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Investment Overview for Exxon Mobil (NYSE:XOM)
WHAT HAS CHANGED?
- Lower oil prices to weighing on profits
Lower oil prices have a significant impact on Exxon’s upstream earnings. According to the company’s latest annual SEC filing, a $1 per barrel decline in the full-year weighted-average realized price of crude oil results in approximately a $350 million negative impact on its upstream net earnings. This means that depending upon the overall lag (between fluctuations in spot prices and their impact on Exxon’s earnings because of the average tenure of pricing contracts), if oil prices (Brent) average below $60 per barrel for the full year, Exxon’s upstream earnings could decline by as much as $14 billion or 50%, compared to last year. We currently expect crude oil prices (Brent) to average below $50 per barrel this year and increase at a decreasing rate to over $90 per barrel by 2022. Our current forecast for Exxon’s average price realization and profitability are driven by this crude oil price forecast.
- New projects boosting production
Exxon’s net upstream (oil and gas) production has been relatively flat over the past decade. It actually declined slightly from over 4.21 million barrels of oil equivalent per day (MMBOED) in 2004, to 3.97 MMBOED in 2014. This has also been the case with most of the other large integrated oil and gas players, as they have been unable to add enough new production to more than offset natural field declines. However, going forward, Exxon expects to ramp up its net upstream production to approximately 4.3 MMBOED by 2017 as it progresses on its plan to add roughly 0.8 MMBOED (assuming an average 4% natural decline in production every year) of new production between 2014 and 2017. The company is banking on a number of new project start-ups to achieve this target. Most of these projects, including the liquefied natural gas (LNG) project in Papua New Guinea, the Kearl oil sands and the Cold Lake Nabiye expansion projects in Canada, and the development of Sakhalin-1′s Arkutun-Dagi field in the Arctic, have either come online recently, and are currently in the ramp-up stage, or are scheduled to start-up in the near future. These new projects boosted Exxon’s net liquids production by 0.132 MMBOED during the second quarter, and are expected to fuel production growth for the rest of the year as well.
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 $57.86 in 2009 during the economic downturn. The global economy recovered in 2010 pushing prices to $74.04 for the year. Prices continued to rise in 2011 as well, increasing to $100.79 per barrel. However, since 2011, oil prices remained relatively flat around a $100 per barrel mark, until 2014. In 2014, the oil markets became oversupplied because of the rapid increase in production from tight oil reserves in the U.S., and prices crashed during the second half of the year. Consequently, Exxon's Average Crude Oil and NGLs Sales Price declined to almost $87 per barrel in 2014. 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, Exxon's Average Crude Oil & NGLs Sales Price could bottom out around $46 per barrel by the end of this year and then gradually rise to $72 per barrel by 2022. 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 Exxon's realizations reach $120/barrel by 2022, 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 2014, the figure declined to 1.50 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 1.74 million barrels per day by the end of our forecast period. However, if the production of liquids falls below 2014 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 Exxon Mobil, 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 2014. 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 2014.
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 2014, Exxon Mobil's total proved reserves stood at over 25.2 billion oil-equivalent barrels (both developed and undeveloped). This equates to more than 17.4 years of reserve life at last year's average production rate. 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, on an average, the company generates around 30-35% 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 $17.62 billion in 2005 to over $38.50 billion in 2014. This is a clear indication of how difficult the oil drilling business has become over the years. This has been primarily due to the 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 sustained low crude-oil price environment has led to Exxon re-evaluating its capital expenditure strategy. The company plans to reduce capex to around $34 billion in 2015 and below $34 billion in 2016 & 2017.
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 have 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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