Oil Company Crisis: Managing structure, profitability and growth
After a long period of cost cutting, the oil companies were left with little choice but to embark on a wave of mergers to rekindle growth aspirations. If these efforts founder, what should the oil companies do next? Should they accept fashionable arguments in favour of deconstruction and break up into focused entities, and would this actually add value? We believe not, but this raises additional questions. How should they address the trade-off between reinvestment in growth and maintenance of returns on
capital employed? How should they measure the latter, and what does the capital market really expect of them? We believe that target returns on capital are far too high and current accounting returns on capital are largely delusive. This also has implications for capital allocation since the upstream is a lot less profitable than it looks, though still much more profitable than refining.