The Third Largest Company Within the Oil and Energy Sector - Research Paper Example

Q1. BP Plc is today the third largest company in the world within the Oil & energy sector and is headquartered in London. Apart from being one of thelargest companies within the private sector, the company is listed and forms a constituent of the FTSE 100 Index. But for a company as old and large as Bp to grow to its current position, could not have been achieved without overcoming competition and market conditions in numerous ways. One of the most prominent forms of expansion and growth for the company has been through mergers & acquisitions, which as the reminder of this section will go to show, has helped the company tap into newer markets and helped it gain access to several new sources of oil and gas, especially in the former Soviet Union. Within this discussion, every detail pertaining to the course taken by BP in its mergers and acquisitions strategy will limit itself to within the past few years. The Company’s strategic growth is deemed to have begun with the inclusion of Sir John Browne in 1995 as the company’s chief executive. The new leadership is then known to have ushered in several great shifts within the company in terms of the size, focus and the direction of operation and strategy. Sir Browne’s strategy at carving out a greater niche for BP was through the use of an accelerated approach towards increased strategic partnerships, which are thought to have reduced costs of operations and administration in operating the business of production and distributing oil and gas throughout the world. For instance, the company has been successful in merging its fuel and lubricant business in the European market with the Mobil Corporation. This Joint venture has been operating in over 45 countries and has secured a 12% share in the market for fuels and 18% in the lubricant domain (EBR, 2009). The company also forged partnerships with companies in China such as the Shanghai petrochemical company that helped the company expand into the Asian economies. All along, this approach has certainly helped the company in minimizing its liabilities by sharing the overall burden of conducting the business. With the fall of communism, the company looked to expand into new areas such as Eastern Europe and South East Asia in particular. The Russian oil sector, which was being privatized at a quick pace was also utilized as it helped BP acquire a 10 % stake in AO Sidanco that helped it gain a 45% majority stake in the company’s oil and gas operation in oil rich east Siberia. One of the earliest mergers undertaken by BP in recent years was during 1999, when the former BP announced that it was merging with AMOCO that led to the combination of two of the largest oil giants in the world (Daniel Yergin, 2008). In the more recent years, the company has also undertaken a stragtegy of shedding some of its business units in a concerted effort to cut down costs and derive other added benefits. For instance, in 2005, the company decided to group its petrochemical businesses into ‘Innovene’ and sell it. In the end, it was sold to a UK based company named INEOS for a sum of $9 billion (Jeffrey Pfeffer, Robert I. Sutton, 2008). BP had been intent on separating its businesses dealing in olefins and derivatives from its petrochemical segment and was initially considering to list it on the New York Stock exchange in order to raise an Initial public offering. However, these plans were scrapped as the company managed to secure a good buyout deal from INEOS. Over a fifth of BP’s reserves are with TNK-BP, a Russian venture formed with three other Russian Billionaires, wherein BP owns a 50% stake in the company. the merger was conducted in late 2003, when Bp combined its Russian and Ukrainian oil interests with the Alfa and Renova groups. In 2005, TNK-BP underwent a restructuring process, wherein shareholders of 14 subsidaries in the company were allowed to trade for a 2.5 % stock in the holding company. this helped the company gain a bigger share in the holding company. additionally, the company succeeded in exchanging its stake in the ONAKO and SIDANKO ventures. With the formation of TNK-BP, the new company employed up to 100,000 personnel and handled almost all of Russia’s oil producing facilities helping it become the third largest oil producer within Russia (John D. Grace, 2008). TNK-BP has recently had a profitable first quarter with over $1.5 billion in profits and is in a strong position to make further acquisitions. It has also been able to withstand the tremors of the Global financial crisis in a much better fashion than its corporate rivals. the company has also posted a healthy profit of $5.3 billion during 2008, which underscore a 5 % rise in earning before tax (EBITDA). Acquiring more oilfields in Eastern Russia has allowed the company to boost oil production by up to 3.9 % and is expected to fulfill production targets for the current year. What is even more interesting is the fact that despite the global recession and reluctance on the part of most companies, the CEO of TNK-BP recently announced that the company was planning to spend up to $3 billion in merger and acquisitions. The company aims to undertake these planned expansions in Russia as well as overseas, especially Zhaikmunai in Kazakhstan and Regal petroleum in the Ukraine. The string cash position has helped the company repay close to $700 million of its debt within the first quarter of the current financial year (Sarah Dixon, 2008). Over the years, BP has also expanded into the North Sea region with major assets in the Norwegian and Scottish sections of the area. In 2003, the company announced a decision to sale a significant number of gas fields in the region. Most of these fields such as Leman, Pickerill and Trent has been acquired by the company when it had acquired both Amoco and Arco. These divestments were seen as part of the broader strategy to fund the company’s foray into the Russian market, where it sought to invest close to $6.75 billion and further sought to invest an additional $20 billion in other markets (David Rothkopf, 2009). Another reason for divesting North sea oil assets has been the relative higher costs of operating fields in the area and the increasing expenditure involved in exploration activities under the sea. The scale of output against the investment required for exploration and setting up the required drilling platforms has also been attributed as the major reasons for such divestments. BP as in the case with other industry experts further cited the hike in north sea tazes that had been implemented by the Chancellor during the previous year, which increased it to as much as 40%. Citing the higher costs of operations, BP was one of the major companies to undertake divestments in this area. Smaller oil corporations, which have for long been interested in obtaining a controlling stake in the region believe that the recent years are the best for the major oil producing companies to exit the north sea arena as this would enable them to pool their massive resources towards exploring new areas. However, the high costs of operation has led the UK Offshore Operators Association to believe that there would have to be significant changes before oil companies could benefit from securing oil from the region (Ernst Gabriel Frankel, 2007). One of the other reasons for bigger companies such as BP to divest over the recent years has been due to the fact that it is increasingly becoming difficult to justify the gap between the amount of money put in to extract reserves from existing oil fields and attribute problems in securing loans from most banks for the purpose. Q2. The merger between BP and AROCO raised fears and concern over the environmental issues in delicate regions such as Alaska and elsewhere. Environmentalists have always believed that such a merger had all the ingredients that would promote the quest for newer drilling rigs, which would prompt the new merged entity to see newer areas that had been known to contain huge reserves of oil and gas. All along the merger process, most of the negotiations took place behind closed doors between the government and the companies and there was very little opportunity for the public or investors to know anything of the outcomes of these negotiations. The government created a joint special committee for the merger that would help monitor the developments in the merger process by taking into account inputs from the two companies, the industry, the judiciary as well as the government. Though it was announced that the general public would be considered all along by the committee, very little has transpired between the two parties that could allow for an addressal of several issues (Peter Tertzakian, 2006). The merger was criticized by the public and the media, which led to amendments within the charter for Development of the Alaska North Slope. On the legal aspects of the merger, the provisions of the amended charter were rejected by the merger committee as it did not imply upon BP Amoco to divest its assets to provide for the ensuing competition. There were growing concerns that the merger would lead to more leverage for the company within the market if it acquired the Alaskan oil fields. In the end, the merger was allowed to proceed after the company’s Alaskan assets were sold off to Philips petroleum. During 2006, the company has had to close down several pipelines in the Alaskan region due to corrosion problems that were detected leading to several disruptions in the oil supply. The loss of almost 250,000 gallons of oil due to leak in the Prudhoe Bay oil pipeline, which could not be contained quickly due to adverse weather conditions received severe criticism from the media and the congress alike. There have been several questions raised over the maintenance standards of BP and problems in adhering to federal pipeline safety regulations (Jonathan Charles Brown, 2006). Several top officials in BP have admitted to inadequacies on the part of the company’s maintenance procedures in its operations within the North slope. Policy makers in the United States called for better and stricter federal oversight in BP’s North slope pipelines (Jeffrey Pfeffer, Robert I. Sutton, 2009). A recurrence of the spill over the next few days led to the discovery of several weak spots in the pipeline that led to a surge in oil prices thus rendering the oil field in the Purdhoe bay as America’s environmentally most sensitive oilfield. the company has acknowledged the problems in its Alaskan pipelines and issued promises that signal a reduction in production volumes to reduce the stress on the pipelines. The company has further spent an estimated $80 million annually towards maintenance, which is a four fold increase since 2000 (Jeffrey Pfeffer, Robert I. Sutton, 2009). The company has had a similar record as its competitors in terms of environmental and social issues. In 2000, the company rebranded itself by renaming from BP Amoco to “BP: Beyond Petroleum”. The change it the corporate slogan was an attempt to rebrand itself as an energy and not an oil company that was looking to incorporate other sources of energy such as solar power into its portfolio signaling a shift from relying entirely on petrochemical sources. The new logo of the company is also aimed at projecting a clean and green image with a vibrant green, yellow and whote combination after helios, the greek sun god. The main purpose of adopting this new logo has been aimed at deriving a commitment towards the environment and solar power (Daniel Yergin, 2008). This shows the BP was trying to reinvent itself in the public eye and cast itself as the prime choice for the environmentally concerned motorist. Also, the brand name was transformed to lowercase characters ad it wa believed that a lowercase brand name would sound much friendlier that its traditional imperialistic uppercase predecessor. The company has further launched new petrol stations under the name ‘BP Connect’ in the US, UK and Australia. This new brand was looked upon to deliver itself as a progressive and environmentally friendly fuel and aimed to connect with the consumer. The use of solar power to drive most of the filling stations under this brand was also aimed at enhancing the social image of the company. Q3. The company has been performing well during the recent period and this is evident from the chairman’s review of the performance of BO during the preceding couple of years. In fact, the chairman believes that there are very few precedents in history that can be compared to the rapid transformation that the company has undergone during the past 2-3 years. Despite the onset of a prolonged recession and a constant decline in the price of crude oil, the company has been able to record a healthy profit owing to the year long surge in the price of crude oil to as much as $140 a barrel. The chairman has further said that BP continues to be in a very strong position financially as well as within the interests of its stakeholders. The company has announced a slightly increased dividend of 14 cents per share, which denotes an increase in comparison to the dividend announced during the previous period. The company under a renewed strategy has moved from the earlier approach of share buybacks and is looking towards weighting the returns through dividends to shareholders as an alternative approach towards consolidating its financial position (BP, 2008). In the words of the chairman, BP has increasingly worked towards a robust cost structure that would enable the group to be operating in a profitable manner despite economic downturns and fluctuations in the prices of crude. This cost model is further strengthened by a diverse portfolio of projects that the company has initiated over the past 4-5 years, such as the recent opening of a drilling platform off the gulf of Mexico. The Chairman along with the board has displayed a careful awareness and concern for the surrounding geopolitical and economic scenario and has sought to overcome any difficulties and risk elements through constant innovation. The company has invested heavily in installing new drilling facilities that provide the much needed deepwater skills such as off the Gulf of Mexico and Gunshali in Azerbaijan. Further, several ailing segments of the company, especially the Texas Oil refinery have been brought to operational capability, which signifies the strategic growth that the company has been striving for across all frontiers. The company hopes to produce about 300,000 barrels of crude oil from facilities installed within the past 5 years, which represents a tremendous increase in the overall annual output (BP, 2008). This is expected to give the company more leverage in controlling the demand and supply of global crude apart from providing more powers to exercise its influence within the group of Oil producers. The chairman has also given due credence to resolving all disputes within its operations in Russia and the former Soviet republics. Apart from succeeding in maintaining its 50% stake in TNK-BP, the management succeeded in reaching an amicable settlement with its Russian partners, thus putting an end to all disputes. This has led the company to become the largest player within the Russian Oil Industry both in terms of production and reserves. The company now hopes to gain a foothold in the proven oil reserves in the Arctic Circle, for which it has been cleverly extending its political clout within the Russian government that maintains a strong presence in the region (BP, 2007). On the financial front, production was at its highest during 2006, although the company has managed to minimize any loss of output during 2008. Further, the company has enhanced its reserves replacement ratio, which is at its all time highest of 121%, thus projecting a strong future for the company in terms of supply (Daniel Yergin, 2008). The company is in a very strong cash position with reserves of over $38.1 billion, which is a 33% increase in just a single year. Although part of this increase was due to surging oil prices during the early part of the year, opening up of new production facilities thereby leading to a larger production volume have also contributed to the enhancement of the cash position (EBR, 2009). The company has constantly succeeded in satisfying its shareholders by committing to its promise of healthy dividends. With each passing year, the margin of dividends has risen on an average of 25%, with the latest dividend offering at 55 cents per share. However, the global economic downturn has had its toll on the performance of the company’s stock that has gone down in value by over 15% during the previous year. Gaining investor confidence thus remains one of the primary areas that the company needs to work upon if it has to succeed in posting a positive shareholder return, which was a healthy 7% during 2007 (David Rothkopf, 2009). Thus, the recent years have helped BP record a strong performance with an overall increase of 35% in terms of the profit before tax and Interest. A major part of the revenue continues to come from established strongholds such as Alaska, the Caribbean as well as the North Sea region although the company has had to face several operational and environmental roadblocks in many of these places (BP, 2008). Higher oil prices have also contributed to enhanced activity in the sector thereby leading to a higher demand for related goods and services. This has in a way helped mitigate the effects of the current economic crisis to a certain extent as a result of efficient cost management that has remained fairly constant (BP, 2008). BP today reflects a strong and diversified portfolio within the industry and is poised for more growth in the future as a result of new investments in several potential regions. Focusing on using technology and innovation combined with the drive towards efficiency and simplification of all processes wherever possible has placed the company in a stronger position that has helped it defend the current global economic downturn in a convincing manner. REFERENCES 1. EBR (2009), Review of British Petroleum. Found at URL: http://www.energy-business-review.com/companies/british_petroleum_plc_wind_energy_market_analysis 2. Daniel Yergin (2008), The Prize: The Epic Quest for Oil, Money & Power. London: Simon Schuster. 3. Jeffrey Pfeffer, Robert I. Sutton (2000), The knowing-doing gap: how smart companies turn knowledge into action. Harvard Business Press. 4. David Rothkopf (2009), Superclass: The Global Power Elite and the World They Are Making. New York: Farrar, Strauss and Giroux. 5. Peter Tertzakian (2006), A Thousand Barrels a Second: The Coming Oil Break Point and the Challenges Facing an Energy Dependent World. New York: McGraw Hill. 6. Jonathan Charles Brown (2006), British petroleum pioneers in Mexico and South America. University of Texas at Austin. 7. John D. Grace (2008), Russian oil supply: performance and prospects. Oxford University Press. 8. Sarah Dixon (2008), Organisational Transformation in the Russian Oil Industry. London: Edward elgar. 9. Ernst Gabriel Frankel (2007), Oil and Security: A World Beyond Petroleum. London: Springer. 10. BP (2008), Annual Review: 2008. Found at: http://www.bp.com/liveassets/bp_internet/annual_review/annual_review_2008/STAGING/local_assets/downloads_pdfs/BP_annual_review_2008.pdf 11. BP (2007), Annual Review: 2007. Found at: http://www.bp.com/liveassets/bp_internet/annual_review/annual_review_2007/STAGING/local_assets/downloads_pdfs/BP_annual_review_2007.pdf APPENDIX a. World Energy Consumption b. Volatile Crude and Oil Prices c. Carbon Dioxide emissions d. Replacement Cost Profit Source: BP, 2008. e. Dividend per Share Source: BP, 2008. f. Total Shareholder Return Source: BP, 2008. g. Recent exploration discoveries Source: BP, 2008. Read More