Introduction:
In this report, we will conduct a financial analysis of Exxon Mobil Corporation. The analysis is based on their annual report for the fiscal year ended December 31, 2006, as well as official documents from their website and reliable sources. To enhance clarity and convenience, we will use abbreviations such as ExxonMobil, Exxon, Esso, Mobil, Corporation, Company, their and its to refer to specific affiliates or groups of affiliates.
This report does not evaluate the fair value of shares or compare their growth potential with the current market price. Nonetheless, it provides a recommended analysis for Exxon Mobil shares. Originally named Exxon Corporation, this company was established in the USA in 1882. In 1999, Mobil Corporation became a wholly-owned subsidiary of Exxon Corporation, resulting in the name change to Exxon Mobil Corporation. This company is a global integrated oil and gas company with various divisions and affiliates.
ExxonMobil is a global company that operates in the United States and engages in diverse energy-related activities. Their primary areas of focus include exploring and producing crude oil and natural gas, manufacturing and selling petroleum products, and producing and marketing petrochemicals such as olefins, aromatics, polyethylene, polypropylene plastics, and specialty products. Furthermore, Exxon Mobil has made investments in electric power generation.
Exxon Mobil’s affiliates conduct extensive research programs to support their businesses. Currently, the company possesses the largest energy resource base among non-government entities and is the top non-government natural gas marketer with the largest reserves. The brand names Exxon, Mobil, and Esso are widely recognized by consumers. Exxon is also the largest fuels refiner in the world and manufactures lube basestocks for motor oil production. Its refining operations span 26 countries, with over 42,000 retail service stations across 100 countries, as well as lubricants marketing in nearly 200 countries and territories.
According to a report by PFC Energy (January 2007, www.pfcenergy.com), Exxon Mobile Corporation operates in over 150 countries and sells petrochemical products. It holds top market positions for the majority of its petrochemical assets in the oil and gas industry. At the end of 2006, Exxon Mobile Corporation was ranked as the largest publicly traded company based on market capitalization, facing competition from other major energy groups including Chevron, ConocoPhillips, BP, and Royal Dutch Shell.
According to Financial Times (Hoyos C., 2007), a new group of oil and gas companies has emerged since 2002. This group consists of Saudi Aramco, Russia’s Gazprom, CNPC of China, NIOC of Iran, Venezuela’s PDVSA, Brazil’s Petrobras, and Petronas of Malaysia. These companies are mainly state-owned and together they have control over approximately one-third of the world’s oil and gas production as well as more than one-third of its total reserves. The aforementioned companies lack the ability to enforce rules in the global oil market and can quickly lose their positions due to their size.
Exxon Mobil, Chevron, BP, and Royal Dutch Shell together produce 10% of the world’s oil and gas but only have 3% of reserves. However, their importance is overshadowed by Saudi Aramco, the largest company globally. Since 2002, Saudi Aramco has launched an ambitious expansion program to increase its production capacity from 11 million barrels per day (representing 13% of global consumption) to eventually reach 12.5 million barrels per day and potentially even 15 million barrels per day. As mentioned earlier, recent years have seen a rise in global energy consumption resulting in significant increases in oil and gas prices.
Exxon Mobil (www.exxonmobil.com) and the International Energy Agency (www.oilmarket.org) have stated that two main factors, population and economic output, influence the energy market. They anticipate a global oil product demand increase from 84.5 mb/d in 2006 to 86.1 mb/d in 2007, with an expected annual growth rate of 1.8% until 2030. The projections also indicate a decrease in world oil prices from $68 per barrel in 2006 to $49 per barrel in 2014, followed by a rise to $59 per barrel in 2030 ($95 per barrel on a nominal basis).
In 2030, global liquids consumption is expected to reach 118 million barrels per day. Exxon Mobil conducted a profitability analysis based on its consolidated financial statements following US GAAP guidelines. The analysis included affiliates with over 50% control and showed no discontinued operations, indicating ongoing activities. Figure 1 presents various indicators from 2004 to 2006. Total turnover increased from $298,035 million in 2004 to $377,635 million in 2006, resulting in a change of $6,955 million and a percentage change of 1.9%. Operating revenue also grew during this period from $291,252 million to $365,467 million with a change of $6,512 million and a percentage change of 1.8%. Net profit similarly rose from $25,330 million in 2004 to $39,500 million in 2006 reflecting a change of $3,370 million and a percentage change of 9.3%. The profitability percentage increased from 9.29% in 2004 to11.68%in2006.Capital Employed doubled as well going from$112millionin2004to$230millionin
In 2006, the growth rate of revenues declined significantly compared to the previous year. This decrease can be attributed to fluctuations in global gas and oil prices, although production volumes remained steady during this time. Nonetheless, the Corporation achieved its highest net income ever in 2006, reaching $39,500 million. This represented an increase of $3,370 million from the previous year’s earnings. It is important to note that this net income includes a gain of $410 million resulting from tax benefits related to investments made outside the United States (for more detailed financial information, please see Appendix 1).
S. assets. Exxon Mobil’s management is proficient in controlling expenses, as evidenced by the decrease in SG expenses in 2006 and the reduction in total number of employees during this period. Additionally, the average capital employed has increased due to significant growth in company assets. The ROCE also improved from 31.3% to 32.2% thanks to an increase in net profits. In comparison to other oil and gas giants in the market, Exxon Mobil holds a strong position, boasting the highest capitalization and receiving high ratings from investors (Figure 2).
The company’s profitability level is slightly below the average level of the industry. However, this difference is only due to the impact of rapidly growing companies like PetroChina and others based in developing countries. ExxonMobil’s profit exceeds the profit of its opponents from developed countries.
Figure 2:
Company name | Market Capitalization (USD Bil.) | % Share price change YoY | Turnover (USD Bil.) | Employees | Net Profit margin (%)
Exxon Mobil Corporation | 449.336 | 377.635 | 82.100 |10.74
PetroChina | 253.673 | 390.283 | 446.290 | 21.68
Royal Dutch Shell | 225.915 | 316.361 | 108,000.845
BP | 218.427 | 4,316.970 | 8,000.825
Chevron Corporation | 160.730 | 203,721 | 62,500.877
ConocoPhillips | 118.224| 183,463| 38,400.862
Industry weighted average | 234.930| 212,172|122,762.11
Source: Reuters, www.investors.reuters.com
Analysis per segments: Exxon Mobil operates in three main segments – upstream, downstream, and chemical.
The upstream segment includes exploration, gas and oil production.
The downstream segment is involved in refining and petroleum product sales.
The chemical segment includes the production of olefins, aromatics, polyethylene and polypropylene plastics, as well as a wide variety of specialty products.
The company provides the following figures with a breakdown per segment in its financial statement:
Figure 3 Segment Earnings After Income Taxes Average Capital Employed Return on Average Capital Employed 2006 2005 2006 2005 2006 2005
Upstream USD m % USD m % USD m % USD m %%%
United States 5,168 13.16 20,017.2 13.94 11,491.4 11.51 37.146
Non-U.S. 21,062.3 53.18 18,149.5 42.43 13,583.9 39.77 34.047
Total 26,230.5 66.42 24,349.7 57.87 14,753.2 53.26 45.345
Downstream
United States 4,250.8 10.83 11,3901.8 10.86 5,365.6 6,650.5 .856 .858
Non-U.S. 4,204.8 10.64 8,0811.3 .17-17 ,172-14 ,030-18 .022-.024
Total .8,4542 -21.,799-22.,368-19.,680-24.,6802-21.,1352 -.832
Chemical United States -36.,0314 -40.,9114 -.45-,14542 -7-,32741 -.723-.735
Non-U.S -15.,75727 -.78-,2727 -.78-,26919 -.636-.63
Total -82.,71383 -29.,16381 -33.,18383 -40.,91484 -33
Corporate and financing -.114-.28…-.154-.47…-.027-.000-.8911-.. Total ..130.. -111..22.. -10.231…-… 11.300
Source: Exxon Mobil Corporation financial statements
All sectors’ indicators were heightened in 2006. The only upstream sector based in the United States reported a decline in profit. Otherwise, it was compensated by steady growth in non-U.S. divisions of the segment.
More than 50% of net income was acquired in the Non-US upstream sector, with the total income increase being driven in part by the growth of oil and gas production outside the USA. The earnings from upstream activities in 2006 amounted to $26,230 million, representing a rise of $1,881 million compared to 2005. This increase includes a $1,620 million gain associated with the Dutch gas restructuring that took place in 2005. Although there were higher operating expenses, the higher prices received for liquids and natural gas helped partially offset these costs. Additionally, there was a 7% increase in total oil-equivalent production, with liquids production reaching 2,681 kbd (thousands of barrels per day), which is a rise of 158 kbd compared to 2005.
Production increases from new projects in West Africa and increased Abu Dhabi volumes were partially negated by mature field decline, entitlement effects, and divestment impacts. Natural gas production, measured at 9,334 mcfd (millions of cubic feet per day), saw a rise of 83 mcfd compared to 2005. Although volumes from projects in Qatar also increased, they were partially offset by mature field decline. Downstream earnings amounted to $8,454 million, marking a $462 million increase from 2005. This increase includes a $310 million gain from the 2005 Sinopec share sale and a special charge of $200 million associated with the 2005 Allapattah lawsuit provision.
Despite lower refining throughput, stronger worldwide refining and marketing margins partially mitigated the impact. The decrease in petroleum product sales from 7,519 kbd in 2005 to 7,247 kbd was mainly due to lower refining throughput and divestment effects. Chemical earnings rose by $439 million compared to 2005, reaching a total of $4,382 million. This increase includes a $390 million gain from the favorable resolution of joint venture litigation in 2005 and a $150 million gain from the 2005 Sinopec share sale. The growth in earnings for 2006 was primarily driven by higher margins and increased sales volumes.
The sales of prime products reached a total of 27,350 kt, which is an increase of 573 kt. The profitability forecast for the oil and gas business is closely linked to being a commodity business. This implies that changes in oil, gas, and petrochemical prices and margins for refined products like gasoline can greatly affect the Corporation and its global affiliates. These prices and margins are influenced by multiple factors on local, regional, and global scales that impact the supply and demand dynamics of these commodities.
The data presented above clearly indicates that Exxon Mobil’s management has made the correct choice for the strategic growth of the company. By exploring and developing new oil fields in various regions such as Africa, Persian Gulf states, former Soviet Union countries, and Asia, there has been a notable improvement in the company’s performance. It is imperative to maintain and expand Exxon Mobil’s dominant position as a petroleum retailer both domestically in the United States and internationally. Consequently, it is anticipated that the corporation will sustain its profitability in the short term. It is worth mentioning that this analysis was conducted during a period of substantial expansion in the oil and gas markets characterized by historically high prices.
Exxon Mobil’s financial prospects could worsen as a result of shifts in the business landscape, necessitating more comprehensive forecasting. The company heavily depends on sales in both the US and developed nations, which face the potential for stagnation. It consolidates its reports and offers restricted information regarding its affiliated entities. There is a chance that governing bodies in emerging economies could require the divestment of shares in lucrative subsidiaries and the abandonment of projects, even following prior investments.
The Group benefits from its global operations as the weak exchange rate of the US dollar in recent years overstates revenues in other currencies. The analysis of Risk Liquidity, working capital, and gearing ratios for Exxon Mobil is as follows:
Figure 4 Ratio Description Unit of measurement 2006 2005 Change, %
Current ratio
Current assets / Current liabilities
times
1.55
1.58
-2%
Quick ratio (Acid-test)
Current assets minus stocks/ Current liabilities
times
1.33
1.38
-4%
Stock holding period
Stocks * 365 / cost of sales days
12.61
10.31
5%
Debtor collection period
Debtors * 365 / Revenue days
27.97<7r/><27.06<3r/><3%
Creditors payment period Trade creditors * 365 / Cost of sales days
45.98
42.36
9%
< Working cycle period Stocks turnover + Debtors turnover - Creditors turnover days -5.40 -4.36 24% Interest cover Profit before interest and taxation / Interest times 103. 06 119. 82 -14% Exxon Mobil short-term liquidity in 2006 decreased: current ratio and quick ratio reduced from 1. 58 to 1. 55 and from 1. 38 in 2005 to 1. 33 in 2006 correspondingly. The normative value for the current ratio is between 1: and 2: depending on the industry, for acid-test ratio – 1: .
Consequently, the company is not facing any solvency problems. Moreover, its efficient management of working capital is evident from the moderate current ratio. The stock holding period increased by 15% to 12 days due to growth in stocks. Similarly, there was a 3% increase in the debtor collection period from 27 to 28 days. Both these trends had an adverse impact on reducing the working capital cycle. On the other hand, the creditor payment period rose from 42 to 46 days, resulting in a decline in the working cycle period from -4 days to -5 days. These negative values suggest that long-term financing for working capital is unnecessary for the company.
The company’s interest cover ratio decreased by 14% from 120 times in 2005 to 103 times in 2006. This decrease is due to an increase in borrowings, which was partially offset by growth in profit before interest and taxes. The interest cover ratio indicates that the company earns enough profit to cover its borrowings.
Figure 5:
Cash Flow Changes
Unit of measurement:
2006
2005
Change, %
Net cash inflow from operating activities
USD m
49,286
48,138
2.38%
In spite of an increase in profit in 2006, Exxon Mobil’s cash flow from operating activities only changed by 2.38%.
The primary reason is a significant decrease in accounts and other payables. Even though some ratios show a decrease, Exxon Mobil still maintains a high margin of safety, with negative values in the working cycle period indicating favorable supply conditions. Considering that major changes in the business environment are not expected in the near future, there is a positive forecast for the company’s liquidity and cash flow. A critical analysis of the company’s disclosure supports this view.
The company annual report contains ample information and an opinion stating that Exxon Mobil is the leading enterprise in the oil and gas industry. However, the report fails to mention any more formidable competitors, such as Saudi Aramco. Additionally, the corporation overlooks the potential risks associated with business limitations in certain countries or specific sectors within a country. Neither expropriation nor forced asset divestment, unilateral contract term cancellations or modifications, nor deregulation of select energy markets are addressed.
Conclusion: Exxon Mobil has experienced four consecutive years of revenue and profit growth, reaching its highest levels. The company has made significant investments in exploring new oil and gas fields, resulting in a substantial increase in reserves. This production growth can be attributed to Exxon Mobil’s involvement in developing new fields across Africa, the Persian Gulf, former Soviet Union countries, and Asia. As a leader in refining, the company’s “downstream” segment is expected to see further growth in sales volumes and profitability as the rate of oil production increases. By following Warren Buffett’s famous method, which includes considering a company’s openness to the public, stable financial growth, and long-term prospects, it can be recommended to purchase Exxon Mobil shares. (Buffet M., 2004) Buffet M., Clark, D. (2004), “Buffettology: the Previously Unexplained Techniques That Have Made Warren Buffett the World’s Most Famous Investor.”
The text includes references to various sources on energy and oil. These include the Energy Information Administration’s Office of Integrated Analysis and Forecasting from the U.S. Department of Energy’s International Energy Outlook 2007 (www.eia.doe.gov), Exxon Mobil Corporation’s Annual Report for the year ended December 31, 2006 (www.exxonmobil.com), Exxon Mobil Corporation’s Form 10-K (www.exxonmobil.com), an article titled “The new Seven Sisters: oil and gas giants dwarf western rivals” by C. Hoyos in The Financial Times on March 11, 2007 (www.ft.com), the International Energy Agency’s Oil Market Report (www.oilmarketreport.org), and a PFC Energy report from January 2007 (www.pfcenergy.com).
