Running head: STRATEGIC AND FINANCIAL PERFORMANCE MANAGEMENT PART A 1

Strategic and Financial Performance Management Part A

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Strategic and Financial Performance Management Part A

Chevron Corporation is an American multinational energy corporation with headquarters

in San Ramon, California. It is one of the globe’s leading integrated energy companies with

many subsidiaries spread out across different countries. It is one of the “super major” oil

companies and was ranked 14th in the fortune 500 list of the world’s largest countries in 2016.

Chevron has subsidiaries in more than 180 countries and has a diversified business model that

captures different market segments. It is engaged in every aspect of the energy industry including

the oil, geothermal, and gas sectors. Operational areas include exploration, production, refinery,

and marketing. Chevron has various competitors in the energy industry including Exxon Mobil,

British petroleum, and RD shell. Chevron has been an industry leader in both the upstream and

downstream segments. The upstream segment consists of the exploration, and production of

natural gas and crude while the downstream segments consists of the manufacture and sale of

various products such as petrochemicals, fuels, additives and lubricants. Chevron has already

established for itself a strong industry presence in the oil and gas industry. It has operations in

more than 100 countries globally and is engaged in all aspects of the industry including

exploration, production, refining, marketing and transport. With about 60000 employees globally

and more than 32000 service stations worldwide the company future looks bright.

Strategic Analysis

Some of the factors that are taken into consideration when analysing the industry that a

firm is operating in includes technological developments, demographic trends, and

macroeconomic impact. Some of these factors have been favourable while others have been

unfavourable to companies in the energy industry. Although the energy industry is regulated by
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the government, its is still poised to show future growth owing to the increasing demand for

energy worldwide. This paper will make use of various strategic tools such as SWOT and

PESTEL analysis to be able to analyse Chevron competitive position at the firm, industry, and

macroeconomic levels.

PESTEL analysis – This acronym stands for the analysis of the “political, economic, social,

technological, environmental, and legal” external aspects that influences the performance of a

firm. This strategic analysis tool shows how all these aspects affect the operation of a particular

firm within its industry. The table below shows the PESTEL analysis for Chevron Corporation

Political Economic

1. Government support in fuel exploration 1. Consistency in economic growth

2. tax benefits in operations in developing 2. Inflation rates in some African and

countries Asian countries might affect the

company’s operations

Social Technological

1.Enforcement of high safety standards in 1. Significant usage of information and

production plants communication technology,

2. Participation in various social projects 2. Chevron’s production and operations

including funding education programs in are automated.

African countries and contributions in health 3. Company’s focus on research and

awareness programs. development.

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Ecological/Environmental Legal

1. Chevron has always strived to use energy 1. Adherence to employment policies.

efficiency programs in their own operations as 2. Maintenance of high transparency

well as helping others to improve their energy levels and ethical standards.

efficiency. 3. Somewhat struggle to adhere to some

2. Diversifying operations in renewable environmental laws.

energy

SWOT analysis – This strategic analysis tool investigates a firm’s strength, weaknesses,

opportunities, and threats. It paints a clearer picture on how a company functions in an industry

given the competitive landscape. For any company to be able to grow within its industry, it must

recognize its strengths, weaknesses, opportunities, and threats.

Strengths - A company’s business characteristics that enables it to have an advantage over other

firms

Weaknesses – Factors that place a firm at a disadvantage to other firms in the industry

Opportunities – chances that a firm can utilize to increase profits or promote future growth

Threats – External environmental elements that could negatively affect a firm’s performance.
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Chevron’s strengths;

 Strong and capable management structure

 Strong global brand name has given it a distinct advantage over competitors

 Financial stability

 Strong market position

Weaknesses;

 Cost of environmental hazards

 Declining global revenues for refined products

 Legal issues and costs of environmental hazards

 Continued global declines in gas and crude oil reserve

Opportunities

 Discovery of new oil fields across the world

 New markets have enabled the company to diversify product portfolio and also to

expand business,

 Acquisition synergies

Threats

 Increasing number of competitors

 Currency volatility risks

 Government regulation

 Increasing price of raw materials

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Five Forces analysis

This strategic analysis framework uses five major ‘forces’ to determine the competitive

intensity and hence the attractiveness or profitability of a particular market. These forces are;

threats of new entrants, threat of substitute products, bargaining power of buyers, bargaining

power of suppliers and rivalry amongst competitors

Supplier bargaining power Buyer bargaining power

1. Diversity in distribution channels. 1. Large number of buyers
2. Chevron seeks suppliers who have 2. Buyers can easily switch to other
reliable operation and quality goods companies
and services,

Rivalry
intensity in the
industry

Threats of new entrants Threats of substitutes

1. Entry barriers are high 1. Threat of solar energy, biofuel and
2. High fixed costs for upstream and wind energy
downstream products 2. Lower quality substitute products

Competitor rivalry

1. Some competitors like British petroleum

have better cost structures.

2. Low exit barriers – weaker firms are likely

to leave the industry

Fig 1: Chevron corporation five forces analysis

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Chevron Corporation Financial Analysis

When analyzing the financial performance of any organization, a useful tool that is

usually used is ratio analysis. Ratio analysis is a quantitative analysis technique that is used to

analyze the information contained in a company’s financial statements such as the balance sheet

or the income statement. This analysis evaluates various aspects of a company’s performance

such as liquidity, profitability, efficiency and solvency. This paper will make the use of two ratios

from each category to analyze Chevron’s financial performance.

Liquidity Analysis – Liquidity ratios analyze a firm’s ability to meet debt obligations. Two of the

most commonly used liquidity ratio are the current ratio and the quick ratio. The current ratio is

obtained by dividing a firm’s current assets with its current liabilities and indicates the firm’s

ability to repay short term obligations. Chevron’s current ratio deteriorated slightly between 2013

and 2014 but improved from 2014 to 2015. On the other hand, the quick ratio is obtained by

dividing deducting inventory from current assets and dividing the result by the current liabilities.

Chevron’s quick ratio was on a decline from 2013 to 2015. The improvement in Chevron’s

liquidity from 2014 to 2015 shows that the company was able to improve its liquidity over that

period. However, the declining quick ratio shows that the company had trouble turning its

inventory into cash. According to the company’s 2015 annual report, the current ratio was

adversely affected due to the fact that the company’s inventory was valued using the last-in, first-

out basis (Chevron Annual Report, 2015).

Profitability analysis – profitability ratios assess a firm’s ability to generate earnings from

investors’ funds. Two of the most common ratios used in this category are the Return on Assets

(ROA) and Return on Equity (ROE) ratios. The return on asset ratio measures the net income

produced by a firm’s total assets during a particular period. It is calculated by dividing the net
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income by the total assets. On the other hand, the return on equity ratio measures a firm’s ability

to generate profits from shareholder investments. It is calculated by dividing the net income by

shareholder equity. Chevron’s experienced a decrease in both the return on assets and return on

equity from 2013 to 2015.

Efficiency analysis – Efficiency ratios analyze how well a firm uses its assets and liabilities

internally. Some of the two commonly used ratios in this category are the asset turnover and the

stock turnover ratios. The asset turnover ratio measures the value of a company’s revenues that is

generated using its assets. It is calculated by dividing revenues by total assets. The stock turnover

ratio indicates how many times a firm’s inventory is sold and replaced during a specified time

period (Guru Focus 2016). It is calculated by dividing sales by the average inventory. Chevron

experienced a deterioration in both asset and stock turnover between 2013 and 2015.

Solvency analysis – solvency ratios measure a firm’s ability to sustain operations through the

comparison of debt levels with earnings, assets, and equity. Two of the ratios that are commonly

used in this category are the debt ratio and the equity ratio. The equity ratio measures the amount

of assets that have been financed by shareholders investments. It is calculated by dividing total

equity by total assets. The debt ratio measures a firm’s ability to pay its liabilities using its assets.

It is calculated by dividing total liabilities with total assets. Chevrons equity ratio declined

between 2013-14 and also between 2014-15. The debt ratio declined from 2013-14 but increased

slightly between 2014-15. According to Chevron’s 2015 annual statement, the increase in the

company’s indebtedness was primarily due to increase in the company’s total debt and lease

obligations during 2015 mainly due to Chevron’s capital investment programs which included

several large projects.

.Industry Analysis
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The fundamentals of the energy sector are still attractive for both investors and other

stakeholders. This is because products from this sector are vital to a growing global economy. As

one of the big players in the industry, Chevron’s performance has been quite promising. Its

historical performance, upstream portfolio, and strategies over the past decade has been a

success. Its cost structure has also been compared with industry peers and has enabled it to gain a

significant competitive advantage within the industry. Its diverse and large resource base has also

enabled the company to be responsive to changing market conditions and to select the most

favorable opportunities when the need arose. Chevron has recently undertaken several measures

aimed at improving its market position within the industry. For example it has achieved several

strides in its Gorgon gas project. The Gorgon project is one of the largest natural gas projects

ever undertaken globally. The project is aimed at developing the Gorgon and Janz oil fields in

Australia and is projected to supply 300 terajoules of gas per day to Western Australia. The

project also involves the construction and operation of facilities aimed at injecting and storing

CO2 in deep reservoir units (Chevron Australia 2016). At the same time, Chevron’s Wheatstone

project is also about to start up. This project, which is due to start mid this year, will enable

Chevron to develop vast natural gas resources as well as third party natural gas located offshore

Western Australia. This two projects are projected to help Chevron to boost future earnings as

current oil prices recover.

The power of a global brand and strong industry positioning is also helpful to Chevron’s

competitive advantage in the industry. The company is expected to gain additional market share

as it continues to expand and diversify with alternative energy operations such as wind,

geothermal, fuel cells, solar, biofuel, and hydrogen alternatives. Between 2011-2013, Chevron
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spent at least $2 billion on the research and acquisition of renewable power sources. In 2011, the

company launched established a 29MW thermal solar-steam facility to produce steam for

enhanced oil recovery. To date, this project is the largest of its kind globally. Chevron has placed

itself strategically in the energy industry as a cost leader and differentiator. It offers its products

to its customers at a relatively cheap price compared to peer companies through heavy

investment in research and development. It also has done well in production and distribution

through state of the art production and distribution facilities. This has made it able to respond to

other firms which have been encroaching market share. Competition has been from new entrants

as well as incumbent firms such as Royal Dutch Shell, ConocoPhillips, Exxon Mobil and BP. An

analysis of the energy industry shows that the company needs to act defensively to maintain its

current position and market share in the industry. It needs to embrace new technologies in the

production, refining, and transportation of finished products to make the process more efficient

and cheaper. Many firms in the oil and gas industries are planning on reducing future capital

expenditures. This follows global economic uncertainties that have forced them to scrap various

planned projects and to reduce their annual spending plans. However, Chevron has continued

with its spending plans.

Conclusion

The energy sector has in the recent past become one if not the most demanding business sectors

in the global economy. There are many firms in this sector and Chevron is facing stiff

competition while trying to find new opportunities to maintain its many market share and also

seeking new ways of increasing its share through technological development. Chevron is one of

the super major oil corporations in the globe and has operations in many countries worldwide.

Diversification into various sectors in the industry has helped Enron to remain competitive still
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today. However, the financial analysis of the company has revealed some worrying areas in the

company’s operations which needs to be drastically improved. For example, the company needs

to improve its inventory management processes to enable it to be able to quickly turn the

inventory to cash. The company also needs to work on its leverage. Although its intended capital

projects are projected a positive effect on its futures cash flows, it financial strategies should be

able to reflect economic realities. All in all, the increasing demand for energy globally makes the

purchase of Chevron stocks a wise choice for any investor.

References

Chevron Australia. Gorgon Project. Retrieved from https://www.chevronaustralia.com/our-

businesses/gorgon
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Chevron corporation (2015). Chevron 2015 Annual Report. Retrieved from

https://www.chevron.com/-/media/chevron/annual-report/2015/2015-Annual-Report.pdf

GuruFocus.com (2016). Chevron Corp (NYSE:CVX)Asset Turnover. Retrieved from

http://www.gurufocus.com/term/turnover/CVX/Asset-Turnover/Chevron-Corp\

Appendix A: Ratio Analysis

Current ratio

component Dec 2013 Dec 2014 Dec 2015

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Current assets 50250 42232 35347

Current liabilities 33018 31926 26464

Current ratio 1.52 1.32 1.34

Quick ratio

component Dec 2013 Dec 2014 Dec 2015

Current assets 50,250 42,232 35,347

inventory 6,380 6,505 6,334

Current liabilities 33018 31,926 26,464

Quick ratio 1.33 1.12 1.10

Return on assets

component Dec 2013 Dec 2014 Dec 2015

Net income 21,423 19,241 4,587

Total assets 253,753 266,026 266,103

Return on assets 8% 7.2% 1.7%

Return on equity

component Dec 2013 Dec 2014 Dec 2015

Net income 21,423 19,241 4,587

Shareholder equity 149,113 155,028 152,716

Return on equity 14% 12.4% 3%

Asset turnover

component Dec 2013 Dec 2014 Dec 2015

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revenues 228,848 211,970 138,477

Total assets 253,753 266,026 266,103

Asset turnover 0.90 0.79 0.52

Stock turnover

component Dec 2013 Dec 2014 Dec 2015

sales 228,848 211,970 138,470

Average inventory 6,262 6,442.50 6,419.50

Stock turnover 36.54 32.90 21.50

Equity ratio

component Dec 2013 Dec 2014 Dec 2015

Total equity 149,113 155,028 152,716

Total assets 253,753 266,026 266,103

Equity ratio 0.59 0.58 0.57

Debt ratio

component Dec 2013 Dec 2014 Dec 2015

Total liabilities 106,640 110,998 113,387

Total assets 253,753 266,026 266,103

Debt ratio 0.42 0.41 0.43

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