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Ticker:
Sector:
Industry:
XOM
Basic Materials
Major Integrated
Oil & Gas
Recommendation:
Hold
Pricing
Closing Price
52-wk High
52-wk Low
$87.83
$96.12
$77.55
Market Data
Market Cap
Total Assets
Beta
Short Percentage
468.2B
258.2B
1.13
0.70%
Valuation
P/E
11.52
P/E vs. Industry
96.97%
PEG (5 yr. expected) 1.08
Financial Strength
Quick Ratio
Current Ratio
Debt to Equity
1.16
1.38
0.08
Profitability & Effectiveness
ROA
16.63%
ROE
35.59%
Gross Margin
43.22%
Operating Margin
16.45%
Profit Margin
10.85%
Exxon Mobile
In 2007, ExxonMobil regained the title of largest U.S.
company in the world and is operating in three of the
most profitable industries. Net income in 2007 of
$40,610 million was the highest ever for the
Corporation, up $1,110 million from 2006. Earnings
in 2007 were also at record levels for each business
segment.
Brief History
The Standard Oil Trust, formed in 1882,
included the Standard Oil Company of New Jersey
(Jersey Standard) and the Standard Oil Company of
New York (SOCONY). In 1911, a Supreme Court
decision broke the Standard Oil monopoly into 34
individual companies. Vacuum Oil and Jersey
Standard, two of the companies formed after the
break-up, changed their names to Mobil Oil
Corporation and Exxon Corporation in 1966 and
1972, respectively. In 1999, Exxon Corporation and
Mobil Oil Corporation merged to form the current
ExxonMobil Corporation. ExxonMobil is a US-based
integrated oil and gas company. It is headquartered in
Irving, Texas and has 82,100 employees. The company
was originally founded by John D. Rockefeller, and
Rex W. Tillerson is the current Chairman/CEO.
Background
ExxonMobil’s business and products include 1)
upstream activities of oil and natural gas exploration,
development, and production, 2) downstream activities
of refining and marketing of petroleum products, and
3) chemical businesses tightly integrated with the
downstream refining operations. ExxonMobil
produces gasoline, energy, and raw materials for
plastics and chemicals. ExxonMobil had revenue of
$404.552 billion in 2007. Their business is a
1
Steven Hinkle
commodity-based business. In order to gain profit in a commodity industry, the seller
has to focus on “ reducing unit cost and improving efficiency through technology
improvements, cost control, productivity enhancements and regular reappraisal of
their asset portfolio” (10-K, 2007).
Critical Facts
The US is experiencing an economic slowdown in the near-term that is
accompanied by rising inflation. In 2006, ExxonMobil generated 30.9% of
consolidated revenue from its US operations, indicating that a slowdown in the US
economy will have a significant negative impact on the company. (Datamonitor, 2007)
Instability in the Middle East and Africa increases the risk associated with
ExxonMobil purchasing and extracting crude oil in those regions. In particular,
ExxonMobil’s upstream operations in the Middle East are at risk. In Africa, Its
production base is focused in the northern and central regions of the continent.
(Datamonitor, 2007)
The threat of natural disasters puts both the Upstream and Downstream
divisions of ExxonMobil at risk. Specifically, hurricanes in the Gulf of Mexico can
cause serious damage to offshore wells and refining operations along the coast. For
instance, the hurricanes Katrina and Rita damaged ExxonMobil’s Gulf of Mexico
operations in 2005. (Datamonitor, 2007)
General Environmental Analysis
Sociocultural. A threat of increased regulation stems from concerns about global
warming and environmental degradation. Further, concern about greenhouse gas
emissions has the potential to alter global energy consumption patterns in the future.
In addition, hydroelectricity and renewable energy is projected to increase at an annual
rate of 1.9% between now and 2030 compared to a 1.4% annual growth rate over that
same period for petroleum liquids. According to Standard & Poor’s, “Most of the
super majors (Exxon’s peer group), such as BP, Chevron, Royal Dutch Shell, and
Total, are building renewable energy business with a long term view.” Recently, there
has been public concern over “windfall” profits among oil and gas companies caused
by sharp increases in the price of oil.
Economic. GDP: Slowing global GDP is a threat to the oil industry because
industry growth is measured in number of barrels demanded daily which is highly
correlated to global GDP. Specifically, the 2.9% expected growth in energy
consumption for 2008 is correlated to the expected 2.9% growth in global GDP
because oil and gas play a central role in global economic activity (i.e., primary fuel for
energy, commerce and transportation). In addition, Standard & Poor’s and Global
Insight have projected that the world economy will shrink from a 3.7% annual GDP
in 2007 to 2.9% in 2008 and then up slightly to 3.3% in 2009. The GDP growth of
the U.S. and China is an important opportunity to the oil and natural gas industries
because they are major consumers of petroleum products. Specifically, China’s GDP
2
is expected to slip from 11.4% in 2007 to 9.9% in 2008 and then to 8.9% in 2009. US
GDP is expected to decrease from 2.2% in 2007 to 1.2% in 2008 and then back up
slightly to 1.9% in 2009 (Standard & Poor’s,2008).
Currency & Inflation: Currency exchange rates and inflation with respect to the
U.S. dollar are a threat to the oil industry’s profitability because oil is globally traded in
U.S. dollars. Specifically, if the value of the dollar remains weak in comparison to
other major currencies, the profitability of domestic oil companies can remain high
relative to foreign companies because foreign companies must convert their dollar
earnings from oil back into higher value currencies before making upstream capital
investments. In response to the weakening U.S. dollar, oil-exporting countries are
petitioning OPEC to peg oil to the euro (Gamal, 2007). Oil producing countries
pegging oil to something other than the dollar is a threat to U.S. economy and holders
of the dollar because it further reduces the strength of the dollar.
Political, Governmental, Legal. The daily global supply of oil is threatened since
many oil-producing countries are concentrated in areas of heightened political
tensions such as the Middle East and parts of Africa. An ongoing threat is that oilproducing countries will not adhere to OPEC’s quotas. Specifically, the collective
influence of OPEC with highly unstable members such as Iran, Iraq, Libya, and
Venezuela could lead to increases or decreases in short term crude oil supply.
However, OPEC has an incentive to limit supply to maintain higher oil prices, which
benefits OPEC nations, the industry, and Exxon. In addition, the reach of the tax
authorities could drastically affect the cost structure of the industry, as integrated oil
and gas companies already pay an average effective tax rate of 38% – 6% higher than
the average for the market as a whole (Williams & Hodge, 2006).
Technological. Technological innovations are an opportunity to gain competitive
advantage since crude oil and natural gas exploration are becoming increasingly
difficult.
International. Due to the global nature of the oil industry and ExxonMobil’s
global operations, the political, governmental, legal, and technological forces are
present both internationally as well as domestically.
Industry Environmental Analysis
Exxon participates in three very profitable industries: Mining/Crude-Oil
industry, Petroleum Refining, and Chemicals. First, the profitability of the industry is
determined by comparing the three industries’ profitability with the S&P 500 median’s
profitability. Second, Porter’s five forces are examined to determine the attractiveness
of the industry with a focus on super majors (i.e., companies that integrate upstream
and downstream activities).
Profitability of the Industry. All three of the industries Exxon participates in are
more profitable than the S&P 500 median (see Appendix A). Specifically, the
Mining/Crude-Oil industry (i.e., Exxon’s upstream activities) is ranked first with a
3
26.6% return on revenues (i.e., most efficient operations), ranked eleventh with an
8.2% return on assets, and ranked tenth with a 21.8% return on equity. The
Petroleum Refining industry (i.e., Exxon’s downstream activities) is ranked twentieth
with a 7.3% return on revenues, ranked second with a 13.2% return on assets (i.e.,
second best productivity of assets), and ranked third with a 30.7% return on equity
(i.e., third greatest power of equity). The Chemicals industry (i.e., Exxon’s Chemical
businesses) is ranked twenty-sixth with a 6.6% return on revenues, ranked seventeenth
with a 6.6% return on assets, and ranked twelfth with a 20.9% return on equity.
Threat of New Entrants. The threat of new entrants is low because barriers to
entry include high capital cost, economies of scale, distribution channels, proprietary
technology, environmental regulation,
Stock Market
geopolitical factors, and high levels of
Company
Cap. (mil)
industry expertise needed to be
ExxonMobil, (XOM)
466,610
competitive in the areas of exploration
and extraction. In addition, fixed cost
BP p.l.c. ADS, (BP)
189,942
levels are high for upstream,
Chevron Corp. (CVX)
178,417
downstream, and chemical products.
Business Rivalry. Business rivalry is
Conoco Philips (COP)
118,159
high because of the commodity-based
Royal Dutch
nature of the business. In addition, there Shell'A'ADS (RDS)
121,448
is competition with other industries that
Total 'B' ADS (TOT)
165,126
supply chemical, energy, and fuel for
both industrial and individual consumers. The industry growth rate (based on the
global demand for petroleum) is estimated to be 1.9% in 2008 and does not pose a
threat or an opportunity. Further, since the oil industry is a commodities market, the
competitive advantage is primarily derived from the ability to produce products at a
lower cost via operational efficiencies. The high number of competitors can be seen in
the following market capitalization analysis.
4
Supplier Power. The suppliers are the oil mining and extraction firms (includes
Exxon). Supplier power is high because OPEC controls 40% of world’s supply of oil
(Gamal, 2007) and, thus, has a strong influence on the price of oil. OPEC’s influence
on oil prices is a threat because Exxon purchases oil on the open market. In addition,
unstable countries that host Exxon oil reserves are a threat because they can seize
Exxon’s assets at any time. For example, Venezuela recently seized one of Exxon’s
major projects.
Buyer Power. Buyers are both industrial consumers and individual consumers.
Industrial (i.e., downstream) buyer power is low because upstream suppliers have an
incentive to limit supply and keep prices high as is evidenced by the shrinking
downstream margins. Individual buyer power is low because of the high volume of
demand as is evidenced by the fact that energy prices are continuing to rise despite
slowing economic growth worldwide (Mouawad, 2008). Further, oil demand is
expected to increase in 2008, although not as much as originally predicted (Mouawad,
2008).
Threat of Substitutes. The threat of substitutes is low and comes from nuclear
power, hydroelectric, biomass, geothermal, solar, photovoltaic, and wind. Nuclear and
hydroelectric energy sources are not a threat within the next decade because of
government regulation, environmental concerns, and a high barrier to entry. Further,
photovoltaic sources are limited by technological issues, and geothermal sources are
limited by geographic availability. The only potential threat could be biomass.
However, efficiency levels of biomass have yet to be proven competitive to
oil/natural gas. Finally, coal could prove to be a threat to oil consumption as an
energy source should technological advancements in coal liquefaction techniques
advance to a level that would provide clean, stable oil molecules from the largely
abundant domestic coal reserves.
Attractiveness of the Industry. The Mining/Crude-Oil industry, Petroleum Refining,
and Chemicals industries as a group are very attractive because the threat of new
entrants is low, buyer power is low, supplier power is high (which is good because
most of the big industry players are both suppliers and buyers), and the threat of
substitutes is low. The attractiveness of the industry is reduced because business
rivalry is high.
Internal Analysis
Value Chain and Competences. Company wide, Exxon relies on operational
excellence and proprietary technologies to create competencies across its value chain.
Exxon’s upstream focus is to sustain output of oil and natural gas via development
and exploration of West Africa, the Caspian, the Middle East and Russia. In order to
thrive in a variety of market conditions, Exxon’s downstream strategy is to maintain a
diversified business that includes marketing and refining complexes across the globe.
5
Specifically, it strives to provide quality, valued products and services to its customers
by means of best-in-class operations, use of leading-edge technology, and synergies
experienced from its many businesses. Finally, Exxon’s chemical businesses are
integrated with their downstream refining complexes and natural gas processing
plants. This integration serves as an operational core competency that provides cost
savings from economies of scale.
Five Year Average Financial Ratios. Although petroleum industry margins and
more specifically those of the integrated oil & gas sector are below that of the S&P
500, the favorable profitability of the industry is evident with exceptional return on
assets and return on equity. This low margin, but high profitability is consistent with
high volume commodity industries. This principle is reinforced by the petroleum
industry’s above average inventory turnover ratio.
Profitability
Gross Profit Margin
Net Profit Margin
Return on Assets
Return on Equity
Liquidity Ratios
Current Ratio
Quick Ratio
Leverage Ratios
Debt to Equity
Activity Ratios
Asset Turnover
Inventory Turnover
ExxonMobil Sector
21.42
35.27
9.57
8.83
16.32
8.4
31.57
18.34
ExxonMobil Sector
1.47
1.49
1.28
1.07
ExxonMobil Sector
7.86
38.5
ExxonMobil Sector
1.75
1.35
27.89
21.13
Industry
27.69
6.77
10.63
21.73
S&P
500
45.83
12.03
6.7
18.2
Industry
1.35
1
S&P
500
1.73
1.21
Industry
14.1
S&P
500
74.8
Industry
1.7
26.27
S&P
500
0.97
12.23
Existing Structures and Controls. Exxon effectively competes in the commodity parts of
its businesses by controlling expenses. Specifically, Exxon employs technology
improvements, cost control, and productivity enhancements to continually reduce
unit costs and improve efficiency (10-K, 2007).
6
Culture. Exxon’s corporate culture focuses on long-term viability using a
disciplined approach that requires large investments in a diverse set of projects that
take many years to develop but are expected to deliver sustainable competitive
advantage for decades (10-K, 2007). A recent article in Fortune Magazine described
the culture as rigorous and analytical (Colvin, 2007).
Business Level Strategy
Porter’s Generic Strategies. Under Porter’s strategy model, ExxonMobil operates as
a broad low-cost-producer. Because the company’s primary products are
commodities, any differentiation among competing products is essentially
nonexistent. As such, it must compete on the basis of cost and efficiency. The
company achieves its cost leadership by competing through technological and
operational efficiencies in the areas of exploration, extraction, and refining.
The company’s Chemical division, however, operates under a best-value
strategy due its leadership in production costs and proprietary chemical and polymer
offerings. This means that many of its chemical products are both differentiated from
competitors and achieve cost leadership through synergies gained by combining
refining and chemical production operations.
Growth Strategies. ExxonMobil’s two largest divisions, Upstream and
Downstream, both employ market penetration growth strategies. This may be partially
due to the fact that the consumption of petroleum products is ubiquitous, so there are
essentially no new markets in which to employ a market development strategy.
Additionally, the products themselves are standardized, so a growth strategy centered
on product development is unfeasible.
In contrast, the Chemical division employs a product development strategy,
focusing on creating new chemical products through the development of proprietary
technology.
Corporate Level Strategy
Diversification Strategy. Exxon employs a vertical integration strategy, which is a
subtype of the related diversification strategy. Through its Upstream, Downstream
and Chemical Divisions, the company has operations at every stage in the supply
chain.
7
Additionally, the company has implemented second related diversification
strategy by horizontally integrating at the downstream stage of its supply chain. The
Downstream and Chemical divisions achieve great synergies by combining chemical
production with refining operations. The company has greater than 90% of its
chemical production capacity integrated with its refining facilities. The products from
both divisions can also leverage many of the same marketing channels.
Center of Gravity. In the last three years, ExxonMobil’s Upstream division (i.e.,
exploration and extraction) has generated twice the profits, garnered four times the
capital expenditures (and exploration expenditures), and employed approximately 50%
more capital than the downstream and chemical divisions combined. By any of those
measures, the company’s center of gravity is at the upstream stage of the supply chain.
SWOT Analysis
Internal Strengths. Exxon’s internal strengths include strong reserves in oil and
gas, global presence, and strong margins (Datamonitor, 2007). Its proven reserves are
by far the largest in its peer group, and it also has strong average replacement ratio,
averaging 114% over the last five years. In addition, the company’s global presence is
also impressive. For example, Exxon currently operates 35 refineries across 21
countries and has over 35,000 service stations across approximately 100 countries.
Over the last five years, Exxon’s operating margins have averaged 14.5% compared to
an industry average of 11.3%. Other strengths include an enormous cash and cash
equivalents balance of $34 billion and technological advantages in its industry allowing
it to explore in the most remote places, and develop unconventional resources more
effectively than other companies. Furthermore Exxon has a well-integrated upstream,
downstream, and chemicals operation and is the best-in-class in its operations and
efficiency. Finally, synergies between refining and chemical production exist as 90%
of the chemical production is integrated with refining.
Internal Weaknesses. Exxon’s weaknesses include declining refinery throughput
both in 2006 and 2007, weak upstream performance in the US, and weak growth in
revenue compared to peers (Datamonitor, 2007). Decreasing refinery output is the
most concerning. The trend of output per day from 2005-2007 was 5.723, 5.603, and
5.571 million barrels. Exxon’s weak revenue growth compared to its peers is likely
because of its size. Once companies become as large as Exxon it becomes difficult for
them to grow as quickly as their smaller competitors. Although in 2006, Exxon’s
upstream performance in the US declined 16%, its non-US performance increased
16.3%, offsetting the weakness in the US. One final weakness for Exxon is that it has
$120 billion in plant, property, and equipment. Since plants and equipment in this
industry are highly specialized, it is difficult to sell them, and they often become
obsolete once resources at a developed site are depleted.
External Opportunities. Opportunities for Exxon abound in its industry. Global
demand is rising, especially from emerging markets and China, unconventional oil
8
resources (e.g. oil sands) pose a big potential for increasing the energy resource base,
and there are opportunities for exploring remote areas to discover and develop new
sources of supply. In addition, through 2030, oil and gas are expected to maintain
60% share of the energy market. There is also an opportunity to purchase and refine
lower quality crude for companies that have the technology and capabilities to do so.
The US monetary policy will also likely cause the dollar to weaken which benefits
Exxon. In 2007, Exxon profited $1.8 billion from the decline in the dollar. Finally,
continued solid demand growth for petrochemicals is expected.
External Threats. Ongoing threats in this industry include the instability of
nations with large supplies of oil, natural disasters and changes in weather patterns,
downstream margins being squeezed by competition, the finite supply of
hydrocarbons, and general market price fluctuations. More immediate threats include
the slowdown in the US economy, public and political backlash over environmental
concerns and windfall profits, and the threat of some nations changing denomination
of their oil reserves from the Dollar to the Euro.
Valuation
To estimate the intrinsic value of Exxon Mobile stock, the warren Buffet Owners
Earning Model was used. The current 10 year T-bill rate of 4.142% was used as the
risk free rate. The beta was determined to be 1.13 which was the average of the betas
provided by yahoo finance and google finance. The market return used was time
weighted average return on the S&P500 (Large Cap Stocks) from 1926-2003 which
was 10.23%.
Discount Rate
K = Rf + β(E(Rm)-Rf))
K = 4.142 +1.13(10.23-4.142)
K = 11.02%
9
Financial Statements
Recommendation
It is important to note that in calculating the intrinsic value per share I entered
expected annual growth rates equal to what I researched forecasted global GDP rates
to be. Due to the Exxon Mobiles large size I felt that future growth beyond global
GDP levels would be difficult and have used these conservative forecast numbers as a
result. Based on these calculations I have found Exxon Mobile to be over priced
slightly. I recommend waiting to purchase shares of Exxon Mobile until the price
drops to $85.49 or below.
10
Income Statement
PERIOD ENDING
31-Dec-07
31-Dec-06
31-Dec-05
Total Revenue
404,552,000
377,635,000
370,680,000
Cost of Revenue
232,852,000
213,255,000
213,002,000
Gross Profit
171,700,000
164,380,000
157,678,000
-
-
-
87,571,000
83,857,000
86,698,000
-
-
-
12,250,000
11,416,000
10,253,000
-
-
-
71,879,000
69,107,000
60,727,000
-
-
-
70,874,000
68,056,000
59,928,000
400,000
654,000
496,000
Income Before Tax
70,474,000
67,402,000
59,432,000
Income Tax Expense
29,864,000
27,902,000
23,302,000
Operating Expenses
Research Development
Selling General and Administrative
Non Recurring
Others
Total Operating Expenses
Operating Income or Loss
Income from Continuing Operations
Total Other Income/Expenses Net
Earnings Before Interest And Taxes
Interest Expense
Minority Interest
Net Income From Continuing Ops
(1,005,000)
(1,051,000)
(799,000)
40,610,000
39,500,000
36,130,000
Discontinued Operations
-
-
-
Extraordinary Items
-
-
-
Effect Of Accounting Changes
-
-
-
Other Items
-
-
-
40,610,000
39,500,000
36,130,000
-
-
-
$40,610,000
$39,500,000
$36,130,000
Non-recurring Events
Net Income
Preferred Stock And Other Adjustments
Net Income Applicable To Common Shares
Cash Flow
11
PERIOD ENDING
Net Income
31-Dec-07
31-Dec-06
31-Dec-05
40,610,000
39,500,000
36,130,000
12,250,000
11,416,000
10,253,000
Operating Activities, Cash Flows Provided By or Used In
Depreciation
Adjustments To Net Income
166,000
(264,000)
288,000
Changes In Accounts Receivables
(5,441,000)
(181,000)
(3,700,000)
Changes In Liabilities
6,228,000
Changes In Inventories
Changes In Other Operating Activities
Total Cash Flow From Operating Activities
72,000
(1,883,000)
1,160,000
7,806,000
(1,057,000)
(434,000)
(1,288,000)
(2,205,000)
52,002,000
49,286,000
48,138,000
(15,387,000)
(15,462,000)
(13,839,000)
Investments
(3,149,000)
(1,848,000)
(2,467,000)
Other Cash flows from Investing Activities
8,808,000
3,080,000
6,036,000
Total Cash Flows From Investing Activities
(9,728,000)
(14,230,000)
(10,270,000)
(7,910,000)
(7,867,000)
(7,478,000)
(31,402,000)
(28,878,000)
(17,961,000)
Investing Activities, Cash Flows Provided By or Used In
Capital Expenditures
Financing Activities, Cash Flows Provided By or Used In
Dividends Paid
Sale Purchase of Stock
Net Borrowings
598,000
73,000
Other Cash Flows from Financing Activities
369,000
462,000
Total Cash Flows From Financing Activities
Effect Of Exchange Rate Changes
Change In Cash and Cash Equivalents
(38,345,000)
(36,210,000)
1,808,000
727,000
$5,737,000
($427,000)
(1,502,000)
(26,941,000)
(787,000)
$10,140,000
12
Balance Sheet
PERIOD ENDING
31-Dec-07
31-Dec-06
31-Dec-05
Assets
Current Assets
Cash And Cash Equivalents
33,981,000
32,848,000
33,275,000
519,000
-
-
Net Receivables
36,450,000
28,942,000
27,484,000
Inventory
11,089,000
10,714,000
9,321,000
3,924,000
3,273,000
3,262,000
Total Current Assets
85,963,000
75,777,000
73,342,000
Long Term Investments
28,194,000
23,237,000
20,592,000
120,869,000
113,687,000
107,010,000
-
-
-
7,056,000
-
-
Accumulated Amortization
-
-
-
Other Assets
-
6,314,000
7,391,000
Deferred Long Term Asset Charges
-
-
-
242,082,000
219,015,000
208,335,000
55,929,000
47,115,000
44,536,000
2,383,000
1,702,000
1,771,000
-
-
-
Total Current Liabilities
58,312,000
48,817,000
46,307,000
Long Term Debt
21,549,000
6,645,000
6,220,000
Other Liabilities
13,278,000
21,047,000
20,181,000
Deferred Long Term Liability Charges
22,899,000
24,858,000
24,441,000
4,282,000
3,804,000
-
-
-
-
120,320,000
105,171,000
97,149,000
Misc Stocks Options Warrants
-
-
-
Redeemable Preferred Stock
-
-
-
Short Term Investments
Other Current Assets
Property Plant and Equipment
Goodwill
Intangible Assets
Total Assets
Liabilities
Current Liabilities
Accounts Payable
Short/Current Long Term Debt
Other Current Liabilities
Minority Interest
Negative Goodwill
Total Liabilities
Stockholders' Equity
13
Preferred Stock
-
-
-
Common Stock
4,933,000
4,786,000
5,743,000
Retained Earnings
228,518,000
195,207,000
163,335,000
Treasury Stock
(113,678,000)
Capital Surplus
Other Stockholder Equity
Total Stockholder Equity
Net Tangible Assets
1,989,000
(83,387,000)
(2,762,000)
(55,347,000)
(2,545,000)
121,762,000
113,844,000
111,186,000
$114,706,000
$113,844,000
$111,186,000
14