Introduction This report consists of financial analysis of Exxon Mobil Corporation and it is based on the company annual report for the fiscal year ended December 31, 2006, on the company’s official documents placed at their website and on other appropriate sources. For convenience and simplicity, in this report the terms ExxonMobil, Exxon, Esso and Mobil, as well as terms like Corporation, Company, their and its, are sometimes used as abbreviated references to specific affiliates or groups of affiliates.
This report doesn’t include calculation of share’s fair value and potential of its growth in comparison with current market price, but analysis based recommendation for Exxon Mobil shares is made in the report conclusion. Company overview Exxon Mobil Corporation, formerly named Exxon Corporation, was incorporated in the USA in 1882. Mobil Corporation became a wholly-owned subsidiary of Exxon Corporation in 1999, and Exxon changed its name to Exxon Mobil Corporation (Exxon Mobil Form 10-K for US Securities and exchange commission). It’s an integrated oil and gas company with several divisions and hundreds of affiliates over the world.
Divisions and affiliated companies of ExxonMobil operate or market products in the United States and most other countries of the world. Their principal business is energy, involving exploration for, and production of, crude oil and natural gas, manufacture of petroleum products and transportation and sale of crude oil, natural gas and petroleum products. Exxon Mobil is a major manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a wide variety of specialty products. Exxon Mobil also has interests in electric power generation facilities.
Affiliates of Exxon Mobil conduct extensive research programs in support of these businesses. Nowadays the company has the largest energy resource base of any non-government company, and it’s the world’s largest non-government natural gas marketer and reserves holder. Consumers know the best of its brand names: Exxon, Mobil and Esso. Exxon are the world ‘s largest fuels refiner and manufacturer of lube basestocks used for making motor oils. It has refining operations in 26 countries, 42 000 retail services stations in more than 100 countries and lubricants marketing in almost 200 countries and territories.
The company markets petrochemical products in more than 150 countries. Ninety percent of its petrochemical assets are in businesses that are ranked number 1 or number 2 in market position. Industry overview According to PFC Energy report (January 2007, www. pfcenergy. com) Exxon Mobile Corporation tops the list of biggest publicly traded companies in the oil and gas industry based on 2006 year-end market capitalization. The company competes on its traditional markets with other the world’s biggest listed energy groups like US based Chevron and ConocoPhillips, Europe’s BP and Royal Dutch Shell.
Regardless of the fact that the mentioned above companies are really huge, they are not the rule makers on international oil market and lose their positions very rapidly. After the surge in crude oil prices since 2002, a new group of oil and gas companies has risen on the scene. These companies identified by Financial Times (Hoyos C. , 2007) are Saudi Aramco, Russia’s Gazprom, CNPC of China, NIOC of Iran, Venezuela’s PDVSA, Brazil’s Petrobras and Petronas of Malaysia. Most of them are state-owned. They control almost one-third of the world’s oil and gas production and more than one-third of its total oil and gas reserves.
In contrast, Exxon Mobil, Chevron, BP and Royal Dutch Shell together produce about 10 per cent of the world’s oil and gas and hold just 3 per cent of reserves. The real world biggest company is Saudi Aramco, which after 2002 launched its most ambitious expansion programme and aims to boost production capacity from 11 million barrels a day – or 13 per cent of today’s world global consumption – to 12. 5m b/d and then 15m b/d. As it was mentioned before the recent years world energy consumption grew, and the prices for oil and gas increased significantly.
There are two primary factors influenced the market of energy: population and economic output (Exxon Mobil, www. exxonmobil. com). According to International Energy Agency (International Energy Agency, www. oilmarket. org) global oil product demand will rise up from 84. 5 mb/d in 2006 to 86. 1 mb/d in 2007, and in forecast for 2030 will grow 1. 8% per year. The world oil prices are forecasted to decline from $68 per barrel in 2006 to $49 per barrel in 2014, then rise to $59 per barrel in 2030 ($95 per barrel on a nominal basis).
Total world liquids consumption rises to 118 million barrels per day in 2030. Analysis of Profitability General analysis The analysis of Exxon Mobil was performed on its consolidated financial statements in accordance with US GAAP, where all affiliates with more 50% control were included. The company didn’t have discontinued operations in the reported report, so all activities were continuing operations. Figure 1 IndicatorsUnit 200620052004Change 06/05Change 06/05, %Change 05/04, % Total turnoverUSD m377 635370 680298 0356 9551. 9%24. % Operating revenueUSD m365 467358 955291 2526 5121. 8%23. 2% Net profitUSD m39 50036 13025 3303 3709. 3%42. 6% Profitability%11. 68%10. 80%9. 29%8. 2%16. 3% Capital EmployedUSD m123 855121 291112 6302 5642. 1%7. 7% Return on Capital Employed%32. 2%31. 3%23. 8%02. 9%31. 5% Source: Exxon Mobil Corporation financial statements The Corporation’s total turnover inclusive sales-based taxes, income from equity affiliates and other incomes grew up in 2006 on 1. 9% (or $6 955 million) to $377 635 millions. The operating revenue increased by 1. % (or $6 512 million) to $365 467 millions (please see Exxon Mobil Corporation financial statements attached as Appendix 1). The growth rate of revenues dropped significantly in 2006 from increase in 2005. As the company production volumes were increased at the same rate these years, the main reason is a change in world gas and oil prices. Net income in 2006 of $39 500 million was the highest ever for the Corporation, up $3 370 million from 2005. The company states that net income for 2006 included a $410 million gain from the recognition of tax benefits related to historical investments in non-U.
S. assets. It should be stated that Exxon Mobil management is quite good in expenses control. They decrease SG expenses in 2006 and reduced total number of employees all this period. As it can be seen above average capital employed also rose up, as a result of significant growth of company assets. ROCE increased from 31. 3% to 32. 2% due to increase in net profits. Exxon Mobil’s results in comparison with other traded oil and gas giants show a very good position of the company (Figure 2). The corporation has greatest capitalization and rates highly among the investors.
Profitability level of company is slightly less than average level of industry, but this difference exists only because of impact of rapidly growing companies like PetroChina and others based in developing countries. ExxonMobil’s profit exceeds its opponents’ profit from developed countries. Figure 2 Company nameMarket Capitalization USD Bil. % Share price change YoYTurnover USD Bil. EmployeesNet Profit margin % Exxon Mobil Corporation449. 336377 63582 10010. 74 PetroChina253. 67390 283446 29021. 68 Royal Dutch Shell225. 915316 361108 0008. 45 BP218. 4274 31697 0008. 25 Chevron Corporation160. 730203 72162 5008. 77 ConocoPhillips118. 224183 46338 4008. 62 Industry weighted average234. 930212 172122 76211. 05 Source: Reuters, www. investors. reuters. com Analysis per segments Exxon Mobil operates in three main segments: upstream, downstream and chemical. Upstream segment consists of exploration, gas and oil production. Downstream is a refining and petroleum product sale. Chemical segment includes production of olefins, aromatics, polyethylene and polypropylene plastics and a wide variety of specialty products.
The company provides following figures with breakdown per segments in its financial statement: Figure 3 SegmentEarnings After Income TaxesAverage Capital EmployedReturn on Average Capital Employed 200620052006200520062005 UpstreamUSD m%USD m%USD m%USD m%%% United States5 16813. 16 20017. 213 94011. 413 49111. 537. 146 Non-U. S. 21 06253. 318 14950. 243 93135. 839 77034. 047. 945. 6 Total26 23066. 424 34967. 457 87147. 253 26145. 545. 345. 7 Downstream United States4 25010. 83 91110. 86 4565. 36 6505. 765. 858. 8 Non-U. S. 4 20410. 64 08111. 317 17214. 018 03015. 424. 522. 6 Total8 45421. 47 99222. 23 62819. 324 68021. 135. 832. 4 Chemical United States1 3603. 41 1863. 34 9114. 05 1454. 427. 723. 1 Non-U. S. 3 0227. 72 7577. 68 2726. 78 9197. 636. 530. 9 Total4 38211. 13 94310. 913 18310. 814 06412. 033. 228 Corporate and financing4341. 1- 154-0. 427 89122. 824 95621. 300 Total39 500100. 036 130100. 0122 573100. 0116 961100. 032. 231. 3 Source: Exxon Mobil Corporation financial statements All sectors’ indicators were heightened in 2006. The only upstream sector based in the United States reported decline in profit. Otherwise it was compensated by steady growth in Non-US divisions of the segment.
More than 50% of net income was gained in Non-US upstream sector. The total income increase was based by half on growing oil and gas production outside the USA. Upstream earnings for 2006 totaled $26 230 million, an increase of $1 881 million from 2005, including a $1 620 million gain related to the Dutch gas restructuring in 2005. Higher liquids and natural gas realizations were partly offset by higher operating expenses. Total oil-equivalent production increased by 7 percent. Liquids production of 2,681 kbd (thousands of barrels per day) increased by 158 kbd from 2005.
Production increases from new projects in West Africa and increased Abu Dhabi volumes were partly offset by mature field decline, entitlement effects and divestment impacts. Natural gas production of 9,334 mcfd (millions of cubic feet per day) increased 83 mcfd from 2005. Higher volumes from projects in Qatar were partly offset by mature field decline. Downstream earnings totaled $8 454 million, an increase of $462 million from 2005 including a $310 million gain for the 2005 Sinopec share sale and a special charge of $200 million related to the 2005 Allapattah lawsuit provision.
Stronger worldwide refining and marketing margins were partly offset by lower refining throughput. Petroleum product sales of 7,247 kbd decreased from 7,519 kbd in 2005, primarily due to lower refining throughput and divestment impacts. Chemical earnings totaled $4 382 million, an increase of $439 million from 2005, including a $390 million gain from the favorable resolution of joint venture litigation in 2005 and a $150 million gain for the 2005 Sinopec share sale. Increased 2006 earnings were driven by higher margins and increased sales volumes.
Prime product sales were 27,350 kt (thousands of metric tons), an increase of 573 kt. Forecast of profitability The oil and gas business is fundamentally a commodity business. This means the operations and earnings of the Corporation and its affiliates throughout the world may be significantly affected by changes in oil, gas and petrochemical prices and by changes in margins on gasoline and other refined products. Oil, gas, petrochemical and product prices and margins in turn depend on local, regional and global events or conditions that affect supply and demand for the relevant commodity.
Generally, the above figures absolutely clear prove correct choice of Exxon Mobil management of strategic direction of development. The development of new fields in Africa, states of Persian Gulf, former countries of Soviet Union and Asia improves the company indicators. The leading position of petroleum retailer in the US and other countries should be kept and expanded. So, the forecast for a short-term period is the corporation profitability will be on the same level. Assumptions and limitations The company performance analysis was made on shot period of time, when the oil and gas markets grew and the prices were at high historical levels.
The changes in business environment may cause a deterioration of financial position of the corporation. Prediction should be done more thoroughly. As the most of sales of Exxon Mobil are made on US and developed countries market with their susceptibility for stagnation. The corporation reports consolidated statements and almost doesn’t disclosure information about its affiliates. It’s very likely that Exxon Mobil may be forced to sell the shares of most profitable subsidiaries by the local authorities in developing countries and to leave the projects in spite of investments.
The Group benefits from its worldwide operations as weak exchange rate of US dollar in recent years overstates the revenues in other currencies. Analysis of Risk Liquidity, working capital and gearing ratios, which is influenced the investor decisions, for Exxon Mobil are following: Figure 4 RatioDescriptionUnit of measurement20062005Change, % Current ratioCurrent assets / Current liabilitiestimes1. 551. 58-2% Quick ratio (Acid-test)Current assets minus stocks/ Current liabilitiestimes1. 331. 38-4% Stock holding periodStocks * 365 / cost of salesdays12. 6110. 315% Debtor collection period Debtors * 365 / Revenuedays27. 9727. 063% Creditors payment periodTrade creditors * 365 / Cost of salesdays45. 9842. 369% Working cycle periodStocks turnover + Debtors turnover – Creditors turnoverdays- 5. 40- 4. 3624% Interest coverProfit before interest and taxations / Interesttimes103. 06119. 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 current ratio is between 1:1 and 2:1 depending of industry, for acid-test ratio – 1:1.
Therefore the company has no solvency problems and moreover because current ratio isn’t too high the company has quite strong working capital management. Stock holding period grew by 15% from 11 to 12 days as stocks increased. Debtor collection period increased by 3% from 27 to 28 days also. Both trends had a negative impact on decreasing working capital cycle. Creditor payment period increased from 42 to 46 days and caused a decline of working cycle period from -4 day to -5 days. The negative values of this indicator allow saying the corporation is not in need for working capital to be financed long term.
Company’s interest cover ratio dropped by 14% from 120 times in 2005 to 103 times in 2006 in connection with increase in borrowings and offsets by profit before interest and taxes growth. According to interest cover ratio the company earns quite enough profit in order to serve borrowings. Figure 5 Cash Flow Cash Flow ChangesUnit of measurement20062005Change, % Net cash inflow from operating activitiesUSD m49 28648 1382. 38% In spite of increase in profit in 2006 Exxon Mobil’s cash flow from operating activities changed only on 2. 38%.
The main reason is significant decrease in accounts and other payables. Risk Forecast In spite of decrease in some ratios Exxon Mobil still has a very high margin of safety. Main indicator of low risk is negative values of working cycle period. It shows that company has very favorable conditions of supplies. Take into account that significant changes in business environment are unlikely to happened, at least for a short term period a positive forecast of the company liquidity and cash flow may be granted. Critical Analysis of Company Disclosure
The company annual report contents a lot of information and formed opinion that Exxon Mobil is number one in oil and gas industry. There is no any information about more powerful competitors like Saudi Aramco. The corporation does not pay any attention to risks of possible restrictions on the ability to do business with certain countries, or to engage in certain areas of business within a country. There is nothing about expropriation or forced divestiture of assets, unilateral cancellation or modification of contract terms, and de-regulation of certain energy markets.
Conclusion The revenues and profit of Exxon Mobil are growing already four years on end and are at highest level. The management invested huge amounts in exploration of new oil and gas fields. It helped to increase the reserves significantly. The growth of production was caused by the corporation participation in development of new fields in Africa, states of Persian Gulf, former countries of Soviet Union and Asia. The “downstream” segment of the company is a world leader of refining and as oil production rate ncreases growth rate of processing capacities Exxon Mobil may reckon on subsequent growth in sales volumes and level of profitability. Answering the questions with the world famous method of Warren Buffett (Buffet M. , 2004) it can be stated that the company is opened to public; it has stable growth of financial indicators and good perspectives in long term period. So, in accordance with above mentioned an overall recommendation is to buy Exxon Mobil shares. Buffet M. , Clark, D. (2004), Buffettology: the Previously Unexplained Techniques That Have Made Warren Buffett the World’s Most Famous Investor.
Energy Information Administration Office of Integrated Analysis and Forecasting U. S. Department of Energy, International Energy Outlook 2007, www. eia. doe. gov Exxon Mobil Corporation Annual report for the year ended December 31, 2006, www. exxonmobil. com Exxon Mobil Corporation Form 10-K, www. exxonmobil. com Hoyos C. , The new Seven Sisters: oil and gas giants dwarf western rivals, The Financial Times, March 11 2007, www. ft. com International Energy Agency, Oil market report, www. oilmarketreport. org PFC Energy report, January 2007, www. pfcenergy. com