Individual Competitors

On the 2014 Capital Markets Day MOG compared itself with what it had determined to be its peer-group.

Adam Newton elaborated, that the selection of which companies were to be included within this group had been based merely on a criteria of size. Jacob Pedersen and Graham Slack both explain how identifying immediate competitors in such a complex industry, in which the characteristics of companies vary greatly on parameters such as geographical presence, technical capabilities, size, level of integration and political ties, is an almost impossible task. However, technological capabilities are the biggest source of competitive advantage in the industry. Consequently, oil companies for whom these technical capabilities overlap are going to be competing over the same resources – i.e. employees with specific knowledge or oil fields in which they can take advantage of these capabilities. Recognizing that it is principally the scarce resources that characterize the nature of competition within the industry, the closest competitors will be identified based on their technical and geographical focus, in addition to size.

Figure 30 - MOG Global Portfolio

Source: MOG Capital Markets Day (2015)

Above is an illustration of the global geographical presence of MOG activities. In the following, the individual companies within the peer group highlighted by MOG as well as the ones identified in the interview with Adam Newton, are analyzed with regards to the nature of competition. Throughout the analysis, particular attention will be given to the size of the production, the reserves available to the company and the level of debt. These measures combined have been found to have heavy influence on the strategic options available to such companies. The following legend will be applicable throughout.

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For the purpose of comparison, MOG had a 2015 production of 315,000 BOEPD, proven reserves totaling 1,310 MBOE and a total debt ratio of 0.44. Additionally, a 2015 profit margin of -38% shows the severity of the current market conditions. Following the analysis, a sub-section will discuss MOG and its competitive advantages in the context of the identified competitors.

Throughout the analysis of the individual competitors, particular attention will be given to the size of the production, the reserves available to the company and the level of debt. These measures combined have been found to have heavy influence on the strategic options available to such companies. The following legend will be applicable throughout.

6.6.1.1 Hess Corporation

MOG already benchmarks itself against Hess when it comes to production and financial performance, due to the similar characteristics of the two companies. Like many other oil companies, Hess explores, develops, produces, purchases, transports and sells crude oil and natural gas. It displays a broad geographic focus, pursuing opportunities wherever it is. Consequently, its efforts geographically overlap with those of MOG in Algeria, Denmark, Norway, the UK and the U.S. Additionally, the company ventures into both offshore and onshore projects (the latter primarily in the U.S.).

The company enjoys the lowest total debt ratio of the examined group of competitors – even lower than that of the Maersk Group. Additionally, the company is among a few that actually increased production last year from 329,000 BOEPD in 2014 to 375,000 the year after. Although the increase in production could be facilitated by several both positive and negative factors, it depicts a company characterized by growth (Hess Annual Report, 2015).

Troels Hedegaard & Morten N. Nielsen 6.6.1.2 Murphy Oil

Murphy is significantly smaller with regards to production and reserves than MOG. The crude oil production is less than half of that of our case company. The company describes itself as ‘an offshore global operator capable of deep-water execution (Murphy Annual Report, 2014). However, only a very small share of its total crude oil production comes from offshore projects (8,000 BPD) (Murphy Annual Report, 2014).

Furthermore, the company is currently only pursuing projects in Canada, Malaysia, the U.S. and the Republic of the Congo (Murphy Oil Annual Report, 2015).

6.6.1.3 Noble Energy

In the value chain analysis, it was determined that exploration is not currently a strong capability of MOG, with little-to-no recent success. Conversely, Noble Energy enjoys an almost one hundred percent success rate within exploration. Previously the company focused almost exclusively on onshore domestic drilling (i.e.

North America), but increased competition for depleting oil reserves has forced the company to explore new possibilities. According to Adam Newton: “Nobel has through certain exploration successes gotten much more into relatively high political risk environments like eastern Mediterranean, offshore Beirut, offshore Cyprus and offshore Israel”. As a result, Noble Energy has developed technical capabilities within deep-water basins, very similar to the case company. At the present time, it has offshore projects all over the world, including the U.S., West Africa, the Gulf of Mexico and the Eastern Mediterranean (Noble Energy Annual Report, 2015).

The comparable size of production between MOG and Noble Energy combined with the overlap of capabilities could potentially cause problems for MOG. Its strategy of exploring new opportunities, wherever it may be, could place them in direct competition for resources in the future.

Noble Energy is a company with experience and capabilities within certain phases of the value chain in which MOG is less strong. A portfolio of expensive, high-risk projects along with a somewhat strained financial position might prevent the company from capitalizing on their capabilities, while Maersk is in an advantageous position to develop such projects. Consequently, although the particular technical and

Troels Hedegaard & Morten N. Nielsen geographical focus of Noble is somewhat different from MOG, it is a prime example of a potential value-creating opportunities based on synergies between players in the industry.

6.6.1.4 Occidental Petroleum

Occidental is one of the biggest oil companies within the category ‘midsize’. Although this label does not suggest immensity, the production of the company is almost twice as big as that of MOG. At the same time, the company has one of the lowest total debt ratios and highest current ratios of the examined group of competitors. The financial flexibility that this entails provides ample opportunity for expansion, even when the rest of the industry is suffering – an advantage that apparently is not only afforded to MOG. The difference in size between the two companies also means that Oxy would be less affected by risky projects, than MOG would by a project of the same size.

Very similar to MOG, the company has a high degree of focus on increased recovery from old oil fields, where traditional methods of extracting oil fall short. In fact, Oxy is widely considered an industry leader within the techniques of enhanced oil recovery, being able to extend the lifetime of an oil field by as much as 30 years. Its strategy involves acquiring large and old oil fields, as an inexpensive way to enhance production. Currently, Oxy mainly operates within the U.S., South America and the Middle East, but this could quickly change in the future as new opportunities arise elsewhere on the planet (Occidental Annual Report, 2015).

6.6.1.5 Anadarko

Anadarko is the biggest company by production volume in the competitive vicinity of MOG with 2.7 times that of the case company. The difference in size is indeed so vast that it is almost incomparable. The company operates mostly within the onshore segment, with most of its operations in the U.S. At the same time, the composition of production segments is significantly different from Maersk, as the vast majority comprises natural gas and liquids. In fact, only around one-third of the production consists of oil and condensate reserves as of 2015. As a result, Anadarko is not considered a close competitor to MOG (Anadarko Annual Report, 2015).

Troels Hedegaard & Morten N. Nielsen 6.6.1.6 Apache

Apache is of similar scope to MOG by production volume, but suffered impairment losses in 2014 in the order of five billion dollars - mainly as a result of revised fair value assessments of oil and gas reserves in the North Sea and assets held for sale (Apache Annual Report, 2014). Bearing in mind that this was before the most dramatic downturn in the oil price, which happened during 2015, this seems to indicate a company under pressure, which is confirmed by the significant amount of debt incurred by the company. In fact, the total debt ratio of Apache is almost fifty percent higher than the average of the examined group. On top of that, a somewhat limited portfolio of proven reserves relative to annual production seems to require future exploration efforts, which entails a high degree of risk for the financially strained company.

The company has exploration and production operations primarily in North America, but is also present in both Argentina, Egypt, Western Australia, the U.K. and the North Sea, most of which being onshore. This global presence along with a diverse set of capabilities makes Apache a prospective competitor, whom MOG will likely have to compete with for essential resources in the future, if it survives the current predicament (Apache Annual Report, 2015).

6.6.1.7 Marathon Oil

Marathon is heavily vertically integrated, with both production, refineries, transportation and retail operations. A historical refinery shortage in the U.S. has put pressure on oil producers to lower prices, while increasing the price of gasoline. Environmental regulations concerned with the construction of refineries have resulted in very few new refineries in the U.S. since 1976 (U.S. EIA, 2016). Rather, the tendency has been to increase output through a more efficient production process. To mitigate the problem, Marathon has been operating one of the biggest refineries in the country since 1976. In fact, the current refining capacity of the company far surpasses its crude oil production (Hargreaves, 2007 April 17).

Additionally, Marathon owns Speedway LLC, which is a series of gas stations combined with convenience stores, through which it also sells its own finished petroleum products. With 2,822 Speedway locations and 5,500 independent Marathon stations across the country, Marathon achieves a broad product exposure that

Troels Hedegaard & Morten N. Nielsen would otherwise not have been possible. Consequently, the level of integration and structure of the company is vastly different from that of Maersk (Marathon Oil Annual Report 2015).

The production volume of the company is fairly similar to that of MOG, though slightly bigger. Although it does have a global presence, with operations in Africa, the Middle East and the U.K., it mainly focuses on North America (Interview: Adam Newton).

As of yet, its geographical need for resources does not overlap to a large degree with MOG. At 105%, the current ratio of Marathon oil ranks in the worst quartile of the group of potential competitors. Its total debt ratio, however, is in the best quartile, suggesting a stable financial situation with room to maneuver.

6.6.1.8 Tullow

As the smallest company in the analysis, Tullow seemingly does not pose a significant threat to MOG. In the interview with Adam, he explains how the company has an impressive exploration record, with almost a one hundred percent success rate. At the same time, however, Tullow is financially over-stretched, preventing them from starting new projects (Ambrose, 2016 April 28), to which Adam Newton elaborated:

“The other thing, Tullow has been quite effective in is its exploration strategy, so a lot this, it is not helping them now unfortunately, because they are over-stretched on expensive projects, but most of its stuff have been converted from exploration into production”

As a result of many fruitful explorations, the company has commenced many projects, because of which they have obtained a significant amount of debt. At the time of the publication of its 2015 annual report it had a total debt ratio of 0.72, but a current ratio of 156%, indicating that no immediate financial problems exists.

With a break-even price somewhere between 25 and 30 USD, Tullow is one of the few companies that has actually been able to maintain positive margins (not including impairments) almost throughout the downturn.

Although the company already had a fairly cost efficient portfolio before the change in circumstances, the significant improvement shows a great ability to adapt (Macdonald & Amon, 2016 January 13).

As of 2015, the company had operations in 22 countries around the world, including Greenland, the United Kingdom and Norway, in which Maersk is also currently present. The majority of its production, however, is in Africa where the company has both onshore and offshore operations (Tullow Annual Report 2015 and Macdonald & Amon, 2016 January 13).).

Troels Hedegaard & Morten N. Nielsen