Legal Scrutiny: A Key Risk To Exxon Mobil’s Stock Price

by Trefis Team
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Exxon Mobil
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As the world’s largest publicly traded oil and gas company, Exxon Mobil (NYSE:XOM) has always delivered solid investor returns in the form of dividends and capital appreciation backed by its high quality oil and gas reserves and strong managerial execution. However, in the current times, where investors are increasingly paying attention to environmental and social issues, the company and its executives have come under closer scrutiny. In this note, we discuss how legal attention can turn into a downside risk for Exxon Mobil and its valuation.

We currently have a price estimate of $80 per share for Exxon Mobil, which is in line with its market price. You can view our interactive dashboard – Downside Risk To Exxon Mobil’s Price and modify the key drivers to see the impact on the company’s valuation.

Background

The integrated company has been facing strict scrutiny from the US Securities and Exchange Commission (SEC) over the last couple of years for failing to follow proper climate change accounting methods. The agency believed that the company failed to recognize the actual impact of climate change on its assets by refraining from writing down its oil and gas reserves amidst the commodity downfall that started in mid-2014.

In addition to this, the investors had filed a securities class-action lawsuit against the company and some of its executives, including former Chief Executive Officer (CEO) Rex Tillerson, in November 2016. The lawsuit alleged the company to have made material misleading public disclosures, i.e. upholding the value of its oil and gas assets despite declining commodity prices, which led to a drop in the company’s stock price and loss of capital to the investors. The investors believe that at a time when almost all the energy companies were writing down or re-valuing their oil and gas reserves in the face of the oil glut, Exxon Mobil decided to uphold the value of its assets, and continued to reassure its investors about the superior quality of its assets, investment processes and project management.

Impact on Exxon Mobil’s Price

After over two years of battling with the SEC, Exxon managed to get a clean chit from the authority earlier this month with no enforcement action against it on the issue. However, a US district court recently declined the company’s motion to dismiss the lawsuit, allowing the investors to go ahead with the class action lawsuit against the company and its executives.

Although it is difficult to determine the merit of this lawsuit and it might take a while for the final judgement to be declared, we believe that Exxon’s reputation may get impacted, causing a drop in its stock price. Plus, with the increased awareness about environmental and social issues among investors, the company may lose some of its charm of being a safe investment. Accordingly, we have created a downside scenario, wherein we expect Exxon’s 2018 P/E multiple to drop to 15x, as opposed to our current estimate of 17x. In this case, the company’s price estimate is expected to be $70 per share, almost 13% lower than our base case estimate of $80 per share.

 

Do not agree with our forecast? Create your own price forecast for Exxon Mobil by changing the base inputs (blue dots) on our interactive dashboard.

 

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