Exxon Mobil (NYSE:XOM) has reached an agreement with Philippines-based conglomerate San Miguel Corporation (SMC) on the sale of Exxon’s interests in three of its downstream businesses in Malaysia.  The downstream businesses that are being sold include operations in refining, retail and industrial and aviation fuels. Exxon will continue to its exploration and production or ‘upstream’ activities in the country. The deal comes on the back of oil majors such as BP (NYSE:BP) looking to divest some of their downstream assets while other players such as ConocoPhillips (NYSE:COP) and Marathon Oil (NYSE:MRO) have announced complete spinoffs of their downstream arms. Exxon and Chevron (NYSE:CVX) maintain that their downstream activities provide them with a significant competitive advantage.
We have a $93 price estimate for Exxon Mobil, which is at a 25% premium over its current market price.
Signs of limited divestment in the future?
Oil majors have been shifting their focus to the exploration and production (E&P) business as high crude oil prices have made upstream activities much more attractive. Downstream operations, on the other hand, show cyclic returns which are negatively impacted by high oil prices. ConocoPhillips became the latest player to follow the trend of focusing on E&P when it announced a tax free spin off of its downstream businesses a month earlier.
Exxon continues to pursue a vertical integration strategy, but the sale of its Malaysian downstream assets indicates that the company may be looking to sell some of its peripheral downstream assets in the future. Refining businesses are currently at the peak of their up-cycle, helping boost valuations. Bloomberg data estimates that the ‘crack spread’ – the difference between the cost of crude oil and the selling price of its derivatives, is now at its highest point in over 25 years. 
Exxon’s Downstream Businesses
The refined products and marketing and chemicals businesses together contribute to around 16% of our $451 billion market cap estimate for Exxon Mobil. The businesses reported a 20% return in their last cycle and are viewed by the company as a significant source of strength.
Exxon’s sale of Malaysian assets, which includes the 88 kbd Port Dickson refinery and over 500 retail outlets under the brands Esso and Mobil,  will not significantly impact our sales forecasts for its downstream divisions.