2000 Global Competitive Assessment

Abstract

Introduction The bottom line, the most important measure of a company's success, is shareholder return. Shareholders are the most important constituency that the senior management of a company works for. In return for shareholder investment, companies must attempt to provide them with competitive returns. Otherwise, shareholders sell their stock and the stock price drops. This article discusses some key factors that affect shareholder return. Different companies approach their businesses from different perspectives and with different strategies, resulting in highly varied performance. This paper addresses the variation in shareholder returns of large oil and gas companies for the last few years, the forces causing the wide range of outcomes, how companies address these forces, and how this affects professionals in the oil and gas industry. Shareholder Return Majors. Fig. 1 shows shareholder returns as of 1 January 2000 for the largest publicly reported oil and gas companies, the majors. Transactions closed before that date are restated (i.e., Exxon and Mobil now ExxonMobil); those not yet closed at that date are not restated (i.e., Total Fina and Elf). Shareholder return takes into account both share appreciation and dividends (if any). The bars indicate average yearly shareholder return for the past 5 years. The 5-year return indicates how companies have done in the long term and through one oil-price cycle. Table 1 shows the stock tickers for the majors and the return for the 12 months ending 1 June 2000. The 12-month return shows company returns during the oil-price recovery of the second half of 1999 and the first half of 2000. The majors are an important group to examine because of their size and influence on the worldwide energy business. Their actions affect the rest of the business. They own relatively little of the worldwide reserves because of the massive reserves owned by national oil companies and governments, but they can leverage their position to have great influence on the business (and probably wish they could also have more influence over the price of oil). Oil price is influenced by worldwide supply-and-demand issues and by groups, such as the Organization of Petroleum Exporting Countries (OPEC) and some large non-OPEC oil-producing countries, that control a substantial portion of total production. The largest majors, now called "megamajors," are also some of the largest companies in all industries in the public markets. They have a great number of employees; therefore, they have the largest impact on industry trends and, of course, on individuals whether the individuals work within a major company or outside of it for a service company or other service provider. Because majors are publicly traded, their results are readily available and reported consistently. They live squarely "in the market." The results of their actions are examined every day and reported every quarter. Analysts can extrapolate trends in the industry by analyzing the large amount of data available about the majors. Fig. 1 shows some interesting results. While others came close, only BP did better than the 5-year Standard and Poor's (S&P) 500 return of 26.1%/yr. The best-performing companies (BP, ExxonMobil, Repsol, Royal Dutch/Shell, and Total Fina) all were undergoing major transformations during 1998-99 because of the megamergers. BP, Exxon-Mobil, and Total Fina completed their mergers, and Repsol Yacimientos Petrol'feros Fiscales (YPF) almost completed theirs by the end of 1999 (it closed in 2000 as did Total Fina Elf). Royal Dutch continues integration of its merger, in which it once again has control of Shell Oil. Also interesting is that the stocks of these better-performing companies did not appreciate because of the premiums paid for mergers to acquirees (the merger premium); these companies all were the acquirers. Two factors seem to be involved: the strength of their stock allowed these companies to be acquirers and the market rewarded them for their megamergers. There was (and still is) great anticipation that huge synergies can be gained from megamergers; therefore, the market was bullish on those companies. Royal Dutch stock also advanced when it announced in late 1998 significant plans to lower its cost structure and this started to show results. This is an excellent example of a company implementing what analysts and investors had been asking for years and achieving the results promised.