Monday, June 07, 2010

oilfield branding

For the so-called “super-majors” of the oil and gas industry, they are all really in two different businesses. There is the upstream side which focuses on exploration and drilling and extracting raw crude and gas from the ground. Then there is the downstream side which focuses on transport, refining and commercial retail sale of refined gasoline and other petroleum products. These two businesses are related in the sense that they both involve oil and gas and as such there are some overlapping technical and operational skill sets that can be employed. However, the two businesses are still rather separate. Their downstream units sell crude to any refinery that will accept it and their refinery business will purchase crude from any driller that extracts it from the ground.

There are six somewhat traditional super-majors: ExxonMobil, Shell, ChevronTexaco, Total, BP, and ConocoPhillips. However, it is arguable that if this being ranked be market capitalization, then ENI should also be included as they are almost as big as COP is now. While BP isn’t what they once were, but they’re not about to fall out of the super-six (barring some Michael Bay-esque hurricane of fire event this summer). COP has lagged for what seems like their ill-timed acquisitions, in particular their decision to acquire Burlington Natural Resources at the peak of the natural gas cycle in 2006. State-owned companies like Saudi Aramco are larger but they don’t qualify from a market perspective and neither do tradable but state-owned firms like PetroChina or Petrobras.

There are many companies in the oil and gas industry that only operate in one of the two business halves. Companies like Valero and Tesoro do not drill or contract rigs. They are just refiners and operators of gas stations. Companies like Occidental (Oxy) or BHP Billiton do not operate gas stations and to my knowledge are not involved in the refinery business. I could pick other drillers like any of the large natural-gas focused independents in the US like Chesapeake, EOG, Apache, Devon, XTO (now being bought by XOM), etc, but I want to work my way back to Oxy and BHP (in future posts).

For BP, they now have a branding problem. The most consumers can now do at this point is to not buy BP gas. However, they does very little to impact BP’s upstream division which is the side that was using Deepwater Horizon. While the cumulative effect will hurt BP and probably cause them to lose franchisees over time, the true business loss is not as significant as many might think. Initially, the protesting of BP stations will probably hurt the local franchise owners and managers who really make very little from the BP brand. Over time, it will reach the rest of BP, but that assumes a long and concerted effort on the part of generally lazy consumers.

BP can dig in their heels, stay together, and ride this out. Depending on public and governmental action, this could ultimately turn out to be an excellent buying opportunity of their stock if you can stomach the risk. Share prices are deeply depressed, but the core business is solid. The upteen-billion dollar question is how big will the bill be for the spill, clean-up, and years of lawsuits. Perhaps BP (and trial lawyers everywhere) should take solace in knowing that Exxon still has the Valdez case tied up in court. The dividend is still being paid despite presidential objections and it should be. (I am disappointed with Obama’s hypocrisy of calling out BP over paying the dividend while saying nothing when the banksters who destabilized our financial system and kited billions from taxpayers continued to pay dividends).

Another possible tact for BP is to separate their upstream and downstream businesses. In the process, they should give the downstream business some friendly-sounding name like ‘PowerPlanet’ or something equally ridiculous. That is the side that sells the gasoline and the 10-40W oil. The upstream business could get a new name as well, but they have a less severe problem because they do not sell to end-use consumers. They have far fewer customers to deal with who might purchase their crude.

This is one of the advantages for the service side of the industry. They don’t sell to end-use consumers. And some of the service companies work to maintain as little publicity as possible in the general public and to generally be not very well known. There is little value in public awareness of your brand if the public does not buy your product. As long as people in the industry know what you do, that is what counts since those people are your customers.

BP can survive, but I believe the choice (or ability) is going to be determined by after-the-fact legislation.

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