VALUATION HIGHLIGHTS

1. Downstream constitutes 85% of the Trefis price estimate for Exxon Mobil's stock.

WHAT HAS CHANGED?

1. XOM Tops Q3 Estimates

High oil prices and skyrocketing natural gas prices helped the company top estimates easily in the third quarter. The company also raised its quarterly dividend by 3.4% to $0.91/share. Q3 revenues surged 52% year-over-year (y-o-y) to $112.1 billion from $73.8 billion in the year-ago quarter. In addition, XOM's Q3 net income totaled a record $19.66B, or $4.68/share, jumping 10% from the previous quarter's $17.9 billion, which also set a profit record at the time. Earnings were driven by record refining volumes, strict cost controls and higher natural gas prices, which offset lower crude prices and weaker industry refining margins.

Q3 production totaled 3.7M boe/day, including a quarterly record from the Permian Basin of nearly 560K boe/day. XOM's gross production from offshore Guyana rose to nearly 360K boe/day. To add to this, Gas realizations increased 22% on European supply concerns and efforts to build inventory ahead of winter, more than offsetting the impact of decreasing crude realizations, which were down 12% on modest supply increases.

Note: Exxon Mobil's FY'21 ended on December 31, 2021. Q3 FY'22 refers to the quarter that ended on September 30, 2022.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

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: Exxon's price realization dropped to almost $56 per barrel in 2019 from $63 per barrel in 2018. It fell further to $35 per barrel in 2020. However, 2021 saw a sharp surge in prices and the figure stood at $62.
  We currently estimate the oil prices to improve gradually in the near term due to the Russia-Ukraine war and subsequently decline as new energy alliances create downward pressure. If realized prices decline to $50 instead of our current forecast of $65 in the long run, then there is a potential downside of 15% from the current stock price estimate.


• Crude Oil and Natural Gas Liquids Produced: The company's production rose more than 7% year-over-year to 1.66 million boed in 2019. However, the figure declined to 1.61 million boed in 2020, and further declined to 1.5 billion boed in 2021.
  The operating margins are significantly volatile with a strong dependence on benchmark prices and total production. With the company having a downstream refining business, these margin fluctuations affect the bottom line significantly. Lower production has a downside risk on cash flows and margins. In line with total production & refining output, a 10% increase at a stable benchmark price is likely to push the stock price upwards by 10-15%.

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.

BUSINESS SUMMARY

Exxon Mobil Corporation (XOM) is the largest of the vertically integrated oil majors. 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 $23 billion in 2021. The geographical diversity of Exxon Mobil's exploration and production (E&P) activities makes 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 4.5 million barrels per day of refining capacity at the end of 2021.

The difference between XOM's reported net revenue and the figures used in our model is primarily because we use core sales revenue (which comes from the sale of hydrocarbons) figures that exclude the revenue it generates from the distribution, processing, and marketing of hydrocarbon and other sources of income.

SOURCES OF VALUE

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 are 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 2021, Exxon Mobil's total proved reserves stood at over 18.5 billion oil-equivalent barrels. This equates to 5 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 average, the company generates around 40% of its total free cash flows from downstream refining and chemicals operations. These relatively stable streams of cash flow partially insulate 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.

KEY TRENDS

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 $30.86 billion in 2015. However, the capex declined to $12 billion in 2021 with the improvement in drilling technologies and horizontal drilling techniques. 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. Going forward, the company aims to retain its capital investment of around $22 billion if the high price environment persists.

Peak oil

It is estimated that a large part of the world's oil reserves has 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 toward 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 by 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 crude. 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.