Understanding Oil Prices: Chevron Oil Corporation - Case Study Example

Introduction

The oil industry is one of those that hold a lot of strategic importance for many economies across the world. Many oil producing countries have managed to establish their economies through the sale of oil to other countries and multinational companies. Inasmuch as there have been latest developments in the energy sector in the world, which seem to be giving priority to non-carbon related sources of energy, oil is remains important.

Several companies that deal in oil and oil products have managed to establish themselves to become global companies (Spilsbury & Spilsbury, 2012). With many countries still relying wholly on petroleum products despite efforts to promote green energy, multinational companies dealing in oil and oil products have a huge chance of remaining successful. The growth and use of green energy is gaining momentum in many developed and developing countries; however, the rate at which it is being adopted means that petroleum products will continue to enjoy market presence for many decades to come. One of the companies that boast of a substantive market share that spans many decades has been Chevron Oil Corporation. This company has been successful in its growth and expansion, managing to provide employment to millions of people in many countries.

Company Background

Chevron Oil Corporation is an energy corporation of an American origin. It is among the companies that managed to succeed Standard Oil after its collapse. The company has its headquarters in the San Ramon region of California of the United States (Muttitt, 2012). Its strategic management and successful leadership has seen it grow its presence to reach more than 180 states across the world. According to Muttitt (2012), the company has been actively involved in the process of exploring and investing in natural gas, oil as well as in geothermal energy, which includes exploration and production of hydrocarbon. It is also involved in activities of refining, marketing as well as transport.

Some of the downstream operations of the company include manufacturing and selling such products like lubricants, fuels, petrochemicals as well as many other additives (Omeje, 2006). The company has been successful in its operations in areas like North America, South Asia, the Gulf Coast, South Africa as well as Australia among many others. On average, it is estimated that the company sells an average of about 3.1 million barrels of diesel, jet fuel and also gasoline. Other alternative energy operations that Chevron Oil Corporation deals in include wind power, geothermal, hydrogen, fuel cells and wind power among many others. The company continues to allocate substantive amounts of money on research and development studies so that it can establish better and effective ventures of renewable power in the world. For a long time, Chevron has continued to claim that it is the largest geothermal energy producer in the world.

The latest financial year

The last financial year has not been an easy one for Chevron Corporation because of the global slump in oil prices. Just like other companies in the same industry, adjusting to these developments has been a tough undertaking, requiring a lot of adjustments in its financial projections in order to remain competitive in the ever-changing industry. During that financial year, the company was forced to make a lot of cuts in its operational costs and general capital spending for purposes of reducing any excessive cash outflows. Despite the huge changes and adjustments that the company was forced to make, it was the first among international oil companies to report its earnings in its final quarter of the financial year. In its reporting, the company disclosed that it had made the first quarterly loss, coming on after more than ten years. At the time of reporting, Brent Crude was being sold at an average price of $34 for every barrel, this was more than 70% reduction from the peak season it had enjoyed in the previous year – 2014 (Crooks, 2016).

Despite the slump in business, the company’s Chief Executive insisted that the company’s top priority was to ensure that it maintained and grew its divided (Crooks, 2016). In this suggestion, he seemed to insinuate that the company would continue adding to its amount of borrowings for purposes of financing the distribution of returns to its shareholders. This would mean that its shareholders retained their interest in the company and continued to support it. Another important step that the company was going to take included investing in new projects for purposes of sustaining and growing their new projects they had launched prior to the slump. The results indicated a kind of pattern that was going to be emulated by other companies in the same industry. In this regard, the slump in the oil prices meant that companies can offset the deficit by using revenue from chemical operations and refinery activities. According to Crooks, (2016), the company reported that it has made a net loss of about $588M during its fourth quarter in comparison to $3.5bn that the company had made in 2014.

The earnings that the company made in its last quarter of the previous financial year was ay below what analysts had projected as the average expectations. in 2015, the revenues that the company made during its first quarter was quite better than what had been anticipated inasmuch as they were down by about 33%, settling at $28bn (Crooks, 2016). The company’s capital expenditure for 2015, which was placed at $34bn were way above the amount that was received from its overall operations of about $19.5bn together with dividend payments of about $8bn for the entire year as well as offsets that were partially attributed to sales rising to $5.7bn, it meant that the company’s net debt went up twice, reaching $27.3bn from $14.6bn (Crooks, 2016). The graphical representation shown below indicates that Chevron’s weakest division was in its production of oil and gas.

The latest financial analysis of Chevron (Crooks, 2016)

Core Economic Conditions

In modern times, the emerging trends for the oil and petroleum industry have been quite dynamic, being seemingly different from how it was some decades ago. According to Crooks, (2016), the present oil industry seems to have had a dramatic shift, something that calls for a change of strategy for companies in this field. The forecast for firms in this industry has become somewhat very different when compared to how it was years ago. Perhaps one of the reasons that can be used to explain this situation is that many companies in the previous year’s formed strong cartels that had a large voice in the industry. This traditional structured approach has now been changed by a kind of systemic imbalance that is characterized by increase in supply and a highly receding growth in demand.

Jarashow (2011) observes that there has been a general economic weakness globally, coupled by a very slow growth in China as well as a continued financial crisis that affected many countries in Europe. At the same time, there have been tough measures to regulate economies with a lot of alternative forms of energy being put forth. Automobile companies have been improving their innovativeness so that they come up with cars and automobiles that have efficient engines. In this regard, the demand for oil has greatly been affected. The fact that there has been a global effort to improve on the use of green energy as opposed to petroleum products that are being blamed for contributing to global warming and climate change. At the same time, many new reserves for shale oil are continuing to glutter the market, which means that oil companies need to be extraordinarily innovative enough to re-invent their competitiveness in this fast-changing world.

Demand factors and how they affected price

According to the U. S’s estimates from the Energy Information Administration (EIA), the year 2014 had a dramatic increase in the world’s supply of liquid fuels including petroleum (Crooks, 2016). This increase supposed the rate of consumption, something that had an effect on the prices. According to Maugeri (2006), this was the best explanation that was given for the reduction in prices of petroleum and reduced profits for companies in this industry. Jarashow (2011) says that this scenario is not desirable for many of the leading giants in the oil industry like Chevron, Total Oil and BP among many others.

According to Maugeri (2006), these companies have the tendency of investing billions of money in the oil exploration activities. The investment that these companies made did not field any concomitant boost in its production or the expected profit margins. In this regard, managing the dynamic industry in future means that these companies are supposed to find alternative sources of renewable energy that they can trade in to cushion them from such unexpectations like those of the previous years.

Demand and supply curves and schedule for oil (Omeje, 2006)

The respective regression analysis graph is shown below

regression analysis graph for oil (Omeje, 2006)

Market Structure

The market structure of the oil industry is composed of few companies that control a large number of buyers. In this case, lack of proper control of the industry often leads to a situation of increased supply against a decreased demand. This is the exact situation that affected companies in the oil industry in the previous industry. This market structure is often unregulated because the actions of one company often trigger changes in the entire industry. Successful companies often find it relevant to invest in other activities that make them successful especially when the industry changes fall into place.

Other industry Macro Trends

The global climatic change patterns, which are attributed to global warming, have tended to push forward efforts in reducing reliance of petroleum products (Fenn, 2008). Many countries and other multinational companies have foreseen the future being lucrative for investing in such sources of energy and are rooting for this route. This could explain why the supply of oil in 2014 increased, surpassing the demand and causing lots of capital losses for companies like Chevron. In this regard, McNeish & Logan (2012) observes that Chevron needs to strengthen its research and development team to explore how they can realign their business strategies to remain relevant and competitive in the world’s energy industry.

Company reports indicate that it has so far slimmed downwards by reducing some of its seemingly unprofitable units. At the same time, stiff competition from other state-owned oil companies means that Chevron has to re-invent its business and competitive strategies if it needs to have enjoy chances of consolidating on the markets that have taken it many years to establish. There are increased government regulations in the oil industry, following the need to control the amount of carbon emissions in each country. For this reason, Chevron and many other oil companies are going to find it hard reaching some markets that were once lucrative. According to McNeish & Logan (2012), there are some countries in Europe, which have already stepped up their efforts in the development and promotion of green energy.

This means that companies that are putting up systems to enhance this trend are enjoying government support and good business, which is still quite young and promising. This means that for Chevron, they can use their experience in the energy sector to establish system and strategies through which they can achieve this and other objectives (Worth, 2010). In future, Chevron Oil and other companies in this field are set for major setbacks should not innovate their way into this dynamic field.

Recommendations

From the foregone discussion, it is quite clear that the oil industry has become more dynamic than how it used to be many decades ago. Many countries and multinational companies are trying to be quite innovative in this field so that they reap the most from their investments. According to some energy experts, the world’s non-renewable sources of energy like crude oil will one day diminish; therefore, it is a good idea experimenting on new sources of energy that can meet the giant global demand. For this reason, Chevron Oil and other companies in this field need to step up their efforts in research to establish new ways of developing and maintaining their competitive edge.

The company CEO for Chevron should first begin by equipping its research team so that it can undertake the bets research that will inform its investment team of the next step forward going into the future. The CEO should ensure that he also establishes a good investment team that will add impetus to the research team in its operations. For the long term, the company may have to cut down some of its unprofitable ventures and those whose profitability seems to be dwindling. For instance, the company should increase its investments in activities that promote exploration on green energy and other forms of renewable energy. This will also include doing feasibility studies in its markets and others in different countries, which are still struggling to set up effective and environment-friendly sources of energy (Carollo, 2012). This is a huge investment that needs a lot of proper planning and preparation for maximum returns from it.

The success of the above strategies will also require having a term of experts of on board that can help to start and run the new venture. This means that the CEO needs to empower its human resource department and set a budget that will help it to get new staff or train the existing ones on alternative sources of energy and investment in the same. This will be an important step that will help the company to manage this highly dynamic industry that seems to be changing with each passing day. The CEO should know that effective leadership needs to inspire action that brings measureable outcomes; this requires teamwork and mastery of purpose. However, the future still looks awesome for Chevron as the world’s energy industry is still large.