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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. We currently estimate that prices would rise annually by about 5%. If increasing demand for energy from developing countries drives prices up by 8% 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 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 2011, the figure declined to 1.72 million barrels per day. With the company suggesting that production of liquids would increase over the next 3 years, we estimate production to reach 1.94 million barrels per day by 2013. However, if production of liquids remains at 2010 levels for the Trefis forecast period, the Trefis price estimate would see an 8% 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 $41 billion in 2011. 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 7,753 retail stations and over 6.2 million barrels per day of refining capacity at the end of 2011.
Crude Oil and Natural Gas Liquids (NGL) production is the most valuable division for the firm for the following reasons:
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 2010, 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 resources base and proven reserves
In 2010, Exxon Mobil added 1.8 billion oil-equivalent barrels to the resource base. Proven reserves make up 31% of the firm's resource base.
At year end 2011, the resource base of Exxon Mobil's consolidated subsidiaries consisted of 17.7 billion barrels of oil-equivalent (boe) of proven oil and gas reserves (both developed and undeveloped). This equates to 11 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
Declining gross margins in recent times drastically impacted the profitability of the refining business for most oil & gas companies. The gross refining margin is the single most important metric that determines how profitable a refinery is. Refining margins are largely driven by the demand for end products which is mainly dependent on the level of economic activity. Refining margins have declined by over 40% from 2005 to 2009.
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 costs associated with upstream / downstream activities
The costs associated with constructing new oil and gas upstream facilities have reached a new record high, according an analysis by Cambridge Energy Research Associates (CERA). According to the analysis, costs related to the extraction of oil & gas have doubled since 2005.
This has been primarily due to several reasons:
- Increasing commodity prices: Prices of items such as fuel, chemicals, steel etc. have risen sharply in the last few years as demand grew in emerging markets. Some refineries typically use 5-7% of their feedstock as fuel to run refineries. Firms are increasing focus on energy efficiency to drive this down.
- Weakness in US dollar: As the majority of expenses in the Oil & Gas industry are denominated in US dollars, weakness in the dollar has given rise to costs. In the 2nd half of 2009, the CERA downstream capital costs index (DCCI) rose 1.5% due to an increase in construction costs related to weakness in the USD. High costs and dimmer margin outlook may cause certain oil companies to cancel or delay certain projects.
- Complexity of 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.
Fears of oil spills and the six month moratorium on offshore drilling in the Gulf of Mexico
On April 20, 2010 an explosion and fire on board Transocean's deep water horizon drilling rig off the coast of Louisiana ruptured an oil well, causing the worst oil spill in US history. The rig was operated by BP. In light of this, the US government conducted an environmental and economic analysis of the offshore drilling industry in the Gulf of Mexico. President Obama ordered a six month moratorium on drilling in waters 500 feet and deeper. The six month moratorium on exploratory offshore drilling closed 33 deep water drilling platforms. In October 2010 the US Government lifted its moratorium on deep water oil and gas drilling in the Gulf of Mexico. Although the costs to oil drillers have been less than predicted, oil drillers have the potential of facing higher levels of regulation for deep water drilling in the Gulf.
Exxon Mobil's bottom line depends on how much it costs to produce the oil that it eventually refines and sells. About 30% of its oil came from expensive and nonconventional reserves in 2008. As its traditional oil basins mature, that percent is expected to rise to 40% by 2013 according to the company.
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.
Trefis Forecast Rationale for Average Crude Oil and NGL Sales Price
The average liquid sales price refers to the price realized for crude oil and natural gas liquids (NGL) by subsidiaries of Exxon Mobil’s upstream division. It is effectively the weighted average of the price the company receives on its crude oil and NGL sales across the world. This is dependent on global crude oil prices and the company's proportion of sales in different countries.
Oil prices in global markets are generally influenced by
- Supply which is largely dependent on the production quota set by OPEC
- Oil reserves
- Oil demand
- Global political uncertainties
The average liquid sales price increased from $48.23 per barrel in 2005 to $91.0 in 2008 before declining to $57.9 in 2009 as the world faced one of the worse economic downturns in recent decades. The global economy recovered in 2010 pushing prices to $74.0 for the year. Oil prices rose sharply in 2011 to $101 mainly because of a shut down of Libyan production and unrest in other OPEC countries. Prices remained around this level in 2012 as well. Growing demand from emerging countries should keep the average realized prices for crude oil and natural gas liquids increasing for the foreseeable future.
Trefis considered the following factors for its forecast
- Uncertainty in the post crisis world
- The global economy saw one of the worst recessions in recent history which led to oil prices collapsing over 70% from its peak. This uncertainty has led many oil exporting countries to rethink their decision to invest in new capacity, which would limit supply and increase prices.
- Political uncertainty in the Middle East
- The Middle East contains over 60% of the world's proven oil reserves. However, continued uncertainty in the Middle East may threaten the ability of oil & gas producers to exploit resources in these regions.
- Libya for instance is estimate to have approximately 47 billion barrels worth of proven oil reserves. According to a Deloitte report, before the revolutions, the country was producing approximately 1.66 million barrels per day. As of the first quarter of 2012 this figure had dropped to 800,000 barrels per day.
- A decline in production in the Middle East would lead to an increase in crude oil prices.
- Robust growth in demand crude oil expected to continue
- In an October 2012 report, EIA estimates that demand is expected to grow in 2013 by 0.92 million barrels per day (bpd) to average 90 million bpd. This compares to an average of 89.5 million bpd expected in 2012.
- The EIA expects China and other non OECD countries to account for most of the demand growth. Liquids fuel consumption in China is expected to rise by 3.6% or 355,000 bpd in 2012 and 400,000 bpd in 2013.
- In its Energy Outlook for 2030, BP noted that China and India will be the largest and third largest economies and energy consumers by 2030. They will account for 35% of the global population, GDP and energy demand.
- The global fleet of vehicles is expected to grow by 60% from 1 billion today to nearly 1.6 billion by 2030. Vehicle density per 1000 people on the other hand will grow from approximately 50 to 140 in China and from 20 to 65 in India.
- Transportation fuel in 2030 will remain dominated by oil (87%) as any gains in other fuels will be constrained by limited policy support.
- The increasing demand is expected to support crude oil prices and oil companies' average realizations on crude oil and NGL going forward.
- Growth in per capita incomes
- Developing nations have seen their wealth increase considerably in the past few years. As incomes rise, households not only tend to consume more fuel but also move up the ladder in the type of fuel consumed.
- OPEC’s involvement
- OPEC limits the amount of crude oil available in the markets. This helps it stabilize oil prices for OPEC member countries especially for those whose budget depends on crude exports.
- Exchange rate impacts
- Exchange rate is also one of the factors that impacts the price of crude oil. As oil is priced in US dollars, a weakness in the dollar is likely to keep crude prices elevated.
- Influence of financial markets
- If inventories of either crude oil or gasoline are low relative to the past average or in the view of market traders, this generally implies that the market is tight implying that the demand exceeds supply. As a result of this prices may rise even if there is no actual shortage.
- In the financial markets, prices are not determined by the physical supply but the open interest in a financial contract at any point in time.
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- Price at which demand declines
- There is a price of fuel at which demand starts to decline as a result of which prices cannot be expected to increase consistently. In 2008, miles driven in the US fell by 4% as consumers cut back on gasoline consumption with many people selling their larger cars for smaller and more fuel efficient models.
- Technological advances expected to increase supply
- The EIA expects non-OPEC production to rise by 570,000 bpd in 2012 and approximately 1.2 million bpd in 2013. The large production increases is expected to continue due to growth from U.S. onshore shale and other oil formations and Canadian oil sands.
- The Arctic, which is estimated to contain vast oil reserves, was previously inaccessible to oil companies due to the harsh conditions and lack of technology. The melting of the Arctic sea, combined with advanced in Arctic drilling technology, have made exploration and production in the Arctic a viable prospect. As a result, a number of oil majors, including Exxon Mobil, are planning large scale exploration and drilling projects in the region.
- The EIA estimates that total crude oil production in 2012 will average 6.3 million bpd. This is expected to increase 6.9 million bpd in 2013.
- If supply grows faster than demand going forward, prices will suffer. However, production is usually limited by the OPEC and oil companies in such situations, which leaves prices intact.
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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