Exxon Mobil Corporation holds a significant position in the global oil & gas sector through their industry leading portfolio of resources, technology portfolio, and disciplined investment approach. The company’s integration in all sectors of oil & gas gives it a market leadership over Royal Dutch Shell, BP, Total, and Chevron. During FY11, the company achieved a substantial growth of 27% in its revenue base as compared to FY10. The main contribution in revenues emanated from company’s upstream (exploration & production of oil & gas) & down-stream operations (refining & marketing of petroleum products). While, revenues generated from chemical division registered a negative growth of 10%, mainly on account of lower volumes sold. In FY11, XOM also announced a 6% increase in their dividend pay-out and an on-going repurchase program that is expected to add economic value to the company going forward. We have recommended a strong buy on XOM’s stock as we believe that through a combination of balanced and competitive portfolio of resources, projects, products and asset base, company will continue to dominate the Oil & Gas sector.
Key Thesis Points
1. The global oil & gas sector includes various government and non-government market players, while it is primarily dominated by a few large international players. While, Exxon holds the dominant market position in the global oil & gas exploration sector which can be gauged from the fact that amongst non-government international vertically integrated oil & gas exploration companies, XOM holds the largest publicly reported resource base of 87 billion oil-equivalent barrels. Moreover, company’s refining network is most integrated and includes a portfolio of 36 refineries which makes it the leader in the down-stream segment, followed by BP, Total and Chevron. Despite a decline in the sales volumes of company’s chemical product portfolio, company is a global market leader in synthetic lubricant segment. Going forward we see intense competition in the Chemical & up-stream segment from BP and Chevron, while we expect Exxon to continue to dominate the leadership in down-stream segment.
2. The global demand for oil & gas is positively correlated with the advancements in the emerging markets. During FY11 the demand for oil & gas depicted an increase of 14%; accordingly company has shifted its focus on expanding its exploration capabilities to meet the rising demand. Resultantly, XOM increased the contribution of diverse portfolio of exploration and up-stream segment to revenue base from 78% to 82% in FY11. Exxon had more than 120 on-going up-stream projects and several significant oil discoveries in FY11 including discoveries in US Gulf of Mexico, Hadrian North & Hadrian South. We expect the contribution of up-stream operations to increase further in 2012.
Currently Exxon Mobil Corporation has a network of 36 refineries which are located in more than 21 countries with a distillation capacity of 6.2 million barrels per day and lubricant base-stock manufacturing capacity of 131 million barrels per day. The demand for petroleum & lubricant products is expected to increase by 12% in FY12. Accordingly to cope with the rising demand, the company has completed new refining facilities in UK and Thailand in 1Q12 that are expected to increase the production capacity by more than 70,000 barrels per day.
3. The revenues of the company witnessed a significant growth of 27% against industry norm of 14%, amounting to $485.5 billion. The increase in revenues was largely a function of increasing contribution of up-stream segments & refining activities to the revenue base. However revenue generated from chemical segment decreased by 10%, mainly due to the weakened volume of petroleum & lubricant products. On the back of substantial expansion in the revenue base, the company was able to improve its gross margins to 23% which were slightly lower than industry average of 28%. During FY11, Exxon’s operating expenses increased by 25% compared to FY10. The increases were in line with company’s expansion in exploration activities and expenses pertaining to setting up refineries in UK & Thailand. Exxon’s net income increased by 35% to $41.1 billion versus $30.5 billion in FY10. Net margin also improved to 8.5% against industry average of 9.5%. Moreover on account of enhanced profitability, the ROA & ROE of the company improved to 12.4% and 26.6% against industry average of 10% and 24%.
4. In a competitive market of oil & gas, XOM faces several risks that might originate from competitive pressures from BP & Chevron, negative demand of oil & energy, declining ratio of discovery to wells, global political crisis, sanctions to operate in oil producing economies and environment related regulations. However on the back of balanced and highly competitive portfolio of resources, products, and on-going projects pertaining to expansion, we believe that the company is well positioned to absorb the pressure of any afore-mentioned risks.
Exxon Mobil Corporation is a growth stock with a price to book ratio of 2.6x against the industry norm of 0.9x. The P/E ratio of the stock has decreased to 9.5x from 17.8x in FY09. We think oil prices will keep climbing as long as global economic growth rate doesn’t become negative. With its single digit P/E ratio, growing dividends, and built-in inflation protection Exxon has a below-average risk profile and an above-average return potential. Billionaires Ken Fisher, David E. Shaw, and Steven Cohen’s large positions in this oil giant are also bullish indicators (see Steve Cohen’s top stock picks).
