ExxonMobil XOM
by Justin Perucki
Thesis 04-10-2006
We think ExxonMobil's massive scale and unrelenting pursuit of operational efficiency create a competitive advantage that the firm can bank on, no matter what path energy prices take.
Joining in the oil megamergers of the late 1990s, Exxon and Mobil combined to form the company we know today. Any way you slice them, the figures are impressive. In 2005, ExxonMobil registered revenue of $359 billion and staggering profits of $36 billion, greater than any other publicly traded firm in history. With more cash than debt and an 87-year-old AAA credit rating, the company's financial strength is almost unrivaled.
Underpinning this record of financial success is a culture of operational excellence and a conservative, disciplined approach to capital allocation, which former CEO Lee R. Raymond labeled as "boringly consistent." Compared with closest peers BP BP and Royal Dutch Shell RDS.A, downstream refining, petrochemical, and lubricant operations make up a larger chunk of ExxonMobil's business. Although we don't view these industries as having attractive long-run economics, the scale and degree of integration that ExxonMobil achieves create opportunities for logistics efficiencies and product-flow optimization upon which the firm capitalizes. This allows the company to generate consistently superior returns.
In the oil field, ExxonMobil is making large investments that will shift its oil and gas production mix. While there's a lot of life left in large yet mature producing areas in North America and Europe, firm output in these geographies will steadily give way to rising production in more politically sensitive regions like West Africa, the Middle East, and Russia. Carving out its stake in the burgeoning global market for liquefied natural gas, ExxonMobil is exercising its forte and building a vast, integrated network.
Despite its industry-leading position, ExxonMobil has several challenges ahead. Its hulking size means growth will be increasingly harder to come by. In looking to work with foreign governments and national oil companies, the firm must ensure its status as a valued partner. Often targeted as environmental enemy number one, its environmental risks will not disappear anytime soon.
Despite being a price taker in a commodity market, ExxonMobil gets our wide moat rating because it consistently earns returns that exceed both its own cost of capital and the returns posted by its peers by a significant margin over the course of the cycle.
Valuation
We're raising our fair value estimate for ExxonMobil to $75 from $64. This adjustment primarily reflects higher projections for near-term oil and gas prices. We think current oil and gas prices are unsustainably high and assume they will decline over the next two years. We incorporate average benchmark oil prices of $60 in 2006, $47 in 2007, $37 in 2008, $38 in 2009, and $40 in 2010. At its recent analyst day, management raised its target annual production growth rate to 3.5% from 3%, but we are sticking with our projected production growth rate of slightly less than 3% at this time. At our fair value estimate, the stock would yield 1.7%, much less than some of its peers. However, ExxonMobil continues to return value to its shareholders by aggressively buying back its stock. In 2005, the firm repurchased over $17 billion shares on a net basis. At the recent price of around $62 per share, we think ExxonMobil represents an outstanding value in the oil patch. All else equal, if we assume oil and gas prices are 10% lower, our fair value estimate would decline to $70 per share. Likewise, if we assume oil and gas prices are 10% higher, our fair value estimate would increase to $80, all else equal.
Risk
The largest risk is a lengthy downturn in energy prices, which could spring from slowing economic growth or oversupply. Exxon's recent spats with Venezuela further reiterate the significant political risk the firm faces, but the firm's diverse portfolio serves as a mitigating factor. Environmental risks and unplanned downtime must also be considered. Due to the firm's strict focus on return on capital and solid track record of generating excess returns on capital, we are not as concerned about overinvestment risk with this company as we are with other firms in the oil patch.
See Previous Analyst Reports
Close Competitors TTM Sales $Mil Market Cap $Mil
ExxonMobil 370,680 378,226
* BP PLC ADR 285,059 259,460
* Royal Dutch Shell PLC ADR A 265,190 219,895
* Chevron 198,200 132,946
* Total SA ADR 152,422 171,378
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 12-31-2004
Strategy
ExxonMobil is focused on generating best-in-class returns on capital. To achieve its lofty profitability targets, the company relies on its size and ability to integrate operations to squeeze efficiencies from its businesses. Investment in technology plays a large role in cutting costs and increasing proven reserves. To offset declining hydrocarbon production in mature areas, ExxonMobil is plowing cash into large projects in the Middle East, West Africa, and Russia. Downstream, ExxonMobil is expanding its presence in liquefied natural gas and improving the reliability of its refining operations.
Management & Stewardship
After spending his entire 42-year career with ExxonMobil, Lee R. Raymond retired at the end of 2005. Former president Rex Tillerson is now in charge. Known for his fierce negotiation skills, we view Tillerson as a worthy successor, and expect the same conservative, high return strategy that characterized Raymond's tenure to continue to be the Exxon mantra. We don't have 2005 compensation figures yet, but in 2004, Raymond's pay was just over $10 million, including salary, bonuses, and other compensation. He also received $28 million worth of restricted stock, but no stock options. Raymond's total compensation is among the highest in the energy sector, but he also headed the company that had the largest profits in the world last year. As a group, executives and directors own or have options on less than 0.4% of the total outstanding shares, not uncommon for a company of this age and size. While we think the company's financial disclosure is a bit weak and we'd prefer to see the chairmanship split from the CEO role, it would be very tough to argue that management hasn't provided good stewardship over time.
Profile
The product of the 1999 marriage of energy giants Exxon and Mobil, ExxonMobil is the largest firm in the oil and gas industry and among the largest companies on the planet. ExxonMobil does business in almost every segment of the oil industry. In 2005, hydrocarbon production and oil refining capacity amounted to 4.2 million and 6.4 million barrels per day, respectively. ExxonMobil has proven reserves of 22 billion barrels of oil equivalent and a presence in more than 200 countries.
Growth
Given the firm's massive size and strict profitability criteria, growth will be moderate at best. Management is not afraid to hold cash and sell noncore assets at peak cyclical conditions. Over the long term, growth will reflect commodity price inflation and the firm's ability to pull more resources from the ground.
Profitability
ExxonMobil has done a stellar job of cutting costs and finding efficiencies after the merger. Its returns on assets, which are consistently higher than peers', are the envy of the oil patch. Returns have also been remarkably stable, considering the cyclical nature of oil. The firm's massive economies of scale and management's knack at effectively allocating capital ensure sector-leading returns over the industry cycle.
Financial Health
Having an AAA credit rating for almost 90 years and one of the healthiest balance sheets in the industry makes ExxonMobil an attractive partner. The firm has more cash than debt, while debt as a portion of debt plus equity amounts to only 7%. The firm had $33 billion in cash at the end of 2005.
by Justin Perucki
Thesis 04-10-2006
We think ExxonMobil's massive scale and unrelenting pursuit of operational efficiency create a competitive advantage that the firm can bank on, no matter what path energy prices take.
Joining in the oil megamergers of the late 1990s, Exxon and Mobil combined to form the company we know today. Any way you slice them, the figures are impressive. In 2005, ExxonMobil registered revenue of $359 billion and staggering profits of $36 billion, greater than any other publicly traded firm in history. With more cash than debt and an 87-year-old AAA credit rating, the company's financial strength is almost unrivaled.
Underpinning this record of financial success is a culture of operational excellence and a conservative, disciplined approach to capital allocation, which former CEO Lee R. Raymond labeled as "boringly consistent." Compared with closest peers BP BP and Royal Dutch Shell RDS.A, downstream refining, petrochemical, and lubricant operations make up a larger chunk of ExxonMobil's business. Although we don't view these industries as having attractive long-run economics, the scale and degree of integration that ExxonMobil achieves create opportunities for logistics efficiencies and product-flow optimization upon which the firm capitalizes. This allows the company to generate consistently superior returns.
In the oil field, ExxonMobil is making large investments that will shift its oil and gas production mix. While there's a lot of life left in large yet mature producing areas in North America and Europe, firm output in these geographies will steadily give way to rising production in more politically sensitive regions like West Africa, the Middle East, and Russia. Carving out its stake in the burgeoning global market for liquefied natural gas, ExxonMobil is exercising its forte and building a vast, integrated network.
Despite its industry-leading position, ExxonMobil has several challenges ahead. Its hulking size means growth will be increasingly harder to come by. In looking to work with foreign governments and national oil companies, the firm must ensure its status as a valued partner. Often targeted as environmental enemy number one, its environmental risks will not disappear anytime soon.
Despite being a price taker in a commodity market, ExxonMobil gets our wide moat rating because it consistently earns returns that exceed both its own cost of capital and the returns posted by its peers by a significant margin over the course of the cycle.
Valuation
We're raising our fair value estimate for ExxonMobil to $75 from $64. This adjustment primarily reflects higher projections for near-term oil and gas prices. We think current oil and gas prices are unsustainably high and assume they will decline over the next two years. We incorporate average benchmark oil prices of $60 in 2006, $47 in 2007, $37 in 2008, $38 in 2009, and $40 in 2010. At its recent analyst day, management raised its target annual production growth rate to 3.5% from 3%, but we are sticking with our projected production growth rate of slightly less than 3% at this time. At our fair value estimate, the stock would yield 1.7%, much less than some of its peers. However, ExxonMobil continues to return value to its shareholders by aggressively buying back its stock. In 2005, the firm repurchased over $17 billion shares on a net basis. At the recent price of around $62 per share, we think ExxonMobil represents an outstanding value in the oil patch. All else equal, if we assume oil and gas prices are 10% lower, our fair value estimate would decline to $70 per share. Likewise, if we assume oil and gas prices are 10% higher, our fair value estimate would increase to $80, all else equal.
Risk
The largest risk is a lengthy downturn in energy prices, which could spring from slowing economic growth or oversupply. Exxon's recent spats with Venezuela further reiterate the significant political risk the firm faces, but the firm's diverse portfolio serves as a mitigating factor. Environmental risks and unplanned downtime must also be considered. Due to the firm's strict focus on return on capital and solid track record of generating excess returns on capital, we are not as concerned about overinvestment risk with this company as we are with other firms in the oil patch.
See Previous Analyst Reports
Close Competitors TTM Sales $Mil Market Cap $Mil
ExxonMobil 370,680 378,226
* BP PLC ADR 285,059 259,460
* Royal Dutch Shell PLC ADR A 265,190 219,895
* Chevron 198,200 132,946
* Total SA ADR 152,422 171,378
* Morningstar Analyst Report Available | Compare These Stocks
Data as of 12-31-2004
Strategy
ExxonMobil is focused on generating best-in-class returns on capital. To achieve its lofty profitability targets, the company relies on its size and ability to integrate operations to squeeze efficiencies from its businesses. Investment in technology plays a large role in cutting costs and increasing proven reserves. To offset declining hydrocarbon production in mature areas, ExxonMobil is plowing cash into large projects in the Middle East, West Africa, and Russia. Downstream, ExxonMobil is expanding its presence in liquefied natural gas and improving the reliability of its refining operations.
Management & Stewardship
After spending his entire 42-year career with ExxonMobil, Lee R. Raymond retired at the end of 2005. Former president Rex Tillerson is now in charge. Known for his fierce negotiation skills, we view Tillerson as a worthy successor, and expect the same conservative, high return strategy that characterized Raymond's tenure to continue to be the Exxon mantra. We don't have 2005 compensation figures yet, but in 2004, Raymond's pay was just over $10 million, including salary, bonuses, and other compensation. He also received $28 million worth of restricted stock, but no stock options. Raymond's total compensation is among the highest in the energy sector, but he also headed the company that had the largest profits in the world last year. As a group, executives and directors own or have options on less than 0.4% of the total outstanding shares, not uncommon for a company of this age and size. While we think the company's financial disclosure is a bit weak and we'd prefer to see the chairmanship split from the CEO role, it would be very tough to argue that management hasn't provided good stewardship over time.
Profile
The product of the 1999 marriage of energy giants Exxon and Mobil, ExxonMobil is the largest firm in the oil and gas industry and among the largest companies on the planet. ExxonMobil does business in almost every segment of the oil industry. In 2005, hydrocarbon production and oil refining capacity amounted to 4.2 million and 6.4 million barrels per day, respectively. ExxonMobil has proven reserves of 22 billion barrels of oil equivalent and a presence in more than 200 countries.
Growth
Given the firm's massive size and strict profitability criteria, growth will be moderate at best. Management is not afraid to hold cash and sell noncore assets at peak cyclical conditions. Over the long term, growth will reflect commodity price inflation and the firm's ability to pull more resources from the ground.
Profitability
ExxonMobil has done a stellar job of cutting costs and finding efficiencies after the merger. Its returns on assets, which are consistently higher than peers', are the envy of the oil patch. Returns have also been remarkably stable, considering the cyclical nature of oil. The firm's massive economies of scale and management's knack at effectively allocating capital ensure sector-leading returns over the industry cycle.
Financial Health
Having an AAA credit rating for almost 90 years and one of the healthiest balance sheets in the industry makes ExxonMobil an attractive partner. The firm has more cash than debt, while debt as a portion of debt plus equity amounts to only 7%. The firm had $33 billion in cash at the end of 2005.
