Royal Dutch Shell PLC and Its Edge

Royal Dutch Shell PLC and Its Edge on the Global Market

The concept of financial analysis is a core indicator of the actual financial health of a given organization. The development of an accurate and dependable conceptual framework to be employed in the analysis of the global and corporate financial system has for quite a long time been an important issue in corporate accounting (Bodie & Merton,1990). An appropriate conceptual framework must be able to meet two main objectives: to effectively address the differences that exists in the institutional structures as well as to explain the main changes in the institutional structures over time. A review of extant literature has been dedicated to the concept of financial analysis. Most of these studies have dwelt on financial ratios. A study by Nenide, Pricer & Camp (2008) indicated that extant literature in accounting as well as finance indicate that the application of ratio calculations having multivariate analysis for the prediction of the performance levels of organizations is quite common. There is a however a general lack of a credible method of determining if the necessary sample assumptions can be adequately met in order for reliable conclusions to be arrived at by the researchers. Nenide, Pricer & Camp (2008) further indicated that the literature that describes the methods as well as theories for the evaluation as well as the prediction of the level of financial performance suggests that even though the method used are increasingly becoming complex very few expert researchers have the ability to adequately address the various problems that are directly related to the sample that is used. For instance, they noted that most of the ratio analysis techniques employ multivariate analysis that is basically pegged on the assumption of a somehow normally distributed set of financial ratios . Foster (1986) noted that when the distribution of the financial ratios is put under consideration, there is a need to comprehend the fact that the normality of the distribution of the dataset can effectively be skewed by the inherent errors in data recording, negative denominators as well as denominators that are approaching zero.

A negative denominator and numerator is indicated by Nenide, Pricer & Camp (2008) to yield a positive ratio calculation. The implication of this is that a company that has a negative owner's equity as well as a loss will automatically report a positive return on investment. This form of error is very common in financial calculation studies. It is therefore worthwhile to note that these systems of performance analysis are never accurate as means of predicting the financial performance of companies or for the prediction of the single ratios for a company's future as noted by Pricer and Johnson (1996). Their usage by analysts are however continually being employed for the understanding as well as forecasting of corporate performance. The main problem that is often encountered is based on a baseless belief that the raw financial data calculations on financial ratios would ultimately result in valid measures to be used in the prediction of future performance. This form of research is widely referred to as liquidity research as it began with the work of Beaver (1966) who tested the capacity of thirty standard accounting ratios. In this work however, we present a detailed a financial and business analysis of Royal Dutch Shell Plc from 1st January 2009 to 31st December 2011, using ExxonMobil one of its major competitors.

Research aim

The aim of this research is to conduct a financial and business analysis of Royal Dutch Shell Plc from 1st January 2009 to 31st December 2011, using ExxonMobil one of its major competitors.

Research objectives

To effectively review the operations of Royal Dutch Shell Plc and report on the business as well as financial performance of the company

To analyze the overall business and financial performance of both the corporations (Royal Dutch Shell Plc and ExxonMobil).

To perform an elaborate SWOT analysis of the company

To examine the various non-financial issue that affects the company such as socioeconomic and ethical considerations

To determine the various actions that can be effectively implemented in order to improve Royal Dutch Shell Plc's performance.

Research questions

How is Royal Dutch Shell Plc performing in comparison with its closes competitor ExxonMobil?

What is the performance of Royal Dutch Shell Plc according to investor perspective?

What is Royal Dutch Shell Plc's dividend policy?

What is the performance of Royal Dutch Shell Plc in regard to debt finance?

What are the various non-financial issues that are affecting the performance of Royal Dutch Shell Plc?

What are the actions that should be undertaken in order to improve Royal Dutch Shell Plc's performance?

Hypotheses

Royal Dutch Shell Plc's business and financial performance has generally been better than ExxonMobil's over the years.

The recent financial crisis has a very negative impact on the performance of Royal Dutch Shell Plc.

Literature review

The Royal Dutch Shell plc a company which is also referred to as Shell is a major oil and gas company that is headquartered in the city of Hague, Netherlands but with its legally registered offices located in London, U.K (Shell,2012). The company is one of the global largest and independent oil and gas corporations in regard to market capitalization, the operating cash flow as well as oil and gas production quantities (Shell,2011, p.2). The company is also engaged in rigorous oil and gas exploration as well as marketing, production and the marketing of liquefied natural gas, the development of power plants as well as the manufacturing, the marketing as well as the shipping of oil products and other forms of petrochemicals (Datamonitor,2006). The company has several vertically integrated operations and is known to be the world's greatest single-brand retail network. As a consequence of its geographically dispersed locations, it is susceptible to geopolitical instability as well as weather disturbances.

SWOT Analysis

Strengths

Has a dominant market position

Has vertically integrated operations

Steady financial position

Has a highly diversified revenue stream

Strong exploration in technological prowess

Weaknesses

There is a decline in global oil reserves

Legal proceedings

Opportunities

An ever increasing LNG demand

Petrochemical demand in China

Strategic mergers and acquisitions'

Joint venture in China

Threats

Disruptions as a result of hurricanes

Political instability in Libya, Nigeria, Iraq, Iran and other OPEC countries.

Economic slowdown in the U.S. And U.K (Eurozone crisis)

Hendratmoko (2006) conducted a financial analysis of Royal Dutch Shell plc and apart from evaluating it on the usual financial ratios, he reconciled the results with the previous year's IFRS and GAAP. He concluded that indeed benchmarking with the best competitor in the given industry will make the company to know its actual position and action. The company has in the past managed to build very strong financial positions through this consideration.

Porter (1985) indicated that the importance of formulating a competitive strategy is to show the relationship between the firm and its environment in relation to its competitors in the same industry or industries. This has led to organizations choosing one amongst the three known generic strategies, that is; low cost, differentiation and focus to enable them gain profitability and competitiveness within the given industry. To understand the low cost strategies employed by the players or firms in the industry, five forces analysis of the main drivers of critical success and change have been discussed. The global and alternative energy trends in the industries have been briefly explained.

Shell Renewable (2004) noted that the main drivers of change in the global energy markets consist of factors such as demand, income level, market liberalization, demographics and urbanization. These however, do not represent the organization's belief that they are central to its evolution. The chairperson of the committee of managing directors of the company was quoted for having stated that by contract, the availability of energy resources, particularly, the imminent oil scarcity in the second quarter of the century which would be followed later by unavailability of gas will ultimately transform the industry (Chemical Market Reporter, 2001). This is plausible as it will place a demand on all firms dealing in energy to move from the current use of fossil fuels to alternative energy sources as traditional fuel sources will have been fully exploited thus making them unavailable and very expensive to mine. Porter's five analytical forces have enabled easy identification of the immediate drivers of change, although the major drivers rely on the industry's ability to produce cheap, flexible and maximum output alternative energy that can compete favorably with the firm's competitors in the energy industry.

It has been noted that the demand for energy in the near future will increase by over 60% with alternative energy market contributing very little to the mainstream market. While it has been acknowledged that oil reserves may effectively answer this need, financial investments on infrastructure and extraction is expected to go overboard. While rising amounts of carbon emissions continues to destabilize climate (IEA, 2004). It has also been predicted that alternative energy sources will be greatly useful in offsetting increased demand substantial change from traditional sources to renewable energy sources, accompanied with improved technology and commitment from the government (IEA, 2004). Factors that are either political, social or legal together with Kyoto protocol has helped speed up the process towards renewable sources of energy (UNFCCC, 2004), making it necessary for Shell (Modern Power Systems, 2002) and BP (Hoffman, 2004) to conform with the demands.

The power of suppliers to bargain tends to rise, driven by minimal number of suppliers of renewable/alternative energy, inadequate information and alternatives for buyers. Large capital amounts and economies of scale needed to facilitate operation within the industry are seen as stumbling blocks for new entrants in the industry. However, alternative energy firms are threatened by substitution of lower cost provision within the larger energy industry. Competition has been heightened, making the big players in the industry compete for low-cost strategy, though through various strategies, which as per Porter (1985), could be achieved by a single firm the industry. Hence, the need to achieve the desired position becomes critical. A review of literature indicates that there is a general lack of knowledge on the financial evaluation and comparison of companies that deal in unrelated products.

Industry Background

The global petroleum industry is marked with stiff competition and uncertain realities of demand shortage as well as stringent regulations. In order to fully comprehend the actual performance of a company within this industry, it is critical that a rigorous financial and business analysis be conducted. The best picture is however created by comparing the performance of a given company with that of its closes competitor. In this case, conduct a financial and business analysis of Royal Dutch Shell Plc from 1st January 2009 to 31st December 2011, using ExxonMobil as its major competitor.

Research Methodology

The research approach

This research will be based on the financial ratio and trend analysis from the point-of-view of various stakeholders. Triangulation technique will be employed. Guion (2002) noted that triangulation is a method that is employed by qualitative researchers in the checking as well as establishment of the validity of their studies. This research will employ the five various types of triangulations that is data triangulation, theory triangulation, investigator triangulation, environmental triangulation as well as methodological triangulation.

The work will cover the following parameters;

Growth

Growth is a very good sign of operational success. This is because it leads to an improvement in the business and financial position and performance.

Earning ratio

These ratios are important in the measure of performance of a given entity, a manager as well as the efficiency of various asset types.