Exxon’s Stock Revised To $84 Based On Lower Realizations And Capital Spending Cuts

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Exxon Mobil

Exxon Mobil (NYSE:XOM) has been hit hard by the current downtrend of low crude oil prices and its average price realizations in both upstream and downstream segments have suffered as a result. Consequently, we believe that Exxon Mobil’s Trefis adjusted total revenue for the year 2015 will decline by more than 30% as compared to last year and amount to $362.2 billion (Calculated revenue figure not subjected to any intersegment elimination). However, we believe that a gradual recovery in oil prices in subsequent years will lead to a period of growth in Exxon Mobil’s revenues and the company’s revenues will be close to $520 billion by the end of our forecast period. We have revised our price target for Exxon Mobil to $84, implying a premium of more than 5% to the market. In this piece, we try to analyze some of the key drivers we have used in our valuation of Exxon Mobil.

See Our Complete Analysis For Exxon Mobil

Oil Prices Will Hurt Exxon Mobil’s Average Realizations Per Barrel In Near Term

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Exxon Mobil’s upstream operations contribute more than 63% to the stock’s value, according to our estimates. We calculate that the company earned close to $100 billion in adjusted upstream revenues in 2014. (We only consider revenues derived from Exploration & Production activities and eliminate Midstream revenues from company reported Upstream numbers) However, the extended period of low crude oil prices has hurt the company’s upstream operations in 2015. Even though Exxon Mobil’s liquids production grew by 9% in 1H-2015 compared to 1H-2014, the company’s average liquids realizations were 49% lower during the same period. [1] The average crude oil price has remained below $60 for the year to date and we believe that prices will not experience any significant recovery for the rest of the year due to the ongoing production related stand-off between OPEC and Non-OPEC producers. Consequently, we believe that Exxon Mobil’s Average Crude Oil and NGL Sales Price will amount to less than $50 for the year 2015 and will subsequently witness a gradual recovery throughout our forecast period.

A similar story has played out in Exxon Mobil’s downstream operations and Trefis estimates that the company’s Average Refined Products and Chemicals Revenue per Metric Ton has dropped more than 30% for the first six months of 2015 as compared to the year ago period. [1] We believe that this figure will remain just below $125 for 2015 before staging a recovery in later years. As a result of this rapid decline in realizations in both upstream and downstream sectors, we believe that Exxon Mobil’s total revenue for the year 2015 will decline by 33% and amount to $362.2 billion. Please note that the calculated revenue figure has not been subjected to any intersegment elimination.

Exxon Curtailing Capital Spending Amid Lower Oil Prices

Exxon Mobil’s net upstream capital expenditures have increased substantially over the past fews years as the company has tried to reverse the decline in production by investing in new upstream growth projects. Its net upstream capital expenditures (including exploration costs) increased from $20.7 billion in 2009 to $32.7 billion in 2014. [1] However, the recent decline in global crude oil prices has forced Exxon Mobil to increase its focus on optimizing capital costs in order to maximize its return in the current commodity down cycle. The company had an overall capital spending budget of $38.5 billion in 2014, but has slashed its 2015 capex budget target to $34 billion. [2] Exxon Mobil has been religiously following this target and the company’s total half yearly capital and exploration expenditures have amounted to $16 billion, down 12% from the prior year period. [1] Additionally, the management believes that annual capital and exploration expenditures will remain below $34 billion till 2017. [2]

Going forward, we expect Exxon Mobil’s Net Upstream CapEx to decline in absolute terms for 2015, as the company continues to adhere to its capital investment target. However, the figure as a percent of revenue will go up due to the significant decline in 2015 revenues. Beyond 2015, we expect Capex as a percent of Upstream Revenues to gradually decrease throughout our forecast period. This is because even though the CapEx will grow modestly in absolute terms as the company ramps up investments in new projects, the growth in company revenues will be greater than the growth in CapEx because of the gradual recovery in oil prices.

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Notes:
  1. Exxon Mobil’s SEC Filings [] [] [] []
  2. Exxon Mobil to Reduce Capital Spending 12% in 2015, March 4, 2015, Wall Street Journal [] []