1
Exxon Mobil Corporation.
Ticker:
XOM
Sector:
Energy
Oil & Gas
Industry:
RECOMMANDATION
Recommendation: Hold
Pricing
HOLD
Market Cap1
$315.95B
Trading Vol.
25.15M
Total Assets
$291,068M
Total Liabilities
$150,896M
Exxon Mobil Corporation is a conglomerate with well
diversified business, both in segments and geography. It is an
industry leader in almost every aspect of the energy and
petrochemical business, operating facilities or market
products in most of the world’s countries and explore for oil
and natural gas on six continents. As the superior capital
allocator and operator and few remaining firms with an AAA
credit rating, Exxon Mobil showed the strong performance in
the first two quarters of 2010. However, the higher
correlation with current economic uncertainty may drag its
future performance down.
EPS(09)
$3.98
POMPANY DESCRIPTION
2
11.85
Closing Price (09/24)
$61.75
52-wk High
$76.54
52-wk Low
$55.94
Market Data
Valuation
P/E
P/Sales
0.87
P/Books
2.23
P/EBITDA
6.34
P/CF
7.40
Div. Yield
2.80%
Profitability & Effectiveness
ROA(06/30)
9.60%
ROE(06/30)
20.00%
Profit Margin
31%
Oper Margin
12.5%
Net Margin
6.9%
Analyst:
Yuhui Qian
Email: yqvcd@mail.missouri.edu
1
2
Exxon Mobil Corporation operates petroleum and
petrochemical businesses on a worldwide basis. In late 1999,
the FTC allowed Exxon and Mobil to reunite, creating
Exxon Mobil Corp. The company’s operations include
exploration and production of oil and gas, electric power
generation, and coal and minerals operations. Exxon Mobil
also manufactures and markets fuels, lubricants, and
chemicals. Over the last 125 years ExxonMobil has evolved
from a regional marketer of kerosene in the U.S. to the
largest publicly traded petroleum and petrochemical
enterprise in the world. Today they operate in most of the
world's countries and are best known by familiar brand
names: Exxon, Esso and Mobil.
In 2009, it produced 2.4 million barrels of oil and 9.3 billion
cubic feet of natural gas a day. At year-end 2009, reserves
stood at 14.95 billion boe (plus 8.03 billion for equity
companies), 62% of which are oil. The company is the
Average of Bloomberg and Morningstar
Bloomberg
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Exxon Mobil Corporation.
world's largest refiner, with 37 refineries, and it is one of the world's largest manufacturers of
commodity and specialty chemicals.
BUSINESS SEGMENTS AND OPORATIONS
Exxon Mobil’s revenues are generated from 3 distinct operational segments consisting of upstream
operations, downstream operations, and chemical operations. ExxonMobil's businesses include oil
and natural gas exploration and production (8% of 2009 sales; 81% of 2009 segment earnings);
refining and marketing (83%; 8%); chemicals (9%; 11%); and other operations, such as electric
power generation, coal and minerals. At year-end 2009, the company had an ownership interest in 37
refineries with 6.23 million barrels per day (b/d) of atmospheric distillation capacity (U.S. 32%,
Europe 28%, Asia Pacific 27%, Canada 8%, and Middle East/Latin America/Other 5%). The
following pages breakdown these operations further.3
 Upstream Operations
Upstream operations consist of exploration, development, produce and gas and power marketing.
Earnings in this segment during 2009 totaled $17.1 billion with a return on average capital of 23
percent. Exxon produced liquids and natural gas for sale of 3.9 million oil-equivalent barrels per day.
Exploration activities span the entire globe and include geographic locations such as Canada, U.S.
Gulf of Mexico, Turkey, Vietnam, Norway, and many more. The company possesses massive
resources, adding 2.9 billion oil-equivalent barrels to the resource base in 2009, bringing the total
resource base to 23.3 billion oil-equivalent barrels. This equates to 16 years of reserves life at current
production rates. Proved reserves make up 31 percent of this resource base.
 Downstream Operations
Downstream operations consist of refining & supply, fuels marketing, and lubricants and specialties.
Exxon’s refining and marketing business was severely affected by the recession reflected by lower
product demand because of the economic downturn. Exxon is the largest global refiner, manufacturer
of lube bases tocks, and supplier of petroleum products.
 Chemical Operations
Exxon’s chemical operations capitalize on their core competencies and benefit from their integration
across different sectors of Exxon’s operations. Selected investment strategies in advanced projects
have led to industry leading performance. Earnings in this operational sector for 2009 totaled $2.3
billion and are complemented with returns on average capital employed of 14 percent.
3
XOM 10-K 2009.
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3
Exxon Mobil Corporation.
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4
Exxon Mobil Corporation.
2009 Earnings by Segments
2009 Earnings by Regions
Chemical
11%
United
States
17%
Downstre
am
8%
Upstream
81%
Non-U.S.
83%
Figure 1
Figure 2
MANAGEMENT
Rex Tillerson is chairman and CEO of Exxon, a role he assumed in 2006. Previously, he served as
president after spending his career with Exxon, beginning in 1975 as a production engineer. Tillerson
is likely to continue a disciplined capital allocation strategy and deliver the high returns that his
predecessor did. Total compensation for Tillerson was only $27 million in 2009, which is reasonable,
considering the size of the company and his peers' compensation. Exxon has a typical compensation
structure consisting of a salary, cash bonus, and equity awards. Performance is not evaluated by
typical quantitative measures but by the executives' performance relative to achievement of the
company's long-term goals. Exxon gets credit for delaying 50% of bonus payment until later periods'
earnings targets are met, and requiring longer vesting periods for equity awards. Low executive
equity ownership relative to total shares outstanding is understandable, considering the size and
history of the company.
Shareholder return is a focus of management. Over the past five years, Exxon paid $39 billion in
dividends and repurchased $135 billion worth of stock, reducing shares outstanding by 23%.4
Table 1
4
Morningstar
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5
Exxon Mobil Corporation.
PERFORMANCE
As the table below shows, upstream earnings for 2009 were $17,107 million, down $18,295 million
from 2008, including the absence of an after−tax special gain in 2008 of $1,620 million from the sale
of a natural gas transportation business in Germany. Lower crude oil and natural gas realizations
reduced earnings $15.2 billion. Downstream earnings were $1,781 million, down $6.4 billion from
2008. Weaker margins reduced earnings $5.1 billion. Lower divestment activity reduced earnings
about $1.0 billion. Volumes decreased earnings approximately $300 million. Petroleum product sales
of 6,428 kbd decreased 333 kbd, mainly reflecting asset divestments and lower demand. Earnings
declined $648 million versus 2008 to a total of $2,309 million. Weaker margins reduced earnings by
$340 million, mostly in commodities. Lower volumes decreased earnings $190 million. All other
items, including unfavorable foreign exchange impacts, reduced earnings $115 million. Prime
product sales of 24,825 kt (thousands of metric tons) decreased 157 kt from 2008. Prime product
sales are total chemical product sales, including ExxonMobil’s share of equity−company volumes
and finished−product transfers to the downstream business. U.S. Chemical earnings of $769 million
increased $45 million. Non−U.S. Chemical earnings were $1,540 million, down $693 million.
Table 2 2009 Financial Performance by Segments5
Table 2
5
XOM,2010 10-K.
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6
Exxon Mobil Corporation.
6
Figure 3
All IN MILLIONS
3-Year Functional Earnings
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
-5,000
Upstream
Downstream
Chemical
Corporate and
financing
2009
17,107
1,781
2,309
-1,917
2008
35,402
8,151
2,957
-1,290
2007
26,497
9,573
4,563
-23
Figure 4
6
XOM 2009 Annual Report
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Exxon Mobil Corporation.
ALL IN MILLIONS
3-Year Earnings by Regions
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0
2009
2008
2007
United States
3,509
8,616
10,171
Non-U.S.
17,688
37,894
30,462
Figure 5
7
Table 3
ExxonMobil reported an 85% rise in second-quarter earnings compared with the same period a year
ago, thanks to higher crude-oil price realizations, improved refining margins, and strong chemical
results. Earnings also benefited from an 8.4% increase in total production from the year-ago quarter.
Production gains came primarily from the continued ramp-up of ExxonMobil's liquefied natural gas
facilities in Qatar and increased European demand. As a result, natural gas volume grew 24.7% from
the year-ago period. However, oil volume fell almost 1% as natural field declines offset higher
volume in Qatar and Kazakhstan. Through the first half of the year, production volume increased 6.4%
from the year-ago period, led by gains in natural gas volume of 19.2%. Benefiting from higher price
realizations as well as increased production volume, second-quarter upstream earnings rose 40%
from the second quarter of 2009. The chemical and downstream segments also showed significant
improvement during the quarter. Chemical segment earnings surged 273% from the quarter a year
ago, thanks to improved margins and higher volume as a result of stronger global demand. The
downstream segment also posted an impressive turnaround during the quarter. Improved global
refining margins resulted in a 138% increase in earnings compared with the same quarter a year
earlier, despite lower volume due to continued weak demand. The U.S. downstream segment marked
a significant reversal by posting earnings of $440 million after posting losses for the past four
quarters.8
7
8
ExxonMobil Annual Report 2009
Morningstar
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8
Exxon Mobil Corporation.
9
Table 4
Figure 6 Morningstar Investment Style
The following chart shows the stocks comparison compared to the S&P 500 and other main
competitors.10
Chart 1
So far in the YTD, XOM price has been down by 10%, chart 1 shows a weaker trend compare to
9
10
S&P Estimates
Yahoo! Finance.
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Exxon Mobil Corporation.
most of Exxon’s peers in the industry, expect BP oil due to the oil spill in the Gulf of Mexico.
However, as Table 5 and 6 below shows, Exxon Mobil’s fundamental condition is still strong,
compare to most of its direct competitors, as Sales and Income are significantly higher than peers.
ROA and Asset turnover is above the industry average and market level; whereas P/E ratio is lower
than the industry and market, showing positive signs for Exxon Mobil.
Table 5 Comparison to Peers11
XOM
Industry
S&P 500
ROA %
9.60
9.30
8.50
ROE %
20.00
20.00
22.20
Net Margin %
6.90
8.70
12.70
Asset Turnover
1.40
1.10
0.80
P/E
11.80
12.80
15.10
Forward P/E
9.30
-
13.50
P/B
2.20
1.80
2.00
P/CF
7.40
7.00
7.00
P/S
0.80
0.80
1.20
Fwd Div Yld %
2.86
-
2.01
Table 6 Comparison to Industry and Market12
REASONS TO BE BULLISH ON XOM
 Financial Health
As one of the few remaining firms with an AAA credit rating13, ExxonMobil’s financial health is
beyond reproach. Cash flow from operations remains sufficient to finance capital expenditures while
increasing dividend payments and buying back stock. More important, the large cash position and
access to cheap debt give the company resources to make opportune acquisitions.
11
12
13
Morningstar Estimates
Morningstar Stock Analysis Report
Morningstar Credit Rating
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10
Exxon Mobil Corporation.
Table 3 Financial Health14
 Well Diversification
As we described earlier in the report, Exxon Mobil is a conglomerate with well diversified business,
both in segments and geography. It is an industry leader in almost every aspect of the energy and
petrochemical business, operating facilities or market products in most of the world’s countries and
explore for oil and natural gas on six continents. More than 80% of its earnings are generated from
non-U.S. markets. With high-performing operations and global integration, Exxon is one of the
best-positioned firms to weather a drop in commodity prices15. The diversity of its operations and a
vast geographic footprint offer protection against regional economic weakness.
REASONS TO BE BEARISH ON XOM
 Economic Uncertainty
The demand for energy and petrochemicals correlates closely with general economic growth rates.
The occurrence of recessions or other periods of low or negative economic growth will typically
have a direct adverse impact on results. Other factors that affect general economic conditions in the
world or in a major region, such as changes in population growth rates or periods of civil unrest, also
impact the demand for energy and petrochemicals. Economic conditions that impair the functioning
of financial markets and institutions also pose risks to Exxon Mobil.
The US economy was more sluggish in the second quarter than was initially projected. The original
report for the second quarter estimated the annualized growth rate to be 2.4 percent, but the rate was
adjusted to 1.6 percent. While the growth rate was less than was initially expected, the GDP did
increase more than the 1.3 percent that polled economists were predicting. The 1.6 percent growth
rate follows a stronger first quarter where growth was 3.7 percent.16 As the economy continues its
14
15
Morningstar Estimates
Morningstar stock Report
16
Tom Barkley and Darrell Hughes, “GDP Growth Revised Downward.” 27 Aug 2010, Wall Street Journal. 28
Aug 2010 <http://online.wsj.com/article/>.
SB10001424052748704147804575455270227305744.html?mod=djemalertNEWS>.
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Exxon Mobil Corporation.
slow recovery, the chances of a recurring recession increase. The threat of a double-dip recession
negatively impacted Exxon’s expected profitability and future growth.
 Government and Political Factors
ExxonMobil’s results can be adversely affected by political or regulatory developments affecting
operations. As nations become more protective of their natural resources, the company will find it
increasingly difficult to increase production and book reserves.
For a company with global operations, geopolitical risk is always an issue.17 Recent events in Russia,
Nigeria, and Venezuela underscore the risk associated with doing business in those countries. These
risks will only become greater as Exxon expands its global production portfolio through partnerships
with NOCs.
Access limitations
A number of countries limit access to their oil and gas resources, or may place resources off-limits
from development altogether. Restrictions on foreign investment in the oil and gas sector tend to
increase in times of high commodity prices, when national governments may have less need for
outside sources of private capital. Many countries also restrict the import or export of certain
products based on point of origin.
Restrictions on doing business
As a U.S. company, Exxon Mobil is subject to laws prohibiting U.S. companies from doing business
in certain countries, or restricting the kind of business that may be conducted. Such restrictions may
provide a competitive advantage to their non-U.S. competitors unless their own home countries
impose comparable restrictions.
Regulatory and litigation risk
Even in countries with well-developed legal systems where Exxon Mobil does business, they are
exposed to changes in law that could adversely affect results, such as, increases in taxes or
government royalty rates, price controls, changes in environmental regulations or other laws that
increase cost of compliance. Another concern is the adoption of regulations mandating the use of
alternative fuels or uncompetitive fuels.
VALUATION
I used the Two-Stage Discounted Free Cash Flow Model to find the intrinsic value of Exxon Mobil
Corporation. I calculated the discount rate of 8.98% by using WACC which considers both the cost
of equity and cost of debt. I used CAPM to determine the cost of equity, shows as follow:
Cost of Equity = 3.74%+0.845*(10.59%-3.74%) = 9.49%
17
Morningstar Report
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Exxon Mobil Corporation.
I adopted the cost of debt and weight of equity and debt from Bloomberg. Beta was found in
Bloomberg as the 10-year adjusted Beta. The risk free rate of 3.74 percent is the mean annual interest rate
of US treasury bills going back to 192818, while the market return rate of 10.59 percent is the average growth
rate of the S&P 500 index since 1871.19 While these numbers may fluctuate in the short-term, S&P 500 and
Treasury bill rates are currently depressed, these averages will likely be maintained in the long-run.
Net Income and Depreciation and Depletion values were taken from the 2009 10-K report.
For the 10-year Average Increase in Working Capital, I firstly calculated every-year working capital
by subtracting current liabilities from current assets. Then I calculated the change in working capital
from previous year to later year. Finally, I calculated the average change in working capital which is
$107.33million. For the 10-year Average Capital Expenditure, I adopted every-year Capital
Expenditure from XOM’s annual reports, and then averaged them to get the value of
$14,121.40million.
In the first stage, I used 5% growth rate which was estimated for 2010, 2011 and 2012 fiscal years.
Then I conservatively decreased the growth rate to 4% for the later years.
In the second stage, we used 3.41% which is average percent change from preceding period in Real
Gross Domestic Product since 1930, as the growth rate of perpetuity.
I find the intrinsic value of Exxon Mobil Corp. is $68.99 per share, which is higher than the current
price of $61.75.
Table N. DCF Sensitivity Analysis
Discount Rate
7%
8%
8.98%
10%
11%
93.47
73.52
60.99
51.89
45.39
16000
99.71
78.42
65.06
55.34
48.41
16968
105.74
83.16
68.99
58.69
51.34
18000
112.17
88.22
73.19
62.26
54.46
19000
118.4
93.12
77.25
65.72
57.49
FCF (All In Millions)
15000
18
19
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
http://www.moneychimp.com/features/market_cagr.htm
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Exxon Mobil Corporation.
CONCLUSION
ExxonMobil sets itself apart among the other super majors as a superior capital allocator and
operator. With a majority of the world's remaining resources in government hands, opportunities for
the company to grow its large production base are limited. After the financial crisis in 2008, Exxon
Mobil Corporation showed a strong recovery in the first 2 quarters of 2010. Through a relentless
pursuit of efficiency, technology, development, and operational improvement, it consistently delivers
higher returns on capital relative to peers. However, the performance of Exxon Mobil is highly
correlative with global economic condition. The increasing probability of “double-dip” recession
after the second quarter negatively affects the expected profitability of Exxon Mobil.
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Exxon Mobil Corporation.
Appendix A
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Exxon Mobil Corporation.
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Exxon Mobil Corporation.
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Exxon Mobil Corporation.
Appendix B
Two-Stage Discounted Free Cash Flow Valuation Model
assuming discount rate (k) of
Free Cash Flow in 2009:
Net Income
Average Increase in Working Capital (subtract)
Depreciation and Depletion (add)
Amortization (add)
Average Capital Expenditures (subtract)
Free Cash Flow (Owner Earnings)
FIRST STAGE
Prior Year Free Cash Flow
First Stage Growth Rate (add)
Free Cash Flow
Discounted Value per annum
$
$
$
$
$
$
Year:
2010
$ 16,968.3
5.0%
$ 17,816.7
$17,816.7
Sum of present value of owner earnings
SECOND STAGE
Residual Value
$147,979.1
8.98%
(In millions)
19,280.00
(107.33)
11,917.00
(14,121.40)
16,968.27
2011
$17,816.7
5.0%
$18,707.5
$17,166.5
$
25,848.7
3.41%
Free Cash Flow in year 11
Capitalization rate (k-g)
Value at end of year 10
$
26,730.1
5.57%
480,170.33
Present Value of Residual
Intrinsic Value of Company
Shares outstanding assuming dilution
Intrinsic Value per share
Current Price
2013
$19,642.9
4.0%
$20,428.6
$15,784.7
<----- This number represents the sum of
long)
Free Cash Flow in year 10
Second Stage Growth Rate (g) (add)
$
2012
$18,707.5
5.0%
$19,642.9
$16,540.1
2014
$ 20,428.6
4.0%
$ 21,245.7
$15,063.8
2015
$ 21,245.7
4.0%
$ 22,095.6
$14,375.9
2016
$ 22,095.6
4.0%
$ 22,979.4
$13,719.4
2017
$22,979.4
4.0%
$23,898.6
$13,092.8
2018
$ 23,898.6
4.0%
$ 24,854.5
$12,494.9
2019
$ 24,854.5
4.0%
$ 25,848.7
$11,924.3
present values of the free cash flow that we expect in the first stage (which in this case is ten years
$203,261.27
$351,240.36
5091
$68.99
$61.75
11.73%
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Exxon Mobil Corporation.
(ALL IN MILLIONS)
Working Capital
Change In WC
Average Change In WC
2009
3,174
(19,992)
107
2008
23,166
(4,485)
2007
27,651
691
2006
26,960
(75)
2005
27,035
9,639
2004
17,396
9,822
2003
7,574
2,458
2002
5,116
(451)
2001
5,567
3,359
2000
2,208
CapEx
Average CapEx
22491
14121.4
19318
15387
15462
13839
11986
12859
11437
9989
8446
Data above is according to Annual Reports 1999-2009 which are directly downloaded from Exxon Mobil Corporation's website.
MU IFM- 09/27/2010