Methods of Working Capital Optimization of Global Petroleum Companies Before and After Economic Crisis on the Example of ExxonMobil and Chevron

Standard Oil Co. (California) as an independent company showed strong financial performance and product line. Within four years, company moved from sixth place of California oil producers to the first one. Throughout the years company explored new reserves (Los Angeles basin; Montebello; Baldwin). At the same time, Standard Oil Co. expanded the number of its service stations (218 in 1919 grew up to 735 stations in 1926). Also, in 1926 company doubled its production capacity and created a new structure with the new name of company - Standard Oil Co. of California or Socal.

In 1920 company started to explore the new fields outside the country and succeeded only in 1932. Later the exploration activities continued in Saudi Arabia.

In 1936 company decided to create a partnership with Texaco, which was named the California Texas Oil Company, or Caltex, for exploration and production in Africa and Asia. At the same time Socal started to explore central America with establishing leadership in Mexico. During the World War the second Socal was one of the key crude oil suppliers. After the war, company developed new different products and became the main supplier of petrochemicals, including Chevron and Chevron Supreme Gasoline (in 1945).

Moving to the western Europe, Socal and Texaco decided to split the Caltex's operations between them. As a result, Chevron Oil Europe was created in 1967 in order to manage the operations.

The huge organizational change happened in 1977, when Chevron U.S.A. Inc. was created. The purpose for that was marked with the need of national identity. The best choice was to take “Chevron” as a name of company, because it was the name of the first product, which became recognizable across the globe.

In 1984 Gulf Oil Corp. was merged with all the marketing and refining systems. After the merger company decided to take a new name - Chevron Corporation. With the help of Gulf merger, Chevron became the leader among the gas liquids. In the late 90s company started to rank all other companies in order to understand which of them would be attractive for Mergers and Acquisitions.

Texaco was a highly attractive future partner, so companies started negotiations and by the ninth of October in 2001 the shareholders of both Chevron and Texaco agreed the merger. The capacity of new company was 11 billion barrels of oil and gas reserves and 2,4 million barrels per day regarding refineries.

In the early 2000s it became more and more complex to explore the new fields and investments were growing rapidly. Later in 2005 the name of company changed again and became Chevron Corp. With the purpose of increase in exploration company decided to acquire Unocal Corp.

Nowadays, company continue to develop new products in order to achieve the production growth. In 2017 the production of oil-equivalent was 2,7 million barrels per day, total income composed 9,2 billion dollars.

Company has in its aim provision of a high value to stakeholders; taking care about safety of all employees; development a competent workforce in order to achieve great results; increase profits with the use of competitive advantage.

In 2017 company's business activities brought 8,1 billion dollars in dividends, it was the thirtieth year in a row, which shows the increase in payouts.

Upstream. During the year company added 1,6 billion barrels to its production of oil-equivalent resources. Exploration and drilling projects continued in the United States, Canada, Argentina. Also, Chevron expanded its portfolio acquiring offshore in Australia, Mexico and the U.S. Gulf of Mexico. Generally, company has its operations in most of global key basins. (Chevron Corporation, 2018)

In the mentioned year, the situation with crude oil prices improved and were supported. As a result, during the year the average price of West Texas Intermediate (WTI) crude oil was 51 dollars, when in 2016 the price composed 43 dollars.

By the end of decade, it is expected a growing tendency in production, by the reason of investments in different main projects, which are currently under construction. The average global growth is expected from 4 to 7 percent in comparison with previous year.

Downstream. Business has a strong performance in refining and marketing of fuels, also in production of lubricants and other petrochemicals. In the strategic view, company is going to increase its earnings across the worldwide business units with the help of sustainable excellence of all operations; improvement of value chain; usage of growing opportunities.

Downstream has a very important role in company portfolio, because Chevron invest in petrochemicals and lubricants in order to integrate new technologies and to get higher returns. Moreover, company continues to focus on safety performance in all its businesses, which is proved by the outperformed total recordable incident rate in 2017.

During the mentioned year downstream earned 5,2 billion dollars, which refers to efficient cost management. Furthermore, company finished completion of plant project and refinery project in Singapore; U.S. Gulf Petrochemicals project in Texas; modification of project in Richmond. In Mexico, there was an opening of Chevron retail stations.

Regarding the product portfolio, company has two ways of orientation: U.S. based and international products. Both of them has in the focus optimization of value chains. Considering the petrochemicals, company produces olefins and aromatics.

As ExxonMobil, Chevron is one of the largest petroleum companies in the world. Between 40s and 70s of twentieth century, company was a part of Seven Sisters. Nevertheless, the recent situation on the oil and gas market had its influence on the company, and depending on the fluctuation of oil prices, Chevron Corporation's performance got worse. Consequently, in 2017 company moved from 28th to 359th place in the Forbes Global 2000 list. (Debter, 2017)

In order to understand what has changed during the economic crisis, it is essential to make financial analysis of the company and take a deep look on the working capital and its management before, during and after the economic crisis.

Table 9 - Calculation of total current assets for the gross working capital analysis, millions of dollars

Source: Compiled by the author based on Chevron Annual reports, years: 2011-2017

Before and during the economic crisis the number of inventories was increasing and in 2015 reached 6334 million dollars. After the economic crisis company started to optimize the inventories, in 2016 the amount dropped to 5419 million dollars (table 9, figure 11).

Figure 11 - Levels of various current assets of Chevron Corporation during the period 2011-2017, millions of dollars

Source: Compiled by the author based on Chevron Annual reports, years: 2011-2017

Account receivables were fluctuating before the crisis, with the beginning of the crisis negative tendency started and in 2015 company had 12860 million dollars of receivables, which is almost twice less with comparison to 21622 million dollars in 2013. After the crisis company started to recover and increase sales, so the account receivables showed small increase. Cash balances showed the same tendency, but even after the crisis cash continued to decrease and reached 4813 million dollars in 2017.

As well as total current assets, quick assets had a decreasing trend during the studying period with the peak in 2012. In 2017 both indicators were twice less than before the economic crisis.

Gross Working Capital turnover ratio was fluctuating between 4,14 and 4,75 before the crisis (table 10). During the crisis, the ratio declined, which showed the less efficient management of working capital. After the crisis, turnover ratio improved and again reached its average value 4,72.

Table 10 - Calculation of ratios for the analysis of working capital, millions of dollars

Source: Compiled by the author based on Chevron Annual reports, years: 2011-2017

Further, it is important to analyze Net Working Capital (table 11). As it is shown in the table below, firstly working capital had a growing tendency, which changed in 2013. With the beginning of the economic crisis the situation became even worse and net working capital was twice less, than it was before (10306 million dollars and 17232 million dollars correspondingly in 2014 and 2013).

During the economic crisis, the indicator continued to decline, finally, in 2016 net working capital of Chevron became negative. From one point of view it is not bad, but according to the data, which is obvious it the table, this company is not the one, which follows the strategy of using negative working capital. After the economic crisis, net working capital started to increase and turned to the positive value again.

Table 11 - Calculation of Net working capital before, during and after the economic crisis, millions of dollars

Source: Compiled by the author based on Chevron Annual reports, years: 2011-2017

On the figure below it is noticeable that changes in net working capital mostly depends on the changes in current assets, which were decreasing from 2012 and until the end of studying period (figure 12). Before the economic crisis there were not large changes in the current liabilities. In 2015 company tried to optimize account payables in order to keep positive working capital, but it was insufficient.

Figure 12 - Changes in Chevron's Net Working Capital during the period: 2011-2017, millions of dollars

Source: Compiled by the author based on Chevron Annual reports, years: 2011-2017

For the better understanding it is essential to analyze which part of current assets influenced the most and how company could prevent the changes in net working capital (figure 13).

Regarding the parts of Net Working capital, the largest change happened in the cash and bank balances. The amount of cash was shortened three times during the studying period. During the crisis accounts receivables also went down by the reason of lower sales and lower oil prices. Reacting on the lower sales, purchases also went down. As a result, there was a decline in the whole business.

Before the economic crisis inventory showed an increasing tendency, which stopped with the beginning of the crisis. With the response to the situation on the market, company started to reduce inventories in order to cut the maintenance costs. After the economic crisis, correspondingly to the growth of business inventory increased. The same situation was observed with account payables.

Figure 13 - Net working capital structure of Chevron, millions of dollars

Source: Compiled by the author based on Chevron Annual reports, years: 2011-2017

The next step is to make a ratio analysis. All the liquidity ratios (current ratio, quick ratio, cash ratio) shows the decreasing tendency since 2012 and until the end of crisis (table 12). After the economic crisis ratios had a small growth. Generally, company had a good liquidity performance, because current ratio and quick ratio most of the years continued to be above 1, which means that company had enough assets to turn them into cash and pay all the current liabilities. In response to the economic crisis in 2016 ratios' values became under 1, but the next year showed the improvement in company's liquidity.

Account payables turnover ratio shows how many times during the period company pays to their suppliers. Before the economic crisis this indicator was in average 6, but with the beginning of crisis the ratio started to decrease, which means that the needed time to pay off suppliers increased.

Net working capital turnover grew rapidly after the crisis by the reason of shortened capital resources. Before the crisis this ratio was stable and its value fluctuated around 11. The correspondence between sales and purchases did not change before the crisis, and then it shows the small growth.

Table 12 - Calculation of ratios for working capital management analysis

Source: Compiled by the author based on Chevron Annual reports, years: 2011-2017

Table 13 - Chevron's cash conversion cycle

Source: Compiled by the author based on Chevron Annual reports, years: 2011-2017

Inventory turnover has a declining tendency since 2012 to 2016, that means that management of stock is not efficient (table 13). In 2017 ratio shows the increase and reached 13,57, nevertheless this indicator was twice bigger in 2011 - 27,05. Consequently, days sales in inventory increased and reached 33 days in 2016, then declined to 27 days in 2017.

Receivables turnover was stable enough before the end of economic crisis, which is also reflected in days sales in receivables. Before the economic crisis customers needed 32 days in average to pay their bills. In 2014 this indicator shortened up to 29 days, but beginning with the next year the needed time started to grow and reached 45 days in 2016.

Considering the payables turnover, it shows the same tendency as receivables turnover. With the beginning of economic crisis company started to use more time to pay to their suppliers (71 days in 2015 and even 86 days in 2016). Nevertheless, after the crisis the situation on the market improved and payables turnover began to increase.

Regarding the cash conversion cycle, it was negative throughout the whole studying period, which means that every year company was collecting their receivables faster than paying their own invoices. Also, company could convert its inputs to cash faster because of the negative cash conversion cycle. After the crisis indicator increased (-8 days in 2016 with comparison to -4 days in 2017). Probably, it is the start of growing tendency and relatively soon the cash conversion cycle would become positive.

3. Practical implications of methods of working capital optimization in the global petroleum industry

3.1 Findings of research on ExxonMobil and Chevron

In the previous chapter, there were made financial analyses of two Global Petroleum corporations: ExxonMobil and Chevron. The next step is to compare the working capital management of these companies in order to understand which of them had a better performance and the reasons for that. Moreover, the comparison would be made in a perspective of different economic periods: before, during and after economic crisis.

It is worth to mention, that working capital management belongs to company's accounting strategy, which leads to monitor such components of working capital as current assets and current liabilities in order to accomplish efficient business activities. Furthermore, working capital management is needed for the purpose of maintaining adequate cash flows to cover short-term liabilities.

To begin with, it is important to analyze the working capital ratio or in other worlds current ratio, which is one of the most important ratio to understand the financial health of the companies (table 14).

Table 14 - Working capital ratio of ExxonMobil and Chevron

Source: Compiled by the author based on ExxonMobil Summary annual reports (years: 2011-2017) and Chevron Annual reports (years: 2011-2017)

With the first look at the data, it is obvious that Chevron's financial performance is better during the all studying periods. Nevertheless, both companies show the tendency of decrease in indicator with the beginning of the crisis. After the crisis, there was an increase in indicator of ExxonMobil in 2016 (0,87), but in general, working capital ratio is fluctuating around 0,8 from 2013 until the end of studying period. It could be concluded that company has problems to meet its short-term liabilities. Before the crisis the situation was opposite and current ratio was growing, which means that company managed working capital more efficient.

The same situation is observed in Chevron's performance. Before the crisis the ratio was 1,58 and 1,63 correspondingly in 2011 and 2012, showing the growth, which indicates the good management of working capital. Despite that in 2013 indicator started to decrease, but even before the end of the crisis the indicator was at its normative value. Only in 2016 working capital ratio of Chevron was below 1, which is explicable as a consequence of the end of economic crisis, after that ratio increased again.

The next step is to compare the average collection period ratio, which shows the efficiency of account receivables management (table 15). Also, this ratio refers to the days sales outstanding.

Table 15 - Average collection period ratio of ExxonMobil and Chevron, days

Source: Compiled by the author based on ExxonMobil Summary annual reports (years: 2011-2017) and Chevron Annual reports (years: 2011-2017)

Average collection period ratio represents the time needed by the customers to pay the invoices. In other words, the lower ratio shows that company has more efficient cash flows. As it is performed in the table 15, both company had the similar collection period in 2011, but with the next year the situation changed. ExxonMobil's collection period was decreasing before and during economic crisis with a slight growth after. At the same time Chevron's collection period was slowly growing before the crisis with a drop in 2014 (29 days after 34 days in 2013). After the crisis, the ratio was extremely large (45 days in 2016), but then the tendency changed to decline.

Generally, regarding the average collection period ratio ExxonMobil has a better performance than Chevron, and it could be concluded that company manages its receivables more efficiently, in particular during the economic crisis.

Finally, it is essential to compare inventory turnover ratio in order to understand how efficiently both companies manage inventories (table 16), because it is important to balance the level of them to meet customer's needs without keeping the excessive stock. The unnecessary inventories could lead to the difficulties in converting them into cash and contribute to freeze the working capital for a long period.

Table 16 - Inventory turnover ratio of ExxonMobil and Chevron

Source: Compiled by the author based on ExxonMobil Summary annual reports (years: 2011-2017) and Chevron Annual reports (years: 2011-2017)

Regarding the inventory turnover, it could be observed that Chevron had the better position than ExxonMobil and used its inventory more efficient. Nevertheless, both corporations show the declining tendency from 2011 to 2016 or in other words before and during economic crisis. Only in 2017, which refers to period after the crisis, both companies had a growth in ratio.

At the end of the crisis Chevron and ExxonMobil had the lowest level of inventory turnover, which means that companies had excessive stock and they should better optimize the inventory during the period of economic crisis.

Both ExxonMobil and Chevron are giants of Global Petroleum industry with long history. These companies felt the forthcoming of the economic crisis even before it, which refers to the decline in sales of both companies. The sales were getting lower and lower with the reduction of the prices on the main product - oil. Nevertheless, the companies adopted to those conditions. In the situation with the weak demand, companies reduced its funds and balanced them at the optimum level, which correlates with the level of the current assets.

Regarding the cash conversion cycles, both companies have negative cycles because they need more time to cover the account payables. On the other hand, negative cash conversion cycle has some advantages. For example, company is able to finance its operations by the borrowings from their suppliers. Nevertheless, Chevron has smaller cash conversion cycle than ExxonMobil, which means that it is easier for Chevron to pay its bills.

Considering the net working capital, it could be concluded that corporations have different strategies, because ExxonMobil during the whole studying period use negative net working capital, when Chevron prefers positive net working capital. Nevertheless, Chevron had a decreasing working capital, which crossed the zero line in 2016, but the next year net working capital turned to grow.

Recent studies consider that negative working capital shows the better financial situation of the company, because in these conditions corporation does not need additional external funds to maintain its business activities. Accounts payable and their effective management provide companies with needed financing. One way or another, negative working capital is riskier. In case of Exxon Mobil corporation, the studying company is a giant in the global petroleum industry and the probability of those risks is very low.

3.2 Identification of typical methods of working capital optimization before and after economic crisis

Working capital plays a very important role in each business, because working capital maintains all of the operating activities of the company. Nevertheless, the methods, which used by companies in order to manage working capital, varies according to the environment conditions. As it was mentioned above, there are three main periods of economic environment: before the economic crisis, during economic crisis and after economic crisis.

For the purpose of successful management of the working capital, it is important for decision-making managers to understand the environment, the operations of the business and how they work. Moreover, it is essential to feel the trends on the market and immediately react on them.

In order to identify which methods of working capital optimization Global Petroleum Companies use at each exact period of economic environment it is better to look at cash conversion cycles of studying corporations (table 17).

Table 17 - Cash conversion cycles of ExxonMobil and Chevron, days

Source: Compiled by the author based on ExxonMobil Summary annual reports (years: 2011-2017) and Chevron Annual reports (years: 2011-2017)

Regarding the cash conversion cycle, it is obvious that before the economic crisis ExxonMobil improved this indicator. It happened because of two reasons - shortened Days Sales Outstanding (figure 14) and Days Payables Outstanding (figure 15), which means that company optimized both accounts receivables and accounts payables. Before the economic crisis the time needed to pay to the customers decreased and, at the same time, ExxonMobil started to collect money from the customers quicker.

Figure 14 - Days Sales Outstanding of ExxonMobil and Chevron, days

Source: Compiled by the author based on ExxonMobil Summary annual reports (years: 2011-2017) and Chevron Annual reports (years: 2011-2017)

Figure 15 - Days Payables Outstanding of ExxonMobil and Chevron, days

Source: Compiled by the author based on ExxonMobil Summary annual reports (years: 2011-2017) and Chevron Annual reports (years: 2011-2017)

Considering the second company, Chevron's Cash conversion cycle (figure 16) was fluctuating around 9-11 days during that period. This situation happened consequently to the increase in all of the CCC components. The most important thing was that Days Payables Outstanding increased and company started to pay to its suppliers more slowly.

Figure 16 - Cash Conversion cycle of ExxonMobil and Chevron, days

Source: Compiled by the author based on ExxonMobil Summary annual reports (years: 2011-2017) and Chevron Annual reports (years: 2011-2017)

Generally, it could be concluded that the first hypothesis: “Before the economic crisis Global Petroleum companies mostly use such methods of working capital optimization as account receivables management” was not confirmed.

During the economic crisis both companies show the increasing tendency of Days Payables Outstanding, which is reasonable because of difficult situation on the market and companies need to collect money first in order to pay their invoices. In response to this ExxonMobil's Days Sales Outstanding decreased during the crisis, that was a good company decision to make more rigorous the payment conditions to their clients. It could be concluded that company used such method of working capital optimization as account receivables management and account payables management.

Regarding Chevron corporation, all of the indicators increased, but with the different speed. Despite that fact, in 2014 the indicator Days Sales Outstanding was lowest from 2011 to 2017, it could be concluded that company decided to provide better conditions to their clients during the economic crisis, because after 2014 company used more time to collect money from customers than in the previous year (correspondingly 34 and 29 days).

The same as ExxonMobil, Chevron used such optimization method as account payables management, which is obvious on the graph (figure15), because company increased its payment period to suppliers.

Worth to mention the situation which happened with inventory of both companies, they decided to accumulate more inventories while the oil prices were low.

After the economic crisis both companies again showed a decline in the cash conversion cycle, which represents the optimization in both businesses. The most important changes happened in Days Payables Outstanding and Days Inventory Outstanding (figure 17). ExxonMobil and Chevron started to pay quicker to their suppliers and to use their inventories more effectively.

Figure 17 - Days Inventory Outstanding of ExxonMobil and Chevron, days

Source: Compiled by the author based on ExxonMobil Summary annual reports (years: 2011-2017) and Chevron Annual reports (years: 2011-2017)

Regarding the Days Sales Outstanding, companies showed the different results. In such a way, Chevron started to optimize the account receivables, while ExxonMobil preferred to give better payment conditions to the customers, so the indicator increased. Consequently, the second hypothesis: “After the economic crisis Global Petroleum companies mostly use such methods of working capital optimization as account payables management” was confirmed.

In general, both corporations prefer to pay to their suppliers as late as possible, because during the all studying periods ExxonMobil and Chevron have negative cash conversion cycle.

3.3 Limitations and prospects for future research

Apparently, all of the studies have some different boundaries and the research above is not an exception. During the work on methods of working capital optimization of Global Petroleum companies there were some unavoidable limitations.

From the beginning, it is worth to mention that there was a lack of recent literature such as books or articles in journals about working capital management in this particular industry. That means that there were not a lot of research on working capital optimization in the Global Petroleum industry, but it is very important, because methods could be used differently in other businesses.

The research was based on the publicly available information, which refers to the year-ended financial figures. Because of that the research could differ from the real situation, because managers usually try to improve the performance of the working capital by the end of the year. The requirements of the working capital during the quarter periods might be higher.

Another limitation was a period of time - 7 years, which could be extended. Moreover, it was taken the recent economic crisis and only two years passed since that, so it would be better to analyse the period after economic crisis when several years would pass. Regarding the period of economic crisis, the recommendation for future researches would be to compare several economic crises. For example, it would be interesting to take a look at the economic crisis of 2008 and analyse how the companies worked at these conditions in comparison to the crisis of 2014, what changed, which methods were used, how the industry recovered after both of the crises.

The huge limitation, which prevented from the clear and full research was the number of companies taken to analyse. Despite the fact that both ExxonMobil and Chevron are giants in the Global Petroleum industry, they are different. One of them has negative working capital, another one - positive. The recommendation for the future research would be to take into consideration these two types of working capital and compare them as groups and, which is more important, within the groups. Moreover, it is essential to take wider range of companies to get more real results. Also, it would be a good recommendation to take a look at companies, which headquarters are located not only in the United States, but throughout the world.

Conclusion

The working capital takes a great role in the business activities. Successful operations cannot exist without wise and effective management of the working capital. Moreover, it is important to understand the need of working capital in different periods of market economy, such as before, during and after economic crisis and how to manage wisely the components of working capital: cash, inventory, account receivables and account payables.

The working capital can vary from negative to positive values, but the optimum level of working capital can differ from industry to industry. In addition, the amount of working capital can fluctuate during the production process.

The financial managers should always analyze the situation on the market in order to understand when it is essential to increase the production according to the higher demand and how to minimize the additional costs or when it is needed to reduce the whole business without crucial losses correspondingly to the decline in the economy.

The first chapter represents the theoretical aspects of the previous researches. There were analyzed different approaches to define the working capital. One of the most relative is an investment in the current business by the purpose of maintaining the current activities via financing account receivables, inventories and cash with the help of account payables. Furthermore, there was provided information of different types of management of working capital. What is more important, there is a difference in use of these methods in the perspective of the different periods of the economic environment (before, during and after the crisis).

The second chapter dedicates to the analytical research of working capital optimization in the global petroleum industry. There was made an analysis of the whole industry. Despite of the recent popularity of electric car industry, the oil and gas is still in use and according to the forecasts the consumption would continue to grow by 2040 because of commercial transportation, aviation and energy generation.

Subsequently, there were two case studies about Global Petroleum companies during the period from 2011 to 2017, which covered different economic environments. Both corporations showed a decline in the business because of the economic crisis, nevertheless they recovered and started to improve their performances after the economic crisis.

ExxonMobil and Chevron uses the different types of working capital: the first one prefers negative working capital, while the second one mostly use the positive working capital. There was only one year (2016), when Chevron had negative working capital, which happened in response to the ended economic crisis. At the same year ExxonMobil also crossed the zero level of working capital and had it at the positive value and showed the need of additional funds, because account payables were less than current assets and cannot finance them all anymore.

The third chapter provides the findings on the research with the help of comparison of two corporations' results and the identification of the typical methods of working capital optimization before, during and after the economic crisis.

Consequently, before the economic crisis Global Petroleum companies usually use account payables management and increase the capital expenditures on exploration and other needs, because they feel the growth of industry and start to expand themselves. As a result, the first hypothesis was confirmed.

During the economic crisis, the main goal of the companies is to overcome the difficult time and market conditions. As customers also feel these difficulties, Global Petroleum companies use such method as account receivables management in order to provide better payment conditions and save their customers.

After the economic crisis, ExxonMobil and Chevron recovered and started to pay to suppliers quicker, also both companies showed the more effective use of their inventories. In this market conditions are more preferable two methods of working capital optimization: account payables management and inventory management. Consequently, the second hypothesis that Global Petroleum companies use account receivables management after the crisis was not confirmed.

Nevertheless, there were some unavoidable limitations such as lack of recent literature about working capital optimization in the Global Petroleum industry. Also, the financial information was taken from the public sources and include year-end variables. For the future researches it would be interesting to try to analyze the dynamics of working capital in the perspective of the quarter changes.

Moreover, the main recommendation for the future researches would be to study more than two companies to get more real results. Also, it would be interesting to analyze and compare companies as two groups, which use negative or positive working capital, and within the groups.

The best way of working capital optimization is an understanding of the optimum level of both current assets, including inventories, cash, account receivables, and current liabilities of the company, especially account payables and a wise management of all of them.

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