What’s Driving Our $96 Per Share Price Estimate For Exxon Mobil?

Exxon Mobil (NYSE:XOM) is the world’s largest publicly traded international Oil and Gas Company. It generates annual sales revenue of more than $410 billion, with a consolidated adjusted EBITDA margin of ~15% by our estimates. We recently revised our price estimate for Exxon Mobil to $96/share, which values it at around 13.2x our 2015 full-year GAAP diluted EPS estimate of $7.29 for the company.  Below, we discuss some of the key trends driving our price estimate for Exxon Mobil.

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Lower Oil Prices

Lower oil prices are expected to have a significant impact on Exxon’s upstream earnings this year. 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 $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) continue to remain around the current $59 per barrel level, Exxon’s upstream earnings could decline by as much as $14 billion or 50%, compared to last year. ^[1]

However, we believe that this is the extreme scenario and is highly improbable unless the global demand for crude oil falls sharply. By our estimates, the key reason behind the recent volatility in oil prices is the sharp increase in non-OPEC supplies relative to the overall demand growth. A large chunk of this growth in non-OPEC supplies has come from soaring tight oil production in the U.S. However, given the sharp decline in drilling activity in the U.S. in response to lower oil prices, we expect the rate of oil production growth from the country to slow down significantly this year, which should provide a meaningful boost to oil prices in the second half. Accordingly, we have revised our forecast for Exxon’s exploration and production (E&P) EBITDA margin based on the combined effect of $85 per barrel crude oil price estimate (Brent) for the full year, and a continued improvement in its sales volume-mix. ^[2]

Improving Sales Volume-Mix

Exxon’s total hydrocarbon production can be broadly split into two categories – liquids, which include crude oil, natural gas liquids, bitumen, and synthetic oil, and natural gas. Liquids are generally more profitable to produce than natural gas because of higher price realizations.  Last year, Exxon sold liquids at an average price of around $91 per barrel, compared to just around $46 realized per barrel of oil equivalent (BOE) of natural gas. This is the reason why the company has been trying to improve the proportion of liquids in its production mix over the past couple of years. Last year, Exxon’s total liquids production increased by over 44,000 barrels per day, or almost 2% y-o-y, excluding the impact of the Abu Dhabi onshore concession expiry. On the other hand, its natural gas production declined by around 690 million cubic feet per day, or almost 5.8% y-o-y. ^[3]

As a result, the percentage contribution of liquids to Exxon’s total hydrocarbon production increased to 53.2% last year, up from 51.5% and 52.7% in 2012 and 2013, respectively. Although, lower weather-related demand in Europe exaggerated the decline in Exxon’s natural gas production in 2014, we expect the overall trend of improving volume-mix to manifest itself in the company’s results this year as well. This is expected to improve its average price realization per barrel of oil equivalent and potentially help reduce the impact of lower oil prices on its unit profitability. Last year, despite lower price realizations, Exxon’s upstream unit profitability increased 8% over 2013 to $19.47 per barrel of oil equivalent. ^[4]

Declining Capital Expenditures

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 $42.4 billion in 2013. This is a clear indication of how difficult sustaining and growing the oil and gas production business has become over the years. However, 2013 was a peak year of capital expenditures for the company and it spent just $38.5 billion on leasing rigs, floating oil platforms, installing pipelines, and repairing oil-refineries last year. During the 2014 annual Analyst Day presentation, Exxon guided for its capital expenditures to decline further to an average of less than $37 billion annually between 2015 and 2017.

We believe that with the recent decline in oil prices, the company could further cut back its spending on some not-as-profitable upstream projects to conserve cash for shareholder distributions like its peers. However, during the fourth quarter earnings conference call, the company officials maintained their medium-term capex guidance and said that they will provide any updates to it as a part of the upcoming annual Analyst Day meeting next month. ^[5]  Therefore, we will soon gain further clarity on this topic.

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1. Exxon Mobil 2013 10-K Filing, sec.gov [↩]
2. U.S. Oil Rig Count Falls To Lowest Since Dec. 2011, reuters.com [↩]
3. Exxon Mobil 2014 Q4 Earnings Supplement Data, exxonmobil.com [↩]
4. ExxonMobil Earns $32.5 Billion in 2014, exxonmobil.com [↩]
5. Exxon Mobil 2014 Q4 Earnings Call Webcast, exxonmobil.com [↩]