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Investment Overview for Exxon Mobil (NYSE:XOM)
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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.
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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.
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Crude Oil and Natural Gas Liquids (NGL) production is the most valuable division for the firm for the following reasons:
Low 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 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.
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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.
Production costs
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.
Peak oil
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 Crude Oil and Natural Gas Liquids Produced
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${forecast} refers to the quantity of liquids produced by Exxon Mobil's consolidated subsidiaries in terms of barrels per day.
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Total liquids produced decreased from 1.76 million barrels per day in 2010 and to 1.52 million barrels per day in 2012. We expect the total liquid production to increase over the course of our forecast period.
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Trefis considered the following factors for its forecast
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- Major projects starting in different countries
- Exxon has recently announced a joint venture with Russian state-owned oil major Rosneft to explore and develop tight oil reserves in the Russian Arctic region. Drilling is expected to commence in 2013.
- President Obama earlier in the year claimed that his administration had granted over 400 permits for onshore and offshore drilling after new safety standards were put in place following the BP oil disaster. As a result, oil companies including Exxon are scrambling to increase their acreage in the Gulf of Mexico. The region accounts for around 18% of the total US crude oil reserves.
- Exxon recently increased its acreage in the Bakken through an asset swap plus cash deal with Denbury Onshore, and is looking to develop its vast acreage in the region. The Bakken oil field in North Dakota could be the largest oil discovery in the US in the past 40 years with a reserve potential of upto 24 billion barrels.
- The company recently announced that it has started oil production from the Angola Kizomba Satellite Phase I project. The Kizomba Satellites initial phase is expected to ultimately produce 100,000 barrels of oil per day, and recover a total of approximately 250 million barrels from the Mavacola and Clochas fields, located 95 miles off the coast of Angola.
- Increasing LNG production capacity
- Exxon has an extensive global position in LNG with interests in liquefaction capacity of approximately 65 million tonnes per year through ventures in Qatar and Indonesia. This capacity has recently increased significantly with the start-up in Qatar of the four largest producing trains in the world.
- The company is progressing new LNG projects to capitalize on the world’s growing gas demand. In Asia Pacific, it has sanctioned the Gorgon Jansz and PNG LNG projects, which will significantly increase its volumes into Asia.
- Additional LNG projects are being pursued in Australia and West Africa. In 2010, another 2 billion cubic feet per day of regasification capacity will come online with the opening of the Golden Pass Terminal near Sabine Pass, Texas.
- Advances in extraction technology
- Improvements in specialized technologies such as Arctic technology, deep water drilling and production systems, heavy oil and oil sands recovery processes, unconventional gas and oil production and LNG have improved the company's extraction capabilities in previously inaccessible regions such as the Arctic, and has also provided access to previously undeveloped reserves among existing assets.
- As of 2011, Exxon Mobil's consolidated subsidiaries had undeveloped reserves of 7,833 million barrels on an oil-equivalent basis. Access to these reserves through technological advances would cause an increase in liquids production.
- Discovery of oil reserves
- As of 2011, global proven oil reserves stood at 1652.6 billion barrels, compared to 1267.4 billion barrels in 2001, which represents an increase of over 30%. As major oil companies discover more oil reserves both onshore and offshore, oil production is expected to continue its upward trend.
- Higher price of oil
- The increase in oil prices in 2010 and 2011 should help companies generate resources to finance exploration and production projects in deep water and other costly resources. This should help in increased production in the long term.
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- Economic uncertainty
- A decline in consumer disposable income and slower investment spending is likely to weigh on oil production. According to data collected by the EIA, US proved reserves have declined by 10% over the 5 year period 2004-2008. During the same time, the reserve base in federal offshore areas has declined by about 17% during the same period.
- Costs of production
- Oil production involves heavy upfront costs associated with exploring and developing oil fields. This is in addition to the lifting costs incurred.
- While technological improvements have made things easier and oil discoveries cheaper, costs nonetheless have been going up sharply in the recent years.
- According to the US Energy Information Administration (EIA) data, average finding costs worldwide were $11.38/boe between 2003-2005. This figure rose to $18.31/boe between 2007-2009. In many cases the costs of production become so great that it does not make sense to proceed with oil field developments and thus impact total oil production globally.
- OPEC’s involvement
- OPEC seeks to create more favorable oil prices for its members by assigning production quotas to its member nations with the aim of limiting the supply of crude oil in the market.
- OPEC member countries produce nearly 42% of the world’s crude oil and control over 80% of the world’s oil reserves. Amongst all the oil producing nations only OPEC countries have significant spare oil production.
- Environmental impact
- The US transportation sector accounts for 33% of the total carbon dioxide emissions. The remaining two thirds are attributable to industries and to industrial and commercial buildings.
- In 2011, the US consumed approximately 134 billion barrels of gasoline. This was 6% lower than the 2007 record high of 142.4 billion barrels.
- Vehicles which run on alternative fuels such as CNG (compressed natural gas), ethanol, hydrogen fuel and electricity, while growing rapidly, still account for a small percentage of the total. However, there is expected to be a larger shift towards alternative fuel vehicles in the long term, as consumers and countries look to reduce emissions and their exposure to oil price volatility.
- Geopolitical tensions / terrorism
- Over 50% of the world’s oil reserves are currently in the Middle East. In recent history, the region has faced a lot of geopolitical instability and terrorism.
- Oil pipelines are commonly targeted by terrorists. Any related uncertainty is likely to impact oil production.
- Political upheavals in 2011 have also contributed to price instability. Libya for instance is estimated 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.
Back to Company OverviewHow 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.
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