ConocoPhillips Internal Business Analysis - Essay Example

The energy industry is going through some changes and companies in this market need to adapt to remain successful. Petroleum the raw material which has dominated the production in the market is at the middle of a controversy due to the war and its worldwide supply is becoming scarce. ConocoPhillips Corporation is a giant in this industry and is ranked the third largest integrated energy company in the world. The purpose of this report is to evaluate this company by providing an internal analysis which focuses on key competitive advantages, distinctive competency and a functional analysis. ConocoPhillips Corporation was founded in 1875 as Continental Oil and Transportation Co. which at that time was one of the first Petroleum makers (ConocoPhillips, 2007). The company has grown a lot in 132 years and in 2006 it had annual sales of over $188 billion, operates in over 40 countries and employees nearly 38,000 people. It is a publicly traded fortune 500 company that has achieved tremendous growth during the 21st century. Its main line of business includes petroleum production and refining, natural gas, chemicals and plastics. The company is recognized worldwide for its technological expertise, deepwater exploration and production, reservoir management and exploitation, 3D seismic technology, high-grade petroleum coke upgrading and sulfur removal (ConocoPhillips, 2007). The company has a very strong crude oil, natural gases and liquid gases operation. It is its strongest line of business. In 2006 the company produced 976,000 barrel of crude oil per day (DB), 4.97 billion cubic feet of gas per day (BCFC), and 136,000 DB of gas liquids daily (Annual Report, 2007). The company has a competitive advantage in this market because they control all sides of the supply chain. They explore, produce, refine, distribute and market the product. They have great logistics which is helped by its physical presence in 40 nations. They own 69.5 million net developed and underdeveloped acres of land in 23 countries for production and exploration purposes (Annual Report, 2007). ConocoPhillips Corporation extended its market share in the natural gases market by acquiring Burlington Resources. The move was also extremely beneficial because it allowed the company to gain access to life-long reserve of natural gases in the North American market. The company has some weakness and faces certain threats related to industry conditions. As a publicly traded company ConocoPhillips Corporation has lost access to direct foreign investments funds due to the fact that these form of capital injection are prohibited in many countries to public companies. The political instability of the Middle East region has made it very hard to start new ventures in this area, which is a prime location for companies in the energy industry due to the large amounts of petroleum reserves in the area. The crude oil business is in a mature stage, thus companies in this industry face intense global competition due to the large amounts of companies in the business. Inflation in materials and services in this industry has lowered margins. Two key materials for players in this industry, concrete and steel, have dramatically increased in price during the last three years due to world wide expansion in energy activity and strong growth in developing countries (Annual Report, 2007). Regulation and public policies have also hurt companies in this industry. Research and development is seen as an important function at ConocoPhillips. The company made great progress with renewable diesel fuel technologies. It is a great opportunity for the company that can generate a lot of future sales. The company’s R&D efforts are helping them develop new business opportunities in areas such as carbon generation; carbon to liquid; technology solutions such as sulfur removal; and alternative energy programs involving heavy oils and biofuels. A weakness within the company’s R&D program is the lack of solar energy, battery powered initiatives and other renewable solutions. These are two key technologies which will replace petroleum as key ingredient to provide energy to cars and homes. Petroleum is projected to still be the main source of energy by the year 2030 with 34% of the market which is only a 4% decrease from 38% it held in 2004 (International Energy Outlook, 2007). The company’s R&D efforts should look beyond the 20 years in the future; it should be creating solutions for the market 35 to 50 years from now. A positive sign of the R&D efforts of ConocoPhillips was an increase of 50% in the budget of the department (Annual Report, 2007). An example of innovation of the company’s Research and Development efforts is an alliance the company formed with Tyson Foods to produce and market diesel fuel from pork, poultry, and beef fat (Krauss, 2007). The refining operation of the company is a key revenue generator for the company. It enables the company to provide gasoline, distillates and aviation fuel to over 13,000 outlets in the United States, Europe and the Asian Pacific Region (Annual Report, 2007). Having a presence in so many outlets indirectly contributes to the company’s marketing efforts. The company utilized different branding strategies for its products depending on the region. In the United States the company products are marketed under the Phillips 66, Conoco and 76 brands. In Europe and Asian Pacific Region the company brands its products as JET and ProJET. ConocoPhillips is a socially responsible company that has donated over $48 million to efforts such as the Indian Ocean Tsunami and Katrina victim relief (ConocoPhillips, 2007). ConocoPhillips has a very sound financial strategy which has helped them achieve a market capitalization of $186 billion. The company has a tremendous dividend policy of providing its stockholders annual increases in dividends. This has made its common stocks very popular among investors. During October 2005 the price of its common stock was $60 per share, as of July 17, 2007 the price of the stock was $87.23 (Yahoo, 2007). This represents an increase of over 45% in price of the stock. Appendix A illustrates the financial statements of the company for the year 2006 and appendix B illustrates a ratio analysis of the company. The overall sales of the company increased by 3% in 2006 and its profitability improvement were even better with an increase of 15% in net income. The natural gas sales were one of the best business lines with an increase of 57%. One weakness of the financial results was a 3% reduction in sales of US automobile gasoline and distillates sales. ConocoPhillips return on equity is 33% higher than the industry and its return on assets is 71% higher. This demonstrates the company has invested its capital well. The company’s level of debt is 79% lower than its competitors. . The organizational structure is the classical or functional structure which is suitable for the company because of the large size of its labor force. As a public company ConocoPhillips has a management structure which starts with the board of director. They have an established code of business ethics & conduct. Its legal division helps the company in matters such as contractual arrangements, commercial matters, intellectual property protection, defending litigations and prosecuting claims (Annual Report, 2007). The company’s customer service is controlled by a global system that interconnects the information system of all PhillipConoco facilities. The Human Resources department, lead by Carin Knickel, prides itself in developing its human capital. The department utilizes the internet to provide training for employees. ConocoPhillips Corporation is a successful global enterprise that has operated for over 132 years in the petroleum and gas business. Their success is based on owning the entire supply chain of a gas operation, diversifying into other areas such as chemical products, and strong research and development commitment. They value a lot their employees and stockholders. Its dividend policy of annually increasing the dividend payout has helps its common stock price rise 45% during the last two years. A strong common stock helped the company raise capital without incurring in a lot of debt. This company has survived for a lot of years and its innovative ideas and global presence will ensure the long term future of ConocoPhillips. References Annual Report (2007). ConocoPhillips 2006 Annual Report. Retrieved July 16, 2007 from http://www.conocophilliips.com ConocoPhillips (2007). Corporate website. Retrieved July 16, 2007 from http://www.conocophillips.com Duns & Bradstreet (2007). Industry Ratios – Petroleum and Gas. Retrieved July 17, 2007 from Duns & Bradstreet database. International Energy Outlook (2007). World Energy and Economic Outlook. 6. Kraus, C. (2007). Tyson Foods and ConocoPhillips to Produce Diesel Fuel from Animal Fat. The New York Times Retrieved July 16, 2007 from http://select.nytimes.com/gst/abstract.html?res=F30A1FF83A5B0C748DDDAD0894DF404482&n=Top%2fNews%2fBusiness%2fCompanies%2fConocoPhillips Yahoo.com (2007). Yahoo – Finance (COP). Retrieved July 16, 2007 from http://finance.yahoo.com/q/bc?s=COP&t=2y Appendix A: 2006 Income Statement ConocoPhillips (Annual Report, 2007) Appendix B: 2006 Balance Sheet ConocoPhillips (Annual Report 2007) Appendix C: Ratio Analysis ConocoPhillips (Duns & Bradstreet, 2007) (Yahoo, 2007) Read More