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Investment Overview for Exxon Mobil (NYSE:XOM)
Below are key drivers of Exxon's value that present opportunities for upside or downside to the current Trefis price estimate for Exxon Mobil:
Crude Oil and Natural Gas Liquid (NGL) Production
- Average Crude Oil and NGL Sales Price: The average liquid sales price increased from $48.23 in 2005 to $90.96 in 2008 before declining to $57.56 in 2009 during the economic downturn. The global economy recovered in 2010 pushing prices to $73.8 for the year. Prices continued to rise in 2011 as well, increasing to $102 per barrel. However, since 2011, oil prices have remained relatively flat around $100 per barrel as supply from unconventional sources in North America has increased sharply. In 2013, Exxon's subsidiaries sold crude oil and natural gas liquids at an average price of $97.5 per barrel. We currently estimate that prices would rise annually by about 2%. If increasing demand for energy from developing countries drives prices up by 5% annually in the years to come, this would represent a 10% upside to the Trefis price estimate.
- Crude Oil and Natural Gas Liquids Produced: Total liquids produced by Exxon's subsidiaries increased from 2.12 million barrels per day in 2005 to 2.25 million barrels per day in 2006 before declining to 1.76 million barrels per day in 2010. In 2013, the figure declined to 1.48 million barrels per day. With the company suggesting that production of liquids would increase over the next 3-4 years, we estimate production to reach 1.6 million barrels per day by 2017. However, if production of liquids remains at 2010 levels for the Trefis forecast period, the Trefis price estimate would see 5% downside.
For additional details, select a driver above or select a division from the interactive Trefis split for Exxon Mobil at the top of the page.
Exxon Mobil Corporation (XOM) is the largest of the vertically integrated oil majors, as well as the largest publicly-traded corporation in the world by market cap and revenue. It was created on November 30, 1999, by the merger of Exxon and Mobil. The company has several divisions and hundreds of affiliates, including ExxonMobil, Exxon, Esso and Mobil.
The firm generates a majority of its income from liquid and natural gas sales with earnings of $32.5 billion in 2013. The geographical diversity of Exxon Mobil's exploration and production (E&P) activities make it less vulnerable to the regional production uncertainties that plague the industry. The company is also an international leader in the downstream refining industry with over 5,000 owned/leased retail stations and over 5.2 million barrels per day of refining capacity at the end of 2013.
Crude Oil and Natural Gas Liquids (NGL) production is the most valuable division for the firm for the following reasons:
Low production costs
The liquids and natural gas divisions (termed the upstream division) of most oil and gas companies tends to be more profitable as a result of lower supply costs. In 2013, Exxon Mobil's average costs of supply (exploration expenditure, production costs and depreciation) averaged around 30% of the price realized for crude oil and natural gas.
Large proven reserves
At the end of 2013, Exxon Mobil's total proved reserves stood at over 25.2 billion oil-equivalent barrels (both developed and undeveloped).
This equates to more than 15 years of reserve life at the current production rates. These reserves are evenly distributed between liquids and natural gas, and represent a diverse and global portfolio.
Refining is a low margin business
Thinner downstream margins weighed heavily on Exxon’s 2013 results. Almost 80% of the total year-on-year decline in its full-year operating earnings (earnings adjusted for divestment gains in 2012) could be attributed to thinner downstream margins. This was primarily due to industry overcapacity amid sluggish demand and higher crude oil prices. There were certain bright spots as well, such as refineries in the Midwest U.S. that gained from lower crude oil prices due to the fast-growing supply from unconventional plays in the U.S. and a lack of midstream infrastructure. However, the sharp decline in international crack spreads more than offset this advantage for Exxon.
Going forward, we expect global refining margins to continue to remain under pressure in the short to medium term due to industry overcapacity, which stems from the fact that governments in different parts of the world are willing to run uncompetitive crude refineries at very low or no returns to sustain employment and reduce their reliance on imported fuels.
Strengthened presence in shale with acquisition of XTO Energy
Exxon acquired XTO energy through an all stock transaction valuing XTO at $41 billion on December 14, 2009. It is the largest US petroleum takeover since 2006 and highlights Exxon Mobil's continued move into shale based oil and natural gas.
XTO has a strong hold in the shale plays in America, including the Marcellus, the Haynesville and the Bakken basins. The acquisition will boost the company's resource base by 10%, leveraging XTO's leadership in the oil and gas industry. XTO energy's current unconventional resource base consists of 45 trillion cubic feet of natural gas.
Increasing capital costs associated with upstream activities
While Exxon’s total hydrocarbon production has remained relatively flat over the last decade, its capital expenditures have soared from around $18 billion in 2005 to over $42 billion in 2013. This is a clear indication of how difficult the oil drilling business has become over the years. This has been primarily due increasing complexity of upstream projects. Various oil companies have embarked on different projects to extract oil such as deepwater, GTL, oil sands, etc. This has led to longer development timelines which have in turn resulted in higher costs.
However, the company believes that 2013 was a peak year of capital expenditures and it would not spend more than $40 billion on leasing rigs, floating oil platforms, installing pipelines and repairing oil-refineries this year.
It is estimated that a large part of the world's oil reserves have already been discovered. Recent statistics have indicated that global consumption has been outpacing reserve additions. Peak oil is a commonly used term to describe the point at which world oil output will reach a maximum and decline afterward.
However, many institutions such as the International Energy Agency (IEA) believe that peak oil will not occur for another 25 years at the very least. Many governments across the world are promoting alternative energy measures to ensure that the supply and demand of energy will be met at all times to come.
Improvements in technology
Due to limited underlying growth in product demand, there has been an increase in recent years towards increasing the complexity of refineries rather than expanding capacity. In the US, no new refineries have been built since 1980 however improvements in process design and technology has seen capacity increase around 1% per year.
The early refineries that were established were mainly used to process light sweet crude resulting in an increase in demand for light sweet crudes. As a result of higher oil prices in recent times, heavy crude oil is becoming more economically attractive. In addition, the interest in the development of new cost effective methods for extracting and transporting heavy crude oil for refining into valuable light and middle distillate fuels is also increasing.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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