Strategic Management Oil and Gas Field Equipment

Question: Choose one oil field service provider and report on its position in the sector. The report should cover the period from the beginning of 2014 to the present day. The report should analyse the current state of the chosen oil field service provider, and then consider the strategic options available to that provider. The report should include the use of appropriate academic model(s) when considering the strategic options available to the chosen firm.? Answer: Introduction Over the last five years, the global oil and gas field services and equipment industry is experiencing steady growth and is soon expected to reach a solid upward momentum, with a 6.9% CAGR over the coming five years and reaching $613 billion approximately by the year, 2017 (Bombourg, 2012). The oilfield service industry has emerged as an extremely large industry which comprises of companies offering assistance to drilling companies who are setting up oil and gas well in different locations. Oilfield service providers are responsible for manufacturing, maintaining and repairing equipment used in the extraction and transportation of oil(Investopedia, LLC., 2016). The services provided by oilfield service providers include services such as, transport services which involve moving both water and land rigs around at some point of time, seismic testing which involves activities of mapping the geological structure beneath the surface and directional services which involve providing speciali sed services of drilling horizontal or angled holes as all oil wells cannot be drilled straight down (Investopedia, LLC., 2016). Being a large and highly-competitive industry, for its participants the industry and its transaction market is noted for significant cyclicality. The OFS industry over the last decade had experienced steady growth, substantial changes and shocks owing to factors such as a rise in commodity price for oil and natural gas, Macondo tragedy, fallout from the great recession and the expansion of U.S unconventional production and drilling (Robert L. Moore Springer, 2014). In the last two years however, the shape of oil field service industry has significantly altered due to some anticipated bankruptcies and a rash of acquisitions and mergers. This report provides insight into the performance of Halliburton Co., over the last two years. The analysis highlights the current position of Halliburton within the oilfield service industry. Porters five forces analysis model is used to analyse the different types of strategic options available to the firm. Last part of the report provides recommendations and justification on the choice of the most suitable strategic option for Halliburton. Current Position of Halliburton in Oilfield Service Industry Founded in the year, 1919, Halliburton after Schlumberger is ranked as the worlds second largest provider of services and equipment to the oil and gas industry(Halliburton, 2016). The companys proud and fascinating history of continuous focus on expansion and innovation began with its founder Erle P. Halliburton. Today the company offers the broadest array of services, products and integrated solutions for oil and gas development, exploration and production. Started in Duncan, Oklahoma as an oil well cementing business with borrowed wagon, a plump and a team of mules, Halliburton made remarkable growth and success and today operates in more than 80 countries and employs a diverse workforce 65,000 employees who represent 140 nationalities (Halliburton, 2016). The company has dual headquarters located in Dubai and Houston. From managing geological data and locating hydrocarbon, to formation evaluation and drilling, completion and well construction, and throughout the life of the field optimising production, throughout the lifecycle of the reservoir, Halliburton serves the upstream oil and gas industry. The thirteen product service lines of the company operate in two divisions: Completion and Production and Drilling and Evaluation. Different product service lines of Halliburton are shown below. Product Service Lines of Halliburton Image.1. Source: Halliburton (2016) Halliburton in North America has the largest industry market share and also operates in geographical segments of Europe/Africa, Middle East Asia and Latin America. The company report a current market capitalisation of $31.23 B, which has reduced compared to its market capitalisation of $51.074 B in the year, 2014. Halliburtons financial performance for fiscal year (January-December) 2014 and 2015 is shown in the table below. Financial performance Jan-Dec 2014 Jan-Dec 2015 Sales/Revenue $ 32.87 B $ 23.63 B Gross Income $ 5.96 B $ 2.52 B Net income $ 3.44B $ (666M) Market Cap $ 51.074 B $ 31.23 B Stock Price (Average) $ 60.55 $ 36.29 Table.1. Source: Made by Student (2016), Adopted: Market Watch (2016) A comparison of Halliburtons stock index over the period of 2 years is shown in the chart below. Stock Index Image.2. Source: Market Watch (2016) Halliburtons detailed company profile in the current year is shown below. Halliburton Company Profile Image.3. Source: Market Watch (2016) Halliburton is committed to outperforming their competitors, focused execution and big thinking to survive in todays dynamic market environment(Halliburton, 2016). Executing on their key strategies around mature fields, unconventionals and deepwater, Halliburton had been able to continuously deliver industry leading growth and returns. Exceptional service quality, strong customer relationships and differentiating technologies have always been Halliburtons competitive advantage over their rivals. The company faces though competition from Schlumberger in France and Saipem an Italian company and currently has to settle for second place in the list of worlds top 10 biggest oilfield services companies list(Market Watch, 2016). Halliburton in spite of being an oilfields service provider has always been more famous than an oilfield service provider should be owing to various controversies the company was a part of over the last decade. Being an industry leader in technology and innovation, Halliburton has defined high standards for its global operations. The Guiding Principles of Sustainability is regarded as the key component of their big vision and they strive to utilise their resources responsibly to create a minimal negative impact on the society and environment(Halliburton, 2016). Sustainability is embedded throughout their business and is considered the core of their long-term success. Halliburton recent announcement of cutting down 5000 jobs further which makes up to 5% of its global workforces has had a negative influence on investors sentiments bringing down its stock value to $ 36.29(Market Watch, 2016). Despite of facing some recent downfalls, Halliburton believes that it will be able to survive its current environment with the companys two-pronged strategies, first by controlling what they can control in the short-term and then shift their focus beyond the cycle and prepare for the recovery. Both these strategies have the same objective of lower down operations costs which will surely help the company in making for its losses by the end of the new fiscal year 2016. Porters Five Forces Analysis Halliburton Porters five forces analysis is a strategic management tool that helps to analyse the degree of competition in the industry and thus business strategy development (Ansoff, 2007). Porters five forces analysis is performed to evaluate Halliburtons competitive landscape and based on the outcome identify difference strategic options available. Threat of New Entrants: Low Though a the number of companies providing oilfield services have increased over the past years, the barriers to entry are still high enough and allow only serious competitors to survive and soon or later swipes out others (Market Watch, 2016). Establishing an oilfield service provider business requires ample amount of cash than any other business making it the most common threat for new entrants. For the companies that for recently entered the oilfield service industry lenders have created a big problem as they are demanding their money back but the collapse in oil prices have crippled the ability of these new entrants to make necessary payments (Yager, 2016). Most of the new entrants are being forced by lenders into receivership. Thus, somewhere lenders are controlling the future of oilfield services industry increasing challenges for new entrants. In areas where specialised workers are required in the oil business presents the highest barriers to entry for new entrants(Yager, 2016). It involves doing some serious business and performing lots of hazardous tasks thus it requires completion of some serious legal documents and following strict laws and regulations to safeguard health and safety of workers involved. Access to distribution channels, product differentiation and cost disadvantages are some of the other barriers to entry in the oilfield service industry. All these factors make the threat of new entrants low in oilfield services industry(Yahoo Finance, 2016). Halliburton had been in the business for almost 100 years and had gained a good reputation and is recognised as a specialised oilfield service provider thus faces a low threat of competition from new entrants. Power of Suppliers: Low to Medium By reducing the quality or raising the prices of purchased services and goods suppliers within an industry can exert bargaining power on participants (Porter, 1979). Powerful suppliers possess the ability to squeeze profitability out of a company which eventually will fail to recover increased costs from own selling prices. As the numbers of companies that manage to survive within the oilfield services industry are less so are their suppliers. The power of suppliers completely depends upon the size and hold of the company itself within the sector. A supplier group is found to exert high power on participants when the group is dominated by few companies and is more concentrated compared to the industry it sells(Porter, 1979). A supplier who had been able to build up switching costs or if its products are least differentiated or unique has more power compared to the company it sells. In the case of oilfield service industry, the number of suppliers is equally concentrated as the number of services providing companies thus they exert a good amount of power on the industry. However, the case of Halliburton is not same as the come is a recognised brand in the industry thus suppliers also look forward to maintaining a strong business relationship(Porter, 1979). Suppliers are ready to provide reasonable pricing and support activities to companies like Halliburton. The company has a strict code of conduct and ethical guide line which its suppliers must adhere to be a part of their global network of suppliers. Power of Buyers: Medium to High Oil and gas industry is a concentrated industry with high competition among the members who manage to survive(Halliburton, 2016). These buyers then exert good pressure on oilfield service providers as they make large volume purchases. In recent years owing to a fall in oil prices and unstable economy the balance of power within the oilfield services industry has considerably shifted to the buyers. As the services provided by different oilfield service companies are not much different, there are several alternate suppliers available to the buyers thus increasing their buying power. To lower down their operations costs, buyers in this industry look for suppliers who can offer the most competitive prices. Halliburton owing to its years long experience in the industry and being an industry leader in technology and innovation provides specialised services to its customers which most of its competitors fail to provide(Halliburton, 2016). The company is recognised as highly customer-focused organisations and enjoys good customer loyalty. Some of Halliburtons customers data is shown below. Image.4. Source: CSI Market (2016) Availability of Substitute: Medium to Low The services provided by oilfield service companies are not very different from each other, owing to advancement in technology(Porter, 1979). Availability of substitute also depends on where the company is operating. Companies providing specialised and obscure services are likely to face less threat of substitutes. Halliburton is the industry leader in technology and innovation and provides some of the unique, highly technical and differentiated services to their customers which not all of its competitors can provide. Competitive Rivalry: Medium to High The oilfield service industry has been hit very hard by reduced oil prices, forcing these companies to cut down costs, reduce activities and force their suppliers to reduce prices. The industry has become highly competitive with only the large ones dominating. Halliburton face tough competition from Schlumberger, Baker Hughes Incorporated and Technip (Yahoo Finance, 2016). Some other competitors in the oil and gas industry include General Electric Company, Jacobs Engineering Group Inc and Dover Corp. Halliburton direct competitor comparison is shown below. Image.5. Source: Yahoo Finance (2016) Strategic Options available to Halliburton Oilfield service industry being hit hard by decreased oil prices worldwide is offering a tough time to survival companies(Ryan, 2013). The competitive landscape is becoming tough and companies focus on reducing operations costs to increase profit margins. Halliburton is facing tough competition from companies like Schlumberger, Baker Hughes Incorporated and Technip. In North America, Halliburton has the highest market share however it is still behind its competitors in the Middle East and Asia, Europe/ Africa and other regions(Halliburton, 2016). The company recently had been involved in several controversies which had a negative impact on its brand perception. Porters five force analysis for Halliburton helped to evaluate its competitive landscape and analysing companys position in the industry. Halliburton had a strong hold in technology and provided some of the most specialised services to its customers. To maintain its market share and position within the industry Halliburton wil l have to formulate new strategies. Some strategic options available to Halliburton are: Lowering Operations Costs: Reducing operations costs will help the company reduce its expenses and increase profitability(Ansoff, 2007). To improve its position in the market, it is important to select buyers and suppliers who possess very less power to influence it adversely. Preference can be given to suppliers from developing countries to increase chances of further negotiation on contract terms. Mergers and Acquisitions: Mergers and Acquisitions have always been one of the most preferred strategic choices(Ansoff, 2007). They help the company increase its capabilities and core competencies to serve their customers better. Halliburtons acquisition of Baker Hughes has enabled the company enhance its core competencies and strengthen its financial position(Market Watch, 2016). Halliburton should plan more such acquisitions to further strengthen its position in the industry. Expand in Developing Countries: To take advantage of opportunities present in the developing countries such as India and China, Halliburton should emphasize on increasing its operations in these countries(Ansoff, 2007). Factors such as lower currency value, low wages and cost of labour, flexible tax laws and government support are some of the benefits associated with these countries. Recommendations Mergers and Acquisitions are the most suitable strategic as it will help companies increase their capability as well as its financial position. The current situation of oilfield service industry is best for mergers and acquisitions as various new companies that have advanced technology but less experience in the industry are finding it difficult to survive. Halliburton will have more power during the negotiation of acquisition contract terms as these companies do not have many options left. Merging with a technically strong company will help Halliburton strengthen its images as technology and innovation leader. With increased capabilities Halliburton will be able to provide more innovative and differentiated services to its customers. Halliburtons acquisition of Baker Hughes proved highly beneficial for the company by enhancing its capabilities and financial stability. Conclusion Despite of the adverse conditions and a highly competitive environment, Halliburton has been able to the secure second position in the list of worlds top 10 biggest oilfield service companies. The company is recognised for its excellent customer service and specialised services. Halliburton is the market leader in technology and innovation within the industry. Its acquisition of Baker Hughes has further increased its capabilities to serve its customers better and also improved its financial position in the market. An analysis of Porters five forces reveals that Halliburton possesses high potential for growth and can outperform its prime competitor Schlumberger provided it makes the right strategic decisions in right time. References Ansoff, H. I., (2007) Strategic Management. Hampshire: Palgrave Macmillan. Bombourg, N., (2012) Top Five Global Oil and Gas Field Equipment and Services Companies: Performance, Strategies, and Competitive Analysis. 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