Want help to write your Essay or Assignments? Click here
Abstract
The following report is an analysis of Halliburton Oil Service provider from the year 2014 to 2016. The escalating drop in oil prices has had major effects on the profitability of oil service providers in the past three years leading to fluctuations in the company’s sustainability.
However, Halliburton is one of the market leaders in the industry having the highest market capitalization as at March 2016. After giving an overview of the company’s market position, the report will give an analysis of the strategies available for the firm to sustain its market position in the plummeting oil prices. Finally, a recommendation on the best strategic measures will be given.
Introduction
Halliburton Corporation operates in the gas and oil service industry. As the second largest company in the oil service industry, Halliburton has been greatly affected by the drop in oil prices. Low demand for services, request by consumers to cut the prices, and fierce competition in the already crowded oil-field sector are some of the challenges faced by the company (Braden, 2012).
As a result of reduced revenue, the company strategized in acquiring one of its rivals at a cost of $36 billion (John, 2015). Additionally, the company has laid off over 10% of its workforce in a bid to reduce both production and operating costs. SWOT analysis, Ansoff Matrix, and STEEPLE are some of the models to be used in analyzing the strategies available for the company to stay aloof in the market.
Want help to write your Essay or Assignments? Click here
Halliburton market position
As of March 2016, Halliburton Corporation was the second largest oil service provider behind Schlumberger (Alex, 2016). Low oil prices caused the company’s revenue to drop from $32 billion in 2014 to $23 in 2015. Increase in cost of goods sold led to a loss in the year 2015 though there was an increase in earnings per share of 14% (Halliburton, 2016).
When compared to its competitors, Halliburton average dividend per share from the year 2014 to 2015 was at par with the industry average. Also, it can be noted that the company pays its dividends year after year while some of the companies in the industry do not pay out their dividends. In 2015, the company used more than $2 billion for investing while its cash flow from operating activities almost totaled to $3 billion.
The pending merger with Baker Hughes negatively affects Halliburton’s stock price. The stock price traded at $34 which was a 13% drop compared to the previous year. Though Halliburton management foresees another challenging year, the optimization of cost per unit of barrel and increased efficiency levels remain some of the core competencies for the company.
The high cost of operations in North America is worsened by the decline in oil prices thus resulting in a 94% decline in operating income in the last quarter of 2015 compared to the previous year (Halliburton, 2016). The high operating cost was brought about by the pending merger which, if it goes through, will provide the company an opportunity to increase its market share.
According to Alex (2016), the factors that led to Halliburton’s current performance status were: low oil prices, a decline in drilling activities both in Iraq and Saudi Arabia, low earnings in Europe, and increased sales in China and Mexico. The company expects to normalize its growth prospects and income when the oil crisis is over. Since Halliburton is the second largest oil service provider, it is in a strategic position to improve its revenue and net income if it improvises the right market strategies.
The oil industry is highly competitive and requires an organization to use its core competencies as well as emergent strategic options to improve its market share and profitability. Since Halliburton is already a market leader, it needs to take advantage of its current position to improve its strategic position. To analyze the strategic options available for Halliburton, the external environment and the internal environment will be analyzed in accordance with the existing business analysis models.
Analyzing strategic options available for Halliburton
The strength of a business lies in the laid down strategies (Lidia, 2013). In the competitive oil industry, it’s critical for a company to come up with strategies that make it stand out. The drop in oil price due to the low cost of production and emergence of other service providers is one of the main reasons necessitating Halliburton to come up with stringent measures to ensure it survives the turmoil.
Want help to write your Essay or Assignments? Click here
SWOT Analysis
Porter’s model is one of the best tools to use when analyzing strategic options available for business. Strengths, weaknesses, opportunities, and threats faced by an organization play critical role in assessing and implementing strategies (Charles and Gareth, 2011). Strengths are compared against the prevailing weaknesses for improvements. When a company takes advantage of available opportunities, it is able to phase off the threats and come up with profitable strategies.
Strengths
1. The company should use its existing mature oil fields to offset the low income experienced in North America. The fields in the Middle East recorded high profits despite the oil drop. Production should be increased in Middle East oil fields to increase overall sales and profits.
2. High market share is also one of the company’s core strengths. The company should concentrate on improving its service provision so as to retain the existing customers as it already has a wide market base. Having a wide geographic base protects the company from downturns in specific regions such as North America. The company can, therefore, improve its operating activities in the upstream regions and reduce costs in the downstream regions (Upstream Intelligence, 2015).
Middle East provides as the leading market share since it hasn’t been affected by the low oil prices with the company recording increased sales in the region over the last one year. The company should take advantage of the high sales in Middle East and increase its production capacity as well as product diversification in the region.
Want help to write your Essay or Assignments? Click here
Weaknesses
1. One of Halliburton’s weaknesses is the gap between commodity prices. Some regions have low commodity prices leading to overall low revenue from its international operations. For example, the large supply as a result of fracking operations in North America led to a reduction in natural gas prices. The management is supposed to cut its expenses in North America and diversify its products instead of focusing on one item. Diversification will lead to high revenues in the negatively affected regions (Alex, 2016).
2. The high cost of operating activities is one of the weaknesses that the company should find ways to manage. Since the company has already retrenched more than 6000 workers, it is advisable to lay off more workers and remain with a manageable workforce. Reducing workforce is essential in reducing operating costs so that high profits will be realized (Braden, 2012). However, the workforce should be reduced in the places that are underperforming and where there is duplication of activities to ensure there is consistency in production after the lay off.
Opportunities
1. The pending merger with Baker Hughes is one of the best chances the company has in surviving the oil price drop. If the merger is approved, it will lead to a reduction in costs for the company leading to high income. Though the proposition is facing antitrust charges, it provides a great opportunity for the company to increase its market share and revenue in the face of the crisis.
2. Technology advancement leading to reduced production costs. Though one of the main reasons leading to oil price drop is improvised technology, it still gives the opportunity for the company to increase its revenue at reduced production cost. The company should take advantage of the new technological methods to increase its revenue stream. The company should use its team of experts to do research and development and come up with ways to increase product value at reduced cost.
Also, technology such as digital should be used to diversify market for the company through the use of internet. There exists a wide base of online clients who can be harnessed through the company’s website and other sites that create awareness about the industry.
Want help to write your Essay or Assignments? Click here
Threats
1. Competition is the main threat faced by Halliburton. Schlumberger poses as the main competitor for the company as it has a wider geographical base with low commodity price difference. The company should increase its outlets to increase its market share as well as use its material science, manufacturing, and service delivery core competencies to beat the competition.
Being the second largest oil producer, the company posses core competencies in manufacturing and service delivery which serve as main sources to use to curb the competition. By diversifying its product portfolio through the use of its production facilities, the company has the capability of retaining its market position as well as increase the existing market share.
2. The proposed merger poses a threat to the company in case it is not approved. Baker Hughes stock is volatile since Halliburton announced it was going to buy it hence if the merger is not approved, the company would have to pay out more than $3 billion for charges. Hughes stock is already volatile since the decision to sell it to Halliburton has not been finalized.
Halliburton is the main loser in case the stock merger is not approved as it is supposed to pay Hughes an amount to compensate for its stock’s volatility. The company needs to adhere to the expected regulations so as to increase its chances of getting Hughes. Halliburton should sell its assets and raise the expected amount to address the antitrust concerns.
STEEPLE analysis
The model uses five factors to analyze the threats and opportunities available for a business. The factors considered are: social, technological, economical, environmental, ethics, legal and political (Weberience, 2015). All these factors must be properly assessed to ensure that the implementation process is authentic. The factors have negative and positive implications on strategies therefore requiring strategic managers to take up the strategies that provide the best output.
1. Social and environmental factors
Social factors considered are demographic and cultural orientation of the external macro environment. Since the oil industry poses a lot of safety issues, Halliburton should consider using machines and tools that protect the health of its workers and customers to increase its public image. When customers feel that the company is concerned with their safety, they tend to purchase more and be loyal to the firm thus increasing its market share and profitability (Lidia, 2013).
In the same line, environmental factors should be considered by the company in formulating its strategies. The company should ensure it follows environmental regulations and avoid activities and come up with ways to reduce pollution to increase customer’s value for increased revenues.
2. Technological factors
Technological advancement has led to a reduction in production costs. Halliburton should adopt the newest production methods to reduce its costs with the reduced oil prices. Together with the simulation technologies and services, the company should use more advanced fracturing technologies with detailed optimization and monitoring abilities to maximize production capacity (Jim, 2015). Also, more research and development is required to be able to implement strategies and come up with modern production methods.
Want help to write your Essay or Assignments? Click here
3. Economic and legal factors
Inflation, economic growth and interest rates are some of the consideration to be made before coming up with new strategies. For optimal maximization, the company should take up loans with low-interest rates to reduce interest expense for increased net income. Countries that have a high economic growth rate provide high revenues. China and the Middle East nations are some of the regions that Halliburton should maximize its operations in to curb the low oil prices since they generate high sales which result in high revenues (Alex, 2016).
The company should adhere to the tax obligations and legal regulations especially since it has a pending merger to increase the chances of the merger being approved. Also, it is advisable for the company to take advantage of the countries that provide incentives in form of low tax rates. A growing economy gives the opportunity to increase market share since more oil will be demanded from the market.
4. Ethical and political factors
Ensuring that the safety of the workers is put in consideration during production is one of the ways the company can use to increase its production capacity since the workers will be motivated. Also, the company should avoid dealing with activities that cause political turmoil since they end up increasing its administrative expenses hence reducing its income. With the reduced oil prices, the main objective should be to reduce costs hence legal charges should be avoided at all cost (Dan and Chelsey, 2015).
Ansoff matrix
Market penetration, market development, product development and diversification are some of the strategies the company can use to sustain its growth with the reduced oil prices (Jim, 2015). Halliburton should focus on increasing its service delivery in the already existing markets, especially the Middle East and Europe which have high revenue capacities compared to other regions.
Since it’s not known when the oil prices will normalize, the company should avoid diversifying in new markets since it would lead to increase in operating costs. Additionally, the merger will provide an opportunity for market development since the company will be able to reach out to new customers at reduced cost (Alex, 2016). Thus, increasing market penetration and market development through the merger should be the main strategies the company should use to increase its market share and revenue before the oil prices start going up.
Recommendation
The best strategy is the one which maximizes profits at a reduced cost. Hence, it is advisable for Halliburton to focus on the merger with Baker Hughes as it provides an opportunity to increase its market share at a reduced cost. Therefore, it is crucial for the company to sell its risky assets to be able to offset the antitrust concerns brought about by the Department of Justice.
A merger will result in increased sales and profit at reduced cost with an additional increase in market share. When the oil prices normalize, the company will be better off than most of its competitors leading to increased growth rate and market capitalization.
As the company improvises on the merger, it can take advantage of the Middle East region to increase its sales and production capacity. The region still provides a high market share even after the decline in oil prices and the increased competition in the industry.
Increasing its product diversity in the region will harness an extra market share and increase its profits leading to an overall increase in revenues. At the same time, the company should try to reduce its production cost in North America by reducing the number of workforce and using Just in Time production method.
Want help to write your Essay or Assignments? Click here
Conclusion
Making the best of an already existing business is the main purpose for managers and business owners. With the escalating drop in oil prices, Halliburton has had to strategize its operations to ensure it remains competitive in the oil industry (Alex, 2016). Laying off workers to reduce operating costs with a proposal for a merger are some of the strategies the company has came up with. From the year 2014 to present, the company has had fluctuating profit levels with a net loss experienced in the year 2015.
Using SWOT, Ansoff Matrix, and STEEPLES analysis, some of the strategies the company could use are increasing market penetration in the already existing markets, merger, reducing operation costs in the low sale regions, and coming up with stringent measures to ensure safety for increased customer value. Since the oil prices are still reducing, the main profitable strategy is the merger with Hughes as it provides an increase in market share at a reduced cost. As the second largest oil provider, Halliburton stands a chance to increase its growth capability even with reduced oil prices.
References
Alex Chamberlin, 2016. Halliburton’s share price is gathering strength, and here is why [online] Available at: http://marketrealist.com/2016/03/halliburtons-share-price-gathering-strength/
Braden, 2012. Analysis: Oil service Titans are gaining power Vs big oil [online] Available at: http://www.reuters.com/article/usfieldservicespowerstruggle-idUSBRE8AC05S20121113#y2LttEqUfwzf4Kja.97 https://books.google.co.ke/books?id=VdG243upAqwC&printsec=frontcover&dq=strategic+management&hl=en&sa=X&redir_esc=y#v=onepage&q=strategic%20management&f=false
Charles and Gareth, 2011. Essentials of strategic management [online] Available at: https://books.google.co.ke/books?id=VdG243upAqwC&printsec=frontcover&dq=strategic+management&hl=en&sa=X&redir_esc=y#v=onepage&q=strategic%20management&f=false
Dan and Chelsey, 2015. Halliburton feels the impact from low oil prices [online] Available at: http://www.wsj.com/articles/halliburton-results-better-than-expected-1429529887
Halliburton, 2010. Halliburton Shale Solutions [online] Available at: http://www.halliburton.com/public/solutions/contents/Shale/Brochures/H06377.pdf
Halliburton, 2016. News [online] Available from: https://www.google.com/finance/company_news?q=NYSE:HAL&ei=MtVfVviZFMOAjAGktqgI&rm=0&startdate=2015-08-01&enddate=2015-09-01&start=30&num=10
Halliburton, 2016. Energy services group [online] Available at: http://media.corporate-ir.net/media_files/IROL/67/67605/reports/company/energy_index_03.html
Halliburton, 2016. Equities. Available at: http://markets.ft.com/research/Markets/Tearsheets/Financials?s=HAL:NYQ
Jim, 2015. Ansoff’s Matrix [online] Available at: http://www.tutor2u.net/business/reference/ansoffs-matrix
John, 2015. Schlumberger Vs. Halliburton Stock: Which one to choose? [online] Available at: http://www.investopedia.com/articles/markets/093015/schlumberger-vs-halliburton-stock-which-one-choose.asp
Lidia, 2013. Strategic management in the arts [online] Available at: https://books.google.co.ke/books?id=bNuVUxG6wP0C&printsec=frontcover&dq=strategic+management&hl=en&sa=X&redir_esc=y#v=onepage&q=strategic%20management&f=false
Richard and Abass, 2013 [online] Strategic management. Available at: https://books.google.co.ke/books?id=IQTfAQAAQBAJ&pg=PR9&dq=strategic+management&hl=en&sa=X&redir_esc=y#v=onepage&q=strategic%20management&f=false
Upstream Intelligence, 2015. Halliburton’s strategy: controlling risk exposure and increasing market share [online] Available at: http://analysis.upstreamintel.com/deepwater/optimizing-production-brings-relief-oil-price-crunch-gulf-mexico
Weberience, 2015. Difference between SWOT, PEST, and STEEPLE analysis [online] Available at: http://pestleanalysis.com/difference-swot-pest-steep-steeple-analysis/
Want help to write your Essay or Assignments? Click here
