David Haigh and Richard Yoxon, Brand Finance Plc, UK, provide an overview of the biggest brands in the upstream oil and gas industry and look into what makes a brand stand out.
World stock markets have experienced a bull run recently. The stimulus of Quantitative Easing combined with rigorous austerity measures in many advanced economies has restored confidence and growth. The US, Germany, Japan and UK are back in very positive economic territory, and the aggregate value of world stock markets hit US$ 64 trillion by December 2013, higher than the 2007 peak in nominal terms. If asset values continue to recover during 2014 it is anticipated that total enterprise values of US$ 85 trillion and intangible asset values of US$ 54 trillion by the end of the year. Against this very positive background there is a large queue of IPO candidates lining up to raise finance in the markets and merger and acquisition activity is back with a vengeance, including in the oil and gas sector. There is no doubt that investors are heavily influenced by brand and reputational issues. Warren Buffet is known to favour brands he ‘knows, likes, respects and trusts’ and to favour strong brands in business-to-business as well as consumer sectors.
Intangible values by sector
Perhaps unsurprisingly there is a marked difference between the value of intangible assets by sector. Some industries are almost entirely tangible in their composition while others are almost entirely intangible.
In the case of the oil and gas sector the majority of intangible asset value lies in technology, trade secrets, know how, human capital and favourable contracts. However, marketing intangibles and brands are also increasingly significant. How can this be possible in such a down-to-earth industry?
Figure 1: Intangible value 2001 - 2013 of companies listed on major stock exchanges.
What is meant by ‘brand’ and why is it an asset?
The oil industry often overlooks the power and value of branding because many executives do not understand how brands work to create economic value. In a nutshell, a brand is a bundle of trademarks, trade names, logos, signs, symbols, domain names, copyright and creative material, which come to represent a set of values and reputation in the minds of stakeholders, which favourably influences their economic behaviour towards the subject company. The most obvious stakeholder group is consumers, but business customers, connectors, distributors, staff, governments, communities and financiers are also stakeholder groups that respond to brands.
Figure 2: Intangible value by sector (2013).
The question is whether an enterprise with a differentiated positioning and brand reputation can elicit a higher response rate from the target stakeholder groups than an enterprise without one.
In the upstream sector this seems to be the case when it comes to winning and developing drilling rights. A reputation for technological prowess and integrity vests in the brand and is critical to getting a seat at the table for the most sought after exploration and production opportunities. There is clear evidence that operators with a stronger corporate brand reputation win more bids, find staffing easier to obtain, raise capital at lower cost and run into fewer difficulties with NGOs, governments and communities.
Downstream consumer brands are more visible and require greater investment, but have to work harder to create preference for commodity products, in order to generate incremental volume and price premium.
The economic benefit of brands is as clear upstream as it is downstream, it is just that the target stakeholders and the required behavioural responses, differ.
Table 1: Total global 500 brand value.
Is it sensible to have an integrated brand upstream and downstream?
One of the great debates in the oil and gas sector is whether it is sensible to have integrated brands up- and downstream. The majors cover the whole industry from oilfield to home. The advantage is that brand awareness is increased, but the risks are much higher. The Exxon Valdez, Shell Brent Spar and BP Gulf incidents illustrate the potential damage, what upstream can wreak on downstream branded operations. But on the other hand, strong downstream brands can significantly help with staff recruitment, government relations and winning drilling rights. Smaller E&P players tend to avoid the limelight. The big players tend to operate through the line, but carefully manage the risks, although not always successfully.
World’s most powerful brands
In many respects the strength of any brand is more important than its absolute value because brand strength is so important as a facilitator of relations with key stakeholders. It is also a leading indicator of financial value.
Figure 3: World’s most powerful brands. Source: Brand Finance Global 500 (2014).
While the primary focus of the Brand Finance Global 500 is a ranking based on the absolute value of brands, each brand in the table is accorded a brand strength rating, expressed as a rating from D though to AAA+. For the second year running it is estimated that Ferrari is ranked as the world’s strongest brand.
These ratings are equivalent to credit ratings, but for brands and are used for determining the level of future revenue growth and risk, factored into the brand valuations. Brand Finance has conducted such brand ratings continuously since 1996 and these are now widely used by investors as an indicator of future or potential brand and business value. In the case of Coca Cola or Disney, a high brand rating underpins high existing consumer value. In the case of Hermes or Rolex, a high brand rating reflects dominance of a niche luxury category. In the case of Google or Red Bull, it predicts high future demand growth. In the case of PwC and McKinsey it reflects dominance in a highly competitive professional business.
But in the case of Ferrari its high brand rating reflects all of these things. Ferrari’s appeal is universal, admired by both businesses and consumers. It is a brand, which could easily stretch and grow, but its management have chosen to keep it exclusive.
In the case of the oil and gas sector brands like Shell and Exxon have developed strength and reputation both upstream and downstream. Both brands have relatively high brand strength ratings with Shell at AA+ and ExxonMobil at AA.
Figure 4: Total global 500 brand value (US$ millions).
Scale of global brand values
Overall the aggregate brand value of the top 500 brands in the world has risen by 12%, increasing by almost US$ 500 billion to US$ 4.4 trillion.
World’s most valuable brands
At US$ 105 billion Apple remains the world’s most valuable brand, followed closely by Samsung at US$ 79 billion, which is the only non-US brand to be found in top 10 most valuable brands in the world. In fact, the top 10 slots are dominated by the US and by technology. Shell is the highest oil and gas brand to feature at 18th with a value of US$ 28.6 billion.
Table 2: Top 30 most valuable upstream brands.
Oil and gas brands are valuable
At US$ 222.5 billion in aggregate the oil and gas sector is the fifth largest sector in the Brand Finance Global 500, behind the banking, telecoms, technology and retail sectors.
Despite a 2.5% loss in value of US$ 0.7 billion since last year Shell, at US$ 28.6 billion, is still the most valuable brand in the oil and gas sector because it uses a single brand in all applications. Chevron is worth US$ 19 billion while ExxonMobil, the corporate brand, weighs in at US$ 16.7 billion alone. If ExxonMobil’s whole brand portfolio (ExxonMobil, Esso, Exxon and Mobil) were combined, the value of its brands would be US$ 32 billion, US$ 3 billion higher than monolithic Shell. However, ExxonMobil retains a fragmented approach to its branding.
Shell’s decline in brand value is due to lower revenue forecasts for 2014 because of planned disposals and downward pressure on oil and gas prices caused by increases in available reserves particularly in the US. This decline in fundamental performance combined with a slight drop in brand equity to cause a fall in Shell’s brand rating from AAA- to AA+.
The authors anticipate that divestment of downstream operations will continue to have an impact on integrated brand values. For example, Marathon Oil, spun off its downstream operation, Marathon Petroleum, to create two extremely valuable brands – US$ 3 billion and US$ 2.4 billion respectively – which only just missed on the Global 500 most valuable brands in the world. The divestment appears to be bearing fruit as enterprise values of both entities have increased significantly as a result of management being able to focus on what is important for two very different businesses.
The policy of the oil majors towards integrated or standalone upstream and downstream operations and brands seems to be diverging. BP sold its share of TNK-BP in Russia and Shell is rumoured to be selling significant downstream operations (notably a Japanese refinery operating under the Showa Shell brand and its Norwegian Shell retail network). There is speculation that both companies are planning to exit refining and retail operations in Australia. Meanwhile ExxonMobil’s recent agreement with 7-Eleven to re-launch the Mobil petrol brand on the East Coast in 2014 bucks the trend.
Such divestments are no doubt prompted by the thin margins available downstream and investor pressure to chase higher returns upstream. High visibility of downstream brands can be a double-edged sword, as Shell, Exxon and BP have all experienced in recent years. Perhaps it is a safer long-term strategy to have one brand for upstream and another downstream, to avoid reputational cross-contamination. A strategy BP successfully benefited from in lubricants with the Castrol brand.
Table 3: Oilfield services brands.
2013 has been a solid year for Chevron. Marginal improvements to each of the main drivers of brand value (revenues, risk profile and brand strength) served to increase Chevron’s brand value by a hefty US$ 1.5 billion (8%). This growth in brand value is reflected in an increase in enterprise value of US$ 36.5 billion (18%) over the same period.
Total’s brand value grew by an impressive US$ 1 billion (8%) compared to EV growth of US$ 22.7 billion (17%). However, the majority of this increase is due to improved revenue forecasts and outlook for Europe rather than a change in Total’s brand strength, which only increased by 1 point.
CNOOC’s brand value also grew by US$ 1 billion, the biggest increase in percentage terms (23%). However, this increase is wholly driven by significantly improved forecast revenues, while CNOOC’s brand rating fell from AA to AA- due to relatively weak CSR performance.
Petrobras’ forecast outlook is more positive than 2013 in absolute terms, but heightened macro-economic uncertainty in Brazil increased the risk profile of these revenues, driving the majority of the US$ 1.05 billion (16%) reduction in brand value. In addition, Petrobras’ failure to keep up with domestic demand for energy and delays in bringing new refining capacity online has led to a drop in CSR performance relative to competitors who have upped their game in 2013, which in turn has resulted in an overall all decline in brand rating from AA+ to AA.
Upstream brand values are significant
Upstream executives often dismiss brands as an exclusively downstream phenomenon. Obviously strong consumer and business-to-business brands are needed to sell refined products to customers worldwide. But what is not often appreciated is that branding also plays a major role upstream and can have significant value in the exclusively upstream sector.
It is estimated that of the US$ 222.5 billion of oil and gas brand value in the Global 500 approximately US$ 89.9 billion is attributable to upstream including brands like Marathon Oil, Oxy and Suncor in pure play exploration and Schlumberger and Halliburton in oilfield services. All these brands reassure and add value to their relevant stakeholder relationships.
This is an era when brand and reputation matter. Even in upstream oil and gas branding is important and can create or destroy huge amounts of enterprise value. Oil and gas executives need to dedicate more time to considering how these important assets can be professionally and scientifically managed for value.
Read the article online at: https://www.hydrocarbonengineering.com/special-reports/30042014/upstream_oil_and_gas_brand_review_2014/