AM-02-22 Our Changing World And What We Should Do About It

Description:

Two characteristics define the current strategic actions of oil companies – consolidation and scale. While there has been significant examination of future business models for oil companies, the one that has emerged is the scale that can be created by forming very large companies. In our NPRA paper last year, we concluded, “We expect new business models will emerge and companies will continue the search for ways to increase shareholder value.” There have been several large deals the past year confirming the drive to increase shareholder value – ChevronTexaco, Valero’s acquisition of Ultramar Diamond Shamrock, and ConocoPhillips. The industry’s structure is now even more skewed toward global companies that are much larger than their competitors. Six huge oil companies have emerged: ExxonMobil, BP, Shell, TotalFinaElf, ChevronTexaco, and ConocoPhillips. Figure 1 illustrates the scope of these companies showing market capitalization as a function of total assets. This chart and other similar performance measures all indicate that size is the common factor driving performance variables such as: cash flow return on investment, return on capital employed, and others. In general, the correlation of performance to total assets is nearly linear, indicating that the larger the company, the higher the performance.