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Extended-form Case Study
Assessing business structure: a case study in the energy industry
Published on May 7, 2015 27 min
A selection of talks on Finance, Accounting & Economics
Hello. My name's Michael McDonald. Today I'll be talking about assessing business structure. This is a case study in the energy industry. There's been a great deal of change and evolution in the way that firms look at business structure in the last few years. In particular, spin-offs have become much more common with the rise of activist investors. Further, for the first time, Master Limited Partnerships, or MLPs, are becoming a major form of business structure. Given these changes in the way that companies are structuring their operations, it's useful to understand the objectives that companies look at when assessing their business structure, and what their different options are.
One area where these challenges are particularly acute is in the offshore oil drilling industry. Now, just to give a bit of background on the offshore oil drilling industry. Drilling for oil can be done either on land or at sea. When it's done at sea, it's called offshore oil drilling. Offshore oil drilling relies on large floating vessels drilling oil wells into the earth's crust. And then the oil beneath the sea is extracted as a result. Major oil companies like Exxon, and national companies like, Cnooc or Petrobras are the most common users of offshore oil drilling. Offshore oil drilling is very expensive and very time-consuming and very technologically challenging. Therefore, it's not generally done by smaller oil firms. And in fact, even large oil firms don't generally drill the oil wells themselves. Instead, they hire third-party companies that perform the work. Again, as I said, that's because this oil drilling is expensive and technologically challenging. But moreover, the vessels that drill the oil wells need to be constantly in use because they cost so much money in the first place. Most oil companies simply aren't prepared to drill well after well after well. As a result, they hire a third-party company, like say Transocean or Noble or Seadrill. That company comes and then drills the well. And then once that well is complete, they move on to another well, potentially for another company. So that level of usage in terms of these offshore oil drilling vessels is not something that most oil companies can simply commit to. In this study, we're going to examine the business structure of several different offshore oil drilling firms and then posit a hypothetical firm which is asking students what changes should be made to their structure.