Download XOM 9-13

Ticker: XOM
Sector:
Oil & Gas
Industry: Integrated Oil
& Gas
Recommendation:
HOLD
Pricing: 9/07/07
Closing Price $85.75
52-wk High
$93.62
52-wk Low
$63.87
Cost Basis
$89.62
# of Shares
200
Acquisition Date
(07/16/07)
Approx: 1.3% now
After buy: 2.6%
Stop-Loss(1% por)~54.00
Recommend: $82.00
ExxonMobil
Exxon Mobil Corporation (Exxon Mobil) is an international oil and gas
company. Exxon Mobil operates facilities or market products in many
countries, and explores for oil and natural gas on six continents. Exxon
Mobil is involved in the exploration and production of crude oil and
natural gas; the manufacture of petroleum products, and the
transportation and sale of crude oil, natural gas and petroleum products.
Exxon Mobil is a manufacturer and marketer of commodity and
specialty petrochemicals, and also has interests in electric power
generation facilities. In addition, the Company conducts research
programs in support of these businesses1.
Here are some excerpts from the company’s website on its business
operations:
Exxon Mobil’s Exploration Company is organized to identify, pursue,
capture, and evaluate all high-quality exploration opportunities. The
opportunities they pursue span the full range of resource certainty:

Market Data
Market Cap
Total assets
$475.59B
$219.015B
Valuation
EPS (ttm)
P/E (ttm)
PEG
Div Yield
$6.99
12.27
2.19
1.60%
Profitability &
Effectiveness (ttm)
ROA
18.87%
ROE
34.71%
Profit Margin 11.0%
Oper Margin 16.49%
Gross Margin 41.9%


New exploration concepts and tests of new plays, which if
successful, will provide significant long-term resource
growth;
Further exploration of established plays. These typically
have the potential for near-term additions to the resource
base; and,
Mature exploration plays and discoveries that are
undeveloped or only partially developed.
Exxon Mobil has a development portfolio of more than 110 projects
with potential net investment of more than $120 billion. Built on the
success of its exploration strategy, it is this portfolio from which they
select the best projects for investment and delivery of superior returns.
Upstream capital spending has increased steadily since 2001 to develop
major new resources. Their highly disciplined approach to pursuing and
selecting the most attractive investment opportunities continues to
distinguish them from their competitors2.
Matthew J Wagner
1
2
http://finance.google.com/finance?q=NYSE:XOM
http://www.exxonmobil.com/Corporate/About/what_we_do.asp
ANALYST NAME
Analyst email address.edu
1
Exxon Mobil is the world’s largest supplier of lube base stocks and a leading marketer of
finished lubricants and specialty products. Anchored by Mobil 1, the world’s leading synthetic
motor oil, they leverage three strong global brands, Mobil, Exxon, and Esso. Many of the
world’s top original equipment manufacturers trust them to deliver technically superior products
that provide the lubrication they need to keep their vehicle engines and industrial machines
running at peak performance. Their dedicated organization and strong distributor network supply
high-quality lubricants and provide technical application expertise to customers around the world
3
.
Leveraging Brands and Technology
Exxon Mobil’s leading lubricant brands – Mobil, Exxon, and Esso – continue to meet customer
needs for transportation and industrial applications around the world. Customers rely on Mobil,
Exxon, and Esso branded products because of their quality, reliability, technological leadership,
close association with many leading original-equipment manufacturers, and their demonstrated
ability to withstand performance stresses, including those of motor sports racing such as
NASCAR, American Le Mans, and Formula 1. They are also backed by a variety of technical
services designed to provide customers with worry-free operations3.
Exxon Mobil continues to grow market share in this very profitable part of the finished
lubricants business.
 Mobil 1 has more endorsements, recommendations, and/or approvals than any other
engine oil in the North American market.
 The growing list of automotive manufacturers recommending Mobil 1 for their highperformance vehicles include the makers of Acura, Aston Martin, Bentley, Cadillac,
Chrysler, Corvette, Dodge, Mercedes-Benz, Porsche, and Saab automobiles.
 New high-endurance Mobil 1 Extended Performance, Mobil Clean 7500, and Mobil
Clean 5000 products drew praise from the chairman of the California Integrated Waste
Management Board, who issued a letter commending the introduction of these products,
especially the reduction of used oil resulting from the longer drain intervals.
 In Europe, the new Mobil 1 ESP Formula, a low-ash lubricant designed for diesel
engines, was named the “Best OEM-Approved Lubricant 2005” by the U.K. Institute of
Transport Management, based on its ability to prolong the life of emission systems of
cars and trucks.
Through the introduction of the new high-endurance product family of Mobil lubricants,
consumers can now confidently extend their drain intervals to meet vehicle manufacturer’s
recommendations3.
Not only is the company the largest supplier of lube base stocks, it is also the largest refinery in
the world. This distinction gives them more cost control over there extensive network and the
ability to meet new challenges within its operating structure with more precision than some of its
smaller competitors.
3
http://www.exxonmobil.com/Corporate/About/lubricants.asp
2
Exxon Mobil breaks down its revenues into three different categories: Upstream, Downstream
and Chemicals. The company uses “Return on Capital Employed” to value the growth of its
business. Essentially this calculation is net PPE minus all liabilities (S-T and L-T). Since the
industry is very capital intensive it has high barriers to entry; since XOM has been a long time
industry participant, it has the resource base to fund new operations and remain competitive
within the industry.
The above table summarizes the amounts of capital employed and the various sources of that
capital (the most prominent being shareholder’s equity).
Earnings Breakdown
Upstream
67%
Chemical
11%
Downstream
22%
Clearly, Exxon Mobil’s upstream business brings in the most earnings.
3
4
4
4
http://exxonmobil.com/corporate/files/corporate/xom_2006_SAR.pdf
5
5
6
5
6
http://exxonmobil.com/corporate/files/corporate/xom_2006_SAR.pdf
http://exxonmobil.com/corporate/files/corporate/xom_2006_SAR.pdf
6
7
7
http://exxonmobil.com/corporate/files/corporate/xom_2006_SAR.pdf
7
8
Oil Industry Outlook
There is an undeniable relationship between the stock market and energy prices. It is a well
known and proven fact that as the stock market in the United States rises so do energy prices,
most notably oil. As prices of energy related products continue to rise so do the profits that these
companies make. The following chart shows the past 5 years of returns on the S&P 500 and the
integrated oil sector:
While there still remains a lot of uncertainty about the short term (what is the next Fed move,
how the credit crisis is going to unfold, and are we in recession) the basic underlying economics
of the market never change. Where there is great demand, there will be great supply and great
profits (if a company is run effectively). There is still is not an efficient and profitable solution
to fossil fuel demand. Looking at the open interest for light crude oil options on the NYMEX
prices of oil are expected to stay within the 70-80 range8 for the next few months or so, and oil
reports by the IEA continue to forecast at least a 60% increase in demand over the next 25
years9. Most of this new demand will come from developing nations, such as China and India.
Even with OPEC talks about raising output, the current refinery capacity is at its peak. The only
option to meet the rise in demand will be refinery expansion.
8
9
See Appendix A
http://online.wsj.com/article/SB118397769578260737-email.html
9
Another short term aspect to the recent high oil prices have been the rise of many alternative
energy companies. Most of these companies are in their infancy and it is still too early to see if
they will remain if oil prices ever subside. The fact that these companies are dependent on a
certain price strategy makes them a speculative bet at best. There is no energy substitute for oil
in the near future. Many blame major oil companies for the lack of innovation into these
products. According to an article in Forbes magazine Exxon Mobil acquired many patents on
solar energy in the 70’s, but after a brief unprofitable period the company decided to stick with
its core operations and has been very successful as of yet10. As more companies are going green,
Exxon is trying to “clean up” its act by researching ways to reduce carbon emissions from its
products (please note the reference from Exxon’s website in the previous section on its lubricant
brands).
The fact that alternative energy is such a small scale industry and their whole market strategy
relies on high oil prices makes them more speculative than an average investment into a strong
integrated oil and gas company. If oil prices are low, demand will still be there to make a profit
(only the largest competitors with ample cost strategies would be able to still turn a profit); and if
oil prices are high, demand for these products reacts very slow to subside, due to the lack of an
efficient alternative and profits can still be made. It is my opinion that once oil supply starts to
wane, large energy companies stand to fill the gap with alternative energy sources. But, until we
see companies like Exxon Mobil or BP starting to go into solar power, we can bet that there is
still plenty of life left in the oil industry.
10
http://money.cnn.com/magazines/fortune/fortune_archive/2007/04/30/8405398/index2.htm
10
Looking at the returns of Exxon Mobil compared to the S&P 500 over the last 10 years we can
see how much the company has grown relative to the market:
11
Over speculation into the oil and gas industry might account for a portion of the returns in the
past couple of years, but much of that is also reflected in net income growth over the same
period.
Net income
YOY % change
Common Base
('99)
2006
39500
9%
399%
2005
36130
43%
357%
2004
25330
18%
220%
2003
21510
88%
172%
2002
11460
-25%
45%
2001
15320
-14%
94%
2000
17720
124%
124%
1999
7,910
The company clearly is growing its earnings on a tremendous scale; but the company also is
thoughtful of its shareholders. During the same periods of earnings growth, the company
increased its dividend policy by 7.6 billion dollars (representing almost 20% of net income
for the year) and repurchased shares in the amount of 25 billion dollars (which was around
64% of net income for the same year). The cumulative distributions for the last five years
have been over 92 billion.
12
Industry Comparison:
DIRECT COMPETITOR COMPARISON
Market Cap:
Employ-ees:
Qtrly Rev
Growth (yoy):
Revenue
(ttm):
Gross Margin
(ttm):
EBITDA (ttm):
Oper Margins
(ttm):
Net Income
(ttm):
EPS (ttm):
P/E (ttm):
PEG (5 yr
expected):
P/S (ttm):
Shares
outstanding
XOM
473.26B
106,400
BP
218.89B
97,000
CVX
186.89B
62,500
RDS-B
Industry
256.41B 134.75B
N/A
73.57K
-1.00%
-0.40%
4.00%
17%
20.30%
366.24B
263.89B
189.82B
318.13B
114.90B
34.89%
19.01%
33.39%
N/A
34.89%
72.36B
34.25B
38.58B
N/A
34.24B
16.49%
9.31%
13.99%
11.77%
14.59%
40.28B
6.988
12.21
21.15B
6.47
10.61
18.89B
8.725
10.05
27.17B
8.58
9.36
12.11B
6.47
12.27
2.12
1.29
1.84
0.83
2.24
0.98
0.92
0.81
1.83
1.3
5.55B
3.17B
2.13B
3.18B
BP = BP plc
CVX = Chevron Corp.
RDS-B = Royal Dutch Shell
11
While the data may show stronger growth in some of the competitors, the sheer size of XOM
gives it the economies of scale advantage when it comes to earnings. Continued share
repurchases will give the company industry leading EPS figures into the future.
11
http://finance.yahoo.com/q/co?s=XOM (added the # of shares outstanding from www.finance.google.com)
13
12
12
http://exxonmobil.com/corporate/files/corporate/xom_2006_SAR.pdf
14
Valuation:
Using the Warren Buffet Owner’s Earning Model gave the following values:
*Sensitivity analysis shows the effect of different discount rates and growth rates (growth rates
are held constant at 6% and 3% for the (k) analysis; the (k) was held constant at 10% for the
growth analysis.
Warren Buffett Owners' Earnings Model
assuming discount rate (k) of
10.00%
(k) Sensitivity
99.35
Owner Earnings in 2006:
8%
201.99
9%
133.23
Net Income
$
39,500,000,000.00
10%
99.35
Depreciation
$
11,416,000,000.00
11%
79.38
Amortization
$
12%
66.32
Change in A/R
$
(1,458,000,000.00)
15%
45.38
Change in A/P
$
2,962,000,000.00
Capital Expenditures
$
(19,855,000,000.00)
Owner Earnings
$
2008
2009
-
32,565,000,000.00
Year:
2006
Prior Year Owner Earnings
$
First Stage Growth Rate (add)
Owner Earnings
32,565,000,000.0 $
6.0%
$
2007
34,518,900,000.0 $
36,590,034,000.0
6.0%
6.0%
38,785,436,040.00 $
2010
41,112,562,202.4
6.0%
6.0%
34,518,900,000.0 $
36,590,034,000.0 $
38,785,436,040.0
41,112,562,202.40 $
43,579,315,934.5
Discounted Value per annum
$34,518,900,000.0
$33,263,667,272.7
$32,054,079,371.9
30,888,476,485.65
$29,765,259,158.9
Sum of present value of owner earnings
$160,490,382,289.2
Residual Value
Owner Earnings in year 10
1st Stage (g) Sensitivity
$
Second Stage Growth Rate (g) (add)
Owner Earnings in year 2011
$
Capitalization rate (k-g)
Value
$
3%
60.61
3.00%
4%
69.36
44,886,695,412.6
5%
81.44
4.00%
6%
99.35
1,122,167,385,314.51
7%
128.90
Present Value of Residual
$432,644,105,024.69
Intrinsic Value of Company
$593,134,487,313.87
Shares outstanding assuming dilution
Intrinsic Value per share
99.35
43,579,315,934.5
2nd Stage (g) Sensitivity
99.35
1%
97.95
5,970,000,000
2%
98.65
$99.35
3%
99.35
4%
100.06
15
The company announced growth in earnings of 8% in 2006 over 2005 and projects a higher
growth rate for future years. I decided to stick with conservative estimates since this company is
out of its growth (infancy stage). Analyst estimations have the growth at 6.7% for this year
versus 1.6% for the industry and 7.0% for the sector.
I also valued the company using DCF and an Earnings Forecast Model with comparative ratios.
For the DCF I calculated a value of 97.21 per share and with the comparative ratios I found a
price target of 92.78-95.40 for this year and a range of 105.35 to 108.32 for next year (see
Appendix A and B).
Appendix C shows analyst recommendations. I do not put too much value into these since it
does not list who recommends these and why. Some other resources offer explanations for a fee
which is out of the cost scope of the assignment (since I am not being compensated to take the
course or make the recommendation).
Recommendation:
Exxon Mobil has major competitive advantages over its peers in the refining and lube basestock
components of the integrated oil and gas industry. Its size gives it cost advantages that its
competitors are not able to match. The company has continued to outperform its peers over the
last ten years, and has invested in research and development so it can remain at the top for years
to come. If we are looking at this company through the long term binoculars, it is clear they will
continue to provide superior returns to their investors compared to other companies in its
industry. I recommend purchasing additional shares on the premise that this is a strong company
and will be for many years. I do not think we will see much capital appreciation over the next
few months or even within the next year or so; I am solely recommending this as a long term
play. I believe it will outperform the money market rate we are earning on our cash holdings in
the short run, but do not forecast any huge returns that could be had in more speculative
industries. This company is well established and poised to make profits in good and bad times.
Over the last 15 years this stock has returned over 2300%, which is 15.33% per year. A price of
91.00 now would mean a growth to 105.00 by this time next year for a 15% return. This is the
low estimate of the ratio comparison valuation.
16
Appendix A:
(numbers in millions)
Operating Profit
%increase in FCF
Avg % increase in FCF (over last 7 yrs)
Operarting Current Assets
Operarting Current Liabilities
Tax Rate
Growth Rate
Total Oper Capital
Net Investment in TOP
FCF 2006
2006
2005
2004
2003
2002
2001
2000
33538.8 28921.8 21057.6 13493.4 8610.6 12204.6 13938.6
0.159637 0.373461 0.560585 0.567068 -0.294479 -0.124403 1.625862
0.409676
72504
40784
6208
573946.8
29551
Total Value
Value to NonEquity
Value of Equity
603497.8
28387
575110.8
Value/share
139199
97.2621
4% 80.3142
5% 97.2621
6% 122.684
7% 165.0537
8% 249.7932
27330.8
Value of Operations (based on FCF of 2006)
Nonoperating Assets
#of shares
70080
37891
0.4
0.05
145407
1999
5308.2
5913
97.2621
17
Appendix B:
2001
2002
2003
2004
2005
Revunues
Sales and Operating
Equity Affiliates
Other
Total
208715
2174
1896
212785
200949
2066
1491
204506
237054
4373
5311
246738
291252
4961
1822
298035
358955
7583
4142
370680
365467 401233.6 440500.4
6985
4500
4500
5183
3000
3000
377635 408733.6 448000.4
0.097865365
Costs (Expenses)
Crude Oil and product purchases
Production and Manufacturing
SG&A
Depreciation
Exploration
Merger Related Exp
Interest
Sales Based Taxes
Other taxes and duties
Income to minority interests
Total
92257
17743
12898
7848
1175
748
293
21907
33377
569
188815
90950
17831
12356
8310
920
410
398
22040
33572
209
186996
107658
21260
13396
9047
1010
139224
23225
13849
9767
1098
185219
26819
14402
10253
964
182546
29528
14273
11416
1181
204535.1
32144.14
14516.02
12151.78
1182.003
229172.9
34992.07
14763.17
12934.98
1183.007
0.120457786
0.088598747
0.017026218
0.064451376
0.000849259
207
23855
37645
694
214772
638
27263
40954
776
256794
496
30742
41554
799
311248
654
30381
39203
1051
310233
747.6462
32082.77
40268.42
1164.174
338792
854.7015
33879.87
41362.8
1289.534
370433.1
0.143189836
0.056014446
0.027177113
0.10768194
23970
8967
17510
6499
31966
11006
41241
15911
59432
23302
67402 69941.52 77567.36
27902 27976.61 31026.94
102
215
449
25330
6482
36130
6266
39500 41964.91 46540.42
5913 5775.576 5641.346
EBT
Income Taxes
Discontinued Ops
Extraordinary Gain
Accounting Change
Net Income (earnings)
Average Common Shares Outstanding
Net Income per share
P/E ratios
Industry Average (Yahoo)
Company P/E (9/18/07)
Price(Industry Average P/E)
Price (Company P/E)
2006 F2007
F2008
Geometric Avg
550
15320
6809
11460
6753
21510
6634
-0.023240994
2.249963 1.697024 3.242388 3.907745 5.766039 6.680196 7.265926 8.249878
12.77
13.13
12.77
13.13
92.78588 105.3509
95.40161 108.3209
18
Appendix C:
RECOMMENDATION TRENDS
Current Month
Last Month
Two Months Ago
Three Months Ago
Strong Buy
5
6
6
6
Buy
4
3
3
3
Hold
11
11
11
11
Sell
0
0
0
0
Strong Sell
0
0
0
0
Data provided by Thomson/First Call
19