This site requires a more recent version of Adobe Flash Player to function properly.
Go here to get Flash.
Trefis's graphical modelling tools require Flash, but here's a preview of some of the content you'll see once
Flash is enabled:
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 $73.80 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 with the increase in supply from unconventional sources in North America. In 2013, Exxon's subsidiaries sold crude oil and natural gas liquids at an average price of $97.50 per barrel. We currently estimate that the recent decline in oil prices could sustain for a longer period of time amid slower demand growth and the diminishing price-controlling power of the OPEC (Organization of Petroleum Exporting Countries). According to our estimates, annual average crude oil prices (Brent) could bottom out around $80-85 per barrel by 2017 and rise back to $100 per barrel by 2020. However, if a faster than expected increase in the demand for crude oil from developing countries, and a sharper than expected cut in non-OPEC supply growth leads to a quicker bottoming out process, and crude oil prices reach $130/barrel by 2020, there could be a 10% upside to our current price estimate for Exxon Mobil.
- 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 around 1.65 million barrels per day by 2017 and then remain relatively stable around that level beyond that. However, if production of liquids remains at 2010 levels for the Trefis forecast period, there could be a 5% downside to our current price estimate for Exxon Mobil.
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 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 the 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:
Large base of proved reserves
Proved reserves is an extremely critical metric for an oil and gas exploration and production company. It represents the total quantity of technically and economically recoverable oil and gas reserves owned by the company at a given point in time. It directly impacts the company's production growth outlook. 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.
Integrated business model
Exxon Mobil is the world's largest public integrated oil and gas company by market capitalization. According to our estimates, the company generates around 35-40% of its total free cash flows from downstream refining and chemicals operations. These relatively stable streams of cash flows partially insulates the company from the volatility in global crude oil prices. Because of its integrated business model, the company is able to fund its long-term, capital-intensive upstream projects even during commodity down cycles.
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 to increasing complexity of upstream projects. Various oil companies have embarked on different projects to extract oil such as deepwater, gas to liquids (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 in 2014.
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 U.S., 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
- Oil Supply
- Oil demand
- Oil reserves
- Global political uncertainties
Exxon's average liquid sales price increased from $48.23 per barrel in 2005 to $91 in 2008, before declining to $57.90 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 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 (Organization of Petroleum Exporting Countries) countries. Prices remained around the $100 level in 2012 and 2013 as well.
However, recently, global benchmark crude oil prices have declined sharply on slower demand growth and rising supplies. According to the International Energy Agency's (IEA) estimates, the growth in global oil demand hit a 5-year low in 2014. This coincided with record growth in crude oil supply from non-OPEC countries, primarily the U.S., at 1.9 million barrels per day. As a result, the price of the front-month Brent crude oil futures contract on the ICE declined by more than 48% in the second half of 2014 and is currently trading around $60/barrel.
We now believe that the recent decline in oil prices could sustain for a longer period amid slower demand growth and the diminishing price-controlling power of the OPEC. According to our estimates, annual average crude oil prices (Brent) could bottom out around $80-85 per barrel by 2017 and rise back to a $100 per barrel by 2020.
Trefis considered the following factors for its forecast:
Back to Company Overview
- Long-term forecast
- The Brent crude oil price forecast used in our analysis represents our long-term view of the global supply and demand balance and the trend in finding, development, and production costs. It does not reflect the price volatility that occurs over shorter periods of time due to geopolitical or other reasons. As a frame of reference, over the past two decades, volatility in crude oil prices has averaged about 30% within a single year, which makes it extremely difficult to predict oil prices in the short term.
- Slower demand growth
- Before we discuss the current slowdown in demand growth for crude oil, it is important to understand what makes up crude oil demand. Crude oil is used by the refining and chemical industries to manufacture petroleum products for transportation and industrial uses. These petroleum fuels primarily include gasoline, diesel, jet fuel, kerosene, and fuel oil. They make up almost one-third of the global energy demand. More than 55% of the global demand for petroleum fuels comes from transportation. The remaining 45% of demand comes from the industrial and power generation sectors with the latter contributing just around 5%.
- Most of the growth in demand for these fuels is expected to come from the transportation sector. This is because the global demand from industrial and power sectors is expected to remain largely stable in the long run, as the growth in demand from developing nations is expected to be mostly offset by the decline in developed nations. However, growing economic activity and vehicle ownership in the developing nations is expected to drive significant growth in petroleum fuel demand for transportation, which would be partially offset by improvements in vehicle fuel efficiency and the growing use of alternatives such as natural gas and biofuels in the transportation sector.
- Transportation accounts for more than a quarter of the global energy demand. Liquid petroleum fuels including gasoline, diesel, and jet fuel currently meet almost all of this demand. Growth in economic activity and population along with vehicle fuel efficiency are some of the key drivers for global transportation energy demand. While the demand for petroleum products has been consistently declining in developed economies, primarily due to vehicle fuel efficiency improvements, it has remained buoyant because of increasing economic activity in emerging markets.
- According to our estimates, the BRIC nations (Brazil, Russia, India, and China) contributed almost 85% to the net growth in global crude oil consumption between 2008 and 2013. However, over the last 2-3 years, the growth in economic activity in these countries has slowed down significantly. For example, China’s GDP, which grew at 10.4% in 2010, expanded by just 7.7% last year and the IMF expects the slowdown to persist in the medium term. Similarly, India’s economic growth has also slowed down from 10.3% in 2010 to just 5% last year and it is expected to improve only marginally this year. This moderation in emerging markets’ growth and persistent weakness in the Euro-zone has led the growth in global crude oil demand to hit a 5-year low of around 700 thousand barrels per day (MBD) in 2014.
- Rising non-OPEC supplies
- The production of crude oil from non-OPEC countries has increased sharply over the past few years, primarily because of the spectacular growth from U.S. tight oil production. According to our estimates, more than 85% of the net increase in global crude oil production between 2008 and 2013 has come from non-OPEC countries. Almost all of this increase could be attributed to the growth in tight oil production in the U.S., which has been phenomenal to say the least. From almost nothing in 2005, the country’s crude oil production from horizontal drilling of relatively impervious rocks has grown to around 4 million barrels per day (MMBD) currently, and the outlook remains positive, as the EIA expects the U.S. to produce more than 25 billion barrels of tight oil over the next 30 years.
- Apart from the U.S., Canada’s crude oil production growth outlook is also quite robust. Thanks to abundant oil sands reserves, the country’s total proved reserves currently make up more than 10% of the global proved reserves. This makes it the third largest source of future crude oil supply after Venezuela and Saudi Arabia. The EIA expects crude oil production from Canada to grow at 1.8% CAGR in the long run.
- Diminishing pricing power of the OPEC
- The OPEC’s price controlling power has been severely restricted over the past few years because of internal conflicts and rising government spending by the member states. For example, Saudi Arabia’s crude oil export revenue, which traditionally exceeded the amount required to fund its government expenditures, enabling it to vary production levels in response to global supply or demand developments in the past, could now fall significantly short of its government expenditures if crude oil prices persist at current levels for very long. This is primarily because the Saudi government has substantially expanded its social and economic programs recently in order to diversify its economy and improve living standards. It plans to spend around $228 billion this year, up by 4.3% over last year.
- The IMF estimates indicate that the Kingdom would need to sell its crude oil at an average price of around $106/barrel in order to balance its fiscal budget. Therefore, despite the fact that Saudi Arabia maintains large financial reserves, revenue needs have become a more important consideration for the government before it responds to a situation of a steep decline in crude oil prices – like the one seen most recently – due to faster supply growth or a sustained downturn in demand. This was reflected in the OPEC’s decision in November 2014 to maintain its production target for the first half of 2015 despite the recent sharp decline in crude oil prices.
- Rising finding, development, and production costs
- On the cost side of things, the fact that finding and developing crude oil reserves is getting increasingly difficult has manifested itself quite profoundly on the financial statements of the world’s largest oil and gas companies over the last few years. According to the latest oil and gas reserves study published by EY, finding and development costs that include costs associated with unproved property acquisition, exploration, and development of proved reserves, increased at more than 14% CAGR between 2009 and 2013 to $22 per barrel of oil equivalent (BOE).
- Similarly, production costs, which include production taxes, transportation costs, and production-related general and administrative expenses, also increased at more than 14% CAGR between 2009 and 2013 to $19.60 per BOE. We expect the trend to continue in the long run, primarily because most of the growth in future crude oil production is expected to come from higher marginal cost areas like tight oil in the U.S., oil sands in Canada, and pre-salt reserves in Brazil.
- Statistical model
- We believe that at the heart of the recent volatility in crude oil prices is the sharp increase in non-OPEC supplies relative to the overall demand growth. In order to substantiate this argument, we looked at the correlation coefficient between the annual change in global crude oil demand adjusted for the increase in non-OPEC supply and the change in Brent crude oil prices since 2004. We found the two variables to be highly correlated with a correlation coefficient of 0.8. Statistically, this implies that the spread between global demand and non-OPEC supply growth explains around 64% of the overall volatility in crude oil prices.
- While we agree that correlation does not imply causation, the behavior in oil prices relative to the estimated demand-supply spread does make intuitive sense. For example, when non-OPEC supply growth exceeded the growth in crude oil demand by 1.6 million barrels per day in 2009, crude oil prices fell by almost 37%. Similarly, oil prices increased sharply by almost 29% in 2010 as the growth in demand exceeded non-OPEC supply growth by 1.8 million barrels per day.
- We currently base our long-term crude oil price forecast on a linear regression model, which assumes that the strong correlation between the two variables described above will continue to hold in the long run. Based on this approach, we expect annual average crude oil prices to continue to decline in the short to medium term and bottom out by 2017 and to reach $100 per barrel by 2020.
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
View All Help Topics