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