Pog303 Strategic Management | Intellectual Assessment Answers

Questions:

“After two years of hunkering down, struggling U.S. oilfield service providers are preparing for an expected oil-price recovery in an unexpected way: filing for bankruptcy.

Companies that drill wells, haul water and provide other services to energy exploration firms have been waiting out a slump in oil prices by idling machinery, laying off workers and extending deadlines for repaying debts. Now they are turning to Chapter 11 creditor protection to shed debt and raise cash so they can spend and invest again.

Without bankruptcy, many of small and medium-sized service companies risk missing out on any upturn that could follow President-elect Donald Trump's prodrilling agenda or OPEC's plan to cut oil production for the first time in eight years, restructuring advisors said.” (Eyeing upswing, more U.S. oilfield service firms restructure, Reuters, Dec 2016)

“As oilfield services companies grow into this space, they handle more risk. The current low oil price environment may accelerate that trend, leading them and oil company operators into new partnerships through which risk can be shared and project delivery optimized”. (KPMG, Unsung workhorses of the oil industry – Oilfield Services Companies, March 2016)

The oil and gas sector is a diverse one made up of various types of firms including IOCs (International Oil Companies), NOCs (National Oil Companies), Independents, Junior oil firms and Oilfield Service Providers.

Oilfield Service Providers have been called the workhorse of the oil and gas sector. During the 2014-2016 oil price drop Oilfield Service Providers also suffered under falling profits due to the issues facing their customers, price cuts and the wider turbulent business environment. Like many firms in the sector Oilfield service providers had to rethink and be flexible in their approach to strategy and the choices they made during this time always with an eye for the future.

Your report should analyse the following

Answers:

Introduction

Oil and gas sector is one of the most revenue generator sectors worldwide. This industry is working as an international powerhouse that employs thousands of employees all over the world and generating a huge amount of revenues every year. Oil field service providers play an important role in the growth and success of any oil and gas company. These oil field service providers offer equipment, infrastructure, intellectual property and services required by global oil and sector for exploring for, extracting and transporting oil and natural gas. There are so many players in the category of oil field service providers. The success of oilfield service operations is relied on effective management of the nations.

In the oil and gas industry, oilfield service provider is most significant segment. This segment is considered as unsung workhorses of the oil and gas companies. In today’s business world, oilfield service providers are struggling in United States. With the significant growth, they are handling more risks and challenges. This report includes the challenges, which are faced by oilfield service provider. The oil service provider that is taken into considered here is Baker Hughes, a GE (General Electric) organization that is operating its business in United States. The below report includes some challenges, which are confronted the organization in oilfield service provider. At the end, it consists of some recommendations, which can be practiced by this organization to overcome these challenges.

Justification for Selected Organization 

The oilfield service provider, which is chosen for this discussion is Baker Hughes that is originated from General Electric Company. It is an American industrial company and known as largest oilfield service organization in the world. As of 2017, now the organization is 62.5 possessed by General Electric Corporation. Baker Hughes runs its business in over 120 nations and offers the products to the companies of oil and gas sector for drilling process of oil, evaluation, completion and manufacturing. The organization is headquartered in Houston, Texas, United States. It is offering oilfield services, products, systems and technology to the oil and gas sector all over the world. In addition, it also provides the industrial and other services for refining, pipelines and process industry (Aliyeva, 2012). Currently, it is employing more than 49000 employees. Now, it is completely devoted to ending the merger with other oilfield service provider, i.e. Halliburton. At the end of 2015, the gross revenues of the company are $15.7 billion. Merger and acquisition is the primary strategy that contributed to the success and growth of Baker Hughes organization in United States. Furthermore, the strategy of this oilfield service provider grown with the increase in the production and manufacturing, upgrading the licenses and protecting the extra land for new and fresh development and oil exploration activities. Other organizations, which come under Baker Hughes via merger and acquisition, are having various benefits from the company (Baker Hughes, 2017).

There are so many reasons, why Baker Hughes has been selected for this discussion. The company is one of the most well-known brand in the industry and providing its services most of the players in oil and gas sector. According to a survey, it is analyzed that this service provider has a strong production system and provide higher quality services and systems to the oil and gas sector players. General Electric is the major player in the oil and gas industry, which is combining its services with Baker Hughes. By this, GE is having access to different oilfield tools and equipment on which it expects to install its sensors, digital system and computers. This oil field service provider should be considered by each and every company in oil and gas sector, when it avails the services for its business. It will offer the benefits from installing these digital tools in-house (Baker Hughes, 2017). The oilfield services of Baker Hughes are currently forecasted to rank after only Schlumberger in the sense of market value. It is chosen as it has selected as responsible oilfield service provider, as it is significantly considering the environmental and safety concerns. By its exclusive and specific services, it is gaining significant competitive advantage over its competitors. The above-mentioned are the reasons and justifications behind choosing this organization. The primary reason is advanced technologies and systems, which have been adopted by Baker Hughes to provide innovative solutions to General Electric and other gas and oil organizations (Zott, Amit and Massa, 2011). There are some examples of oil and gas sector companies, which are availing services from this oilfield service provider, like; General Electric, Schlumberger etc. The examples for oil and gas drilling fluids include Newpark, Aquaness and Milchem.

Challenges Faced by Baker Hughes Oilfield Service

With the growth of oilfield service providers, the companies are facing more risks and challenges in the country. There may be some issues, like; low oil price environment that may quicken that industry trend and directing the oil and gas companies in new mergers and partnerships, via which the company is sharing the risks and challenges and optimize the delivery of projects. The oil and gas industry is very much diverse and made of different firms, like; International oil companies, National oil companies and oilfield service providers (Anis & Siddiqui, 2015). The organizations in the oilfield service providers are known as the workhorses of oil and gas industry. Drop in the oil prices between the period of 2014 and 2016, these service providers also confronted under decreasing profits because of problems facing their customers, cut in prices and unsettled business atmosphere. The entities in the sector of oilfield service provider need to rethink and be adaptive in their strategies and business models and alternatives, which they made after thinking about the future (Chamberlin, 2017).

Like other oilfield service providers, Bakers Hughes is also facing various challenges in this competitive business environment. There are various external factors that are influencing the developments in the sector. The major issue that is face by the organization is the oilfield water challenges. Under this challenge, it can be stated that oilfield water contains some contaminants, like; iron sulfide, bacteria and hydrogen sulfide, which can affect the quality of ingredients and equipment that will be delivered to the oil and gas sector company (DesJardins and McCall, 2014). If the company keeps it untreated, it is raising various problems, like; destroying the wellbore and limiting the flow of production. This is the major reason that is affecting the revenues and sales of the company as oil and gas entities are facing issues in their oil manufacturing and exploration activities.

The pipelines of the companies are based in underground, which is raising environmental issues. The companies are responsible for the handling the land and left it without cleaning. According to the Baker Hughes’s financial results of 2017, its revenues decreased mostly due to reduction in the upstream spending in the global offshore projects, weaknesses in the pricing in international revenues and sales and loss of revenues from one of its business, i.e. pressure pumping segment (Hill, Jones and Schilling, 2014). In addition, the company is intense competition in the industry, as the number of players is increasing. New organizations are enhancing their business operations by incorporating new and advanced technologies in its tools and equipment.

According to the data of energy institute, the performance of the oilfield service provider is fully relied upon the pricing policy of government. It is affecting the business of Baker Hughes and also the oil and gas organizations, which are availing the oilfield services of Baker Hughes. It involved a major risk for foreign direct investment and raised the problems of bargaining power (Kennedy, 2016). Along with this, labor could become a major challenge as pressure-pumping gear up for the recovery, Baker Hughes said in the reports of results in 2016-2017. The labor market is very much tight and the organization thinks that it will be considerable restraint in bringing extra capacity back in the services. For the company, last year was the most daunting ever for the American oilfield service providers (Kiany, Rahimi & Jokar, 2015).

As discussed above, the oilfield services of Baker Hughes are totally based on the technology and digital systems, the company has confronted the issues related to technology. It has implemented the advanced technology, but there was lack of staff and technology experts to handle systems. It affected the business operations and delivery of services to their partners in oil and gas sector. In addition, the organization faced the challenges related to organizational and logistical processes. Handling these challenges is very important for the organization to manage the growth (Kelland, 2014). There should be effective management of capital projects. In the year 2016, the company has made efforts to cut the costs that had various safety and health implications and deteriorated the quality and standards of services and machinery. One of the major challenges is to make innovations and get it around enhancing a manufacturing mindset. In today’s competitive business environment, the organizations are coming with new and innovative techniques for offering oilfield services. They are using advanced technologies and new techniques and software for managing the service delivery. It affected the sales and revenues of Baker Hughes in duration of past few years (Kun & Jian, 2011).

It is also considered that business organization is operating its business under changing societies, so it needs to develop the services according to diverse qualities, standards etc. The code of conduct of partner companies is also posing challenges to the organization. For example, General Electric has different laws and policies for operating its business from Baker Hughes, so it created issues for the company in delivering the oilfield services (Mitchell, Marcel and Mitchell, 2012). There was the shift in control over the resources, which had fundamental impact on the oilfield service sector’s customer base as more as more development and exploration activities are being assumed directly by the oil companies on national level. Apart from the above challenges, the price collapse also has a large impact on the growth of organization. During last few years, there was a dramatic collapse in the prices of oil. Capital investment budgets have reduced by more than 10 percent and it forced the oil field service provider to handle the brunt of decreased manufacturing activity in the lost business (Mitchell and Mitchell, 2014). For example, the impact of price collapse cause the oilfield service providers to loss $210 billion and approximately one-third of their market-capitalization. The companies in the industry have some major pricing concerns, which threatened the growth and survival of the oilfield service providers (Yusuf, et al, 2014). In this era, Baker Hughes has faced loss of profit margins in terms of labor, development, costs of raw materials, costs of projects, synergy and targets etc.

The investments in the oil and gas sector in recovery will shift in the future. New and innovative systems will fall of the upstream side to midstream area, petrochemical areas, and refinery processes. In the oil and gas industry, upstream operators will focus on gathering the funds from mergers and acquisitions by developing more dynamic and productive business operations (Osinovskaya & Andronova, 2017). The oilfield service providers are very much beneficial for the oil and gas sector companies. They assist the organizations in generating more revenues and maximizing the sales of these companies. But these certain threats are affecting the business of oil and gas industry, which is not good for the growth of organizations. The organizations in the industry are going global and adopting technological advancements to deal with the above-mentioned challenges and risks. To overcome these challenges, the firms need to adopt some effective strategies and market tactics for enhancing their brand image in the industry and recover the losses due to above-mentioned challenges and risks (Shuen, Feiler and Teece, 2014).

Thus, it can be stated that oil field service providers are obviously confronting difficult time from last few years. It made worse the business of these organizations. These companies were not able to protect themselves from the decrease in profit margins. These changes in the prices and project costs lead the organization to major business loss (Teka, 2012). Under the given situations, survival of oilfield companies will include great diligence by considering major strategic factors of business that consists of pricing and innovative contracting, portfolio justification and effective service delivery and cost management by looking at the profit margins. The organizations, which are going to change and adopt current market conditions and trends, would recover these challenges and issues with significant growth.

Recommendations 

To deal with these challenges, Baker Hughes should adopt some specific strategies for improving the strategic direction. To overcome the water challenges, the organization needs to rely on the oil-field chemistry experience, proficiency in adopting new technology, research and sector-directing the knowledge about the reservoir. By implementing a systematic method, the company can manage the integrity of its well and reuse water economically. It leads to effective utilization of resources, enhanced manufacturing and production and increased economic life of company’s assets for its coming future. These oilfield service providers must offer the equipment, infrastructure, intellectual property and services, which are required by global oil and gas sector to extract, explore for and transport oil and natural gas from the land to the refinery and finally to the customers.

In order to improve the strategic directions, Baker Hughes is required to develop some training and development programs. It will assist the organization in managing the issues related to labor turnover and labor market. It should analyze the market, so that it can understand the market trends and requirements of organizations in oil and gas sector. Considering the market trends will lead the organization towards significant growth and success in the future. It will enhance the revenues and maximize the sales of organization. In addition, it is recommended that Baker Hughes should focus on managing its assets and properties. The firm should be engaged in social and environment friendly activities, so that it can attract the people towards its services. Furthermore, the firm should consider norms, regulations and restrictions, which are regulated on the emission of environmental pollutants, as they can affect the environment, people, plants and other living things. There should be consideration of health and safety standards and policies by taking some specific initiatives. Adopting these processes and strategies will enhance the strategic directions for Baker Hughes in this difficult period. Improving these strategic directions will enhance the brand image and good will of Baker Hughes among society. Baker Hughes should consider the above-mentioned recommendations to overcome the associated challenges in oil-field service providers.

Conclusion 

From the above analysis, it can be concluded that oilfield service providers are facing various challenges in today‘s oil and gas industry. In United States, oil and gas industry is one of the great revenue generators, which have various leading players. Baker Hughes is one of the well-established oilfield service providers that is offering its services to the General Electric any some other partners in oil and gas sector. The industry is facing various challenges, which affected the financial performance of the company in last 2 or 3 years. The report includes the justification regarding the selection of Baker Hughes for this discussion. After discussing the challenges, there are some recommendations, which are given to improve the performance and strategic direction of the company. The organization should follow these recommendations to cover a significant market share in oil and gas industry in United States.

References 

Aliyeva, F, 2012, Top 10 Challenges in Oil and Gas Industry, Retrieved from https://www.intelligenthq.com/latest-news/top-10-challenges-in-oil-and-gas-industry-in-2012/. 

Anis, M.D. & Siddiqui, T.Z, 2015, Issues Impacting Sustainability in the Oil and Gas Industry, Journal of Management and Sustainability; Vol. 5, No. 4.

Baker Hughes, 2017, Baker Hughes: A GE Company, retrieved from https://www.bhge.com/.

Baker Hughes, 2017, Oilfield Water Challenges, Retrieved from https://www.bakerhughes.com/capabilities/water-management.

Chamberlin, A., 2017, What Challenges Does Baker Hughes Face? Retrieved from https://marketrealist.com/2017/04/what-challenges-does-baker-hughes-face/.

DesJardins, J.R. and McCall, J.J., 2014. Contemporary issues in business ethics. Cengage Learning.

Hill, C.W., Jones, G.R. and Schilling, M.A., 2014. Strategic management: theory: an integrated approach. Cengage Learning.

Kennedy, A. 2016, Unsung workhorses of the oil industry – Oilfield Services Companies, retrieved from https://home.kpmg.com/xx/en/home/insights/2016/03/oilfield-services-companies-unsung-workhorses-oil-industry.html. 

Kiany, D., Rahimi, G., & Jokar, M. S, 2015, Gas Exporting Companies forum, Past and Future. Research Journal of Recent Sciences, 4(5), 89-94.

Kelland, M.A., 2014. Production chemicals for the oil and gas industry. CRC press.

Kun, H. & Jian, Z, 2011, Circular Economy Strategic of Oil and Gas Exploitation in China, Elsevier Journal. 

Mitchell, J., Marcel, V. and Mitchell, B., 2012. What next for the oil and gas industry?. Chatham House.

Mitchell, J.V. and Mitchell, B., 2014. Structural crisis in the oil and gas industry. Energy Policy, 64, pp.36-42.

Osinovskaya, I. V., & Andronova, I. V., 2017, The Role of Innovative Decisions in the Development of Oil and Gas Companies: International Journal of Energy Economics and Policy, 7(2), 346-351.

Shuen, A., Feiler, P.F. and Teece, D.J., 2014. Dynamic capabilities in the upstream oil and gas sector: Managing next generation competition. Energy Strategy Reviews, 3, pp.5-13.

Teka, Z., 2012. Linkages to manufacturing in the resource sector: The case of the Angolan oil and gas industry. Resources Policy, 37(4), pp.461-467.

Yusuf, Y.Y., Gunasekaran, A., Musa, A., Dauda, M., El-Berishy, N.M. and Cang, S., 2014. A relational study of supply chain agility, competitiveness and business performance in the oil and gas industry. International Journal of Production Economics, 147, pp.531-543.

Zott, C., Amit, R. and Massa, L., 2011. The business model: recent developments and future research. Journal of management, 37(4), pp.1019-1042.