Noble Energy INC: A Brief Overview - Case Study Example

? of the of the Number External Analysis on Noble Energy INC Introduction The internal and external environment of a country acts as a hindrance and the means through which companies can achieve their goals. The business environments therefore provide opportunities as well as act as a threat for the organizations. The internal business environment is inner to the organization and remains within the control of the firm. However, the external business environment remains beyond the control of the organization. As a result of that it is important to analyze the external business environment and accordingly develop strategies to cope up with the external threats and capitalize on the opportunities of the market. An organization is directly impacted by the occurrences of the external environment in which the organization functions. Moreover, the external environment provides the impetus and paradigm that shapes the function of a company. A number of reports and observation of the eminent scholars reflected that organization having the ability to adjust itself to the exterior environment, essentially survives in the marketplace. On the contrary, companies that fail to match up with the external requirements get eliminated from the competition and the industry. Therefore, from the above discussion it is obvious that a company should carry out in-depth analysis of the external business environment to enhance the chances of prospering. Proper analysis will not only help in better understanding and formulating appropriate strategies, but will also ensure improved productivity and better performance of the company (Williams and Cutis 4-8). This study will analyze the external business environment of Noble Energy INC, which is a US based company involved in manufacturing and distribution of petroleum and natural gas. The external analysis of the company will encompass an overview of the general environment. Demographic segment, economic segment, political/legal segment, socio-cultural segment, technological segment as well as the global segment will be highlighted. In addition to the analysis of the external business environment, the study will also shed light on the industry driving forces. The next half of the study will carry out the activities mentioned above. However, before getting further deep into the study, a brief overview of the company is presented below: - Noble Energy INC: A Brief Overview Noble Energy, Inc. also known as Noble Affiliates Inc. is a Houston based oil and natural gas production and exploration Company. The company was founded in the year 1932 and is currently headquartered in Houston, Texas, United States. During the year 1985, the Noble Affiliates spun off the subsidiary Noble Drilling Corporation to the shareholders. This company in turn went public in the early 1990s. From then Noble Energy, Inc. became one of the major brands of as Noble Affiliates and customers started to recognize this company in the name of Noble Energy Inc. It is now an S&P 500 company of the world. During this span of 80 years in the market, the company has been able to achieve colossal success and added several feathers to its cap. Noble Energy is also the first company to have explored the Gulf of Mexico for the purpose of oil exploration. Moreover, it enjoyed so much power during a phase that it helped in shaping the industry as well as shaped its own future. Charles D. Davidson is the current chairman of the company and also acts as the CEO and president of the firm. As per the views of the stakeholders and customers, the company is best known for the proficiency in exploration, flexibility, innovation and technical expertise. Furthermore, the strong financial platform and a well balanced portfolio offer prospering opportunities across the commodity price and economic cycles. Apart from USA, the company operates in several other parts of the world as well. For example, in South America it operates in Nicaragua and Argentina; in Africa, it functions in Cameroon and Equatorial Guinea. Furthermore, it operates in Israel, Cyprus and Mediterranean Sea. In the recent past, the company has also started business in China. According to latest figures the company has reserve oil of 1.2 billion barrels and an asset of over $17 billion by the end of 2012 (“North America: United States”). The mission of the company is to improve the quality of human life by continuously supplying energy. The corporate statement of the firm “Energizing the World, Bettering People's Lives®" also reflects the dedication of the company towards improving the standard of living. Moreover, the company also believes that responsibility cannot exist in a vacuum and should be meant for the welfare of the company as well as the society in which the company is currently operating. Some of the activities of the company that reflects societal development and welfare of the shareholders are as follows: - The company manages a portfolio of the superior assets. Noble Energy put into practice a best-in-class investigation program. Makes significant investments in technology and people. The company also maintains investment and economic disciplines Another evident activity of the company is the demonstration of leadership activities in fields such as health, environment, compliance management, safety and corporate citizenship (“About us”). 3. External Analysis The external analysis of an industry is one of the most important functions of a business. This is because the success and failure of a firm is greatly dependent upon the scenario of the external business environment. Some of the direct benefits of a firm for performing external analysis are it enables them to get an in-depth idea of the business scenario, formulate strategies according to the requirement, bring in changes to the internal environment and also create contingency plans so as to deal with the changing situations. According to scholars “Performing an external analysis is important to the long term competitiveness of your firm. Being cognizant of your environment is advisable for an individual as well as a company” (“Reeves”). This study intends to conduct an external analysis of the oil & gas production industry and therefore the scope is unlimited. The industry is highly globalized and the company chosen for the analysis, Noble Energy has international operations. Since, the business environment of each country differs to a certain extent, analyzing every context will be difficult. In that case, the entire world needs to be considered as a single market. However, this study will only focus on the US market. In this section, the study will put more emphasis on the major external factors such as demographic segment, economic segment, political/legal segment, socio-cultural segment and technological segment. One section of the study will also encompass the global trends of the external business environment. The strategic analysis tool to be used for the study is PESTEL analysis. PESTEL analysis stands for political, social, economical, environmental, technological and legal factors (Witcher and Chau 25). 3.1 General Environmental Analysis A company does not exist in a vacuum, but operates in some environment. The business environment is again classified as internal environment and external environment. This study has analyzed the external business environment of Noble Energy INC in the context of US market. However, before presenting the findings of the general environment is necessary to present an overview of the important products of the industry. Some of the important products are light crude oil, heavy crude oil and natural gas. On the other hand, some of the vital activities of the industry are exploration of oil and gas, extraction of crude oil, natural gas, production of liquefied natural gas (LNG) and Liquefied Petroleum Gas (LPG) except in combination with petroleum refining, and oil shale extraction. The poor economic and political situation of a country adversely affects the oil and gas manufacturing industry. The industry gets highly influenced by the ecological factor, political factor as well as the price leverage. Several eminent scholars have argued that oil industry is principally based on two major factors namely political status of the country and the economic stability of the world. For example, the reduction in the value of a currency has a direct impact on the overall import of oil and gas. With the rising population, the demand for oil and gas keeps rising and the government faces extreme difficulties in matching up to the demands. (Source: “Jayaram”) The figure above clearly displays the growth in demand. According to reports, the oil and gas manufacturing industry is also vulnerable to the slightest of changes in the external business environment factors. Although, certain factors changes at a very slow pace, but still there is a strong impact. The pricing mechanism followed by the industry makes it unique and reactive to the international business environment. OPEC is the organization which is responsible for setting the level of oil quantity and pricing level. 3.1.1 Demographic Segment The demographics of a country play indispensable role in the success of a business. The demographic factors directly impact the fate of a business (Kelley and Bishop 3-20). For example, a company involved in manufacturing of children toys will have to depend on the market size of the below age 6 children. In the similar way, if a company is involved in the business of luxury cars it has to depend on the lifestyle and annual income of the potential customers. In the context of crude oil industry, demographic factors have similar importance. The age structure is one of the major determinants of this industry. Currently, the US has 20% of the total population belonging to the age group 0-14 year, whereas 13.7% belongs to the age group 15-24. However, the most encouraging fact for the company is that around 40.2% people belong to the 25-54 age groups (“North America: United States”). Since, this age group is the majority user or consumer of petroleum products; it is an oblivious encouragement for the companies belonging in this sector. The changing demographics of the country also influence the oil and gas manufacturing sector (Kelley and Bishop 3-20). According to the research reports, the US population is getting bigger, more diverse and older. (Source: Shrestha and Heisler, 1-15) (Source: Shrestha and Heisler, 1-15) The above figures clearly represent the shifting trends in the consumer demographics. Although, these changes are slow and gradual but still significantly impacts the industry. 3.1.2 Economic Segment The economic factors impacting the prosperity of an industry include interest rates, economic growth, exchange rates as well as the inflation rate. These factors have a major impact on the decision making process of an organization and the operations of a business. For example, the interest rate has a direct impact on the operation cost of the firm and hence indirectly it is related to the extent to which a business expands and experiences growth. The oil and petroleum manufacturing industry of the USA is wide open and the trade flows are large in comparison to the production. The US economy is one of the largest economies of the world. The per capita GDP of the country is $49,800. The net GDP of the country is $15.94 trillion (Schultz and Gordon 14). This figure clearly articulates the growth trend and stable economy of the country. It is also evident that with high per capita income, the consumer spending will be high, but crude oil being the necessity of human life, it is apparent that the economic scenario of the country is favorable for business. However, one of the major disappointing facts about the country is the high unemployment rate. The unemployment rate of a country has direct impact on almost every business. In the similar way, the oil and gas manufacturing industry is likely to get affected. The economic prosperity of a country plays indispensable role in the success of oil and gas manufacturing industry. The high growth rate of the economy of a country leads to more consumption of oil and natural gas. The level of imports is also influenced by the economic scenario of the country. (Source: “Market Trends — Natural Gas”) Interestingly, the situation of the global economy also acts as a decisive factor in the oil and gas manufacturing industry. Recently, a combination of the capital flows, savings and fiscal imbalances have contributed heavily towards the global economic predicament. Countries with reduced currency value are more vulnerable to risks. (Source: “Market Trends — Natural Gas”) However, considering the stable economic scenario of the US and high disposable income it is evident that the consumption of crude oil will be high. Moreover, the country also has a number of established in-house producers which minimizes the requirement of oil import. Therefore from an overall viewpoint, the economic scenario of the country is favorable for oil and gas manufacturing business. 3.1.3 Political/Legal Segment Political factors have a strong influence on the prosperity of an industry. It mainly states about the extent to which government intervenes in the economy. Especially, the political factors that impact an industry is labor law, tax policy, trade restriction, environmental law, political stability as well as the tariffs imposed by the government. Crude oil is considered as one of the most necessitated commodity of the world. A slightest fluctuation in the prices of crude oil will have direct and indirect impact on the economic scenario of the country. Like any other products, the price of crude oil varies depending upon the demand and supply. The US government is highly stable and as a result of that there are hardly any negative impacts. Another encouraging fact for the companies belonging to this sector is the US government maintains a cordial relationship with most of oil producing countries. As a result of that importing oil during the requirements is not a major cause of concern. In the similar way, the US government has tried to maintain good relations with other nations which make it easy for the US based oil producers to sell in the overseas market. Therefore, it can be stated that the political scenario of US, pertaining to the oil and gas manufacturing and distribution company is highly favorable. In the US market, the oil and gas rights are generally owned by the corporations, private individuals or the federal government. The oil and gas rights are transferred to the aforementioned only when the explicitly separated by a deed. The taxation policy of the country is however a negative factor. The corporate tax for the companies is high. According to reports, the oil and gas industry of US contributes to nearly $1 trillion in the US economy (“ExxonMobil and U.S. Taxes”). However, despite high tax rate the overall political situation of the country is stable and is favorable to the oil and petroleum business. 3.1.4 Socio-Cultural Segment The socio cultural segment encompasses a number of factors such as the cultural aspects, health consciousness, age, population growth rate, career attitude, age distribution and the level of emphasis on safety. Furthermore, the trends in the social factor are also responsible for demand of a company’s products and services. For example, an apparel retailing company is directly impacted by the age distribution. In the similar way, a company involved in oil and petroleum product manufacturing is directly associated with the lifestyle and population of a country. As increased population and better lifestyle, would lead to more use of automobiles and other purposes. Studies have shown that a number of socio cultural factors have impacted the business of a company or industry. However, the intensity of influence depends upon the nature, size and form of business. Some of the factors such as Dependency ratios, Age structure, and most importantly the population of the country are responsible for the business growth. The net population of the country is 316,668,567 as of July 2013 (“North America: United States”). Hence, with this number population, it is obvious that the use of petroleum products will rise. The population growth rate is 0.9%. This represents that companies involved in the oil and petroleum industry have great opportunities. Another major factor that plays a crucial role is the attitude of public towards energy consumption. Reports have suggested that the people of USA has positive outlook towards the presentation of energy. The US people believe that global warming is a major issue and is a cause of concern for the society. Sustainable development is also another vital factor for the petroleum industry. However, regarding this aspect majority of the companies in USA pursues sustainable development strategies. The US government has also taken several initiatives to promote sustainable development. As a result of that the awareness among the consumers has increased greatly and the country has been able to maintain sustainable development practices. Therefore, from the above facts and information, it is evident that the socio-cultural segment is favorable for the oil and gas manufacturing business in the USA. The activities of the government and positive outlook of the consumers foster the company to comply with the environmental standards. 3.1.5 Technological Segment The technological factors impacting the growth and prosperity of an industry are automation, R & D activities, technological change, technological incentive and the technological infrastructure offered by the country. The technological segment plays indispensable role in determining the barriers to entry, influence outsourcing decisions, minimum efficient production level, and influence outsourcing decisions. However, a technological shift will obviously affect the quality, cost and lead to innovation. In the context of the petroleum industry, technology is mostly used for the purpose of complying with the environmental issues as well as the regulatory standards. The testing methods as well as the environmental analysis techniques are considered as a vital part of the future and current refining activities. Considering the present context, the petroleum refining industry must have the ability to meet the growing challenges of the market. The challenges are both regulatory and environmental. The US market is characterized by strongly developed technical infrastructure. The company has a strong technical infrastructure in the form of well spread telephone lines, internet connection, as well as broadcasting media. However, what is more important for a company involved in oil and natural gas production and manufacturing is the transportation facilities. According to the latest data, the country encompasses 1,984,321 km pipeline of natural gas and 240,711 km pipeline of petroleum products. The roadways and waterways also play a crucial role in the development of oil and natural gas business. Reports have suggested that the country has 6,506,204 km roadway transportation and 41,009 km waterways (“North America: United States”). From this data, it is obvious that the country has a well developed technological infrastructure. 3.1.6 Global Segment The global economy presents a number of opportunities and threats to the business houses in almost every industry. The oil & gas production industry is not an exception and thus provides its own set of threats and opportunities for the players belonging to this industry. The oil & gas production industry has exhibited a volatile performance over the last few years. The last few years of the industry are characterized by revenue trending in-line with the steep declines in the oil prices over a period of time and large spikes. The industry is also driven by subsequent recovery and the global economic slowdown. The global demand for crude oil continues to grow at a robust pace and this is more evident in the developing countries such as India and China. According to reports, India and China alone accounts for 40% of the global consumption (“England”). The global oil and gas industry is increasingly facing challenges in areas such as arctic regions, deep water and political instability. Although the headline for the industry is the dramatic development over the past few years but a number of external turbulences such as shifts in technology, the credit crunch and increased awareness of sustainability have actually changed the global landscape of oil and gas industry. One of the major threats to the industry is the difficulty of the extraction process that hinders the growth of firms. Despite that the industry concentration is low. One of the most interesting characteristics of the industry is that it is geographically diverse and large and hence makes it tremendously difficult for even larger player to maintain a large share. Each company only accounts only a small proportion of the global output. According to reports, Concentration is projected to increase in the late 2013. One reason is the merger and acquisition activities of the global oil and gas manufacturing companies. The acquisition of US-based natural gas and crude oil company, XTO Energy by ExxonMobil is the latest example. The same also happened with PetroChina and Arrow Energy Limited, an Australian based company (Porter 45). 3.1.7 Summary of General Environmental Analysis The analysis of the US oil and gas industry has shown that companies belong to this sector of the US have favorable business environment. The country is highly politically stable, which is one of the major requirements of oil and gas industry to flourish. Moreover, the economic scenario, technological infrastructure and socio economic factors are favorable for business. The only negative factor from the perspective of the company is the high corporate tax rates. Apart from that each of the factors are encouraging for oil and gas production and distribution business. The initiative of the US government also acts a major driver for the businesses. 3.1.8 Industry Driving Forces The oil and gas manufacturing and distribution company is undoubtedly the backbone of global economy and is considered as the driving force for the rapid development of the world (“Virani”). The big question is that what is the driving force for the oil and gas manufacturing industry? According to experts and scholars the major drivers of the industry are the streamlined supply chain starting from exploration of the production and all the way to marketing, distribution and sales. The demand of the oil is another major driver of the industry. Therefore it can be concluded that oil and gas sector is one of the most important sectors of business and as a result government of respective countries must initiate programs and develop an environment that is favorable for the business (“The future of oil and gas and the resultant challenges and opportunities for NOCs”). 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