating Profit Margin Cash Tax Rate

Pessimistic (-10%)

Expected

Optimistic (+10%)

Range

Corporate Value (th)

Range

Corporate Value (th)

Range

Corporate Value (th)

4.9%

136283

5.4%

142065

5.9%

148076

126925

20.5%

142065

22.5%

18.4%

Pessimistic (+10%)

Expected

146195 Optimistic (-10%)

12.8%

140793

11.7%

142065

10.5%

143336

IWCI

0.9%

142043

0.8%

142065

0.7%

142086

WACC Variables Combination

5.1%

137290

4.6%

142065

4.1%

147045

$127,063,600

$144,632,300

$170,989,000

Figure 12 The calculations in Figure 12 lead to the following conclusions:  The Sales Growth Rate and Operating Profit Margin variables have significant impact on the company’s value.  An Operating Profit Margin decrease by 10% would reduce the company’s value by $20m, while a 10% increase would elevate the value only by $4m. For this reason, measures need to be put in place to maintain a consistently increasing Operating Profit Margin, as decreases in this variable significantly reduce the company’s value.  None of the pessimistic scenarios for any of the variables provide a negative value for Verenium Corporation. More importantly, all values in the Pessimistic column are still higher than the firm’s current value derived via the Market

Page | 28

approach in point 1 ($24m-$44m range via the Weighted Valuation Multiples method; and a $60m-$73m range via the High Valuation Multiples). The application of a standard Scenario Analysis approach further informs whether an acquisition of this company is desirable. By combining all variables in a single scenario (a 10% negative change for each variable in a Pessimistic scenario and a 10% positive change for each variable in an Optimistic scenario) we arrive at $127m and $170m respectively. Both the Sensitivity and Scenario Analysis highlight the fact that the value of the company will increase significantly over the next decade. An investment is therefore strongly recommended.

VI. BP CORPORATE GOVERNANCE 1. Overview and Assessment A key step in assessing whether BP will be able to manage successfully the recommended change in strategy, is by examining whether it has proper Corporate Governance in place. BP’s Board Performance Report published in 2013 (BP, Board Performance Repoer) provides the following data: Total number of Board members: 14 Chairman: Carl-Henric Svanberg CEO: Bob Dudley Group Chief Financial Officer: Dr Brian Gilvary Chief executive, Downstream: Iain Conn Non-executive directors: Paul Anderson, Antony Burgmans, Admiral Frank Bowman, Cynthia Carroll, George David, Ian Davis, Professor Dame Ann Dowling, Brendan Nelson, Andrew Shilston and Phuthuma Nhleko. BP’s Senior Managers, referred to as “Executive team” in the report, are 8 in total and occupying the following positions: Group Chief Counsell – 1 individual Executive Vice President – 4 individuals Chief Operating Office – 2 individuals Chief Executive – 1 individual The UK standard on Corporate Governance dictates 2 key features of a functioning Board of directors: 1. There should be an equal number of Executive (ED) and Non-Executive Directors (NED). 2. The Chair of the board should be separate from the CEO. While BP has separated the Chair and CEO functions between 2 individuals, the ED to NED ratio is very low – 4:10. Looking further into BP’s repot the following analysis can be observed:

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An analysis by the UK Government from 2011 (‘Women on Boards’, 2011) of 100 Boards shows an average of 12.5% female board members. At the end of 2013 BP’s Board of Directors is scoring only 1.5% higher on gender diversity to the average from 3 years ago. The Geographic background chart shows a more balanced picture, where the UK and US have almost equal representation. An assessment of BP’s Board of Directors against OECD’s 6 Principles of Corporate Governance (OECD, 2004) provides further insight into the effectiveness of the company in maximising its shareholder value. The table below matches the OECD principles with BP’s own principles (BP, “Board Governance Principles”). OECD Principles

BP Board of Directors

I. Ensuring the Basis for an Effective Corporate Governance Framework

The Board "will have regard to economic, political and social issues and any other relevant external matters which may influence or affect the development of BP’s business".

II. The Rights of Shareholders and Key Ownership Functions

- The Board will engage in an appropriate dialogue with shareholders and seek to obtain the view of the shareholders as a whole - All directors will stand for re-election by shareholders each year - The Board will determine the terms of engagement and the level of remuneration paid to its members within the limitations approved by the shareholders. - All Committees report to the shareholders.

III. The Equitable Treatment of Shareholders IV. The Role of Stakeholders in Corporate Governance V. Disclosure and Transparency

No mention in BP's Governance Principles.

Safety, Ethics and Environment Assurance Committee to guard this principle. Financial performance, operating performance and governance publicly available via BP reports. http://www.bp.com/content/dam/bp/pdf/investors/bp_board_governance_principles.pdf http://www.bp.com/content/dam/bp/pdf/investors/board_performance_report_2013.pdf

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VI. The Responsibilities of the Board

“2.2 Strategy The Board will review and where appropriate determine the long term strategy (the Strategy) and the annual plan (the Plan) for BP based on proposals made by the GCE for achieving the BP Goal. 2.3 Monitoring The Board will monitor the decisions and actions of the GCE and the performance of BP including: (a) the implementation of, and performance against, the Strategy and the Plan; and (b) the exercise of authority delegated to the GCE. The Board will satisfy itself that: (a) the material risks to BP are identified and understood and that systems of risk management, compliance and control are in place to mitigate such risks; and (b) its expectations for the conduct of BP’s business and its employees are reflected in a set of values established by the GCE. 2.4 Succession The Board will ensure that systems and processes are in place for the succession, evaluation and compensation of the GCE, the Executive directors and other key members of senior management.”

The table above shows that BP is making an effort to structure its Corporate Governance around the accepted principles. 2. Strategy Risk and Mitigation In view of the suggested strategic direction (Acquisition of SG Biofuels in order to enter the jatropha biofuels market), the following risks can be identified: 1. The current owner, and founder of SG Biofuels, is critical to the operations and practices of the company and therefore future success is dependent on him to a large extent. 2. The optimistic projections for jatropha-based jet fuel might not match reality, if another more sustainable and economically viable option is developed. 3. The optimistic projections for biofuels in general might not match reality, as they are still in a research and development stage and despite the big demand they might not prove sustainable enough to support the aviation industry. If BP invests further in biofuels, these risks need to be acknowledged and minimised via Corporate Governance. Risk

Mitigation

1. Dependency on current owner

BP can turn this risk into an advantage if the current owner continues to act in a leading capacity for SG Biofuels. Historically SG Biofuels has been very driven to make jatropha-based fuel into success, but has been heavily reliant on funding and support external parties. BP's backing can eliminate the dependency on external funding or at least reduce it significantly, thus ensuring that BP will share both profits and risks with SG Biofuels. Beyond this arrangement, SG Biofuels and its current owner can be allowed independence in the way they conduct and manage their research (Agency Theory).

2. Jatropha: future success uncertainty

Through Corporate Governance BP can build a robust and efficient communication channel between its own biofuels R&D science centre in San Diego and SG Biofuels, thus securing resiliency in case 1 option proves ineffective. Constant feedback between the science teams will allow more options to be explored and even if 1 scenario proves unsustainable, it could be modified or enhanced much faster if the science teams do not work in isolation.

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3. Biofuels: future success uncertainty

Similarly to the point above, BP should build an efficient communication and feedback channel between its multiple science teams, in order to ensure optimal security for its biofuels research. In the worst case scenario, where biofuels cannot be developed to the extent where the aviation industry can exclusively rely on bio jet fuel, BP can optimise its exceptionally deep knowledge of fossil fuel and explore multiple alternatives of a fossil + biofuel combination which can still reduce CO2 emissions and prove to be economically viable while other CO2-free alternatives are being researched.

BP has a robust Corporate Governance structure in place which can be utilised to meet the risks involved with an investment in a company specialising in jatropha biofuel development.

VII.

RECOMMENDATION AND IMPLICATIONS

Following the analysis from the previous sections, it is recommended that BP enhances its biofuels portfolio by acquiring SG Biofuels, a company specialising in jatropha research and development. By undertaking this investment, BP will secure a territory not only in the market of 1 of the 3 main jet biofuels, but also in future partnership with Airbus – a leading aircraft manufacturer supporting SG Biofuels’ research. Out of the 3 main options (Algae, Jatropha and Camelina), jatropha is most aligned with BP’s strategy in biofuels development, and is therefore the least risky option, and the one associated with least costs. The valuation of a similar company from the Biotechnology sector (Verenium Corporation) and the subsequent Sensitivity and Scenario Analysis showed that an acquisition of this company will be profitable even in the unlikely event that sales growth rates decrease or become inconsistent. The prognosis that this sector will grow by 32.27% in the next 5 years and even further over the next decades makes it safe to assume that investing in a biofuels firm is highly recommended. The financial analysis shows that the acquisition of SG Biofuels for an amount within the range of $50m-$70m will likely double the invested amount within 10 years. However, since SG Biofuels and Verenium Corporation are not identical companies, the financial valuation in Section V should only be used as an informational assessment, and not as an accurate representation of SG Biofuels’ value. An acquisition of SG Biofuels should not be undertaken before an independent financial valuation of the company is conducted. An acquisition of SG Biofuels by BP will have the following implications:  BP will show deliberate effort to fulfil its environmental responsibilities as an oil and energy company, by expanding its existing biofuels portfolio. Following the reputational impact on the company after the Gulf of Mexico oil spill in 2009, and the criticism directed at all oil giants that efforts in Alternative energy are not enough, this will address the concerns that BP is uninterested in its impact on the environment.  In this unique stage of biofuels development, when they are still unsustainable but in high demand, an investment in SG Biofuels will show BP’s support in biofuels research, but also secure its future position in this market via the involvement of Airbus in SG Biofuels’ current project in Brazil.

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ď ś While this acquisition carries risk, it is the safest option for BP to pursue if it is to expand its current strategy on Alternative Energy. It also presents multiple opportunities in knowledge enhancement as it will involve a significant talent and intellectual property transfer. The recommendation based on the analysis in this project is that BP pursues an acquisition of SG Biofuels.

VIII. APPENDICES APPENDIX I LIST

OF DEMONSTRATION AND COMMERCIAL FLIGHTS POWERED BY BIOFUELS, WITH CORRESPONDING

LINKS TO SOURCE INFORMATION .

2009, 2009, 2010, 2011, 2011,

Algae Continental Airlines Japan Airlines EADS, Germany Continental Airlines Alaska Airlines

2008, 2009, 2009, 2010, 2011, 2011, 2011,

Jatropha Air New Zealand Continental Airlines Japan Airlines TAM Air China Interjet AeroMexico

2009, 2010, 2010, 2010, 2011, 2011, 2011, 2011,

Camelina Japan Airlines US Navy US Air Force US Navy Boeing Honeywell US Navy US Navy

APPENDIX II RESEARCH AND ANALYSIS CAMELINA BIOFUELS.

ON SUSTAINABILITY, EFFICIENCY AND VIABILITY OF

ALGAE, JATROPHA

AND

Algae Biofuels from algae: challenges and potential The future viability of algae-derived biodiesel under economic and technical uncertainties Viability Studies of Biofuels Jatropha Feasibility of Jatropha oil for biodiesel: Economic Analysis JOil shows yield improvements from large jatropha field trials Economics of biodiesel production from Jatropha oil ECONOMICS: JATROPHA BIODIESEL PRODUCTION Camelina MODELING THE PROFITABILITY OF CAMELINA SATIVA AS A BIOFUEL Biofuel Crop Sustainability ENHANCING ECONOMIC VIABILITY OF CAMELINA AS BIOFEEDSTOCK APPENDIX III SG BIOFUELS

INFORMATION.

Page | 33

SG Biofuels Company website Partnership with Airbus APPENDIX IV VERENIUM CORPORATION BALANCE SHEET (SOURCE: OSIRIS) Consolidated data

Cons

Cons (R)

Cons

Cons (R)

31/12/2012

31/12/2011

31/12/2010

31/12/2009

31/12/2008

th USD

12 months

Unqual

US GAAP

10-K

56,302

53,952

102,647

46,574

20,879

5,311

6,323

5,316

2,586

2,432

-579

129

290

171

367

597

495

258

319

241

5,293

5,699

4,768

2,096

1,824

Assets Total Current Assets Net Stated Inventory Raw Materials Work in Progress Finished Goods Inventory Prepayment and other Inv. Adj. Net Accounts Receivable

n.a.

10,577

11,371

6,708

6,558

8,051

Accounts Receivable

10,677

11,471

6,848

6,842

9,811

-100

-140

-284

-1,760

40,414

36,258

90,623

37,430

10,396

5,539

7,499

10,086

n.a.

2,694

2,500

2,938

n.a.

Total Cash & Short Term Investment Cash or Equivalent

34,875

28,759

87,929

24,844

7,458

34,875

28,759

87,929

24,844

7,458

Short Term Investment

n.a.

37,474

19,320

9,110

121,348

132,744

36,798

15,611

3,134

4,169

117,271

n.a.

1,560

Total Land Depreciation

n.a.

Net Stated land

n.a.

23,277

7,804

570

1,748

9,194

n.a.

Doubtful Accounts Others Other Current Assets Prepaid Expenses & Advances Deferred Charges

Fixed Assets Net Property, Plant & Equipment Land

Buildings Total Buildings Depreciation Net Buildings Plant & Machinery Plant & Machinery Depreciation Net Stated Plant & Machinery

n.a.

33,557

27,958

26,665

25,825

88,544

n.a.

Page | 34

Transportation Equipment

n.a.

Transportation Equipment Deprec. Net Transportation Equipment Leased Assets

n.a.

Leased Assets Depreciation Net Leased Assets

n.a.

6,412

4,106

n.a.

90,996

n.a.

-26,448

-24,257

-24,101

-23,404

-73,023

n.a.

Goodwill

n.a.

Other Intangibles

n.a.

Other fixed assets

676

3,709

5,976

117,179

15,473

Exploration

n.a.

Long Term Receivables

n.a.

Investments

n.a.

676

3,709

5,976

117,179

15,473

93,776

73,272

111,757

167,922

153,623

63,246

39,868

27,235

27,573

190,294

n.a.

-26,448

-24,257

-24,101

-23,404

-73,023

36,798

15,611

3,134

4,169

117,271

n.a.

Other Property Plant & Equipment Other Property Plant & Equip. Deprec. Net Other Property Plant & Equip. Accumulated Deprec., n.e.s. Intangibles

Long Term Associated Companies Investment Properties Other Long Term Assets Total Assets Memo Lines Property, plant & equipment at cost Revaluation of property, plant & equip. Accumulated depreciation Net property, plant & equipment Goodwill & intangibles Supplementary Data Consolidated data

Cons

Cons (R)

Cons

Cons (R)

31/12/2012

31/12/2011

31/12/2010

31/12/2009

31/12/2008

th USD

12 months

Unqual

US GAAP

10-K

Liabilities

Page | 35

Total Current Liabilities Loans Current Portion of LT Debt Current loans & overdrafts Trade Creditors

15,623

54,850

18,900

24,696

44,644

34,851

n.a.

8,837

34,851

n.a.

8,837

n.a.

7,573

8,543

8,631

4,690

15,921

8,050

11,456

10,269

20,006

19,886

Other Creditors

n.a.

Income Tax Payable

n.a.

Other Other Short Term Debt

Social Expenditure Payable Dividends Payable Other Current Liabilities Non Current Liabilities Total LT Interest Bearing Debt Bank Loans Debentures & Convertible Debt Lease Liabilities Other LT Interest Bearing Debt Other non-current liabilities Pension Fund Provisions

n.a.

8,050

11,456

10,269

20,006

19,886

47,500

8,295

89,687

168,675

148,671

46,881

7,135

88,011

105,756

130,391

24,861

88,011

105,756

130,391

n.a.

22,020

7,135

n.a.

619

1,160

1,676

62,919

18,280 n.a.

n.a.

Deferred Taxes

n.a.

Provisions

n.a.

5,175

Deferred Revenue

n.a.

619

1,160

1,676

7,268

1,105

n.a.

55,651

12,000

Total Liabilities and Debt

63,123

63,145

108,587

193,371

193,315

Total Shareholders Equity

30,653

10,127

3,170

-25,449

-39,692

Participation Shares

n.a.

Preferred Shares

n.a.

Other LT Non-Interest Bearing Debt Minority Interest

Share Capital Common Stock/Shares

Redeemable Preferred Shares Other

30,640

10,115

3,158

-25,461

-39,698

Share Premiums

612,884

610,572

609,133

604,571

573,863

Treasury Shares

n.a.

Revaluation Reserves Retained Earnings Other Shareholders Reserves Total Liabilities and Equity

n.a.

-582,244

-600,457

-605,975

-630,032

-613,561

n.a.

93,776

73,272

111,757

167,922

153,623

Page | 36

Number of Employees

111

n.a.

270

303

Total Debt

46,881

41,986

88,011

105,756

139,228

Total Long Term Debt

46,881

7,135

88,011

105,756

130,391

34,851

8,837

Net Assets

30,653

10,127

3,170

30,202

-27,692

Net Debt

12,006

13,227

80,912

131,770

Enterprise Value

39,617

40,720

40,410

133,631

191,156

Memo Lines

Total Short Term Debt

APPENDIX V VERENIUM CORPORATION INCOME STATEMENT (SOURCE: OSIRIS) Consolidated data

Cons

Cons (R)

Cons

Cons (R)

31/12/2012

31/12/2011

31/12/2010

31/12/2009

31/12/2008

th USD

12 months

Unqual

US GAAP

10-K

Total revenues

57,171

61,267

52,073

48,819

56,845

Gross sales

57,171

61,267

52,073

48,819

56,845

n.a.

57,171

61,267

52,073

48,819

56,845

Income statement

Adjustments/excise tax Net sales Other revenues Cost of Goods Sold Research & Development expenses Other Operating Items EBITDA Total Deprec., Amort. & Depletion Depreciation Amortization & Depletion

n.a.

-29,901

-33,133

-29,968

-25,574

-29,767

-15,060

-11,038

-6,198

-5,829

-12,702

11,711

-18,991

-27,662

-29,520

-34,528

23,921

-1,895

-11,755

-12,104

-20,152

-2,195

-1,348

-1,747

-2,355

-5,386

-2,195

-1,348

-1,747

-2,355

-5,386

n.a.

Operating Income After Depr. & Amort. Unusual/Exceptional Items

21,726

-3,243

-13,502

-14,459

-25,538

-30

12,406

-2,786

12,923

-118

Earnings Before Interest & Tax Financial Revenue

21,696

9,163

-16,288

-1,536

-25,656

Financial Expenses Financial P/L Other non Oper./Financial Inc./Exp. Earnings before tax

-567

-24

1,000

957

-2,086

-3,088

-7,457

-11,105

-9,820

-2,653

-3,032

-7,481

-10,105

-8,863

-548

-869

-145

5,277

-121

18,495

5,262

-23,914

-6,364

-34,640

Page | 37

Income taxes Earnings after tax Minority interest Other Extraordinary items after tax Preferred dividends Net Profit Ordinary dividends Dividend share capital other

-226

368

9,748

18,269

5,630

-14,166

-6,364

-34,640

n.a.

-56

-112

34,099

-15,527

-141,850

n.a.

18,213

5,518

19,933

-21,891

-176,490

n.a.

Memo Lines Personnel Expenses

n.a.

Amortization of Goodwill Pre-Tax

n.a.

Operating Profit Discontinued Op. Dividend Received

n.a.

Order Backlog

n.a.

Monetary Correction

n.a.

APPENDIX VI VERENIUM CORPORATION CASH FLOW STATEMENT (SOURCE: OSIRIS) Cash Flow Statement Consolidated data

Cons

Cons (R)

Cons

Cons (R)

31/12/2012

31/12/2011

31/12/2010

31/12/2009

31/12/2008

th USD

12 months

Unqual

US GAAP

10-K

18,213

5,518

-5,350

-56,240

-188,990

2,195

1,348

1,747

2,355

5,386

n.a.

Operating Cash Flows Net Income Depreciation Depletion Depreciation/Depletion

2,195

1,348

1,747

2,355

5,386

Amortization of Intangibles

n.a.

Amortization of Acquisition Costs Amortization

n.a.

Deferred Taxes Accounting Change

Page | 38

Discontinued Operations Extraordinary Item Unusual Items Purchased R&D Equity in Net Earnings/Loss Other Non-Cash Items Non-Cash Items

-242

-1,074

-41,306

8,930

n.a.

107,413 n.a.

-30,710

-13,948

2,931

-18,200

-3,360

n.a.

1,149

839

-7,943

7,257

15,655

-29,803

-14,183

-46,318

-2,013

119,708

Cash Receipts

n.a.

Cash Payments

n.a.

794

-4,663

-39

1,554

384

1,012

-1,007

-2,730

-228

3,478

Accounts Receivable Inventories Prepaid Expenses

n.a.

Other Assets

110

1,165

2,894

694

577

Accounts Payable

n.a.

Accrued Expenses

n.a.

-357

-2,929

8,020

-3,720

1,344

n.a.

Payable/Accrued Taxes Payable Other Liabilities

-2,471

3,175

309

-1,484

-969

Other Assets & Liabilities, Net Other Operating Cash Flow

n.a.

Changes in Working Capital

-912

-4,259

8,454

-3,184

4,814

-10,307

-11,576

-41,467

-59,082

Total Cash from Operating Activities Consolidated data

Cons

Cons (R)

Cons

Cons (R)

31/12/2012

31/12/2011

31/12/2010

31/12/2009

31/12/2008

th USD

12 months

Unqual

US GAAP

10-K

-10,046

-5,396

-1,554

-1,016

-2,985

n.a.

Investing Cash Flows Purchase of Fixed Assets Purchase/Acquisition of Intangibles Software Development Costs

n.a.

-10,046

-5,396

-1,554

-1,016

-2,985

Acquisition of Business

n.a.

Sale of Business

n.a.

Sale of Fixed Assets

n.a.

31,183

96,026

141,311

Capital Expenditures

Sale/Maturity of Investment Investment, Net

5,700

-3,200

5,400

-360

-10,040

Purchase of Investments

n.a.

-132,127 n.a.

Sale of Intangible

n.a.

Intangible, Net

n.a.

Other Investing Cash Flow

n.a.

-3,375

-4,400

-43,649

36,883

-3,200

98,051

-4,760

-44,505

Other Investing Cash Flow Items, Total

Page | 39

Total Cash from Investing Activities Consolidated data

26,837

-8,596

96,497

-5,776

-47,490

Cons

Cons (R)

Cons

Cons (R)

31/12/2012

31/12/2011

31/12/2010

31/12/2009

31/12/2008

th USD

12 months

Unqual

US GAAP

10-K

Other Financing Cash Flow

n.a.

28,608

77,860

16,190

Financing Cash Flow Items

n.a.

28,608

77,860

16,190

n.a.

Financing Cash Flows

Cash Dividends Paid Common Cash Dividends Paid Preferred Total Cash Dividends Paid

n.a.

Sale/Issuance of Common

501

12,749

1,432

Repurchase/Retirement of Common Common Stock, Net

n.a.

501

12,749

1,432

Sale/Issuance of Preferred

n.a.

Repurchase/Retirement of Preferred Preferred Stock, Net

n.a.

Sale/Issuance of Common/Preferred Repurch./Retirement of Common/Preferred Options Exercised

n.a.

Warrants Converted

n.a.

Treasury Stock

n.a.

501

12,749

1,432

n.a.

n.a. 50,365

Issuance (Retirement) of Stock, Net Short Term Debt Issued Short Term Debt Reduction Short Term Debt, Net Long Term Debt Issued

n.a.

-34,978

-38,645

-20,568

-1,154

-2,700

-10,915

-39,000

-20,568

-1,154

47,665

Total Debt Issued

n.a.

Total Debt Reduction

n.a.

Issuance (Retirement) of Debt, Net

-10,915

-39,000

-20,568

-1,154

47,665

Total Cash from Financing Activities

-10,414

-38,998

8,055

89,455

65,287

Long Term Debt Reduction Long Term Debt, Net

Consolidated data

Cons

Cons (R)

Cons

Cons (R)

31/12/2012

31/12/2011

31/12/2010

31/12/2009

31/12/2008

Page | 40

th USD

12 months

Unqual

US GAAP

10-K

n.a.

Balance Foreign Exchange Effects Net Change in Cash

6,116

-59,170

63,085

24,597

-41,285

Net Cash - Beginning Balance

28,759

87,929

24,844

7,458

48,743

Net Cash - Ending Balance

34,875

28,759

87,929

32,055

7,458

Consolidated data

Cons

Cons (R)

Cons

Cons (R)

31/12/2012

31/12/2011

31/12/2010

31/12/2009

31/12/2008

th USD

12 months

Unqual

US GAAP

10-K

1,986

3,386

4,090

4,838

8,947

n.a.

2,195

1,348

1,747

2,355

5,386

n.a.

Supplementals Cash Interest Paid, Supplemental Cash Taxes Paid, Supplemental Depreciation, Supplemental Reported Cash from Operating Activities Reported Cash from Investing Activities Reported Cash from Financing Activities

APPENDIX VII VERENIUM CORPORATION STOCK PRICE

DATA

(SOURCE: OSIRIS)

General information No of outstanding shares (31/10/2013):

12,788,544

Current market capitalisation (th USD):

51,026

(based on stock price on 31/10/2013) Security information Type of share:

Ordinary Shares

ISIN number:

US92340P2092

SEDOL number:

2544971

Ticker symbol:

VRNM

Page | 41

Nominal value (USD):

0.00

Stock exchange(s) listed:

NASDAQ National Market Boerse Berlin Boerse Frankfurt Boerse Munchen Boerse Stuttgart

Market price - Year (USD)

2013

2012

2011

2010

2009

2008

Market price - January

2.36

2.66

3.00

5.20

14.87

49.20

Market price - February

2.46

2.82

3.27

5.43

4.54

35.88

Market price - March

2.58

4.15

3.04

5.06

3.48

42.24

Market price - April

2.30

4.32

2.91

4.13

4.08

36.00

Market price - May

2.24

3.58

2.12

3.17

7.20

28.80

Market price - June

2.24

3.13

1.75

2.35

9.12

23.16

Market price - July

2.18

4.40

1.60

2.49

6.96

24.12

Market price - August

2.35

3.15

3.13

3.05

7.33

27.12

Market price - September

3.97

3.25

2.40

3.29

6.84

11.28

Market price - October

3.99

2.48

2.52

3.83

3.81

12.24

Market price - November

n.a.

2.20

2.65

3.25

4.15

9.12

Market price - December

n.a.

2.16

2.18

3.20

4.50

10.56

Stock split information Corporate event

Reverse stock split

Date of event

10/09/2009

Ratio

12.00

Cumulative ratio

12.00

Current market price (USD) Date of current market price

31-10-2013

Market price - Current

3.99

Market price - Year to date - High

4.00

Market price - Year to date - Low

2.00

Price trends (%) Date of current market price Price trends - Last week Price trends - 4 weeks Price trends - 13 weeks Price trends - Quarter to date

31-10-2013 n.a. 0.25 82.19 0.50

Price trends - Previous quarter to date

77.23

Price trends - Year to date

78.13

Price trends - 52 weeks

62.86

Page | 42

BETA Date of current beta calculation

25-10-2013

Reference index 1: DOW JONES INDUSTRIAL AVERAGE Ref. index 1 - Beta - 1 month

0.10

Ref. index 1 - Beta - 3 months

-2.05

Ref. index 1 - Beta - 1 year

-0.42

Ref. index 1 - Beta - 3 years

0.83

Ref. index 1 - Beta - 5 years

1.08

Ref. index 1 - Correlation coefficient - 1 month

0.40

Ref. index 1 - Correlation coefficient - 3 months

-0.19

Ref. index 1 - Correlation coefficient - 1 year

-0.07

Ref. index 1 - Correlation coefficient - 3 years

0.20

Ref. index 1 - Correlation coefficient - 5 years

0.16

Reference index 2: NYSE COMPOSITE INDEX Ref. index 2 - Beta - 1 month

n.a.

Ref. index 2 - Beta - 3 months

n.a.

Ref. index 2 - Beta - 1 year

n.a.

Ref. index 2 - Beta - 3 years

n.a.

Ref. index 2 - Beta - 5 years

1.05

Ref. index 2 - Correlation coefficient - 1 month

n.a.

Ref. index 2 - Correlation coefficient - 3 months

n.a.

Ref. index 2 - Correlation coefficient - 1 year

n.a.

Ref. index 2 - Correlation coefficient - 3 years

n.a.

Ref. index 2 - Correlation coefficient - 5 years

0.19

Reference index 3: NASDAQ-100 Ref. index 3 - Beta - 1 month

0.05

Ref. index 3 - Beta - 3 months

-1.08

Ref. index 3 - Beta - 1 year

-0.18

Ref. index 3 - Beta - 3 years

0.72

Ref. index 3 - Beta - 5 years

0.83

Ref. index 3 - Correlation coefficient - 1 month

0.21

Ref. index 3 - Correlation coefficient - 3 months

-0.12

Ref. index 3 - Correlation coefficient - 1 year

-0.03

Ref. index 3 - Correlation coefficient - 3 years

0.21

Ref. index 3 - Correlation coefficient - 5 years

0.14

Reference index 4: DOW JONES COMPOSITE AVERAGE Ref. index 4 - Beta - 1 month

0.10

Ref. index 4 - Beta - 3 months

-2.06

Ref. index 4 - Beta - 1 year

-0.48

Ref. index 4 - Beta - 3 years

0.79

Page | 43

Ref. index 4 - Beta - 5 years

1.03

Ref. index 4 - Correlation coefficient - 1 month

0.35

Ref. index 4 - Correlation coefficient - 3 months

-0.21

Ref. index 4 - Correlation coefficient - 1 year

-0.08

Ref. index 4 - Correlation coefficient - 3 years

0.20

Ref. index 4 - Correlation coefficient - 5 years

0.16

Reference index 5: NASDAQ COMPOSITE Ref. index 5 - Beta - 1 month

0.05

Ref. index 5 - Beta - 3 months

-0.84

Ref. index 5 - Beta - 1 year

-0.11

Ref. index 5 - Beta - 3 years

0.76

Ref. index 5 - Beta - 5 years

0.84

Ref. index 5 - Correlation coefficient - 1 month

0.23

Ref. index 5 - Correlation coefficient - 3 months

-0.09

Ref. index 5 - Correlation coefficient - 1 year

-0.02

Ref. index 5 - Correlation coefficient - 3 years

0.22

Ref. index 5 - Correlation coefficient - 5 years

0.15

Equity price volatility Date of Equity price volatilty

25-10-2013

Equity price volatility - 360 days

0.68

Equity price volatility - 100 days

1.05

Equity price volatility - 50 days

1.16

Equity price volatility - 30 days

1.41

Equity price volatility - 10 days

0.03

31/12/2012

31/12/2011

31/12/2010

31/12/2009

31/12/2008

1.52

4.98

2.02

n.s.

3.97

9.12

4.20

n.s.

- low -

1.44 2.71

3.09 6.10

1.36 2.78

n.s. n.s.

65.96 69.50 25.17 36.96

20.07 32.41 10.97 16.39

49.43 73.57 23.79 35.95

n.s. n.s. n.s. n.s.

Price / cash flow ratio close

1.35

4.00

1.86

-2.70

-0.35

Dividend yield - close Dividend yield - high Dividend yield - low

0.00 0.00 0.00

Price / earnings ratio close Price / earnings ratio high Price / earnings ratio Price / earnings ratio average high-low Earnings yield (%) Earnings yield (%) Earnings yield (%) Earnings yield (%) average high-low

- close - high - low -

Page | 44

Dividend yield - average high-low

0.00

Dividend payout per share

0.00

Price / book value close Price / book value high Price / book value low Price / book value average high-low

ratio -

0.90

2.72

12.72

-2.07

-1.50

ratio -

2.36

4.97

26.44

-8.56

-9.01

ratio -

0.86

1.68

8.55

-0.04

-0.87

ratio -

1.61

3.33

17.49

-4.30

-4.94

0.90

2.72

12.72

-2.07

-1.50

Market Capitalisation / shareholders funds

APPENDIX VIII Section I. Executive Summary II. Introduction 1. About BP 2. Current Strategy III. BP Analysis 1. External Analysis 2. Internal Analysis 3. International Business 3. Unique Competing Space 4. Strategic Opportunity IV. Strategy Formation 1. Growth Strategy 3. Strategic Options Evaluation V. Corporate Finance: Valuation 1. Base Valuation 2. Scenario Analysis VI. Corporate Governance 1. Overview and Assessment 2. Strategy Risk and Mitigation VII. Recommendation and Implications VIII. Reflection and Conclusion IX. Appendices (not included) X. References TOTAL

Word Count 476 717 312 405 3092 911 737 288 649 507 2565 1124 1441 2428 2032 396 1121 676 445 456 117 3461 299 11271

% of Total Word Count 4 6 3 4 27 8 7 3 6 4 23 10 13 22 18 4 10 6 4 4 1 3 100

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IX. REFERENCES Bloomberg (2014), “Oil Industry Risks $1.1 Trillion of Investor Cash” http://www.bloomberg.com/news/2014-05-07/oil-industry-risks-1-1-trillion-of-investorcash-study.html International Energy Agency, “World Energy Outlook 2013”, p4 and p7 http://www.iea.org/publications/freepublications/publication/WEO2013_Executive_Sum mary_English.pdf Institute of Mechanical Engineers , “When will oil run out” http://www.imeche.org/knowledge/themes/energy/energy-supply/fossil-energy/whenwill-oil-run-out BP (2014), BP Energy Outlook 2035, p13 and p17 http://www.bp.com/content/dam/bp/pdf/Energy-economics/EnergyOutlook/Energy_Outlook_2035_booklet.pdf Birchall and Tovstiga (2005), Portfolio approach to capability management Barney, J B & Hesterley, W S (2006) Strategic Management and Competitive Advantage. Upper Saddle River, NJ: Pearson Prentice Hall Henley Business School (2013), ‘Strategy and International Business’ Module Core, p98 Tovstiga. G (2013) Strategy in Practice, 2nd ed. Chichester: John Wiley & Sons Air Transport Action Group (2014), Facts and Figures http://www.atag.org/facts-and-figures.html Henley Business School (2013), ‘Strategy and International Business’ Module Core, p29 Drucker, P F (1994) The theory of the business. Harvard Business Review, Sep/Oct, 95–104 Porter, M E (1985) Competitive Advantage. New York: Free Press Henley Business School (2013), ‘Strategy and International Business’ Module Core, p67 Ansoff, I (1988) The New Corporate Strategy. New York: John Wiley & Sons Henley Business School (2013), ‘Strategy and International Business’ Module Core, “Diversification Strategies”, p70 Henley Business School (2012), ‘Strategic Innovation’ Elective Pathway, p11 and p26 Birchall, D W & Tovstiga, G (2005) Capabilities for Strategic Advantage. Basingstoke: Palgrave Macmillan

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Thompson, J & F Martin (2010) Strategic Management: Awareness and Change, 6th ed. London: Thomson Henley Business School (2013), ‘Strategy and International Business’ Module Core, p73 BP (2014), “Our Values” http://www.bp.com/en/global/corporate/about-bp/company-information/ourvalues.html Henley Business School (2013), ‘Corporate Finance and Governance’ Module Core, p21 Henley Business School (2012), ‘Valuation of SMEs’ Elective Pathway, p22 US Treasury Bonds http://www.treasury.gov/resource-center/data-chart-center/interestrates/Pages/TextView.aspx?data=yield Brealy, Myers and Allen (2011), ‘Principles of Corporate Finance’, p273 BP (2014), Board Performance Report 2013 http://www.bp.com/content/dam/bp/pdf/investors/board_performance_report_2013.pdf UK Government (2011), ‘Women on Boards’ https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/31480/ 11-745-women-on-boards.pdf OECD (2004), OECD Principles of Corporate Governance. Paris: OECD BP Board Governance Principles http://www.bp.com/content/dam/bp/pdf/investors/bp_board_governance_principles.pdf

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