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<ul><li><p>Research and Analysis Project </p><p>BUSINESS AND FINANCIAL ANALYSIS OF: </p><p> ROYAL DUTCH SHELL PLC (SHELL) </p></li><li><p>Table of contents </p><p>1. Introduction </p><p>2. Research Objectives and overall research approach </p><p>3. Information gathering </p><p>4. Analysis </p><p>5. Findings and recommendations </p><p>6. References </p><p>7. Annexes </p></li><li><p>1. INTRODUCTION </p><p>As global population is rising and economic development is occurring to many developing countries, energy </p><p>consumptions are increasing significantly. This leads to the importance of supplying suitable, reliable </p><p>energy source. </p><p>Shell estimates that by 2050, global energy demand could increase by up to 80%; as living standards will </p><p>rise and the worlds population will grow from seven to nine billion this will cause significant pressure to </p><p>the environment and to the consumption levels of traditional energy sources. Although the continuous efforts </p><p>to improve energy from renewable sources, oil is still the most important source of energy; due to its non-</p><p>renewable nature oil companies need to exploit new fields in order to restore declining oil reserves. </p><p>Oil has a quite complicated chain value cycle that is going to require differentiated and articulated activities </p><p>to manage it; these activities go from exploration, drilling, extraction, refining, transport, marketing to final </p><p>distribution. Many players operate the industry according to geographical presence, targeted markets and </p><p>presence along the value chain; the most important players manage almost all the activities of the chain and </p><p>acting as multinational players with operations through the world with branches and local entities. </p><p>Much attention has been given to this industry since oil industry has been shaped in the years by waves of </p><p>consolidation, mergers and acquisitions (e.g. Exxon and Mobil, Total and Elf, Conoco and Phillips, BP and </p><p>Amoco), development of rising giants (China Petroleum or Petrobras for instance), waves of nationalization </p><p>in some countries (the case of YPF in Argentina as the most recent event) and sudden and dramatic oil price </p><p>changes due to political risks and lack of adequate supply. </p><p>Some points will be covered by this document with the purpose to analyse the performance and the effects of </p><p>the strategies for one of the most important players of this industry, but also of the world of the most know </p><p>multinational companies: Royal Dutch Shell. </p><p>In the following pages a disclosure about strategies, financial results and perspectives of this company will </p><p>be made in the attempt to assess its profitability, liquidity solvency and evaluation of the effectiveness of the </p><p>strategies undertaken in the last years. </p><p>2. RESEARCH OBJECTIVES AND OVERALL RESEARCH APPROACH </p><p>Choice and selection of the organization </p><p>I have selected the The business and financial analysis and the Research and Analysis Project is in the </p><p>context of Royal Dutch Shell financial statements. The financial analysis is based on the performance of </p><p>Shell over three financial years, from 2010 to 2012 with the purpose of evaluating both strategies, business </p><p>and financial performance for the period of analysis. Strategy and business aspects will allow to appreciate </p><p>the impact of the organization and of external factors that have affected the performance of the company </p><p>(Robinson 2012). </p><p>Reasons for selection </p><p>There are number of reasons for choosing The business and financial analysis basing on the financial </p><p>dimensions of Royal Dutch Shell plc. These reasons entail the following: </p></li><li><p>1. Financial ratio analysis is a vast and deeply related technique to assess performance of a company. It </p><p>permits to evaluate the effects of past strategies over the financial results and helps in understanding </p><p>the companys actions. Financial results are the outcome of strategies which are deeply linked to the </p><p>constraints and opportunities offered by the industry and by the competitive positioning that result </p><p>from the actions of the other players that operate in the same business. </p><p>2. Although financial ratios are calculated according to historical figures, they improve knowledge </p><p>about the company and highlight relationships between operations and capital structure of the </p><p>business. This is a potential help in order to assess and predict future performance and for </p><p>operational management. </p><p>3. Shell is a multinational company which has its operations in most of the countries of the world; this </p><p>increases the interest about its operations and in particular on how it is managed, how it is viable </p><p>according to liquidity and solvency and how the impact of fluctuations of the prices of oil and gas </p><p>change its results. </p><p>4. Oil and gas industry is perceived to be one of the most lucrative industry. Is this perception real or is </p><p>it related to a common perception which is influenced by the fluctuation of the oil prices ? </p><p>5. The industry has been characterized by some important acquisitions in the last years. Oil and gas was </p><p>one on the most targeted industries in the most recent years with a 15% of the transaction volumes </p><p>occurring to energy industry (Bloomberg 2012). According to Dealogic, in 2012 oil & gas was the </p><p>leasing sector with 385 USD billion, a 14% share of global M&A volume (2,7 USD Trillion); this </p><p>makes this industry very attractive and interesting to analyse. </p><p>6. Analysis of Shell could offer an opportunity to understand why this company has been able to set its </p><p>competitive positioning and to become a leading player in this industry. </p><p>7. The competitive positioning and leadership of Shell could be related to financials and value creation </p><p>for its shareholders. </p><p>8. On the other side one needs to assess if the actual financial performance could be sustainable or if </p><p>the financial situation could lead to risks of liquidity and solvency that could create problems to the </p><p>company in the ability to pursue new investments and to undertake strategies to improve its </p><p>competitive positioning. </p><p>9. Should be Shell considered a potential target for other oil and gas companies or could be considered </p><p>a potential actor driving a further consolidation of the industry ? </p><p>In the following pages we are going to try to respond to these points. </p><p>Research objectives </p><p>1. To have understanding on how companies in oil and gas industry operate and what are the main </p><p>aspects in managing such kind of companies. </p><p>2. To conduct company corporate appraisal in order to identify company strengths and opportunities; to </p><p>highlight weaknesses and threats that could affect its operations. </p></li><li><p>3. To analyse the company business and financials over the three year period in order to assess for </p><p>profitability, solvency, liquidity, capital structure and highlights relationships between the different </p><p>types of ratios. </p><p>4. Analyse the industry competitive environment according to the Porters five forces and highlights </p><p>these point with the strategies pursued by Shell and how this company is creating its competitive </p><p>advantage over other competing players. </p><p>3. INFORMATION GATHERING </p><p> Most of the data and information have been taken according to the disclosure published by the oil & gas </p><p>companies in the investor relation section of their corporate website and in particular data disclosed in their </p><p>annual reports and investors presentations. Other data and have been taken according to published articles </p><p>on leading financial journals such as Financial Times, Wall Street Journal and finally some selected data </p><p>come from reliable sources such as providers of league tables such as Dealogic, Bloomberg and specialized </p><p>entities operating in the international analyses such as Chatam House. </p><p>4. ANALYSIS AND RECOMMENDATIONS </p><p>Shell and the Oil & Gas industry </p><p>Shell operates an industry which is characterized by a large number of players that compete in order to </p><p>exploit oil reserves, developing, refining and finally selling refined products to the market. As soon as the oil </p><p>& gas cycle is vast industry with many potential niches, players choose to position themselves on some </p><p>activities of the value chain (e.g. upstream for someone, downstream for others) or to operate the full cycle. </p><p>Usually the most important players such as Shell, BP, ExxonMobil and Chevron but also rising ginats such </p><p>as Petrobras and China Petroleum operate the entire value chain. </p><p>Due to their nature of non-renewable sources, both oil and gas resources have strategic issues related to the </p><p>need of securing the supply. Acquisition of rights and exploration of potential reserves have great importance </p><p>in order to permit companies to be able to supply in the long run. Ability to undertake investments, to avoid </p><p>extra costs in exploring and developing field and finally to optimize capital allocated has an impact on the </p><p>value generated by each project and the overall return on capital invested. In order to secure reserves many </p><p>companies undertake M&A transactions and acquire minor players which holds rights on some fields. In the </p><p>attempt to improve efficiency and recover profitability other companies divest assets or reduce their presence </p><p>in some businesses, and in particular in the downstream. </p><p>The industry is also influenced by the impact, at this time limited, of new source of energy, mainly from </p><p>renewable sources such as biofuels which are potentially reducing the monopoly of oil as a mass transport </p><p>manner. This is going to alter the strategies adopted by the most important companies and at this time some </p><p>of them, such as Shell, have started to improve their refining capacity in biofuels. </p></li><li><p>Gas is also gaining importance as an energy source to be used both for electricity generation, for heating and </p><p>also for mass transit thanks to its cleaner burning and lower pollution impact; hence some strategies have </p><p>pursued by the players in this segment such as building infrastructures to transport it. </p><p>Finally oil & gas industry is deeply related to geopolitics with prices that are widely affected by decisions of </p><p>OPEC and by political crisis and turmoil in the producing countries. Due to Asian development there is a </p><p>rising concern about the ability of the supply to secure needs of the developing economies and how these </p><p>issue could affect prices in the medium long term. Porter five forces model seems quite useful to highlight </p><p>and to summarize the main factors that are affecting the competitive positioning of the different players in </p><p>this industry: </p><p>Threat of new competitors: low </p><p>Barriers of entry to the sector are quite high with issue relate to capital needed to undertake investments, to </p><p>acquire rights and to develop projects. All these barriers make the potential risk of new competitors can be </p><p>ranked as low. </p><p>Threat of substitute products or services: medium to low </p><p>At this time, common concerns about the effects of oil and gas effects on environment have risen; further </p><p>concerns about reserves for the long run of these resources have increased with the results that new substitute </p><p>products such as biofuel or electricity produce from renewable sources are starting to gain market shares. </p><p>There is high possibility that new products and services can enter into the market although at this time, </p><p>according to the rise in the demand by developing countries, there is a limited risk that these new substitute </p><p>products would reduce significantly the demand of oil. </p><p>For this reason substitute risk can be ranked as medium to low. </p><p>Bargaining power of customers (buyers): low </p><p>Oil and gas demand is a traditionally characterized by a quite inelastic demand curve since people require </p><p>these resources in order to manage their productive cycle or to solve basilar and important issues. Although </p><p>customers can select from many suppliers at this time they do not have a significant power to influence </p><p>prices. For this reason, buyers power can be ranked a s low. </p><p>Bargaining power of suppliers: high </p><p>Oil & gas companies need to secure rights to develop field by the states or by land owners which have a </p><p>strong bargaining power in the selection of the most appealing offer. For this reason Bargaining power of </p><p>suppliers is high. </p><p>Degree of competition: high </p><p>Competition among oil and gas companies is high both in the upstream and downstream business; in </p><p>upstream business companies compete in order to secure rights to explore while in downstream they compete </p><p>in order to sell refined products to final customers. Final products are quite standardized and hence price and </p><p>marketing efforts plays a crucial role in order to create awareness among customers. </p><p>Shell: company corporate profile and recent strategies </p><p>Focusing on the company of this report, some highlights are useful to put complete the general framework </p><p>and to be viable for the following financial analysis. </p></li><li><p>Royal Dutch Shell (Shell) is a public limited company registered in England and Wales and headquartered in </p><p>the Netherlands. Thanks to a long time operating history the company is one of the most important </p><p>independent, that is not state owned players in the Oil and Gas industry. The group operates all around the </p><p>world with a presence around the world which is quite balanced. Revenues come from all around the world </p><p>with Europe and Asia leading the sales. </p><p>Business operated by Shell covers all the different phases of the industry cycle: both upstream (e.g. </p><p>acquisition of the rights, exploration, development and production) and downstream activities (e.g. refining </p><p>the crude product, processing and purifying the natural gas, marketing and distribution of the refined </p><p>products). Downstream is the most important revenue source although upstream is leading according to </p><p>invested capital. Corporate is a residual division which cover some activities offered to the group and to the </p><p>other companies which are accounted as equity investments. </p><p>In the last years the company has pursued a differentiated strategy with the purpose of maintaining capacity </p><p>of supply and to improve proven reserves thanks to development of new fields/projects which should allow </p><p>to achieve a target of 3.7 million boe/d 1 production for 2014, 12% higher than the 2010 level. </p><p>Around 30 new projects are being developed in order to create an integrated group with activities based on </p><p>oil, gas and biofuels. Investments were also made to improve operations in deep water explorations and LNG 2 project which should assist company strategy with outcomes in the medium long term. Some critical points </p><p>concerning investments occurred to Alaska drilling program which has been paused during 2013. </p><p> 1 Boe/d: barrel oil equivalent per day </p><p>2 Liquified natural gas </p><p>Country Revenues Segmentation</p><p>USD mln 2010 2011 2012 2010 2011 2012</p><p>Europe 137,359 187,498 184,223 37.3% 39.9% 39.4%</p><p>Asia, Oceania, Africa 110,955 148,260 156,310 30.1% 31.5% 33.5%</p><p>USA 77,660 91,946 91,571 21.1% 19.6% 19.6%</p><p>Other Americas 42,082 42,467 35,049 11.4% 9.0% 7.5%</p><p>Revenues 368,056 470,...</p></li></ul>
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