Chevron - SWOT Analysis of a Multinational Oil Company - Report Example

Strategic Management: Chevron Table of Contents Table of Contents 2 Introduction 3 SWOT Analysis 3 Recommendation 6 Conclusion 8 Reference list 9 Introduction This paper is focused on the detailed SWOT analysis of a multinational oil company, Chevron. It explains how the internal factors like the Strength and Weakness; and external factors like Opportunity and Threats, impact the business of the organization. It also includes ranking of each aspects in those factors based on their importance. Chevron is a multinational energy corporation, based in San Ramon, California. The company holds third rank in the Fortune 500 list, with a market valuation of $ 227014 million. It is also the second largest oil company after Exxon Mobil (Fortune 500. 2014). This company has been chosen for the SWOT analysis because, it is one of the major multinational companies in the world and its study will help to understand how to sustain and grow in a competitive sector like oil and energy. SWOT Analysis Strengths: 1) Chevron operates on a global scale in more than 180 countries; a few of them are Australia, United Kingdom, Nigeria, Brazil, Angola, etc. As of 2014, the company has made revenue of $ 220356 million. Due to its high revenue generation and high worldwide ranking, it faces almost no competition from the new entrants in the industry. 2) Chevron has started a new project in Australia, the contract states a 20 years lock in for its Gorgon liquefied natural gas export plant. A total of seven LNG projects, worth $ 200 billion, will be online between 2014 and 2017. The company has also planned to sell 85 % of the Gorgon Project’s output to long term clients. This will lead to rise in demand in Asia, which is world’s biggest LNG consumer. This should work in Chevron’s advantage as natural gas sells at a much higher price in Asian markets than that of U.S (SMH. 2014). 3) Chevron has a wide range of business operations in the oil and energy industry. It produces and transports, refines, markets and distributes crude oil and natural gas. It also sells petrochemicals, generates power, produces geothermal energy, works on energy efficiency solutions, develops future energy resources and conducts research in advanced bio fuels (Chevron. 2014). Due to its wide spread of operations, it faces lesser risk of incurring loss. Because if one sector under performs, it is compensated by the others. In 2011, companies like Transocean and Diamond offshore had fallen by 18 and 14 percent, but on contrary Chevron had fallen only by 1 percent (Cohan, P. 2011). 4) The wide spread business operations of Chevron works in its favour. In 2011, despite of the decline in oil production, the company was able to make a profit of $ 7.7 billion, which was raised by 43% and its revenue also increased by 31% to 66.7 billion (Cohan, 2011). 5) The company also makes investments in CSR activities which eventually work in favour of the company. It recognizes that the American STEM skilled work force plays an important role in global market place. Chevron has invested $ 100 million to support the STEM education initiative. CSR investments like these put a positive impact for the company in the market place and also foster a long term relationship with the business partners (theatlantic. 2013). The above ranking has been done on the basis of the company’s financial strength and global scale of operation. Chevron’s expansion strategies in Australia are ranked second, followed by its wider market coverage and lastly its CSR activities. All the strategic activities that the company practices, have paved its way towards a secured future. The investments in the Gorgon project has contributed to its growth and has made the company stand firm amidst its competitors. As far as sustainability is concerned, the development of alternative energy projects and the clean energy projects will help the company sustain in the long run. Thus, it can be rightly stated that management activities are compatible with the corporate strategies of Chevron. Weaknesses: 1) Oil drilling sites are always accident prone and any hazardous incident can cause a significant downfall in business. There are several cases of explosions in oil drilling sites, for example in 2010; BP’s Deepwater Horizon explosion had caused severe financial loss for the company. Incidents like these cause panic among the investors and they are hesitant to invest in the oil sector (Plautz, 2012). In order to avoid such incidents, Chevron spends a lot of money on the safety maintenance, which is added cost to the company. 2) Oil companies like Chevron, faces political constraints, which hinder their business activities. Political regulations limit where how and also when, the oil extraction can be done. These regulations are even stronger overseas. In developing countries, where the political scenario is unstable, drilling up natural resources can lead to political war with neighbouring countries. 3) Chevron also faces environmental issues, since, oil drilling causes negative environmental impact. In Ecuador, Chevron had to pay a penalty of $ 8.8 billion for environmental charges (Solano, 2013). The company’s operations had caused almost 18 billion gallons of water to get contaminated with polycyclic aromatic hydrocarbons and it was alleged that this contamination had increased the cancer rates in Ecuador (Feige, 2008). 4) Inevitably, natural resources are limited. Almost all the easy to acquire drilling sites are already tapped out, so in order to find a fresh drilling site, the company has to move to a less friendly terrain- like in the middle of an ocean or in an area where climatic conditions are extremely harsh. Geological barriers like these not only mean difficulty in extraction but also it means that the possibility of finding expected amount of resource is low. High geological barriers eventually cause high cost of extraction, which in turn reduces the profit margin (Beattie, 2014). The major weakness for an oil company is the occupational hazard. Since the drilling process is prone to major accidents, it is indeed the most dangerous weakness. Secondly, the political scenario has always been involved with oil. Since, oil is a major natural resource, which every country wants to get their hands on; political wars often wage over acquiring drilling sites. This is followed by environmental issues. The oil extraction process is hazardous to the ecosystem; it pollutes the surrounding land and a huge quantity of water, which leads to diseases. Naturally, oil companies face several barriers from the environmental activists, which hinder their operation. Lastly, the scarcity of natural resources will eventually be a problem for the oil companies in the future. As, natural resources are limited, it is bound to run out some day. Opportunities: 1) The Gorgon project in Australia will bring huge opportunities in making profit for Chevron. The liquefied natural gas (LNG) is much easier to store and transport than traditional natural gas. This will be one of the biggest natural resource projects. Chevron holds largest interest in the project since it operates 47.3 % of its development. The project has both upstream and downstream exploration prospects. The upstream facilities will include eight high rated wells and sub-sea extraction and pipeline system, which will channel out gas from Gorgon fields. The downstream side will have almost 15.6 million tons per year LNG extraction facility and storage plant (Ciura, 2014). 2) Chevron’s clean energy projects should be developed as it has huge prospects for the future growth. As natural resource supplies are decreasing day by day, a major shift towards the development of geothermal energy will help the company to sustain in the long run. The company made an after tax profit of $ 27 million in 2013(almost double of its target) in the geothermal projects. So, further development of this sector will lead to more profitability in the future as oil and gas resources are scarce (Elgin, 2014). 3) With the help of modern technologies along with improved seismic data collection and interpretation procedures, Chevron will be able to dig in to previously inaccessible terrains, like in Greenland and Arctic, and also into the ultra deep coasts of Brazil (c1wsolutions. 2012). 4) Asian countries like China are emerging as good business prospects for the energy industry as on contrary oil demand in Europe and Japan is declining (c1wsolutions. 2012). 5) Dependency on traditional crude oil drilling can be reduced by tapping in to the unconventional resources like shale gas, coal bed methane and oil sands by using “Fracking” technology (Energy. 2013). The opportunities are ranked on the basis of the company’s growth prospects. The gorgon project offers biggest opportunities for Chevron because it operates maximum portion of its development and this project will yield high amount of resources as well. Secondly, Chevron’s clean energy ventures also have opportunities for development in the near future, so the development of more clean energy projects will lead to the Chevron’s growth. Thirdly, the company’s R&D expenditure in latest extraction technologies should pay off, by reducing extraction costs and effort. Lastly, China holds prospective business opportunities as the demand in the Asian market for oil is increasing day by day. Threats: 1) High demand for oil has led to threat of severe competition in the market. Chevron faces strong rivalry from companies like Exxon Mobil Corporation, Royal Dutch Shell PLC, and PetroChina Co Ltd. Chevron has a market capitalization of $210,895 million; whereas Royal Dutch Shell and Exxon Mobil have $ 229,571 and $388,982 respectively (Morningstar. 2014). 2) Chevron faces threats from several environmental activists. In August 2013, thousands of people gathered near Chevron’s refinery at California, in order to protest over air pollution and climate change. They also marked the one year anniversary of the 2012 explosion which injured 15,000 people across the region (Ostrander. 2013). 3) Global volatility increases operating risks. Both National and International economic conditions were one of the most high risk factors in 2012, along with the increased supply and demand, cited by 87% of the companies (increased from 76% in previous year) (Digital Energy. 2012). 4) The turmoil in the Middle East and North Africa in 2011 resulted in the rise of oil prices. Considering the fact that increase in production and exploration cost, the volatility on the downturn creates a greater challenge (EY. 2014). 5) Sudden tax changes made by the government also keeps the oil industry on high alert during the election years. The disappearance of the federal income-tax reductions was cited by 73 percent of the companies, which was a dramatic increase from 43 percent in 2011 (Digital Energy. 2012). The biggest threat for any oil company is the rising competition among rival firms. All of Chevron’s major rivals are of comparable size with respect to market capitalization, so the company must try to keep up its pace in order to sustain in the market. Secondly, the global economic conditions pose some threat to the buyer’s purchasing power. The turmoil in the Middle East comes next as it caused rise in oil prices and decreased profitability for the company. Lastly, the sudden tax change creates fluctuations in the market prices, which leads to market volatility. Recommendation The following recommendations are ranked on the basis of importance and urgency. 1) Chevron should put more effort in the development of clean energy projects. Since, natural resources are scarce and are diminishing rapidly; the company must find ways to secure alternative sources of income. The geothermal energy projects should be expanded. This will not only make a secure platform for the company’s future, but will also create another source of revenue generation. Other clean energy projects like hydro electric, solar energy and wind electric systems should also be developed eventually. The wind power generation has almost tripled in US since 2008. Moreover, the installation cost of turbines has gone down and wind energy constitutes 43% of new electrical generation capacity in the country, so it is a prospective venture for Chevron to invest in (Tillemann, 2013). Bio fuels can also be a revenue generating source for oil companies. As alternative fuels are not yet produced at a large scale, the bio fuels can be a viable alternative. This will diversify the company’s portfolio, and will give it a competitive edge over its rivals. 2) The company should acquire smaller oil and energy firms to expand itself. In the past, several companies like Dragon oil, Pluspetrol, etc, has gone in mergers and acquisition deals to achieve business expansion. Just like Dragon oil made an $800 million bid for the oil company Petroceltic to enhance its presence in Algeria, likewise Chevron can also expand its reach overseas by acquiring other fellow companies, or go in for a merger or joint venture (Rigzone. 2014). 3) Chevron should look into the prospective oil deposits in the Arctic. Recent studies have shown that, the Barents Sea holds huge oil deposits. In 2009, the Russian state oil company failed to find any oil deposits and stopped their exploration, but others found it and decided not to drill, because of high evacuation cost in that terrain. But, this can be Chevron’s gold mine for oil. Since, the company has the ability to invest huge capitals in exploration; it can use high end technological advantages to dig out oil from the arctic. Few companies like Lundin Petroleum has already started exploring the Barents Sea, and it has stated that this can the next biggest oil exploration site in the world. The recommendations are ranked on the basis of company’s future sustainability. The natural resources are diminishing day by day, so in order to sustain, the company should look for future alternatives, by investing in clean and renewable energy in order to sustain in the industry. Moreover clean energy generation costs are reducing, so it will be profitable for Chevron. Secondly, the company should keep expanding itself in order to stay ahead of its competitors, in order to do so; Chevron must collaborate with other fellow firms. This will not only increase its market capitalization but also pose serious threat to its competitors. Lastly, Chevron should look in for new oil deposits prospects, especially in the Arctic. Since, drilling out oil in the Arctic is tougher, and if the company manages to do extract from there, it will definitely give it a competitive advantage over its rivals like Exxon Mobil and Shell. Chevron’s strategic management has led the company to adapt to the changing environment. The continuous extraction of the limited natural resources, will finally cause the oil deposits to run out; in order to deal with this situation Chevron has successfully diversified it product portfolio and has worked on development of clean energy projects. Moreover, it has also invested in future projects to ensure its growth. Thus, it can be stated that the company’s strategic management is flexible enough to adapt with the market environment. Conclusion Chevron stands in among the oil giants in the industry, which makes it a target for its rivals and also it brings growth and sustainability opportunities for the company. The company possesses huge market capitalization, which is helpful in gaining trusts of the investors and also it can invest in expensive projects like the Gorgon project. According to the Porter’s five forces, the rivalry among firms is high and the threat of new entrants is low, because Chevron is too big a company to face any competition from a new entrant. The companies in the oil and energy industry face a lot of threats apart from the already existing competitor’s threat. The operation process of oil extraction causes environmental hazards, so the companies cannot drill wherever it wants. The environmental issues often cause several penalty charges and opposition from the local communities. The political environment is responsible for controlling the oil prices and demand and supply chain. Thus according to the PESTLE analysis, the political and Environmental issues are most important. Finally, the development of clean and renewable energy is the future of the oil and energy industry, as natural resources are scarce, so companies must focus on development of clean energy projects. Reference list Beattie, A., 2014. 5 Biggest Risks Faced By Oil And Gas Companies. [online] Available at: [Accessed 16 October 2014] C1wsolutions., 2012. The Top 10 Opportunities for Oil and Gas Companies in 2012. [online] Available at: [Accessed 16 October 2014] Chevron. 2014. Providing Energy for Human Progress. [online] Available at: [Accessed 16 October 2014] Ciura, B., 2014. Heres Why the Gorgon LNG Project Is Critical for These 3 Energy Giants [online] Available at: [Accessed on 16 October 2014] Cohan, P., 2011. Oil Plays: Why Drill When You Can Integrate? [online] Available at: [Accessed 16 October 2014] Digital Energy, 2012. Factors that Could Threaten the Oil & Gas Industry in the Future. [online] Available at: [Accessed on 16 October 2014] Elgin, B., 2014. Chevron Retreats on Clean Energy After Renewables Hit 20% Margin. [online] Available at: [Accessed 16 October 2014] Energy., 2013. What is Fracking? [online] Available at: [Accessed 16 October 2014] EY., 2014. Oil and Gas - Top 10 risks. [online] Available at: [Accessed on 16 October 2014] Feige, D. 2008. Pursuing the polluters. [online] Available at: [Accessed 16 October 2014] Fortune 500, 2014. Chevron. [online] Available at: [Accessed on 16 October 2014] Morningstar., 2014. Chevron Corp CVX. [online] Available at: [Accessed 16 October 2014] Ostrander, M., 2013. Thousands Protest Chevron Oil Refinery in Richmond, California. [online] Available at: [Accessed 16 October 2014] Plautz, J., 2012. Report: BP and Chevron Are Riskier Bets for Oil Investors. [online] Available at: [Accessed 16 October 2014] Rigzone., 2014. Company Mergers and Acquisition JV. [online] Available at: [Accessed 16 October 2014] SMH., 2014. Chevrons Gorgon the latest LNG mega-project hit by US-fuelled gas boom. [online] Available at: [Accessed 16 October 2014] Solano, G., 2013. Chevron Pollution Judgement In Ecuador Halved By Countrys Highest Court. [online] Available at: [Accessed 16 October 2014] Theatlantic., 2013. Securing Economic Strength Through Education [online] Available at [Accessed 16 October 2014] Tillemann, L., 2013. Revolution Now. [online] Available at: [Accessed 16 October 2014] Read More