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Research and Analysis Project
BUSINESS AND FINANCIAL ANALYSIS OF:
ROYAL DUTCH SHELL PLC (SHELL)
Table of contents
2. Research Objectives and overall research approach
3. Information gathering
5. Findings and recommendations
As global population is rising and economic development is occurring to many developing countries, energy
consumptions are increasing significantly. This leads to the importance of supplying suitable, reliable
Shell estimates that by 2050, global energy demand could increase by up to 80%; as living standards will
rise and the worlds population will grow from seven to nine billion this will cause significant pressure to
the environment and to the consumption levels of traditional energy sources. Although the continuous efforts
to improve energy from renewable sources, oil is still the most important source of energy; due to its non-
renewable nature oil companies need to exploit new fields in order to restore declining oil reserves.
Oil has a quite complicated chain value cycle that is going to require differentiated and articulated activities
to manage it; these activities go from exploration, drilling, extraction, refining, transport, marketing to final
distribution. Many players operate the industry according to geographical presence, targeted markets and
presence along the value chain; the most important players manage almost all the activities of the chain and
acting as multinational players with operations through the world with branches and local entities.
Much attention has been given to this industry since oil industry has been shaped in the years by waves of
consolidation, mergers and acquisitions (e.g. Exxon and Mobil, Total and Elf, Conoco and Phillips, BP and
Amoco), development of rising giants (China Petroleum or Petrobras for instance), waves of nationalization
in some countries (the case of YPF in Argentina as the most recent event) and sudden and dramatic oil price
changes due to political risks and lack of adequate supply.
Some points will be covered by this document with the purpose to analyse the performance and the effects of
the strategies for one of the most important players of this industry, but also of the world of the most know
multinational companies: Royal Dutch Shell.
In the following pages a disclosure about strategies, financial results and perspectives of this company will
be made in the attempt to assess its profitability, liquidity solvency and evaluation of the effectiveness of the
strategies undertaken in the last years.
2. RESEARCH OBJECTIVES AND OVERALL RESEARCH APPROACH
Choice and selection of the organization
I have selected the The business and financial analysis and the Research and Analysis Project is in the
context of Royal Dutch Shell financial statements. The financial analysis is based on the performance of
Shell over three financial years, from 2010 to 2012 with the purpose of evaluating both strategies, business
and financial performance for the period of analysis. Strategy and business aspects will allow to appreciate
the impact of the organization and of external factors that have affected the performance of the company
Reasons for selection
There are number of reasons for choosing The business and financial analysis basing on the financial
dimensions of Royal Dutch Shell plc. These reasons entail the following:
1. Financial ratio analysis is a vast and deeply related technique to assess performance of a company. It
permits to evaluate the effects of past strategies over the financial results and helps in understanding
the companys actions. Financial results are the outcome of strategies which are deeply linked to the
constraints and opportunities offered by the industry and by the competitive positioning that result
from the actions of the other players that operate in the same business.
2. Although financial ratios are calculated according to historical figures, they improve knowledge
about the company and highlight relationships between operations and capital structure of the
business. This is a potential help in order to assess and predict future performance and for
3. Shell is a multinational company which has its operations in most of the countries of the world; this
increases the interest about its operations and in particular on how it is managed, how it is viable
according to liquidity and solvency and how the impact of fluctuations of the prices of oil and gas
change its results.
4. Oil and gas industry is perceived to be one of the most lucrative industry. Is this perception real or is
it related to a common perception which is influenced by the fluctuation of the oil prices ?
5. The industry has been characterized by some important acquisitions in the last years. Oil and gas was
one on the most targeted industries in the most recent years with a 15% of the transaction volumes
occurring to energy industry (Bloomberg 2012). According to Dealogic, in 2012 oil & gas was the
leasing sector with 385 USD billion, a 14% share of global M&A volume (2,7 USD Trillion); this
makes this industry very attractive and interesting to analyse.
6. Analysis of Shell could offer an opportunity to understand why this company has been able to set its
competitive positioning and to become a leading player in this industry.
7. The competitive positioning and leadership of Shell could be related to financials and value creation
for its shareholders.
8. On the other side one needs to assess if the actual financial performance could be sustainable or if
the financial situation could lead to risks of liquidity and solvency that could create problems to the
company in the ability to pursue new investments and to undertake strategies to improve its
9. Should be Shell considered a potential target for other oil and gas companies or could be considered
a potential actor driving a further consolidation of the industry ?
In the following pages we are going to try to respond to these points.
1. To have understanding on how companies in oil and gas industry operate and what are the main
aspects in managing such kind of companies.
2. To conduct company corporate appraisal in order to identify company strengths and opportunities; to
highlight weaknesses and threats that could affect its operations.
3. To analyse the company business and financials over the three year period in order to assess for
profitability, solvency, liquidity, capital structure and highlights relationships between the different
types of ratios.
4. Analyse the industry competitive environment according to the Porters five forces and highlights
these point with the strategies pursued by Shell and how this company is creating its competitive
advantage over other competing players.
3. INFORMATION GATHERING
Most of the data and information have been taken according to the disclosure published by the oil & gas
companies in the investor relation section of their corporate website and in particular data disclosed in their
annual reports and investors presentations. Other data and have been taken according to published articles
on leading financial journals such as Financial Times, Wall Street Journal and finally some selected data
come from reliable sources such as providers of league tables such as Dealogic, Bloomberg and specialized
entities operating in the international analyses such as Chatam House.
4. ANALYSIS AND RECOMMENDATIONS
Shell and the Oil & Gas industry
Shell operates an industry which is characterized by a large number of players that compete in order to
exploit oil reserves, developing, refining and finally selling refined products to the market. As soon as the oil
& gas cycle is vast industry with many potential niches, players choose to position themselves on some
activities of the value chain (e.g. upstream for someone, downstream for others) or to operate the full cycle.
Usually the most important players such as Shell, BP, ExxonMobil and Chevron but also rising ginats such
as Petrobras and China Petroleum operate the entire value chain.
Due to their nature of non-renewable sources, both oil and gas resources have strategic issues related to the
need of securing the supply. Acquisition of rights and exploration of potential reserves have great importance
in order to permit companies to be able to supply in the long run. Ability to undertake investments, to avoid
extra costs in exploring and developing field and finally to optimize capital allocated has an impact on the
value generated by each project and the overall return on capital invested. In order to secure reserves many
companies undertake M&A transactions and acquire minor players which holds rights on some fields. In the
attempt to improve efficiency and recover profitability other companies divest assets or reduce their presence
in some businesses, and in particular in the downstream.
The industry is also influenced by the impact, at this time limited, of new source of energy, mai