Mergers in the Oil Industry Executive Summary
For the corporation that has acquired another company, merged with another company, or been acquired by another company, evaluate the strategy that led to the merger or acquisition to determine whether or not this merger or acquisition was a wise choice. Justify your opinion.
The oil and gas industry is extremely important in how the world operates and sustains its living. The ability to capture the nature resources provided to us by the environment has proven to be a very lucrative and profit rich industry that had demonstrated its worth over the long run. Within this industry, there are many large and powerful companies that have built strong organizations across the globe. Exxon — Mobil is one such company that has experienced mergers and has benefited greatly off of their benefits.
The joining between Exxon and Mobil in 1999 created shockwaves around the industry as a new global giant had been born. According to Exxon Mobil’s website “This merger will enhance our ability to be an effective global competitor in a volatile world economy and in an industry that is more and more competitive, ” said Lee Raymond and Lou Noto, chairmen and chief executive officers of Exxon and Mobil, respectively.” These men were correct as this merger is evaluated in today’s terms.
The oil and gas industry has received plenty of negative criticism over the years with many accidents and market fluctuations along the way. When Exxon and Mobil merged 15 years ago, the birth of the biggest and most profitable major oil companies organized resources that would make this company more productive than most nations in the world. Exxon Mobil has embraced their role in their world and have focused their efforts strictly on oil and gas.
In the long run these efforts have panned out well for both companies since the merger. Many of the numbers speak for themselves in terms of massive market share gained and profits realized. Corocoran (2010) explained “By 2008, the combined Exxon Mobil had posted sales of $459.58 billion and net income of $45.22 billion, one of the biggest annual profits in U.S. corporate history. Though sharply lower energy prices and the global economic downturn sliced that to $301.5 billion in revenue and $19.28 billion of net profit in 2009. Assets had risen to $233.32 billion, from $96.06 billion for Exxon alone at the end of 1997, while its workforce has shrunk back to 80,000.”
The strategy behind this merger was total domination and the arrival of a mega power that can dominate like nation states. The success of this strategy appears to have been effective as this super corporation has successfully realized extraordinary profits and have became a global economic force all unto themselves. What made this possible was the leadership vision that instilled momentum in this change and transformation. Coll (2012) wrote “the idea was to install systems that would take the human fallibility out of these operations to the greatest possible extent by automating them, by idiot-proofing them, and by giving everybody the same playbook, no matter where in the world they were, because ExxonMobil was rapidly evolving, especially after the merger, into a more international company with employees distributed all over the world.”
Question 2: 2. For the corporation that has not been involved in any mergers or acquisitions, identify one (1) company that would be a profitable candidate for the corporation to acquire or merge with and explain why this company would be a profitable target.
Within the oil and gas industry, there are certain organizations that are required to remain domestic due to the nature of the business. Pipeline companies are such organizations where it makes little sense to expand internationally due to geographic restraints. Mergers and acquisitions at this level are much more rare and competition seems to be more rampant at the distribution level. The ability to transport oil and gas is a large factor in the overall success of the oil industry and there are many opportunities for growth with or without the use of large scale mergers and acquisitions.
QEP Resources Inc. is a managing company that operates through its subsidiaries as an independent oil and natural gas exploration and production company. QEP sells its acquired energy sources to distributors and refiners. Additionally QEP offers midstream field services as well, providing the best opportunity for a possible merger or acquisition. The midstream portion of the oil industry can provide a significant opportunity for continual growth.
DCP Midstream Partners is a reasonable target for QEP for acquisitions for several reasons. DCP conducts midstream operations, which is only a portion of what QEP offers. DCP, according to its website “provide an integrated package of services to natural gas producers including gathering, compressing, treating, processing, transporting, storing and selling natural gas as well as producing, fractionating, transporting, storing and selling NGLs and condensate. We believe our ability to provide all of these services gives us an advantage in competing for new supplies of natural gas because we can provide substantially all services that producers, marketers and others require to move natural gas and NGLs from wellhead to market on a cost-effective basis.”
The idea is to stay flexible and ready to move if the opportunity arises. Much like Exxon and Mobil, the fortitude to accept change and be accepting to transformation is a great asset. Hitt, Ireland & Hoskissson (2013) agreed with this premise. They wrote ” to be strategically flexible on a continuing basis and to gain the competitive benefits of such flexibility, a firm has to develop the capacity to learn. Continuous learning provides the firm with new and up-to-date skill sets which allow it to adapt to its environment as it encounters change.”
QEP’s size and capital resources would allow them to absorb the operational content of DCP. The pipeline business can be built upon already existing infrastructure that makes the merger more of paper exchange than any real exchange of materials, making it that much more simple. The current growth of the Natural Gas industry due to hydraulic fracturing ha put the entire domestic industry in a great position of advantage and significant gains may be made if prudent and wise mergers are allowed to take advantage of the benefits of such a marriage.
Question 3: For the corporation that operates internationally, briefly evaluate its international business-level strategy and international corporate-level strategy and make recommendations for improvement.
Exxon Mobil has been highly successful in their international strategy since the inception of their merger. It appears that a shift in expanding the market and imagining new heights of success were critical in allowing the leadership to let people believe that these levels could in fact be reached. Technology has allowed for global expansion, and as a result, new, global strategies are necessary to evolve along with the industry itself.
Exxon Mobil has been met with much resistance in this meteoric ascent to competitive advantage. Attacks from many fronts have attempted to lessen their dominating performance and recapture loss market share. Environmentalists have proven that through political maneuvering that oil giants such as Exxon Mobil can be harmed.
To truly escape this problem, Exxon Mobil had to strategize to rebrand themselves as a global company, not interested in the petty political interests of nations. The corporate model and its ability to assume massive amounts of wealth have shifted the balance of power much into the favor of corporations who know how to take advantage of the situation.
The culture at Exxon Mobil is not aligned to any one nation or set of principles other than their own. Kelly (2012) explained how this mindset eventually led to world domination of the oil industry. He wrote “around 2004 ExxonMobil analysts forecasted that “worldwide energy demand would grow by about 35% overall by 2030 and that demand for oil and gas liquids would rise by about 22%, to 108 million barrels per day. At an industry meeting in Washington in the early 2000s, an executive asked ExxonMobil chairman Lee Raymond about building more refineries in inside the U.S. — the corporation operated and licensed more gas stations overseas despite being headquartered in Irving, Texas — to help protect the country against gasoline shortages. Raymond replied, “Why would I want to do that? … I’m not a U.S. company and I don’t make decisions based on what’s good for the U.S.”
Although unpopular in many political circles, this attitude adjustment attracted many other interests that also saw the opportunity for growth by creating mega oil companies. Regardless of the political issues, Exxon Mobil was successful because they captured an opportunity when it arose, demonstrating courage and forethought. This shift in strategy was key to the ultimate success of the operation. This political maneuvering created an environment of success for the new oil company. ” Instrumental to the implementation of Exxon’s strategy was its participation in industry and lobby groups. Exxon is a prominent member of the American Petroleum Institute, the major U.S. petroleum industry trade association and was from the date of its creation in 1989 a board member of the Global Climate Coalition one of the most influential U.S. lobbying front group on the climate issue.” (van den Hove, Menestrel & de Bettgnies, 2002).
Question 4: For the corporation that does not operate internationally, propose one business-level strategy and one corporate-level strategy that you would suggest the corporation consider. Justify your proposals.
Improvement opportunities are abundant for QEP in today’s market climate. Both business level adjustments in strategy and corporate level strategy adjustments can provide the competitive advantage that is necessary to maintain growth and profits in a very competitive industry such as the oil and gas industry. Examining what can be improved upon is an important process that may lead to big advantages if successfully completed.
Business level strategies are attempts to model ways in which value may be brought to the customer and improving an internal skill set. QEP could take advantage of the negative attitudes towards hydraulic fracturing and develop a cleaner and safer method of shale gas extraction. The political opposition to this practice intensifies and thus allowing for a company willing to step out of the crowd and take the lead on an issue to make significant gains within the market. By becoming an environmentally aware company, the backlash to their practices, valid or not, may be lessened. The political aspects of business should not be overlooked in this case and the public relations business level strategy adjustment could significantly aide in solving the problems and increasing growth and profits.
Corporate level strategies require more imagination and ingenuity to discover their real potential in helping an organization such as QEP become more effective and efficient in their given industry. These strategies must present a clear direction for the overall direction of the organization itself and serve as guide posts for all activity and motivation.
One such corporate strategy is investing in ways to export the seemingly unlimited supply of shale gas overseas into new markets as well as more reasonable markets such as Canada and Mexico. The U.S. has quietly became a massive energy producer within the world. The events unfolding in North Dakota demonstrate the abundance of wealth that lies beneath the ground. It is time for QEP to think in global terms much like Exxon Mobil’s leadership in their new vision for their companies. This corporate level strategic adjustment may take some risk, but the resources available suggest that the time to act is as soon as possible.
Coll, S. (2012). Private empire: ExxonMobil and American power. Penguin.
Corcoran, G. (2010). Exxon-Mobil 12 Years Later: Archetype of a Successful Deal. The Wall Street Journal, 30 Nov 2010. Retrieved from http://blogs.wsj.com/deals/2010/11/30/exxon-mobil-12-years-later-archetype-of-a-successful-deal/
DCP Midstream Partners (nd). Competitive Strengths. Viewed 29 May 2014. Retrieved from http://www.dcppartners.com/company/competitive-strengths
Exxon Mobil (nd). Our History. Viewed 29 May 2014. Retrieved from http://corporate.exxonmobil.com/en/company/about-us/history/overview
Hitt, M.A., Ireland, R.D., & Hoskisson, R.E. (2013). Strategic Management Concepts And Cases Competitiveness And GlobalizationTenth Edition. Mason: Cengage Learning.
Kelley, M. (2012). 10 Steps That Led to Exxon Mobil’s Global Domination. Business Insider 16 May 2012. Retrieved from http://www.businessinsider.com/exxonmobil-private-empire-2012-5?op=1
Van den Hove, S., Le Menestrel, M., & de Bettignies, H.C. (2002). The oil industry and climate change: strategies and ethical dilemmas. Climate Policy, 2(1), 3-18.
Yahoo Finance. QEP Resources Inc. Profile. Viewed 29 May 2014. Retrieved from https://finance.yahoo.com/q/pr?s=QEP+Profile
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