By René Orij
Quote 1: “The jatropha ‘hype’ was financialized when the refinery manufacturer D1 Oils raised £11.5 million from their initial public offering in London Stock Exchange in October 2004, reaching a market capitalization of £72 million in September 2005”
Quote 2: “…D1 Oils’ dramatic collapse in the stock market after mid 2007…”.
This article contains a brief external analysis of the investment and reporting by D1 Oils plc (1) (D1) and its partner BP plc with regard to a once very promising alternative source of energy: the jatropha tree. When did BP and D1 publicly report that their jatropha investments had become worthless?
Investment analysis normally requires much detailed information on projected cash flows and the expected risk involved. These must have been difficult to assess at the time D1 offered its shares in an IPO (2) in 2004 to raise funds, as no track record on jatropha investments was available. BP got involved at a later stage, in 2007. Their indirect investments in plantations of this inedible crop were part of BP’s attempt at energy diversification. I try here to understand the timing of the valuation of the investments by both companies, the failure of the investments and the collapse in the stock market in the period 2007-2009.
The data discussed are found in publicly available sources: annual reports and accounts of BP and D1, and BP sustainability reports and press releases. The sequence, timing and consistency of the provision of numerical and narrative information on jatropha investments is analyzed using regulations for the provision of information on investments. In this analysis, I apply an interpretative financial-accounting research methodology (3).
The earliest available public information on D1’s investments in jatropha is found in their Annual Report 2004. Later, in 2007, BP and D1 started a cooperation to invest in jatropha through a joint venture (JV). In the period 2007-2008 BP released several statements on their investments in the JV. BP asserted the huge potential of the crop and proposed future investments in jatropha through the JV of $160 million (4), and in the wider field of alternative energy of $8 billion (5). General optimism about jatropha’s potential was confirmed by Goldman Sachs in 2007 (6), when they described jatropha as one of the most efficient biofuel crops.
The only information in BP’s publicly available reports concerning their jatropha investments was provided in 2007-2008, in the Annual Report 2007 and in several press releases. Following that, BP did not publish anything on the issue again. The value of the investment was too small to be mentioned by BP, according to accounting rules – under the materiality concept, small items can be ignored. Contrary to BP, D1 has provided information on the JV in many of their annual reports since 2004.
The valuation of the JV on D1’s balance sheet is a central issue in this analysis. In the JV’s founding year 2007, D1 Oil’s share in the JV was valued at around £15 million. BP must have calculated the same value for its stake in the JV , as both companies owned 50% of the JV. BP did not mention its stake in the JV, as it was too small to be mentioned separately. One year later D1’s balance sheet indicated a full-value reduction of the JV, which was explained by a large operational loss, combined with an impairment loss (7). According to International Financial Reporting Standards, an impairment is a write-off that is required due to the low recoverable amount of an asset. The recoverable amount is the highest amount from a direct sale, or the present value of the discounted cash flows of the asset – here, the value of the jatropha crop. This is a remarkable issue – in 2007 BP invested millions and these were fully written off a year later (according to D1). The exact reasons were not mentioned, but technically the reasons may be the lack of a market for the JV shares, increased risk, lowered cash flow expectations, or information asymmetries between the parties at the start of the JV.
D1’s narrative information provided between 2004 and 2010 explains some issues, but also shows contradictions. Until 2007 they had shown great confidence in jatropha yields. The Annual Report 2007 states, “Plant science operations to develop high-yielding varieties of jatropha [are] progressing well” (8). The 2008 report shows a turning point. It states – without explanation – that BP wanted to sell its stake in the JV and that there was a lack of interest from investors for this BP stake. Surprisingly, in the same year the report mentions the first production of crude jatropha oil. The same 2008 D1 narrative report confirms the earlier focus on the improvement of the jatropha yield and on maximizing the value of the JV, while stating, “We remain committed to developing jatropha, which remains the most attractive of the potential new oilseed crops” (9). Simultaneously, the numerical report provides the contradicting information on the full-value reduction of the JV.
Up to the end of 2008, D1 had raised more than £100 million in equity. After the impairment of the JV and many years of “cash-burning activities,” mentioned in the accounts as “administrative expenses” (10), not much was left of the value of D1 – no money, and no expectations. The share price of D1 plummeted between 2005 and 2007 from around £500 to £110. After the biggest relative drop in the second half of 2008, t the time of writing (11) shares list at £0.38. The post-crisis drop does not correspond with the changes of overall equity markets – D1’s share price drop was much steeper. The plummeting share prices paralleled the value D1’s investments suddenly lost.
Not much BP information can be studied, as it is almost non-existent, with the exception of a few press releases. The data provided by BP are one-sided – focusing only on the positive aspects of the JV. All the available BP information mentions the start of the JV with D1, but nothing is said about the follow-up. A logical explanation is that, for BP, the investments in the JV were too small to be mentioned. However, it may also be that BP only appreciated the positive impression created when announcing the jatropha investment, underscoring the company’s green policies.
D1 has changed its strategy. They are now called NEOS Resources, and focus on animal feed made from jatropha seeds.
- Since March 2013 called NEOS Resources plc.
- IPO stands for initial public offering.
- See Chua, W.F. (1986) Radical Developments in Accounting Thought, The Accounting Review, vol. 61, no. 4, , p. 615.
- Press release, June 29, 2007.
- Press release, November 8, 2007.
- Goldman Sachs, Food, “Feed and Fuels: An outlook on the agriculture, livestock and biofuel markets” (London, 2007).
- D1 Annual Report 2008, pp. 38-41.
- D1 Annual Report 2007, p. 1.
- D1 Annual Report 2008, p. 1.
- D1 annual reports 2003-2011.
- At June 19, 2013.
When did BP an D1 publicly report that their Jatropha investments had become worthless? by JARAK the short history of Jatropha projects in Indonesia, unless otherwise expressly stated, is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.