History of Shell Energy and Oil Company - Term Paper Example

Shell Energy and Oil Company History Shell oil and Energy Company is a multinational whose parent company is the Royal Dutch Shell. The company has invested in the energy segment being one of the major players in exploration, extraction and sale of the commodity. The company has expanded to other nations since its formation. The company has its stocks listed in various countries giving management funds to invest in its operation activities. The company is ranked first among competing companies in the energy. The company has a diverse work force employing locals in the countries where its branches are situated. The company has invested heavily on exploration, production and marketing of petroleum products in the local and international market. In America, the company is considered a market leader in the sale of petroleum products. This is attributed to the penetration of the brand with most of the gas stations in the country bearing the company’s logo (Kochan, Nick, and Goodyear 35). The management of the company over the years has changed the way the company operates. From its formation, the company has used mergers and acquisitions to expand its operations. Its partnership with major oil producers in Saudi Arabia has enabled the company to maintain a stable source of raw material for its products. The company has also collaborated with established brands in the market to ensure that market penetration is facilitated. The company history traces the origin of the company in the year 1833. Marcus Samuel who sold antiques and oriental shells expanded his small business into London. As the business expanded, he ventured into fashion and interior design. He imported his shells from the Far East, which laid the foundation needed for a successful business (Kochan, Nick, and Goodyear 214). Corporate structure The oil and energy company has employed workers from over 90 nations where most of the plants and outlets are situated. The management of the organization is dedicated to providing the customers with quality products extracted from natural resources in a safe manner. The management of the company is divided into the executive, managers, department heads and the workers. The company ensures that its workers contribute to the growth of the company (Mallin 161). The business in which the company undertakes is divided into three sections. The upstream section deals with exploration, extraction and manufacturing. The company is responsible for oil exploration in major oil producing nations. The company enters into a contract with the nations to charge a fee for exploration process. The company also obtains rights to drill in the nations where the natural gas deposits are found. Oil from the wells is processed in plants owned by the nation. Through the upstream section of the company, Shell is able to provide employment to people in foreign nations thus improving the GDP of the country. The company also provides quality products in the competitive energy business. The customers are able to choose from a wide selection of products. Upstream international covers major oil producing areas including Africa, Asia Russia and Europe. Shell is committed to ensuring that the methods of exploration, extraction and manufacturing used preserve the environment (Mallin 217). The downstream section of the company deals with marketing of the products owned by the company. The company has penetrated globally to ensure that its products are available to customers. The company uses a mix of marketing strategies to encourage customers to use products from the company. The company has been in the market for a long time thus the brand name Shell is strong. The company advertises its brand using all the media available to increase revenue generated. The downstream section of the business is responsible for revenue generation to the organization. The section also funds the major activities undertaken in the company. Projects and technology is one of the advances sections in the company that uses most of the company’s resources. The section is committed to testing the product and raw materials produced in the company. The main duty of the section is conducting research to ensure that the customers have quality products. The section also ensures that the company provides new innovative products to the customers to attract new customers and retain its market share. The section receives high funding to ensure that the company is competitive and adopts to the changing markets treads like the need for clean energy (Mallin 221). Company environment The company is not a monopoly thus it faces competition from various players in the energy sector. The competition can be classified into two. Direct competition from other companies such as BP pose a significant threat to the business. There are many competitors in the market thus; Shell spends most of its revenue on promotion and research. This results to low earnings for the investors who have bought the company’s stock. Shell Energy and Oil Company has been able to maintain a sizable market share due its strong brand name and its position as an innovative producer. Indirect compensation is due to the emerging trends in globe over environmental preservation. This has resulted in competition from other players in the sustainable energy sector. Customers are shifting to electric vehicles and solar power to reduce carbon emission. The company is reducing the effect of the competition by venturing into new products that are efficient and secure to the environment. The company is relatively safe from new entrants into the energy market due to the restrictive capital needed to enter the market (Davies 125). The company faces different political environments in the nations where branches are located. The political environment in African nation is affected by political stability due to presence of militia and civil war. In developed nation, the company faces political challenges related to passing bills that hider Shell’s operations like exploration and extraction. The legal environment, which the company exists, affects the business of Shell. The legal environment covers the lawsuits against the company by the competition, environmental agencies and the society. The company faces various lawsuits that have resulted in payment of damages further reducing shareholders profits. The environmental degradation caused by exploration of national gasses has caused the society to seek alternative sources of energy. The company faces social challenges and has turned to advertising, production of quality products participating in social events provide a favorable business environment. Shell also faces a challenging economic environment. The stability in the Middle East and African nations has affected the company’s ability to sale its products at a constant price. War in the Middle East causes an increase in the cost of production, which is translated, to the customer. The economic crisis in the US was felt by all major economies also affected Shell’s business. A decline in business was due to the use of alternative energy and a reduction in consumption of petroleum products. Fluctuation in the oil prices due to economic factors has been the cause of fluctuation of the revenue generated by the company. Investing in other sectors will stabilize the fluctuation (Davies 162). The technological environment that the company enjoys favors its operations. The changes in technology are the cause of increased efficiency in exploration and manufacturing process. The technology available today enables the company to detect natural gas deposits accurately and safely compared to a century ago. The technological environment also helps the company to reduce production expenses and increase shareholders profits. Technology has been used in the research done by the company to develop the quality of its products. The use of technology has also been implemented in marketing the product produced by the organization. The environment that the company exists determines its profitability. The company operates in various countries thus diversification of environmental factors that may affect one nation (Davies 174). Evaluation of financial data The financial reports of the company show how Shell has been generating revenue over the last five years. The income statement shows that the sales of the company have increased from 177.8 billion in 2007 to 293.29 billion in the year 2011. The sales have been on the upward trend with an exception of 2009, which showed a drop in the sales from the previous year. The decline in the sales in 2009 was attributed to a combination of factors including the recession. The sales growth in the year 2009 dropped by 28.7% from the previous year. The sales in 2011 grew by 23.03%, which shows an upward trend in the sales. The increase in sales is attributed to the increase in the global oil prices and fast growing economies in the global market. The expenses incurred by the company have been increasing with time. Amortization has grown from 6.12 billion in 2007 to 7. 09 billion British pounds. The fluctuation in the sales and other expenses to the company causes the fluctuation of the gross profit margin. The financial reports show a 1.7 gross profit margin. The company has also been experiencing financial growth over the five-year period, which is supported by the increase in sales revenue (Royal Dutch Shell PLC). The assets of a company are important to investors. The assets show the financial health of the organization. Shell’s assets include cash and short-term investments for short-term assets. The cash at hand has been fluctuating over the five-year period with 4.85 billion pounds recorded in 2007 and 2.95 billion pounds recorded in 2011. Short-term investments in 2007 have not been quantified in the company’s financial records. The general trend of short-term investments has been on the increase from 2009 to 2011. Short-term investments in 2011 being recorded as 4.31 billion pounds. The total current assets for the company have been on the increase. The assets enable the investors to evaluate the ability of the company to recover its expenses. 77.07 billion pound was recorded as the total current asset value in 2011. The current asset and fixed assets total to 222.16 billion pound as per the balance sheet in the year 2011. The balance sheet also shows an increase in the total assets over the five-year period (Royal Dutch Shell PLC). The financial reports also show the current and fixed liabilities. The liabilities show how revenue generated is spent in the organization. Shells total liabilities have been fluctuating with time. The total liabilities were 72.09 billion for 2007, 106.79 billion for 22008, 95.39 billion for 2009, 110.36 billion for 2010 and 112.13 billion for 2011. The company equity ratio to total assets shows that the operations of the company are highly dependent on outside borrowing. The ratio, which ranges from 46% in the tear 2007 to 49.1 % in the year 2011 shows that the company is gaining control of external borrowing. This shows that investor confidence has increased with time for the company. External borrowing is a negative financing option for any organization. External funding shows that the investors are not confident with the management. External funding also attracts a high interest rate, which is paid before the share holders are paid dividends (Royal Dutch Shell PLC). The financial reports also show the working capital of the organization. The working capital is the difference between the current assets and current liabilities. Shell PLC has maintained a working capital of 10 billion and 11 billion in the year 2007 and 2011 respectively. This is a significant working capital, which shows that Shell’s management is able to maintain sufficient funding to run the operations of the company. High figures of working capital show that the business is able to sustain its operational expenses. An incline in the number of assets is witnessed in all years recorded in the financial reports except 2009. An increase in the asset base will help the company increase its financial strength. The company also has more tangible assets than intangible assets. Over 65% of the company’s assets are held as tangible assets. The merit of this system is that the company is able to preserve its wealth. Intangible assets are prone to economic conditions and fluctuate with time (Royal Dutch Shell PLC). Financial reports are available in the company’s website to ensure transparency in the organization. The shareholders and potential investors can access the information necessary to make an informed decision. The financial reports have been interpreted to enable investors without the professional expertise to understand. The company also provides updated information for the investors for every financial year. The availability of the financial records to the customers is in accordance to the law to avoid investors losing their investments through fraud. The executive is liable for any misleading information provided in the company’s financial reports. The company also provides ratios that enable investors to make investment decisions. Investors can also consult investment agencies to get advice that will assist in decision-making (Bull 156). The financial reports in the company’s website also give a detailed explanation of the management and ownership of the company. The information about top managers enables investors to conduct research on the managers. Ownership evaluation helps to understand the dividend awarded to the members. The presence of external borrowing in the financial records shows investors that the divided awarded will be low due to borrowed capital. Apart from shareholders and potential investors, the financial reports can also be used by the workers to understand their future in the company. The workers are assets to the organization and the success of the organization and the job security of the workers are interdependent. Competition from other players in the market is likely to affect the organizations ability to maintain quality workers. The loss of quality workers will cause the company to lose trade secrets, which may affect business. The workers in Shell have interest in the financial reports, which the management has provided. The financial reports show that the performance of the organization is good considering the challenges the company faces (Bull 239). Understanding Shell Energy and Oil Company The size of the multinational and the growth rate are key in decision-making. A new board member should understand the volatile nature of the industry where the company is located. The increase in plant and equipment is alarming with the company spending 182.37 billion in 2010 and 190.18 billion pounds in 2010 for plant and equipment. The company should focus on the global trends that favor green energy. Spending large values on assets that are at risk of being obsolete in the future is a bad financial decision. The figure of bad debts in the year 2011 was recorded at 350.04 million pounds. Although bad debts are inevitable, the board members should ensure that their effect on the business is negligible. The management also has the obligation of ensuring that the company uses equity capital rather than borrowed capital. The fact that the company depends on borrowed capital is alarming. Investing in preference shares and outside funding drains the profits accruing to the shareholders. A decline in the dividends paid will result in a decrease in investors, which may affect the growth of the organization (Idowu, Samuel O, and Leal 38). An increase in the revenue has been recorded. The new board member should understand the cause of the increase. Increase in revenue may be because of increased sales or an increase in the selling price. In the case of the company, Shell’s increase has been attributed to both factors. Increase in the product prices has been a significant factor in determining the revenue generated. Increase in the products sold is due to the increase population and economic growth. A new board member also needs to understand the environment that the company exists. The company is faced with various challenges which are either specific to the company or affect all the players in the industry. The company also has opportunities to diversify into other energy sectors that are deemed safer to the environment. Based on the calculation of gross profit margin, the company profitability will enable the management to invest in other sectors. Production of new and innovative products assure the company new markets while retaining a stable client base. The company strategies like innovation and advertising to market its products. The company also uses market penetration to ensure that its products sell (Idowu, Samuel O, and Leal 150). Market penetration is facilitated by increasing operations in the global market. Globalization has opened new markets that the company can exploit. A new board member also needs to understand liabilities in the organization. Long-term liabilities are paid over a long time and are subject to economic changes. Long-term liabilities decreased in the year 2011 from 21.96 billion reported in 2010 to 19.6 billion pounds. The general trend for this for long-term liabilities is increasing with the three years before 2010 reporting increases. The company needs to ensure that the strategies used by the management are updated and effective in the current business environment. The company is among the major players in the industry and management is one of the factors affecting its growth in the market (Brady 261). Conclusion The strategies used by the company have helped it recover from the recession in the year 2009. The company’s market penetration strategies have helped the company retain a loyal customer following and attract new customers. Sales revenue has increased from 178.26 billion in the year 2009 to 293.29 billion pounds in 2011. The company also concentrates on innovation and technology to ensure that the customer have quality products. Increase in investment in the field of technology has resulted in increased expenses, which have affected profitability. The expenses are considered investments, as they will increase the company’s sales in the future (Brady 272). The company also uses various form of advertising to catch the attention of the customers. Investing in all modes of advertisement has allowed the company to connect with customers and maintain a stable market share. The company uses social media to advertise its products and provide customer care service to its clients. The company invests research as a way of improving product quality. The quality of the products needs to be improved to ensure that the company competes effectively. Research also ensures that the company can produce products that fit the current market. The strategies implemented by the company have worked improve the quality of products produced and improved the company’s image. The financial reports published by the company also help to market the company. The company is profitable according to the financial statement. An increase in the number of investors is reflected by the increase in the shareholding and the decline in borrowed capital (Brady 311). Works cited Brady, Donald L. Essentials of International Marketing. Armonk, N.Y: M.E. Sharpe, 2011. Print. Bull, Richard. Financial Ratios: How to Use Financial Ratios to Maximise Value and Success for Your Business. Oxford: CIMA, 2008. Print. Davies, Adrian. The Globalisation of Corporate Governance: The Challenge of Clashing Cultures. Farnham, Surrey, England: Gower Pub, 2011. Print. Idowu, Samuel O, and Filho W. Leal. Professionals' Perspectives of Corporate Social Responsibility. Heidelberg: Springer, 2009. Print. Kochan, Nick, and Robin Goodyear. Corruption: The New Corporate Challenge. London: Palgrave Macmillan, 2011. Print. Mallin, Christine A. International Corporate Governance: A Case Study Approach. Cheltenham [u.a.: Elgar, 2006. Print. "Royal Dutch Shell PLC." Market Watch Journal. N.p., n.d. Web. 7 Dec. 2012. . Read More