The paper "The Capital Structure of the Shell and How to Finance Their Operations" is a wonderful example of a case study on finance and accounting. The capital structure that Shell Company applies depends on equity more than debt. “ Equity is a more expensive form of capital than debt. And acquisitions that have unstable cash flows require capital for growth and compete in turbulent industries that often require a greater amount of equity. Moreover, equity provides for Shell Company more financial flexibility because it does not require scheduled payments” (Brigham and Ehrhardt, 2008).
Also returned earnings take a place in the Shell organization's capital structure by using their profit, which has been generated to reinvest in the business again while it can be paid out to the shareholders “ as dividends” . Shell’ s capital structure focuses on many aspects, such as bonds and commercial papers. Shell uses commercial papers to finance, which are short term debt requirements while bonds take longer repayment dates, global commercial program and commercial paper program, and euro medium-term notes (Epstein, Nach, and Bragg, 2007). The table below shows the Shell Royal Dutch Petroleum Company equity and the debt from 2005 until the year 2009.
Moreover, to find the capital employed is debt added to equity and that will be in order from 2005 to 2009 (110,840-130,718-144,067-152,135-171,464). year 2005 2006 2007 2008 2009 Equity 97,924 114,954 125,968 128,866 136,431 Debt 12,916 15,733 18,099 23,269 35,033 Equity capital 88.3% 87.9% 87.4% 84.7% 79.6% Debt capital 11.7% 12.1% 12.6% 15.3% 20.4% Recently, the Group decided to produce gas and oil, Dich Royal Shell. The sale of several assets already owned, including Royal Dutch Shell of oil and liquefied gas fields, in addition to the European in the North Sea, in order to assist the group in the providing of approximately 28 billion U. S. dollars representing an expenditure program adopted by the new group this year (White, 2010).
Especially the assets relating to the refining and marketing in mature markets, such as Europe, in addition to the sales of some fields of oil and gas production in the Sea and Nigeria, which is what makes this plan one of the largest sales of assets, or re- restructuring of assets, in the history of Shell (Shell plc, 2010). The company invited buyers to give their presentations and bids including, according to estimates by experts, appraisers of The European arm of Shell LPG, of which the value of LBG is based in France, and specializes in the sale of gas cylinders for homes in rural areas and mobile vehicles, up to one billion Euros (1.4 billion U. S.
dollars). “ Experts believe that the sale of the strong arm of Shell in Europe, L. RPG, will be prepared in one of the largest private equity deals Petroleum and natural gas since the crisis put the global financial implications over and solved the world” (White, 2010). To measure an organization's business in terms of its equity and debt should be enough to classify this business.
Shell is one of the biggest companies specializing in oil and petrochemical, working upstream and downstream, which they operate in more than 100 countries: Downstream strategy and Upstream strategy: The strategy of downstream focuses on the following elements: cost reduction and operational excellence through a globalized organization, refocusing manufacturing portfolios on large and integrated sites, customer focus, strong brand, differentiated fuels, concentrated investment, and exiting non-core markets. Shell global downstream (trading) goes through three stages, which are to make, move, and sell.
The first stage includes refining and chemicals; the next stage involves distribution and supply; and the third, which is the selling stage, contains business-to-business sales, retail, lubricants, and chemicals marketing. Downstream business actions in any country deal with its local currency avoiding the risk of currency exchange. Upstream, in terms of the oil sector, means that the processes of exploration and production, which is a long term of investment and can risk business, refers to the uncertainty of the future and the enormous funds for these kinds of projects.
However, Shell’ s upstream includes numerous activities, such as gas exploring and producing, developing fields and mining oil sands, and converting gas to products (liquid products). To avoid business collapse, Shell Company needs to pay off its regular interest and ROP; while the debt payments do not change the same as the level of profits for operations and sales, there will still be a possible risk in terms of paying off its debt. On the other hand, when the level of performance does not meet the company’ s expectation, it will lead to difficulties of debt payments; all these financial problems are linked to the state of debt, while firms with low debt face less risk than firms with high debt (Asaf, 2004). Upstream business, in terms of “ currency exchange and interest rate” transaction in US Dollars, correlates to London Interbank’ s offer rate, which is regarded as the “ floating-rate basis” that Shell's debt is structured on.
“ These exchange rate transactions are real-time transactions where one thing is just exchanged for another these swaps can also be used for hedging interest rate risks where two parties can exchange their fixed and floating interest rate obligations with each other. ”