Strategy for Parallel Energy Company

Strategyfor Parallel Energy Company

Table ofcontents Page

1.0Introduction 3 2.0 Background 4 2.1Effect of price falls on companies 5 3.0 Analysis andFindings 6 3.1 Need for strategy 6 3.2Strategic analysis 6 3.2.1 Alternatives 7 4.0 Conclusions 8 4.1 The strengths of thecompany 8 4.1.1 Strategies 8 4.2Weaknesses 9

4.2.1Strategies 9

4.3Opportunities 10

4.3.1Strategies 10

4.4Threats 10

4.4.1Strategies 10

1.0Introduction

Strategicmanagement entails the science and the art of developing andimplementing long-term decisions regarding the direction of anorganization. Strategic decisions have several commoncharacteristics. First, the decisions provide the long-term decisionof a company. Second, the decisions take into consideration, a largescope of the organization`s activities and operations to develop themost suitable direction for an organization. The key aim of strategicdecision-making is to enhance the sustainability of the organizationby accounting for competition and other critical threats. Strategicdecisions create a strategic fit of the organization within itsenvironment (Johnson 2006, p.51).

The currentpaper aims at providing a potential strategic plan for the parallelenergy trust company. It is an energy production company establishedin the year 2011 in Calgary. The principal activities of the companyentail the geographical exploitation of oil, production of oilproducts, transportation, storage, and processing of gas products. The company’s operations are located in Texas and Oklahoma(Johnson, &amp Scholes, 2005 p. 47).

The paperfound that in the year 2014, the company had revenues amounting to63.16 million United States Dollars equivalent to 42.11 millionpounds. During the year 2015, the company anticipates losses due tothe current downturn in the prices of oil and oil products. Theresultant reduction in oil prices is due to the increase in thesupply of oil that began in the last quarter of the year 2014. Mostyoung companies in the gas and oil sector have experienced financiallosses while others have shut down operations in the effort to reducefurther losses. It is imperative for young companies to developfeasible strategies that ensure the continuity in their operationsduring such economic downturns (Sadler 2003, p.31).

2.0 BackGround

Amidst aneconomic downturn, big oil companies such as Exxon Mobil, Shell, BG,CNOOC, and Chevron are better in creating the resilient system to seethem through to the next resurrection of oil prices. The current oilprice anemic trend is quite an Armageddon for the young companies inthe oil industry (Tverberg, 2015).

The oilindustry is a tricky playground for oil companies. It is comprised ofperiods of highs and lows. In the year 2015, the performance of theoil companies was forecasted to slow down due to an oversupply of oilfrom the world markets. OPEC reported that the refinery margins foroil fell across the globe due to high inventories and expectations ofa mild winter. Products in the Atlantic basin continued to weakendespite an improvement in the US demand for gasoline. The OECD notedthat there had been an increase of oil inventories above the averageinventory for the past five years. Besides, the demand for oil is lowdue to the high supply. The prices of oil have not been attractivefor oil companies. Specifically, the increase in the demand for oilis lower at 1.6 million barrels per day compared to the growth in thesupply of 2.5 million barrels per day (Mainwaring, 2015).

OECDobserves that the increase in inventories began in the last quarterof the year 2014. The surplus has also resulted due to increasedrefinery utilization rates in the United States and Europe. Middledistillates account for most of the total global surpluses. Gasolinestocks started to rise above the five-year average starting September2015. The decline in oil prices has consequently provided achallenging market environment for the production of high-cost crudeoil. Countries such as China and India have taken advantage of thefall in prices to add their reserves. The OECD expects the trend offalling prices and increasing reserves to continue into the year 2016(Mainwaring, 2015).

The declinein the price of oil has had a depraved impact on the oil companies.Specifically, the index for shares of companies in the oil industryhas declined. According to the FTSE by mid-December 2014, the FTSE350 oil and gas index fell from a high of 423.88 in November to a lowof 346.20 points. The index lost 18 percent in value for thecompanies listed on the London exchange market (Inkpen and Moffett, 2011, p.58).

2.1Effect of price falls on companies

The declinein the price of shares has devastating consequences for small oil andgas companies. Companies such as the LGO energy private limitedraised capital worth 2.4 million to maintain the pace of its onshoredrilling program in Trinidad. The fall in the prices of oil hasresulted in a drop in the share prices more than thirty percent(Saloner and Shepard, 2001, p.53).

Another UScompany, Empyrean energy private limited experienced a drop in itsshares by more than 58 percent within two months. The fall in stockshas contributed to devastating results for the Range ResourcesCompany Limited. The company’s shares were suspended from tradingin December 2014. The company’s lender- Lind Asset Managementconsequently demanded an immediate repayment of its loan of more than7 million United States dollars (Johnson, 2008, p.88).

Finally,the fall in prices is global in nature. In China, companies such asLey shon decided to return money to the shareholders after its shareswere canceled from trading. The fall in prices made it difficult forthe company’s management to implement its strategy that entailedacquiring additional oil and gas assets in China. The companyexplained that it evaluated most of its target projects and foundthem as either uneconomic or marginal (Saloner and Shepard, 2001p.53).

3.0Analysisand Findings

Theanalysis for the various strategies is conducted through PESTELanalysis. The results of this section are the foundation for thearguments in the conclusion.

3.1 Needfor strategy.

Despite thedevastating effects of falls in prices on young oil companies, thereare companies whose operations remain unaffected. There are severalsecrets for survival during such markets conditions. First, thecompany needs to improve its cost efficiencies to enable it tocontinue producing oil. The aim is to reduce the amount of downtimeas well as pairing down the operational costs (Vactor 2010, p.47).

Forcompanies operating offshore, the shallow waters are more economicalto drill oil as opposed to deep waters. The shallow waters enablesecure well reentries and the company can easily get back to itsoperations (Lynch &ampLynch 2008, p.201).

3.2Strategic analysis

Accordingto the PESTEL model of strategic analysis, business operations areimpacted by Political, Economic, Social, Technological and Legalfactors. The Parallel Energy company limited PESTEL analysisindicates various strengths and weaknesses. First, the politicalenvironment is stable enough to foster operations for oilexploration. Although the political factors do not provide subsidiesto enable young oil companies to thrive during a decline in prices,the political environment is stable enough to allow growth. Some ofthe political challenges entail the change in policies concerned withthe government’s taxation of gas and oil products. Besides, thecompanies face challenges in meeting the government’s regulationconcerning the protection of the environment.

The Socialfactors are favorable as the Canada Society serves as a constantsource of labor. Besides, the worker population in the country iswell educated and experienced in the production of Oil. However, theAmerican labor is expensive to maintain during the low economicperiods (Mainwaring, 2015).

Theeconomic factors are unfavorable for the company’s profitability.Specifically, the increased supply of oil has led to a decline inprices and affected the profitability of the firm. Consequently, thecompany is exposed to failing on its debt payments. There arepossible increases in the interest rates on its debt that couldincrease its debt liability in future. Besides, the numerousvariations in the exchange rates are potential threats to the pricesof oil. The reduction in the exchange rate of the dollar to othercurrencies implies a reduction in a number of oils and consequently,it affects the profitability (Vactor 2010, p.87).

3.2.1Alternatives

The firstalternative is to renegotiate its debt with its financiers. Theparallel energy company needs to ensure continuity in its operations.First, the parallel company should renegotiate for lower interestrates with the financiers to levels that are affordable during thelow-price season. The alternative is to ensure that the company canmanage the debts within acceptable levels (Johnson, 2008, p.88).

The secondalternative is to raise more capital to maintain its operations. Thelow market prices of oil imply that the company has a high chance ofclosing operations as its current oil stocks are sold at a lossbearing the low prices. It is advisable for the company to raise morecapital and maintain its operations. The company can raise more moneythrough issuing more shares or by increasing the amount of debt(Lynch &amp Lynch 2008, p.201).

An increasein debt will assist in the pursuit of more profitable oil explorationactivities that suit the current prices. The debt can help thecompany to get through the hard times and meet its necessaryexpenditure in capital and operational assets.

Thetechnological factors surrounding parallel energy are favorable. Thecompany uses the latest oil production technologies. The legalfactors seem favorable, as there are no constitutional limitations tothe company’s operations (Mainwaring, 2015).

4.0Conclusions

Theconclusions for the strategic analysis are presented inform of a SWOTanalysis. The various strategies available are discussed for eachaspect.

4.1 Thestrengths of the company

It isimperative for parallel trust to utilize and maintain its strengthsto remain profitable amidst the price crisis, The company’sstrengths include a committed and experienced management. Themanagement has the capability to provide the appropriate guidanceduring the price crisis owing to their experience in the gas and oilmarkets.

Second arethe employees. The company’s employees are an important asset indetermining the successful production and delivery of products.However, the employees pose a big challenge concerning the wage billon the company. It is imperative for the company to manage the wagebills accruing from its payroll (Mainwaring, 2015).

4.1.1Strategies

The fall inprices implies that the company is facing problems in meeting thewage bill. The company has two alternatives to deal with thesituation. First, it is imperative to reduce the number of permanentemployees and to turn their contract into a temporary basis. Themanagement should communicate with the employees and make sure thatthey understand the position of the firm and the industry.Consequently, it is the role of the management to communicate thealternatives available to the firm and the reasons behind thedecisions. The key benefit from this alternative is that the companymanages to reduce the wage bill as well as to hold on to itsemployees during the low season. Consequently, once the season ishigh, the company does not incur extra hiring and training costs inobtaining new employees. Besides, the company wins the trust of itsemployees (Lynch &amp Lynch 2008, p.201).

It is alsoimportant to note that the operations of the business are reduced,and the employees are not fully committed at the workplace. Thecompany should utilize the opportunity to advance the careerdevelopment of the employees. It should enroll the employees inpart-time courses so they can advance their careers. The companyshould maintain its key employees in sensitive departments such asresearch and development during its operations since the price crisisis only seasonal (Tverberg, 2015).

Failure toimplement the first alternative, as a last resort, the company shouldreduce the wage bill by retrenchment. The retrenchment should beafter a thorough evaluation of its optimum wage bill. The evaluationshould take into consideration its most delicate departments.Sensitive units entail those of top management and key research anddevelopment personnel. They are the key to the success of the companyand losing such personnel during low seasons may impact negatively onthe business once it is back to normal operations (Johnson, 2008,p.88).

4.2Weaknesses

The majorweakness of the firm is inadequate capital. Oil and gas operationsare capital intensive, and the majority of the companies do not haveadequate capital to finance their operations. Consequently, the firmsare forced to involve financiers inform of debt. The parallelbusiness requires the support of investors to keep up its servicesduring the down period (Saloner &amp Shepard, 2001 p.53).

4.2.1Strategies

Themanagement should request the assistance of their financiersregarding any capital requirements to maintain its operations duringthe low prices period. It is key for the management to negotiate forstrong positions concerning interest rates and the repaymentprocesses. The interest rates should not hinder the company’sambitions to maintain its operations (Boon 2012, p.69).

4.3Opportunities.

There arevarious opportunities available for the parallel company during thelow-price season. They entail the ability to shift its operations andelimination of the intermediaries. There is the opportunity for theParallel Energy Company to add value to the various individualproducts to attract more customers (Johnson, 2008, p.88).

4.3.1Strategies

Thecompany should evaluate the whole process of oils and gas productionand delivery to identify quality requirements by the end consumer.First, the company can eliminate the intermediaries and offer todeliver the products to the consumers. By this method, the companycan provide its products at a relatively low price matching thecurrent prices in the market. Besides, it is possible to develop aone on one relationship with the customers, which serves as anadvantage to the company (Saloner &amp Shepard, 2001 p.53).

Second,although mining processes can prove expensive to pursue, the parallelcompany can buy the oil from companies that can mine and deliver theoil to the end consumer. As a broker, the company can earn additionalmargins to sustain its operations (Mainwaring, 2015).

4.4Threats

First, thekey threat facing the parallel company is a reduction in the marketprices of oil and gas products. The prices are below the productionprofitability. Consequently, the firm faces a threat of possibleclosure due to operational losses. Besides, low profitability furtherimplies that the company is prone to defaulting on its interestpayments owing to debts from its financiers (Lynch &amp Lynch 2008,p.201).

Secondis the exposure to currency fluctuations. The changes in the exchangerate of the dollar to other currencies result in a reduction in theprofits of the company. For example, a decline in the exchange rateof the dollar to other currencies such as the pound causes losses tothe parallel energy company (Tverberg, 2015).

Strategies.

It isimperative for the parallel energy company to manage the variousthreats and yet still, remain profitable. First, the parallel energycompany should hedge its oil prices against its exposure to lowprices. Forward contracts are options available to producers of oiland other products of volatile markets to protect against massivelosses due to price variation. A forward contract can guaranteeprofits for the company. Consequently, it shall be able to continueits operations regardless of the prices in the market (Johnson, 2008,p.88).

Second, thecompany should enter into financial derivatives such as futures tomanage its exposures to currency fluctuations. Futures are contractswhere the company promises to sell its oil products in the future ata specific price and exchange rates. Consequently, the company canoperate without the fear of the direction of exchange prices. Inaddition, the futures contracts guarantees the company has expectedmargins despite the prevailing economic conditions during the time ofsale (Saloner &amp Shepard, 2001, p.53).

Third, thecompany should reduce its operational expenditure and capitalexpenditure. To maintain its operations, the company should reduceits capital spending (CapEx). These are expenses incurred in theprocess of acquiring new oil exploration assets and fields.Consequently, it should divert the financial resources into the mostfeasible oil production operations at hand (Tverberg, 2015).

References

Boon,B., 2012.&nbspMANT251: management and organisations : resourcesfor study, Auckland, N.Z.: Pearson.

Inkpen,A.C. &amp Moffett, M.H., 2011.&nbspThe global oil &amp gasindustry management, strategy &amp finance, Tulsa, Okla.:PennWell.

Johnson,G. &amp Scholes, K., 2005.&nbspExploring corporate strategy:text &amp cases.&nbsp7th. ed., Prentice Hall

Johnson,G., 2006.&nbspProduktionssamling: Exploring corporatestrategy.&nbsp7. enchanced media., London: McGraw-Hill.

Johnson,G., 2008.&nbspProduktionssamling: Exploring corporate strategy :text and cases.&nbsp8. ed., Harlow: Prentice Hall.

Lynch,R.L. &amp Lynch, R.L., 2008.&nbspStrategic management&nbsp5thed., Harlow: Financial Times Prentice Hall.

Mainwaring,J. (2015) Junior Oil Firms: Not All Doom.&nbsp Rigzone.WebJanuary. 21, 2015.Available from:http://www.rigzone.com/news/oil_gas/a/136875/junior_oil_firms_not_all_doom_and_gloom/?all=hg2[Accessed 2015]

Sadler,P., 2003.&nbspStrategic management&nbsp2nd ed., Sterling,VA: Kogan Page.

Saloner,G. &amp Shepard, A., 2001.&nbspStrategic management, NewYork: John Wiley.

Tverberg,G.,(2015). Oil and the economy:Where are we headed in 2015-16? Ourfinite world. The Economy. Web.January 6, 2015.Availablefrom:&nbsphttp://www.ft.com/intl/cms/s/af043696-a616-11e4-9bd3-00144feab7de,Authorised=false.html?siteedition=intl&amp_i_location=http%3A%2F%2Fwww.ft.com%2Fcms%2Fs%2F0%2Faf043696-a616-11e4-9bd3-

Vactor,S., 2010.&nbspIntroduction to the global oil &amp gas business,Tulsa, Okla.: PennWell Corp.

Segment

Macro-environmental Factor

Opportunity or Threat?

Political

Change in accounting policies

Threatand Opportunity

Economic

Low prices for oil products

Low demand of oil products

High supply of oil

High production prices

Actions of OPEC

High interest rates

Insufficient capital

Threat

Threat

Threat

Threat

Opportunity/ Threat

Threat

Threat

Sociocultural

High supply of labor

Availability of high quality labor

Opportunity

Opportunity

Technological

Need for more advanced oil exploration machinery

Threat

Ecological

Weather conditions

Environmental and health risks

Opportunity

Threat

Legal

Regulation and tax owing to change of government regulations

Environmental protection requirements

Threat

Threat

Strengths

  • Highly experienced management

  • Qualified employees

Strategies

  • Retrenchmentto reduce wage bill

  • Renegotiation of employee contracts and offer career advancement opportunities

Weakness

  • Inadequate capital

Strategies

  • Issue debt capital

  • Issue share capital

Opportunities

  • Shift operations

  • Elimination of intermediaries

  • Adding value to the products

Strategies

  • Direct delivery of products

  • Brokerage of oil and gas products

Threats

  • Low prices for oil products

  • Low demand of oil products

  • High supply of oil

  • High production prices

  • Actions of OPEC

  • High interest rates

Strategies

  • Hedging of prices through forward contracts

  • Use of financial derivatives to reduce foreign exchange exposure

  • Reduce operational expenditure

  • Reduce capital expenditure