Mergers,Acquisitions, and International Strategies
Mergers,Acquisitions, and International Strategies
Thepetroleum industry is quite significant since it involves theproduction and marketing of oil products. Oil is also a vitalcomponent required in many industrial operations, and this explainsthe competitive nature of the trade. The Royal Dutch Shell is knownto be one of the largest and most profitable companies in thepetroleum industry, and its presence in the major oil markets hasfacilitated its success. Although the demand for petroleum helps inthe oil companies’ profitability, the price of this resource keepsstagnating, and this might adversely affect a firm’s share price.The BG Group’s agreement to a merger with Shell, therefore, wasintended to increase the profitability of the combined companies.This essay is an evaluation of the Shell and BG merger, as well asother possible mergers and international strategies.
Itis apparent that Shell had taken several considerations beforedeciding to have a union with BG. The BG Group’s key performanceindicators for 2015 showed that the unification came at theappropriate time considering the weak price environment for oil backthen. For instance, the company’s earnings before interest (EBIT)decreased by 39% from the previous year’s results, and BGattributed this to the fall in commodity prices (Shell Global, 2016).The decline in BG’s earnings before interest (EBIT) also affectedthe sales prices considering that the total shareholder return (TSR)had a 6.5% reduction over a period of 1 year. As the organization’ssales prices had reduced, other segments of the firm’s businessperformance were also affected in 2015, including, the LNG shipping &marketing, as well as the upstream sector (Shell Global, 2016).
AlthoughShell could have merged with other petroleum companies apart from theBG Group, the identified firm was the most appropriate for thetakeover. Shell’s primary competitors in the oil industry includedChevron and ExxonMobiland, so the buyout evidently placed thecombined companies at a better position than their rivals in buildingtheir LNG market share. Shell considered BG as the best partner thatwould enable them to respond to the rising demand for natural gas(Scheck, Williams, & Gilbert, 2015). A significant portion of theglobal energy market in the future would likely be the developingnations, and these countries would be shifting to the use of cleanerfuels.
Theoil industry is highly unpredictable, and any shift in the globaltrade of petroleum products affects the entire field. Most nationsare concerned about global warming, so they are emphasizing on theuse of the appropriate energy forms that would not contribute to thisphenomenon. As more countries are curbing emissions, the use ofnatural gas and other clean energy sources will also increase.ExxonMobil, which is one of Shell’s competitors, also estimatedthat by 2040, most of the Asian and Pacific nations would importalmost half of the required natural gas (Scheck, Williams, &Gilbert, 2015). Shell’s consideration of the trends in thepetroleum industry is, therefore, the primary aspect that led to themerger with BG Group, and this shows that the buyout was a wisedecision.
Asthe earnings and revenues from the BG Group’s financial results haddeteriorated in 2015, the petroleum company needed a partner thatwould revive its business performance. At the same time, BG was in agood position to boost Shell’s LNG component, as the global oilprices are currently volatile. Even though BG’s revenues haddropped in 2015, its LNG shipping and marketing revenue improved. TheBG had a 63% increase its LNG delivered volumes in 2015, as itsincome from this component increased from $8.21 billion in 2014 to$8.34 billion in 2015 (Shell Global, 2016). The revenue that BG canpotentially accrue from LPG shipping is also likely to increase inthe future, and this further illustrates that Shell had carefullyconsidered the merger.
Shellalso wanted to protect itself from the effects of the unpredictableoil prices, and BG’s capacity to export large volumes of LNG madeit a suitable merger partner. BG and Cheniere Energy have a long-termagreement that would make the merged firm a major export facility ofLNG in the U.S (Scheck, Williams, & Gilbert, 2015). Hence, Shellwould get hold of a large percentage of the Asian and Pacific marketsas the demand for LNG in the region increases. BG’s assets willfurther enable Shell to surpass the LNG production volumes of itscompetitors such as ExxonMobil by a large margin.
Shell’sacquisition of BG commenced after it agreed to purchase a 50% premiumof the company in 2015, and the deal offered a 19% stake to the BGshareholders in 2016 (Scheck, Williams, & Gilbert, 2015). Theoffer tabled by Shell came at the ideal time considering thefinancial difficulties that the organization was facing and theinstability in the oil prices. The BG Group also made a wise decisionin agreeing to the merger because its low share price would likelyincrease with the support of Shell’s assets despite the low oilprice environment.
OasisPetroleum is also an oil company, but it operates solely within theU.S., and it does not have a history of mergers and acquisitions.Although the firm is independent, it has the potential to increaseits shareholder value and enhance its operational efficiency througha merger with another petroleum company. One of the businesses thatcan be a successful candidate for a merger with the Oasis Company isthe FieldPoint Petroleum Corporation. FieldPoint’s cash flows fromits investment activities decreased from $109,278 in 2015 to $79,469in the second quarter of 2016 (SEC, 2016). This indicationillustrates that the low prices of oil and natural gas have similarlyaffected the smaller companies. The firm’s involvement in theexploration of both oil and natural gas in its wells, however, willactualize its growth plan after a merger with the Oasis Petroleum.
Someof the Oasis Petroleum’s assets include oil and gas propertiesacquired through the successful efforts method, and their valueappreciated from $6.28 billion in 2015 to $6.40 billion in 2016 (SEC,2016). The increase in the value of the identified assets illustratesthat the company can still utilize its property and equipment inexploring additional resources. However, Oasis’ oil and gasrevenues for the first six months of 2016 were lower than therevenues for the same period in 2015, and the takeover would likelyimprove its profitability.
TheFieldPoint would be a profitable target for a merger with OasisPetroleum primarily because of its desirable features. First, theorganization is involved in the exploration of natural gas, and theliquefied form of this resource has been identified to be the mostprofitable in the future of the petroleum industry. Besides, OasisPetroleum can acquire FieldPoint with a premium of up to 50%considering that the total assets of the latter company were $9.2billion in June 2016 (SEC, 2016). Furthermore, the size of OasisPetroleum is almost similar to that of FieldPoint, and this wouldmake the merger successful.
Theother aspect that makes FieldPoint a remunerative target for a mergerwith Oasis Petroleum is that it does not appear to utilize itsresources and capacities optimally. The firm’s liquidity indicatesthat it has a working capital deficit of $6.4 million, and this isbecause its line of credit is classified as a current liability (SEC,2016). FieldPoint’s failure to comply with the financial ratiosimplies that they could be in default of their loan agreement if theyfail to secure alternative financing. Since Oasis Petroleum hasproducts that are complementary, it can combine its resources withthose from FieldPoint and maximize their efficiency.
Shellconducts its operations globally, and this implies that the unstableconditions of the global petroleum market can easily affect itsoperations. Although the firm is one of the largest petroleumcompanies, the decline in the oil prices has also affected itsoperations adversely. The primary reason that Shell selected BG as apartner for a merger is that it needed to invest in LNG due to theexpected increase in its demand. By identifying the petroleum marketniche at an early stage, Shell ensured that the merger would beprofitable. The Shell Company can improve its business-level strategyby utilizing highly effective and efficient production resources. Anoil company that takes this approach would have lower operationalcosts, and its profitability would increase.
Shell’sinternational corporate-level strategy also revolves around thedemand for LNG and the drop in oil prices. Before the buyout, theexecutives at Shell indicated that the merger would generate a cashflow of $15-20 billion from each company through integrated gas anddeep-water oil (Scheck, Williams, & Gilbert, 2015). Thisvalue-creating strategy would help the merged firms in gaining alarger market share, especially from liquefied natural gas (LNG).However, Shell can adopt a value-neutral strategy that would secure asteady cash flow for the company since the future of the industry isunpredictable.
OasisPetroleum should utilize a business-level strategy that would protectit against the effects of the volatile oil prices. The firm shoulddevelop a distinctive advantage over its competitors by making use ofa cost-effective supply chain that would deliver the petroleumproducts at a reduced price. Even though the oil and gas revenueshave depreciated, effective resources would improve the company’sprofitability. Oasis should also consider a corporate level strategythat would help it gain a larger market share, and it can achievethis by increasing its product differentiation. Although the businessis not a large multinational company, it can still try to export LNGto other markets since the demand for the commodity is increasing.
TheBG Group’s key performance indicators for 2015 show that its mergerwith Shell came at the appropriate time considering the weak oilprice environment. Although Shell could have merged with otherpetroleum companies apart from BG, the identified firm was the mostsuitable for the takeover. Shell considered BG as the best partnerthat would enable it to respond to the rising demand for natural gas.A successful candidate for a merger with Oasis Petroleum isFieldPoint Petroleum Corporation. The FieldPoint’s involvement inthe exploration of both oil and natural gas in its wells willactualize its growth plan after a merger with Oasis Petroleum.
Scheck,J., Williams, S. & Gilbert, D. (2015). Shell to Buy BG Group forAbout $70 Billion. The
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