Oil Firm Industry Analysis

¶ … price of oil has fallen from around $120 per barrel about a year and half ago to around $50 per barrel. This has resulted in a sharp fall in revenues for all oil companies and specially the smaller companies that have a limited cash or revenue reserve. IN this condition this paper studies the possible strategies that can adopted by smaller oil companies to tide over the situation. For this study we take the case of BNK Petroleum.

The study reveals that the company expended more than three forth of its revenue of exploration which was one of the major causes of losses. It was recommended that the company should reduce its exploration expenses and look to venture into new markets of South America and Africa. To enable financing of marketing expenses in these markets, it has also been recommended that the company dilute some of its equity. To further penetrate the existing market, it is also advised that the company should focus on product differentiation.

Contents Introduction 3 Background of BNK Petroleum 3 Analysis of BNK Petroleum 4 SWOT analysis 4 Market Analysis for Oil & Gas Industry 5 PESTLE Analysis 5 Porter's 5 Forces Analysis 8 Ansoff's Growth Matrix 10 Company Health 11 Recommendations / Conclusion 11 References 13 Introduction The continuous fall in oil prices over the last one year or more has led to a crisis situation for the oil manufacturing companies. The price of oil has fallen from around $120 per barrel about a year and half ago to around $50 per barrel.

This has resulted in a sharp fall in revenues for all oil companies and specially the smaller companies that have a limited cash or revenue reserve to tide over the difficult period (Johnson, Scholes and Whittington, 2008). Several reasons have been granted to the sudden fall in the global oil market. One of the major reasons has been the anticipation that Iran, having struck a peace deal with the western powers, would not flood the market with cheap oil.

There has also been high production by the OPEC countries in the Middle East. Added to this is the problem of high shell gas production in North America. As such there has been an abundance of crude oil in the market and less demand. The demand has also been significantly reduced due to the slowing down of the Chinese economy.

China is one of the largest importers of oil and a slowing demand from China has had a rippling effect on the global oil market and consequently the oil companies have suffered. In this situation many of the smaller oil companies are facing acute revenue shortage and are looking for ways and means to augment revenues and tide over the situation.

In this study we will look into the case of BNK Petroleum and try and find out the possible strategic plans that the company can formulate in order to get out of the tight financial crunch position it finds itself in (Inkpen and Moffett, 2011). Background of BNK Petroleum BNK Petroleum Inc. is an international energy company and has its primary operations in the acquisition, exploration, and production of large hydrocarbon reserves. The fields that the company operates in are primarily in North America and the European Union.

The company started shell gas exploration outside of North America about 5 years ago and now the company has projects running in Europe. Currently the company now drills shell gas from just over 1.0 million net acres in two basins in Poland and Spain even as the company has searched for shell gas in more than 10 countries in Europe to date.

In the third quarter of 2015 the company recorded a net income of $4.2 million compared to a net loss of $299,000 in the third quarter of 2014 which has been attributed to realized and unrealized gains on commodity hedges. Despite a decrease in average prices of gas 58% over the last year, the company managed to clock a positive cash flow from operating activities at $1.7 million for the third quarter of 2015 compared to $2.9 million in the third quarter of 2014 (Bnkpetroleum.com, 2015).

Analysis of BNK Petroleum SWOT analysis The analysis of the company's businesses and operations is provided by the SWOT Analysis of BNK Petroleum. This analysis is necessary assess the competitive strength of the company in the market and under the present market conditions (Fine, 2009).

Strength There are high barriers to the entry into the market and BNK is already a part of the market and hence new competition is unlikely The company has skilled workforce The company has got monetary assistance and hence strengthened financially to a certain degree The company does not only depend on North American oil fields and has drilling operations in Europe.

Weakness Intermittent productivity is a problem for the company Given the debts to equity ratio of the company, it would face problems with debt ratings in the near future.

Opportunities Shell gas is growing in demand in comparison to crude petroleum Income for the company has been increasing steadily for the last few years Threats Lowering of global oil and gas prices Simultaneous increase in oil prices Market Analysis for Oil & Gas Industry PESTLE Analysis For a complete analysis of the factors of external environment of the market that could influence the organization and entire industry, organizations use the PESTLE analysis (Warner, 2010). The macro-environmental factors have a significant influence on companies in the oil and gas industry.

Political factors: Oil industry is considered to be a strategic industry in the political, economic and social needs of a country as the industry has direct ramifications transport capacity, energy production, industrial production, chemical production, agriculture and social welfare. Therefore the political forces tend to exert influence on the industry. Political stability is one of the important factors that not only affect the production of oil and gas but also but the consumption as well.

In the last decade, there has been political unrest in some parts of the Eastern Africa and the Middle East which has hampered production. This has directly affected the price of oil globally. However for BNK, political stability in both North America and Europe means that the company is able to conduct business quite smoothly in these regions (Rigzone.com, 2015).

Also Political decision to promote green energy and the rising awareness about greenhouse gas emission primarily from burning of fossil fuel has to an extent reduced consumption of oil and gas in sections of the European Union, the U.S. and other developed countries. The advent of the hybrid car and its promotion by the polity for the above mentioned reason is has also resulted in decrease of demand.

Economic factors The supply and demand on the oil and consequently its prices is generally determined by the economic condition of the world and of a specific region or a country. The global financial crisis of 2008 is an example when the demand of oil decreased drastically due to fincnial instability in the purchasing countries as well as in the manufacturing countries. This was also the time that some countries began to ook for cheaper alternatives to oil.

This gave rise to the proliferation of the North American shell gas industry which is still in its growth stage. In recent years -- specifically in the last year and half, there has been some economic turmoil in Choina. China is the largest importer of oil and gas and economic slowdown in the country has resulted in slack demand even as production remained steady. Therefore this had a direct impact on the global price of oil.

Other economic factors that directly affect oil and gas prices are exchange rates of currencies. This factor is an impediment for oil and gas importing countries and tends to affect the demand for the product. Oil and gas drilling and production is a very cost intensive activity and the rates of interests also directly affect the financial health of oil companies, especially the ones like BNK Petroleum which do not have huge cash reserves or assets and rely on borrowed money for production and other activities.

The influence of the economic factor on oil and gas industry can be perceived from the fact that due to global slowdown in demand, the price per barrel of crude oil which reached a peak of 141 USD per barrel in 2008 touched a low of 33 USD per barrel in July this year. Social factors The demography, culture, ethnic structure, religion structure, inter-cultural relation, structure of family, ideological view, literacy, urbanization, income distribution and migration are some of the issues that fall within the gambit of social factors.

No society in the present day can go without oil and gas. This is a global product that is vital for everyone. Conversely, any change in the outlook of the society towards oil and gas affects the demand of the product. For example, many sections of the society view the excessive use of oil and gas as a source of pollution and global warming and hence are averse to the rampant use of the petroleum products.

There have been changes in government policies ushered in by opposition against excessive use of oil and gas and in favor of pollution reduction which have directly affected oil companies. Governments have changed policies and imposed stricter pollution norms or even restricted the use of petroleum products under pressure from societal forces. In that respect all oil companies are affected by social thinking, views and likings. Smaller companies with smaller capital re affected to a greater degree by social factors.

Technological Factors Technologies, techniques and methods that influence the activities within an organization are termed as technological factors. By creating the need to acquire the last technologies (by buying equipment), techniques and methods, the technological factors could influence an industry or an organization from the inside. The adaption of technology is necessary to remain competitive. Exploration, Transport, refining, storage and promotional and marketing strategies are the areas where technology is used in the oil and gas industry which has direct bearing on the costs of production.

Therefore technology affects the oil companies which includes smaller companies like BNK. Environment factors In today's world, the two major concerns for the oil industry in terms of environmental factors are the green house gas production and the pollution of seas and rivers resulting from oil spillage. There is growing concerns about environment pollution and there is growing pressure on governments to improve new also and regulations to reduce pollution. The courts and governments are very severe on oil companies in cases of accidental oil spills.

For shell gas companies like BNK, it is a big challenge ot meet the environmental needs as their operations are primarily on land. Legal factors The laws and regulations that govern import and export are the legal factors that affect the oil and gas industry. Any change in the laws directly imposes a challenge to the oil companies to change to adapt to the new rules and regulations.

Porter's 5 Forces Analysis To understand the competitive market that BNK Petroleum works in the application of the Porter's 5 forces for market analysis is given below. Given below is a graphical representation of the Porter's 5 Forces (McKeown, 2012). (Source: www.cgma.org) Industry Rivalry Given the presence of very large oil and gas companies in the industry who have the cash reserves and assets, BNK is at a disadvantage given the limited equity and finances of the company.

In a scenario where the price has nearly bottomed, BNK faces competition in pricing and supply. Supplier's Bargaining Power Oil and Gas exploration is a highly technical function and is dependent on technology and machinery. The supply of the machinery as well as the regular maintenance of the same is a challenge for oil and gas companies. But since there are a lot of suppliers competing with each other, BNK does not face threat from the bargaining power of suppliers (Warner, 2010).

Buyer's Bargaining Power Given the present slack in demand in the oil and gas market and the falling prices, it can be said that the buyers are perhaps enjoying the highest bargaining power ever. BNK Petroleum would have very little say as far as bargaining power of buyer is concerned. Threat of New Entrants Being a highly technical and cost intensive industry with a lot of requirement for government permits, the entry barriers to the industry are high.

Moreover the present state of the industry entails that very few companies would venture into the industry. in that aspect therefore BNK is quite safe from the threats of new entrants. Threat of Substitute Products The growing popularity of alternative energy sources like bio energy, solar power and nuclear power has posed a threat to the industry. For a relatively small company.