OBU – Oxford Brookes University BSc Honours in Applied Accounting

Download OBU – Oxford Brookes University BSc Honours in Applied Accounting

Post on 14-Apr-2017

412 views

Category:

Education

2 download

Embed Size (px)

TRANSCRIPT

  • Research and Analysis Project

    BUSINESS AND FINANCIAL ANALYSIS OF:

    ROYAL DUTCH SHELL PLC (SHELL)

  • Table of contents

    1. Introduction

    2. Research Objectives and overall research approach

    3. Information gathering

    4. Analysis

    5. Findings and recommendations

    6. References

    7. Annexes

  • 1. INTRODUCTION

    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

    energy source.

    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

    (Robinson 2012).

    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

    operational management.

    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

    competitive positioning.

    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.

    Research objectives

    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