BP and the consolidation
in the Oil Industry,
1998-2002
Performed by:
Anna Bachurina
Maxim Peskin
Vladimir Maximov
Agenda
Current situation brief
Analysis
Hypotheses
Strategic opportunities
Strategy as Paradigm
Implementation
Where we are: brief
British Petroleum, an oil&gas supermajor with almost 100 years history.
130 business across 100 countries, $144 bn assets generate $162 bn sales
Socially and environmentally responsible
Where are we going?
What are the alternatives for continued growth?
How is it possible to expand company’s business further?
Is it the right decision to divest to become more profitable?
How attractive will the company’s products be in the future?
Lord Browne: ”We are moving on to productivity and producing profitable
organic growth...”
Analysis: SWOT
TAT
Porter’s model: Upstream
Force of new entrants:
•New companies backed by national governments
•Small local producers
Substitutes:
•Natural gas
Existing competition:
•Stable competition\production
structure (M&A epoch already
passed by)
•Super majors and national
monopolies
•All super majors have lower net
margins for upstream than BP
Suppliers:
•Exploration seen as
part of oil production
Customers:
•Independent refineries/marketing companies emerged
within recent 30 years
•Majors’ share declining
•Fund market hedging
Porter’s model: Downstream
Force of new entrants:
Substitutes:
•Entrance barriers much lower than in
upstream, both refineries, wholesale and retail
•Ethanol biofuels (for transportation
– agricultural nations)
•Coal (for heat and energy – coal
producing nations; threat if oil is
expensive)
•Renewable (environmental
awareness)
Existing competition:
•Majors share declining
•Independent
refineries/marketing
companies emerged within
recent 30 years
Suppliers:
•Stable competition\production
structure (M&A epoch passed by)
•BP, national monopolies, other
super majors (?)
Customers:
•Oil products are used for heat, transport and electricity production
• Same for business use
•Brand recognition and loyalty issues – gas stations network
•Fund market hedging
Possible scenarios
Negative:
Positive:
Oil is cheap, at historic
90s minimum ($10-15)
Oil is moderately pricey
Prices are at latest big trend
extrapolated ($25-30)
•
•
•
•
•
•
Slowdown in global economy growth,
strained demand,
inefficient OPEC attempts to restrain
production
Stable global economy,
restoration growth after crisis,
supported by «cheap money» era
Positive is conservative!
Oil market speculations
inflate 25% of the actual price
=> $30-40 as avg estimate
for 2000-2005.
Strategic opportunity 1: Acquisitions
What:
•ENI
•Repsol YPF
•(Other supermajors –
too big; state oil
producers – politically
improbable)
Why:
E.G., Repsol YPF:
•High refinery capacity
•Access to European
market
WHY NOT ACQUIRE CERTAIN ASSETS?
non US&Europe downstream
chemical business, but that's weak focus
How:
2000 net cash flow of $3,7 bn
and promising strengthening
=> 5-6 yrs. internal reserves
Debt. Possible due to strong
cash and earnings. Leverage
is only 14%
ENI and Repsol are
worth $20-25 bn EACH
What then:
Stronger presence in European markets
Competition increase
Inefficient in terms of internal capital
Too big = too slow
Big investment = cash flow reservations or worsened debt portfolio and
financing options in future
Strategic opportunity 2: Internal growth
a) Internal efficiency
What:
•New technologies
•New oil fields
•Associated gas
•Ecology
Why:
•Increasing assets
turnover!
How:
•R&D, quality management
•IT infrastructure
•Organizational culture, finance
discipline, business units
peer groups
b) New markets
What:
•Downstream – Far
East & South East Asia
Why:
•2/3 of business is US&UK
How:
•Joint ventures (e.g. China)
•Franchise gas stations
network roll-out
Strategic opportunity 2: more Internal growth
c) New products
Why:
What:
•Aggressive positioning
•Quality, service, price:
offering triple benefit
• Focus on brand image
•End customer
perception as target
•Reputation in contact
audiences
How:
•Gas stations: convenience
stores, premium service, noncash payments...
•Alliances: grocery, fast food,
snack...
•BP branded goods
What then:
Entering new markets (geography/product)
Brand/customer loyalty
Competitors angry, but have to follow
Business processes might require re-engineering
Level of expertise is crucial
Operating expenses poised to grow
Strategic opportunity 3: Divestiture
What:
Least efficient units to most
willing competitor.
•downstream (gas stations) to
national state-backed
companies
• “rigid rule”: 10% least
efficient assets each year
within 5 yrs
•chemical business to
ExxonMobil
Why:
•Focus on most profitable
businesses
How:
•Direct sale
•Exchange for share in
joint venture
What then:
Mature markets — improved competition
Opportunity to reallocate capital and optimize process chains
Competitors probably gain stronger assets portfolios (even if we get
rid of inefficient assets)
Info networks tighter = easier experience sharing
Strategic opportunity 4:
Diversification/change of focus
What:
1) B2B services:
• Refinery lending
•Finding and exploration
2) Development /
organizational consulting
within the industry
3) Diversifying into
energy services
business:
•renewable energy
•energy production and
transportation
Why:
• Utilizing benefits and
expertise
•Moving closer to end
consumer
•Excessive refinery
capabilities and highest
efficiency among
supermajors — we can
offset falling margins
• Potential emergence of
new players in
developing countries
How:
•Re-engineering product
flows controls
•Improving experience
sharing circuitry, launching
internal consulting as first
phase
•Networking and union
formation
What then:
Markets are happy
This is an easy switch, so competition may be tight
Probable optimization. Issues with corporate targets alignment
also probable.
Strategies against target objectives
Key objectives
1) Performance improvement potential: $2.0 bn over 2000-2001, $1.4 bn per year in mid-term
2) Downstream unit cost reduction rate: 2.5% per year, 1.5% per year in mid-term
3) Upstream unit cost reduction rate: 6.0% per year
Upstream volume growth rate: 5,5% per year
4) Chemicals production unit cost reduction rate: 4.0%
5) Earnings: double-digit growth
6) Dividend policy: pay out 50% of income
Acqusitionbased strategy
Internal growthbased strategy
Divestiturebased strategy
Diversificationbased strategy
Performance
+
+
-
+
Downstream
+
+
+
+
Upstream
+
+
+
-
Chemicals
-
+
-
+
Earnings
-
+
+
+
Dividends
-
+
+
+
3/6
6/6
4/6
5/6
SUM
Optimal strategic paradigm: internal growth-based strategy plus some
diversification elements.
+ “rigid rule” of 10% to improve earnings and performance discipline.
Details of chosen strategy
Internal growth is focused on:
Internal technological and organizational efficiency
Cost chain optimization
New markets and products within our category (lively downstream roll-out)
Attacking pricing and offers for end consumer @ gas stations
Quality of products
Customer service
Sharp, coherently communicated brand image
Diversification is focused on:
Oil products flexible portfolio – as a goal @ each refinery
B2B services: exploration, consulting
Energy services: renewables development, energy production/transportation
SUM: aggressive action on all fronts and markets of presence,
basing on our key competencies, along with entering new
neighboring sectors where we can utilize our broad advantages.
Strategic paradigm
Achieving optimal costs level
while
•Diversifying our efforts in a
mature industry
and
•Maintaining our core brand
values,
thus
•Binding cost- and differentiationcentered approaches.
Fragmentation
Specialization
Number
of ways
and
means
Deadlock
Volume
Size of advantage
“Advantage matrix”: moving from “Volume business” to “Specialized business”.
Our plan: broad attack supported by action at flanks.
Therefore – aggressive positioning of a coherent value- and
quality-conscious brand.
Implementing the strategy
HR initiatives
Inducement of risk tolerance and adaptivity into corporate culture
More flexible management style
More result-oriented motivation/compensation systems
Core competencies
“Continuous improvement” and ”best practice” logics – virus for employees, all levels
Forming and improving company's unique competencies, aligned with strategy
Build and enhance strategic partnerships with suppliers of services, equipment etc.
From competencies to structure: maintaining virtual integration!
Organizational structure
Budgeting incentives
Re-engineering, processes reorganizing
Policies and procedures
Target: fit new businesses into global corporate frame!
Metrics
KPIs realigned to strategies
Process-oriented measurements
Region/Division/Product
Margins, turnovers, ROA/ROE, EVA
Thank you for your attention
Performed by:
Anna Bachurina
Maxim Peskin
Vladimir Maximov
Appendix A. CapEx & Financing
CAPEX
Planned increase in gas stations fleet: 1000 / year
Each capexed @ $1 M, sum capex $1 bn / year
Gas stations: 50% of total capex near-term, 80% mid-term
WORST CASE capex total additional: $2 bn / year
FINANCING
1. Estimate of continuing operations:
2000 net cash flow of $3.7 bn, poised to strengthen
Company is underleveraged (14%), issuing debt possible
2. Estimate of natural growth:
Physical demand worldwide growth rate, y-on-y: 0.5%; Prices average growth rate, y-on-y:
3.7%; Revenues projected natural growth rate: 4.2%. Even next year, +4.2% is $7bn
3. Estimate of growth driven by diversification / internal efficiency in 2001:
Assuming 20% of projected natural rate: 0,8%. Even next year, +0.8% is $1.4 bn
4. Estimate of opex:
Contributed by new projects, +0.8%, prices, ½ of +3.7%, and volume, 0.5%; Opex
projected natural growth rate: 3.2%. Even next year, +3.2% is $4.6 bn
Conservative estimate suggests $2 bn/year add capex and $4.6 bn/year add opex
vs $8.4 bn/year add revenue .
Appendix B. Codename: Cakemonger
So, how many cakes does BP actually sell? (As of 2000)
Input data:
• 28 000 gas stations currently, 50% have cake-producing equipment and outlets.
• Cake priced at $0,80 (generic)
• Avg customer buys 30 liters of gas.
Refined petroleum product sales — extrapolated ca. 23 M barrel daily.
Gas consumption proportion 56,7%, so 2,066 M liters of gas.
Then, 74,000 liters of gas daily per station.
This means roughly 2400 customers every day. Of them:
•50% care about anything apart from fuel. Of them:
•75% buy what they desire to. Of them:
•50% are actually interested in food and drink.
Actualized food/drink market is 18,75% of gas customers.
BP branded cakes share estimate: 10% (1,88% of all visitors). That's 46 men/women daily.
Assume sales force efficient (x2). Daily revenue is $74.
Across the globe it's $1,033 K daily, or $358 M yearly.
That's 0,21% of the group's total revenue ($171 bn), or 0,28% of downstream operations
revenue ($129 bn).
Appendix C. Diversification/Divestiture analysis
framework
Sector attractiveness: market volume, growth and promised profits, competition
intensity, opportunities and threats, influencing factors, entrance barriers.
Competitive capabilities: relative share, relative production costs, products analysis,
bargaining power, strategic alignment, technological capabilities, brand power.
Resource base and productivity analysis: identifying cash cows and leeches, resources
vs needs, synergy effects, emergence of additional advantages, returns and ratios
1) Technologies and experiences sharing
+
2) Brand sharing
+
3) Mutual use of resources for
•cost-cutting
•new competitive advantages
SUCCESSFUL
DIVERSIFICATION