The Financial Performance of the Companies - Essay Example

? Management Investigation and report Table of Contents Executive Summary 3 Introduction 3 About the Companies 4 Financial Performance of the Companies 5 Macroeconomic Analysis 7 SWOT Analysis 9 Research Analysis 9 Summary of the Situation 10 Recommendations 10 Conclusion 14 References 16 Bibliography 19 Appendix 21 Executive Summary The main aim of this research is to compare the various oil and energy companies and its impact on the field. The report will include a thorough study of three major companies’ viz., Exxon-Mobil, Shell and BP as well as their comparisons. These are big oil-producing countries operating in almost every countries of the world. For better analysis and case study, a focus was made on the diversified communities worldwide while not restricting it to the U.S. head-quarters only. At the end of the study, the project draws a conclusion on oil and gas companies and its response to the complex and urgent sustainability issues. This report will be a crucial one to understand the future energy supply-demand balance.The report is prepared on the basis of consumer view-point, the catastrophes’ caused and data analysis. Firstly, the project makes an analysis of the three companies holding the leading positions in the market. Following this the macroeconomic analysis has been provided which is a reflection of PESTEL. An analysis has also been done with regards to the present financial performance of the three companies. PESTEL demonstrates the political, economic, socio-cultural, technological, environmental and legal factors which influence the companies. Finally, an analysis of the internal strengths, weaknesses, threats and opportunities are some of the factors based on which the strategies have been recommended for the three companies. Introduction Oil and natural gas account for one of the major requirements in the daily lives of people. More than 60% of a nation’s energy is provided by natural gases and oil. Apart from providing fuel to cars and heating homes, they help to generate electricity and provide the necessary power required for daily activities of people. The oil and natural gas industry has been booming and the world has not yet witnessed any oil shortage. However, there is real shortage of the cheap variety of oil which was taken for granted by the world at large since long. Since 2005 February, the world supply of oil has been flat. There has been 1.4% increase in its production since December 2007 (Arup, “Introduction”). Firstly the project analyses the position of the three leading oil and natural companies namely, Shell, BP, Exxon-Mobil. Firstly the macroeconomic analysis is done using PESTEL and then based on this analysis the respective strengths, weaknesses, opportunities and threats are determined. The three companies are analysed with respect to their financial performance and how the present global scenario has impacted that performance. Following from the research it aims to make a comparative analysis of the positions of the three companies in the market. About the Companies Exxon Mobil operates in about 41 countries and is one of the renowned Energy and Technology sources, striving to meet the increasing demand. The company claims, that it can opt for many challenges to meet the requirements of the evolving new supplies, intensifying efficiency yet preserving the environment. Technology will play a critical role in meeting these challenges. The company keeps an eye of various magazines trend analysis that’s required to figure out the global energy demand and supply in the future years. Also, it increases the global demand and supplies, keeping in mind the environmental hazards. Thus, by energy efficiency technique one can utilise the energy obtained and diminish the greenhouse gas emissions at a very manageable cost (Exxon Mobil, “Energy & Technology”). BP is operating in almost every continent, across 80 countries. It offers a variety of products and is best known for fuel and energy. The company boasts of building a hefty and robust production platform with the use of modernised technology. The company refines and processes crude oil into useable daily items. It works in harbour ports and airports all around the world. It makes every effort to make the provision of energy both from traditional sources as well as from new, alternative energies and technologies reliable sources (BP, “Finding Oil and Gases”). Shell is a global energy and petrochemicals company with round about 93,000 employees and operating in more than 90 countries in all the continents. The company claims that it tackles the challenges of building a future for new energy. The business motive is to extract crude natural gas and oil, mainly in joint ventures either with international or national oil companies. Natural gas is cooled and liquid gas is obtained thus providing cleaner burning fuels. Besides trading natural gas and power, Shell extracts bitumen –from mined oil sands thick and heavy oil) and converts it to synthetic crude oil. Shell generates electricity while developing wind power (The Shell Global homepage, “Our business”). Financial Performance of the Companies Shell’s financial performance was greatly influenced by the fluctuations in the oil prices across the world. “As a consequence, our after-tax net income in 2006 declined to RM258 million from RM522 million in 2005” (Shell, 2007, p.33). This fall was mainly attributable to the stockholding losses and the lower margins in refining in 2006; the refining margins were even more lowered because the increase in product prices did not commensurate with the increase with the price of oil. The sales turnover of the company can be demonstrated using the following figure. The company’s net earnings per share has shown a gradual increase and then fall since 2002 till 2006 (Please refer appendix 2). Figure 1: sales turnover (By Product) 2006 (Source: Shell, 2007, p.33) The financial performance of Exxon Mobil has also been steady over the years. It has been able to generate a strong income from an efficient capital base. This is demonstrated by the company’s return on the average employed capital verses their competition. The company’s sustainable financial performance has allowed it to emerge as a leader as the provider of the most reliable and affordable energy, in an environmentally safe and responsible manner. It has also allowed the company to deliver long term value towards its shareholders. This is represented by the total shareholders returns and the return on the average employed capital (Please refer appendix 3 & 4). BP has also shown steady and growing financial performance over the years. However, there has been a fall in the operating cash flow of the company (Please refer appendix 5). This reduction has been primarily caused due to the incident in the Gulf of Mexico. The incident also had an impact on the shareholders return. Dividends payments were cancelled and thus there was fall in the price of shares (BP-a, 2010, p.15). Macroeconomic Analysis The PESTEL analysis throws light on macro-economic factors influencing the operations of the three companies. The world has shown a recent fall in the number of oil industries. Some critics have blamed the US government in this matter. The Persian Gulf War has also been considered responsible for disrupting the supply of oil in the world. The American government has never the less maintained smooth flow of economic, national and energy activities. Both the democratic and the Republican parties in the US have emphasized on the utilization of renewable energy sources and efficient management of energy. The scenarios in places like Malaysia and Angola was even worse. Due to the reduction in the supply of energy companies are increasingly failing to meet the growing demand. Exxon Mobil has demonstrated significant loss of jobs due to this phenomenon. The oil spill in the Gulf of Mexico has also been responsible for disrupting the functioning of British Petroleum. Some of the environmental factors influencing the companies are as follows. A microbiological test was conducted to study two types of microbes. One that cannot self-synthesize food and depends on organic compound (mainly hydrocarbons) for obtaining minerals and the other is the oil-degrading microbes. It was found that addition of fertilizer resulted in a higher content of hexadecane and phenanthrene in the experimental design implemented plot compared to the one where no fertilizer was added. But with the further addition of fertilizer, a significant fall in the minerals was observed. Thus, a conclusion was deduced that it was due to the rise of microbiological contents, there was a significant rise in hydrocarbon caused by bio-degradable microbes; though these microbes are comparatively less than the waste or crude oil released (Lindstrom, et al., and p.2514). It utilizes the biomass in production of fuel as most developed countries prefer. Though bio-degradable oil is comparatively very costly, it is environment preserving. Thus, U.S. companies keep this in mind. Also it tries. All the three companies operating in US try to utilize solar, wind and wave forms, so as to preserve the natural resources. While energy saving is also done, at the same time, recycling of products (especially steel and rubber) can be a significant tool in preserving the natural resources for the future. Technology implemented in US to preserve natural resources (Source: New Production sources Biomass, p.18). The companies were also required to look into some of the legal factors. BP’s work on plugging up of its oil well in the Gulf of Mexico which involved drilling and cleaning was a duty that shifted from the engineers to the lawyers. Thus, a lawsuit worth $ 20 billion was filed and the federal panel judge took into account the numerous lawsuits filed by injured workers, hotel owners and fisherman as it was set to be one of the most complex legal cases. The defendants included Halliburton Co, Transocean Ltd, Mitsui & Co, Anadarko Petroleum Corp and Cameron International Corp. Thus, BP was forced to permanently shut down the Deepwater Horizon. Near about 300 lawsuits were filed against BP. Majority of them were restaurant owners, fishermen, retailers or others who have sued BP or its partners (Hals, p.1). SWOT Analysis The reason for providing SWOT analysis is for analyzing the internal strengths, weaknesses, opportunities and threats of the firms. The purpose is to specify the business objectives by identifying the internal strengths, weaknesses, opportunities and threats of the firms. This helps to identify the factors which are favorable or unfavorable for the operations of the business (please refer appendix for SWOT analysis of the three companies). Research Analysis As per the SWOT analysis of Exxon Mobil, it is seen that holding the leading position in the market accounts for one of the key strengths of the company. It has also demonstrated a stable financial performance throughout its growth path. However, the company's performance in the US market has not been very successful. There is also a lot of employee unrest in the organisation. Among the key opportunities confronting the company is the increased demand for liquefied natural gas in the world and also the demand for refined products. However, some of the threats faced by the company are the risks associated with conducting business operations. Also the company is faced with a number of environmental regulations. Most importantly, the economic downturn accounts for the one of the main factors behind the slowdown in its growth. The situation in BP is also somewhat similar. The company already holds one of the leading positions in the industry. Also the geographical presence of the company is large and wide. However, the company has demonstrated a gradual fall in its production of natural oil and crude oil. The company has also faced a lot of criticisms lately. However, the prospects for the company look bright because of the increase in demand for natural gases in North America. The company also has the option of investing in alternative business alternatives. However, it must be realised that the resources have become saturated in the North Sea and there is also instability in the oil producing regions. The company Shell also holds a favourable position in the market and has a number of resources in its advantage. However, it is seen that the organisation has not been able to perform well in areas of scarce resources. The growing demand for natural gases and oil all across the world gives favourable opportunities for the company. The company is also known for having a highly qualified and valuable human resource from majority of the well known universities in the world. This company is also faced with a number of environmental regulations which limits its operations to a considerable extent. Summary of the Situation Following from the study, it appears that the situation of all three companies is favourable. However, Exxon Mobil appears to be the strongest of them all. Holding a leading position in the market, the company also has a number of favourable factors which could be exploited for its growth. However, the common threat for all is the coming natural crisis which the entire world is being apprehensive about. Also the external environmental effects of these companies remain very high because of which they are subject to strict regulations. For this purpose their progress might get slowdown substantially. Also the business cycles have accounted for one of the major factors drawing oil prices considerably across the world and the threat still remains. Recommendations Based on the strengths, weaknesses, opportunities and threats faced by the three companies (Refer Appendix), recommendations are provided. The recommendations primarily cater to the kind of products and services that they can produce, the prices they can change and the main areas of investments that the companies must look into. One of the major concerns of the companies is to provide a shield against external shocks which reflects through their financial performance. For example, companies must try and keep maintain their share prices at a constant rate to maintain a constant return for the shareholders. One of the essential ingredients in the provision of services by an organization is the recruitment of appropriate people and staff. The staff must be chosen appropriately and guided in the right directions as per their skills and abilities. In this aspect they must also be provided the right training for delivering the right quality of services in the organization for it to maintain competitive advantage in the market. The product offered by Exxon are: - Lubricants and Specialties (among them are:- Passenger vehicle lubricant, Consumer vehicle lubricant, Mobil Industry lubricant, Exxon Mobil Marine lubricant, Exxon Mobil Aviation lubricant, Exxon Mobil Basestocks, Specialities and Asphalt) & Chemicals (Interpack 2011, Index11, SpectraSyn Elite Metattocene PAO, Polypropylene). It is recommended that the companies look for alternative sources of energy. This is because the energy sources have already been depleting and the world has been showing a crisis in its natural resources. Thus greater emphasis must be provided to. The products for the consumers as well as for business that are offered by BP are :- (Gas and Petrol stations, Gas and fuel cards, Liquidified Petroleum Gas, Motor oil and lubricants, Route and energy planner, Solar powered energy, Gas and petrol station locator, Target neutral, Air BP, ARCO Aluminium, Aromatics & Acetyls, Asphalt / Bitumen, BP Crudes, BP Franchising, BP Shipping, Gas and fuel cards, Gas and power energy, Industrial lubricants, Invoice tracking system, Liquidified Natural Gas, Liquidified Petroleum Gas, Marine fuels and lubricants, Natural Gas Liquids, Solar power for business). Products offered by the Shell Oil Corporation includes offers on the road service such as Card Services, Fuels, Loyalty, Oils, Shell station locator, solutions for business, LPG supply at home. Also, it has tie-ups with Ferrari and Ducati. It is seen that all these companies have been providing greater emphasis on products which are in demand in the market. However, little concentration is provided to the fact the energy sources are on the downfall. Thus, it is important that the companies try and use solar energy power for meeting consumer demands. Also the price of oil and natural gas has been raising rapidly all across the world. This is one of the reasons why nations across the globe have been demonstrating high rates of inflation. Thus The process used by the companies must also be adjusted to the situation. The present situation demonstrates a lot of disturbances in the sector. Recently there have been many oil spills which have incurred loss to the companies. The situation is similar with Exxon Company where a huge compensation as large as $500 million dollars was paid to the fishermen, canneries, local residents affected by the environment. Still the company works hard to allow a smooth flow of work, replacing pipelines wherever necessary (Faulkner, “Exxon Valdez fishermen’s claims process report to the fishing community in the gulf of Mexico BP oil spill”). It has been cited that the Shell reliability management cost saves about 8% maintenance costs per year. Still disaster happens and company follows more or less the same approach as the above two (Shell global solutions. “Shell’s risk and reliability management approach saves 8% per year in the maintenance cost of Stanlow”). This is where the importance of technology and making technological advancements come into play. The companies must emphasise more on technology and innovation. Greater attention must also be given to research and development for achieving innovative technology. This would be effective in cost reduction and would also save a lot of time. Most importantly, with the use of advanced technologies, the products and services would be available to the people at lower prices. This would consequently reduce the price of oil all over the world. The promotional campaigns undertaken by the company starts from the day of the launching of any new product or scheme. The company selects press meet as the top priority and apart from the campaigns on newspapers, magazines, TV, Internet, gift coupons are also issued with the purchase of various other goods. Lottery tickets are also provided while sometimes free service products are also provided to garner a new customer bases or retain existing ones. Promotional activities must be given greater priority. However, it must be ensured that such activities do not end up raising the price of the products. The aim must be to keep prices under control and not let it rise at any cost because this is the major cause of concern in the industry. All the three oil companies operate in almost all countries of the world. Each country has its own-website which boasts of national language customer care service. Even though it’s not head-quartered in the same country, its tries to offer the solutions to its customers with the same care world-wide. The U.S. people do not seem to have any complain against these companies, as these companies’ supplies as well as takes care of the socio-economic and environmental issues of the people (Exxon Mobil, “About us”). However, the company must look into the nations which have been providing complaints against it and try and uplift their image in those areas. The companies must not only rely on the American clients. They must try and widen their operations as much as possible so that in case of exigencies and external shocks they can rely on other nations. A study was conducted in these companies to reveal the importance of staff to design, source and sell. At the same time, the study was undertaken to look into how HR policies were working with regard to employee selection, training as well as motivating the Employee motivation. Exxon follows the government’s ethical policy while abiding by the government rules, laws regulations that are applicable to business. It follows local customs of that place. Conflicts among fellow workers are avoided. Also, it keeps general public up-to-date about the corporation plans, financial forecasts, discoveries, business forecasts, competitive bids, technological personnel and competitive bids. BP recruits people on the basis of merit, qualifications and skills irrespective of race, colour, religion, gender, age, national origin, sexual orientation, gender identity, marital status or disability. Shell respects the fact that its employees have the right to work in good and safe working conditions. It tries to create a competition among the employees, also give equal opportunity to each employee. Thus, they can develop their talent and skill and encourage more motivation and commitment from them (Exxon Mobil Corporation, Code of ethics and business conduct). Conclusion Though a number of measures are performed and latest technology has been implemented, it is not a time to over-look the past catastrophes. The Gulf of Mexico incident which occurred due to the leakage of gallons of crude oil, stills stands as a glaring example. Though through strict prohibition, fishing as well as consumption of sea-foods from the area has subsided, still the area is contaminated leading to various health problems. The incident has affected the financial performance of the companies. This is reflected through the fall in the operating cash flow of BP due to the crisis. We all wish these companies use a more safety measure and run a smooth business (The George Department. of Community Health, “BP Oil Spill”). Also the growing concern of depleting natural resources must not be overlooked. This is because this would eventually end up ruining the future prospects of the companies. Instead they must look towards finding alternative sources of energy. Greater emphasis must also be provided to research and technological innovation for the production of low cost technology. In other words, the aim should be to lower production costs and control the depletion and scarcity of natural resources in the world. References Arup. (2008). The Oil Crunch Securing the UK’s energy future. [Pdf]. Available at: http://www.arup.com/_assets/_download/4D6FF5E5-19BB-316E-408B503DFB26ADDB.pdf. [Accessed on April 16, 2011]. BP. (2011). BP Global. [Online]. Available at: http://www.bp.com/sectiongenericarticle.do?categoryId=9021489&contentId=7039991. [Accessed on March 29, 2011]. BP-a. 2010. Annual Report and Form 20-F 2010. [Pdf]. Available at: http://www.bp.com/assets/bp_internet/globalbp/globalbp_uk_english/set_branch/STAGING/common_assets/downloads/pdf/BP_Annual_Report_and_Form_20F.pdf. 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