Shell Investment Report, Research Paper Example

Brief history

Shell is a global petrochemical company, currently operating in 70 countries worldwide, and employing 500.000 people around the world. In 1833, an antique trader, Marcus Samuel decided to move into export-import of shells. Later, moving into transportation, the family business set up their oil storage and shipment business (Shell, n.d.). Around 1900, the company was starting to explore new sources of oil in the Middle East and Russia. In 1907, Shell Transport and Royal Dutch Petroleum merged, and formed Royal Dutch Shell Group. In the early 20^th Century, the company provided aviation fuel for the war, and the inter-war years were also prosperous (Shell, n.d.). Losing profit and tankers during World War II, the offshore drilling for oil in the Gulf of Mexico started (1947), and by 1955, the company had 55 wells. The breakthrough for Shell to come out on top, however, was based on the innovative approach towards creating fuel: the company teamed up with Ferrari, and created lubricants, based on joint research efforts.

Corporate Strategy and Structure

Shell became the number one oil and petrol company because it adapted a policy of diversification (Shell, n.d.) into metal, coal, and nuclear power. Today, the company focuses on research related to bio-fuel and solar energy generation. In 2005, a structural reorganization of the global group was carried out, and Royal Dutch Shell was created, with a new headquarter in Hague, Netherlands, and incorporated in the United Kingdom.

Company Overview

Shell has the largest retail network of branded fuel with around 43.000 retail sites. The company sells 160 billion liters of fuel each year (Shell, n.d.). Shell processes over 25 million customer sales transactions each year.

Shell has two different types of activities: Upstream and Downstream. Upstream operations involve exploring and extracting oil, natural gas, and other energy sources, while Downstream refers to business activities related to transforming crude oil and gas into customer products. The 2014 Royal Dutch Shell Annual Report (2015) states that the main challenges that the global firm focuses are as follows: climate change, the need for cleaner energy, the need for innovation, and strong ongoing demand for fuel. The main activities of the company are: exploration, development and extraction, manufacturing and energy production, and transport and trading.

Shell’s main upstream activities are concentrated in North and South America (Shell, 2015), and downstream activities are carried out worldwide. The revenue of the company from upstream activities in 2014 was $92.299 million, and $378.046 million from downstream activities. 37 percent of the group’s revenue came from Europe, 35.6 percent from Asia, Oceania, and Africa, and 16.8 percent from the United States. The company also has a large expenditure for research and development projects, focusing on accessing new resources of energy in a more cost-effective way.

Financial Details

The earnings of the company were down from 2012 to 2013 and the income for the period of 2014 was $14.730 million, down from $16.526 in 2013. The main reason for the declining income of the company was the lower price of crude oil and gas. According to the Euro Investor (2015), the share price of Royal Dutch Shell in October 2012 was $26.87, and it declined throughout 2012 and 2013, finally recovering in 2014, and declining again, currently standing at $21.46. (EuroInvestor, 2015). The Income attributable to Royal Dutch Shell Plc shareholders, according to the 2014 annual report also declined.  Therefore, the main challenge the company is currently facing is maintaining profitability, despite the declining prices of non-renewable energy.

Part Two: Macro-Analysis

Today, two main trends determine the fossil fuel industry: the need for renewable sources and the declining fuel prices. According to the 2014 Annual Report of Shell (Shell, 2015), the global demand for oil and gas rose by 0.7 percent between 2012 and 2013. At the same time, Shell estimated that demand rose by approximately one percent between 2013 and 2014. Natural gas and crude oil prices, however, have been declining since 2012 (Shell, 2015, p. 16). The main risks defined by the company’s annual report for Shell, originated from the operating macro-environment are as follows: the fluctuating prices of crude oil that endanger the company’s financial stability and strategy, the lack of price assumption accuracy, trading risks originating from commodity market fluctuations and influences, and the high amount of investment made in future hydrocarbon production.

Hokroh (2014) created a competitive analysis of the oil and gas industry, based on Porter’s Five Forces model. According to the author, the Royal Dutch Shell is currently in the 7^th position globally based on production. Some of the largest companies are 100% state-owned, such as Saudi Aramco and the China National Petroleum Corporation. The main barriers of entry in the marketplace are: large requirement of capital investment, regulations, and economies of scale. This means that there are some high barriers of entry, therefore, the companies currently operating in the industry would not need to face new competition. At the same time, the threat of substitute products is extremely high. As governments are now creating guidelines and quotas on a national level to replace current sources of energy with renewable supplies, it is likely that new companies being able to produce renewable energy will gain traction in the market. As governments can impose high taxes on companies with the greatest carbon footprint, some large customers of Royal Dutch Shell might opt for substitutes: green, renewable energy.

The power of suppliers is high, as there are many companies bidding for the same resources of gas and oil.  The bargaining power of customers is also high, and  – as it has been confirmed before – economies of scale and corporate companies can move away from one company to maximize their benefits.

Shell’s Strategic Report (Royal Dutch Shell Plc, 2013), the global economic growth was 3 percent in 2013. While the U.S. economy recovered during 2013, the Eurozone’s GDP declined by 2.4 percent. The global demand for oil, at the same time, rose by 1.4 percent in 2014, and the demand in India and China rose.

The December 2014 report of the International Energy Agency (IEA, 2014), in November 2014 Brent prices were at five-year low. At the same time, the global production of non-renewable energy sources declined, as well as OPEC crude supply. As the report (IEA, 2014, p. 3) confirms: “When it comes to supply, lower oil prices are already slashing producers’ spending, but this is more likely to affect medium? and long?term output than short?term supplies”. In China, crude throughput increased continuously since 2012, and the oil product trade experienced a great level of fluctuation.

It is also important to note that the U.S. sanctions against Russia have several economic implications. According to Nelson (2015), in 2013, mineral fuel and oil import from Russia to the United States amounted for $18.458 million. Several restrictions were also applied to oil-related products. As the report (Nelson, 2015, p. 6) states: “The United States restricts U.S. individuals and entities from exporting goods, services, or technology in support of projects that have the potential to produce oil in Russia”. This, as well as the fluctuation of commodity markets, oil prices, demand, and currencies can negatively impact oil and gas companies, including Royal Dutch Shell. In the last section of the paper, the author would like to explore the risks that affect the future competitiveness of the company on the global market.

In 2014, the return on average capital employed by Shell was relatively low: 7.1 percent (Shell, 2015). Net capital investment declined, and the number of employees increased. The company is facing with increasing greenhouse gas emissions. Production and manufacturing expenses have been rising throughout the industry, and this affected Royal Dutch Shell, as well. At the same time, interest expenses increased, as well. The company reduced its R&D budget in 2014, and this would negatively impact Shell’s ability to successfully discover new, greener sources of energy that have the ability to provide sustainable growth. The company’s assets also reduced in 2014.

In order to face the main challenges, such as developing technologies that make the production of renewable energy cost-effective, reducing risks originating from market volatility and rising carbon footprint, the company will need to revise its strategy to increase its R&D investment’s return on investment. Further, the company needs to work on eliminating some of the main risks associated with its operations, such as violations of corruption and competitive regulations, and reducing the company’s operation’s environmental impact.

References

EuroInvestor. (2015) Shell Historical Share Prices. Retrieved from http://ir1.euroinvestor.com/HistoricalQuotes/

Hokroh, M. A. An analysis of the oil and gas industry’s competitiveness using porter’s five forces framework.The Global Journal of commerce & management prespective. 04/2014; 3(2):76.

IEA (International Energy Agency) (2014) Oil market report. Retrieved from https://www.iea.org/media/omrreports/fullissues/2014-12-12.pdf

Nelson, R. (2015) U.S. sanctions on Russia: Economic implications. Congressional Research Service. Retrieved from http://www.fas.org/sgp/crs/row/R43895.pdf

Shell Global.(2015) “Our History” Retrieved from http://ir1.euroinvestor.com/HistoricalQuotes/

Shell Global. (2015) Annual Report. “Royal Dutch Shell plc Annual Report and Form 20-F for the year ended December 31, 2014” Retrieved from http://reports.shell.com/annual-            report/2014/servicepages/downloads/files/entire_shell_ar14.pdf