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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 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 $97.5 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 and remain relatively stable around that level beyond that. 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 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 U.S. 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 to 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 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
- 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 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 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 $100 level in 2012 and 2013 as well. We believe that growing demand from emerging countries would continue to push oil prices higher.
Trefis considered the following factors for its forecast
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- Long term forecast
- The world oil price estimate used in our analyses represents a long term balance between supply and demand. It does not reflect the price volatility that occurs over shorter periods of time. As a frame of reference, over the past two decades, volatility in crude oil prices has averaged about 30% within a single year.
- Rising exploration and development costs
- Oil exploration and development costs have been rising sharply over the past few years. This is primarily because reserves are getting tougher to locate and develop, and cost of labor and services is also on a rise as more and more challenging oil reserves are being developed. According to Ernst & Young analysts, oil exploration costs per barrel rose sharply by almost 30% in 2012, from around $17 in 2011 to almost $22. Apart from this, production costs also rose as much as 6% globally in 2012. As a result, total exploration and development spending by oil companies surged by 20% in 2012.
- However, despite higher spending, global oil reserves rose by just 3% in 2012, while production rose just 2%. Annual capital spending by the oil and gas industry has more than tripled in the past ten years to $550 billion in 2011, while the amount of oil produced per dollar of investment has consistently declined. As more and more oil is produced from costlier sources, including bitumen, tight oil and shale oil, supply side pricing pressures are expected to increase.
- Growing demand from emerging markets
- We expect most of the growth in oil consumption to come from the emerging markets such as China and India, where growing populations and rising income levels make a solid case for higher energy requirements. According to the recent statistical review of world energy completed by BP, China and India accounted for nearly 90% of the net increase in global energy consumption in 2012. On the other hand, the consumption of crude oil by the developed countries that are a part of the Organization for Economic Co-operation and Development or OECD nations, declined by 1.3%, which was a sixth decrease in the last seven years. OECD nations now account for just above 50% of the global demand for crude oil.
- As China's economy moves from dependence on energy-intensive industrial manufacturing to a more service-oriented economy, the transportation sector is expected to become the most important source of growth in liquid fuels use. The EIA expects China’s liquids consumption to double compared to the 2010 levels and exceed that of the United States by 2035, to become the largest consumer of liquid fuels globally.
- We therefore expect emerging economies to primarily fuel future demand for oil. The EIA expects world liquids fuel consumption to increase by almost 33% by 2040, virtually all of it coming from the non-OECD countries, as strong economic growth increases consumption in the transportation and industrial sectors. The agency expects the global share of non-OECD demand for crude oil to reach 60% by 2040.
- Non-OPEC supply on the rise
- We expect international crude prices to increase at a very conservative 1.5% CAGR in contrast to almost 15% CAGR seen over the last decade, because we believe that rising oil production form non-OPEC countries, especially the U.S., Canada, Kazakhstan and Russia will reduce the pricing power long held by the OPEC countries. These countries together accounted for ~29% of the global crude oil supply or 51% of global non-OPEC crude oil supply in 2012.
- Crude oil production from the U.S. has been rising sharply over the past few years as high oil prices have allowed energy companies to invest billions of dollars in developing the tight or shale oil reserves in the country. In 2012, crude oil production from the U.S. grew by ~14% to reach around 9 million barrels of oil per day. It was the biggest driver of non-OPEC supply growth last year. In the U.S., unproved technically recoverable resources of tight oil are estimated at 58 billion barrels. The EIA expects the U.S. to produce around 26 billion barrels of tight oil from the Bakken/Three Forks, Eagle Ford, Woodford, and other tight oil plays over its 30-year projection period.
- Canada's production growth outlook is more robust than the U.S. Thanks to the abundant oil sands reserves; the countries 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 production from Canada to grow at 1.8% CAGR in the long run. Liquids production in Canada comes from three principle sources: bitumen from the oil sands of Alberta; crude oil in the broader Western Canada Sedimentary Basin (WCSB); and offshore oil fields in the Atlantic Ocean. Production from oil sands accounted for more than one-half of Canada's oil output in 2011, a proportion that has increased steadily in the recent decades.
- Much of Kazakhstan’s production growth is expected to come from the Kashagan and Tengiz oil fields in the Caspian Sea. In particular, Kashagan has been described as one of the largest fields discovered in the past 30 years outside the Middle East and is estimated to hold as many as 35 billion barrels of oil, of which around 13 billion barrels are likely recoverable. After the completion of the second phase of the project, it is expected to produce oil at a plateau rate of around 1.5 million bpd, which is equivalent to the average rate of crude oil production recorded by all of Exxon’s subsidiaries in 2012. Commercial production from the field started in late 2013, after being delayed by almost a decade due to several technical issues.
- Russia's petroleum production is expected to gradually shift from western Siberia to eastern Siberia because of declines in existing, mature oil fields and the opportunity to increase exports to China and other Asian markets, including India and Japan. At the same time, there is significant potential for tight oil development in western Siberia to at least offset declines from existing fields. The geology of areas like the Bazhenov shale in the Western Siberian Basin is conducive to tight oil development. An estimated 75 billion barrels of technically recoverable shale oil resources may lie in the Siberian Bazhenov shale formation. While taxation and other issues currently impede significant expansion, Royal Dutch Shell and Gazprom have an agreement to develop the Bazhenov resource that could result in long term commercial production.
- Relatively stable OPEC supply share
- Regardless of other supply developments that have recently garnered considerable market attention, including tight oil in the United States and bitumen from oil sands and tar sands in Canada, OPEC petroleum liquids production continues to be critical for world oil markets, as the OPEC nations still hold almost 73% of the global proved oil reserves.
- In 2012, the OPEC nations contributed 43.2% to the global crude oil production. We expect the share of OPEC supply to remain relatively constant around 40-43% in the long run, primarily because of the improved production outlook from the Middle East OPEC countries of Saudi Arabia, Iraq, Iran, Kuwait and Oman. Together these countries contribute ~60% to the total OPEC supply.
- Saudi Arabia's oil revenues have traditionally exceeded the amounts required to fund its government expenditures, enabling it to vary production levels in response to global supply or demand developments over the past 25 years without significant concern about the revenue implications of such actions. However, more recently, social and economic programs funded by the Saudi government have expanded substantially. While Saudi Arabia maintains large financial reserves, revenue needs may become a more important consideration as the government considers its future responses to a situation of persistent high growth in supply from other key OPEC or non-OPEC producers, or a sustained downturn in demand.
- Iraq has established an official oil production target of 12 million barrels per day in 2017, a huge increase compared with its 2012 production level of 3 million barrels per day. It is unlikely to come close to reaching that target, which would exceed the amount of global incremental liquids production needed to meet projected global demand growth to 2017 in the International Energy Outlook 2013. Political disputes and infrastructure limitations are likely to continue hampering output growth in the short run. In addition, terrorism, the poor investment climate and other problems could limit Iraq's production over the projection period. However, if those problems can be overcome, major improvements in production and export infrastructure could enable Iraq to sustain high production growth rates through 2040.
- Iran's liquids production, which reached a peak of 6.1 million barrels per day in 1974, has been well below that level since 1979. After averaging an estimated 4 million barrels per day from 2001 to 2010, Iran's production has declined further in 2012. A series of international sanctions targeting Iran's oil sector have led foreign companies to cancel a number of new projects and upgrades at existing projects. Iran faces continued depletion of its production capacity, as its fields have relatively high natural decline rates (between 8 and 13% per year). Additional factors hampering investment include unfavorable foreign investment requirements, underinvestment, and gaps in professional expertise and technology for certain projects. U.S. sanctions on financial institutions that handle payments made for oil exports from Iran, coupled with actions by the European Union to cease imports from Iran and prevent it from accessing insurance from European Union companies for its oil shipments caused a further reduction in Iran's oil exports in 2012. The country’s crude oil production fell 16% y-o-y in 2012 on these concerns. However, it has been able to reach a breakthrough agreement recently, which could potentially provide with some sanctions relief in exchange for moderating its nuclear program. Iran’s oil minister recently announced that the country’s production would be ramped up to 4 million barrels per day as soon as the sanctions relief comes about. This is a positive sign for global crude supply as it could potentially lead to even higher production levels from Iran in the long run.
- Kuwait's current crude oil reserves and production are in mature fields, but prospects could improve with the success of Project Kuwait, a plan proposed in 1998 to attract foreign participation and increase oil production capacity from four northern oil fields: Raudhatain, Sabriya, al-Ratqa, and Abdali. The four fields contain a mix of heavy and light oil resources. Additionally, it may be possible to boost oil production in Kuwait from the partitioned neutral zone (PNZ) that the country shares with Saudi Arabia, which could hold as much as 5 billion barrels of oil. Similarly the ongoing enhance oil recovery program at Oman is also expected to driver higher supplies from the OPEC countries.
- Increasing fuel efficiency and the growth in liquid fuels alternative
- However, declining gasoline consumption in the developed world due to improving fuel efficiencies and the growing use of electric and natural gas fueled vehicles, coupled with slower than estimated demand growth from emerging markets could potentially result in lower crude oil prices. The EIA expects total liquids fuel consumption in the U.S. to decline slightly over the 30-year period ending 2040, as the agency expects gains in vehicle efficiency to more than offset increased transportation demand in the developed world.
- On the other hand, high crude oil prices, government mandates on the use of biofuels due to the increased focus on reducing carbon emissions as well as improving energy security and technology advancements driving cost reductions are some of the key factors driving the rapid growth in the biofuels market. More than 50 countries, including some developing countries as well, have now adopted biofuels blending mandates and targets such as the Renewable Fuel Standard in the U.S. In the U.S., biofuels make up more than 7% of the total transportation fuel consumption. Higher biofuels adoption could also impact crude oil prices negatively in the long run.
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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