VALUATION HIGHLIGHTS

1. Downstream constitutes 80% of the Trefis price estimate for Exxon Mobil's stock.
2. Chemicals constitute 12% of the Trefis price estimate for Exxon Mobil's stock.

WHAT HAS CHANGED?

Post Pandemic Recovery

With benchmark prices continuing with their month-long rally in January, the shares of American oil companies have been on a rise.

The average crude oil production price realization by Exxon Mobil has ranged from $45/bbl in 2015, $38/bbl in 2016, $48/bbl in 2017, $62/bbl in 2018 to $56/bbl in 2019. Thus, cash flows from operations ranged from $22 billion in 2016 to $36 billion in 2018.

In Q1 2022, the company reported $54.3 billion in revenues, a 70% (y-o-y) increase - pushed by benchmark prices and transportation demand.

In May 2020, the OPEC and allied nations slashed 10% of global supply (around 9.7 mb/d) due to low demand. Currently, the cartel is increasing production by 0.4 mb/d on a monthly basis until the 5.8 mb/d curtailment gets phased out. Given high benchmark prices, Upstream companies are increasing capital spending.

Exxon Mobil is also committed to maintaining a strong balance sheet and returning capital to shareholders in the coming years. Despite an uncertain demand-supply environment, the company’s 2021 results got a boost from high benchmark prices, assisting deleveraging plans.

Despite the coronavirus pandemic causing a paradigm shift for policymakers by reviving their focus on non-conventional sources, Exxon Mobil’s future cash flows remain highly dependent on crude oil prices as well as high return upstream investments.

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: 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 the $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. The oil glut continued in 2015, causing the commodity prices to fall more than 50% during the year. As a result, Exxon's price realization dropped to almost $45 per barrel in 2015. It fell further to $38 per barrel in 2016 due to the persistently low commodity prices during the year. However, 2017 saw a sharp surge in prices and the figure stood at $49. Average crude pricing in 2018 came in at $55 a barrel. The realized price increased slightly to $62/bbl in 2021.
  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 relaized prices decline to $50 instead of our current forecast of $70 in the long-run, then there is a potential downside of 20% from the current stock price estimate.


• 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. However, despite depressed commodity prices in 2015, the company's production rose more than 8% to 1.62 million boed in 2015. It continued to grow gradually to 1.63 million boed in 2016, despite the depressed commodity prices. However, the figure declined to 1.56 million boed in 2017. Exxon increased supply in 2018 - pushing output to 1.8 billion BoE/d. In 2021, total liquids production was 1.5 billion boed.
  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 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, 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 $23 billion in 2021. 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 4.5 million barrels per day of refining capacity at the end of 2021.

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 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 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 flows 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 technique. 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 $25 billion if the high price environment persists.

Peak oil

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 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.