Exxon Mobil Corporation (NYSE: XOM), or ExxonMobil, is an American multinational oil and gas corporation. The company is a direct descendant of John. D. Rockefeller’s Standard Oil Company, which was founded in 1882. ExxonMobil is one of the largest publicly traded companies by market capitalization and is the largest oil refinery in the world. ExxonMobil is divided into three global operating divisions – upstream, downstream, and chemicals. The upstream segment explores, develops, produces, and markets gas and power.
The downstream segment refines and markets petroleum products, and the chemicals segment manufactures and markets commodity petrochemicals.
This case analysis will review ExxonMobil’s comparative financial statements published in the 2010 Annual Report and amended SEC 10-K to assess key factors in the areas of cash flow, equity, operations, profitability, and risk. The analysis will conclude with a recommendation on whether ExxonMobil is a secure long-term investment.
The 2010 Annual Report notes “delivery of superior cash flow” as a financial highlight, driven by operating cash flow management and a disciplined approach to employed capital.
Net cash flows generated from operating activities was the largest contributor of cash at $48.4B. This reflects a $20.0B increase from 2009, which is driven by increased net income from higher crude oil and natural gas realizations in the upstream segment and increased margins in the downstream segment.
Also, the noncash provision of $14.8B for depreciation and depletion increased by $2.8B from 2009, driven by higher capital investments in the upstream segment. Total operating cash flow of adjusted net income is 106%, which reflects a positive eight point increase over the past five years.
This is a healthy sign because it shows that the major source of cash is derived from persistent events that can sufficiently fund operational activities and fixed commitments. Net working capital contributed an additional $3.5B, however, this is attributed to the timing of liability payments in relation to receivable collections and inventory consumption, and may not reflect any specific initiatives in working capital management.
Net cash used for investing activities netted to $24.2B in 2010, which was driven by capital and exploration expenditures in the upstream segment, partially offset by proceeds from the sale of subsidiaries, investments, and assets. Net investing activities reflect a five-year CAGR of 11%, which is funded by operating cash and shows a positive investment towards technology and multi-year projects to support key strategic goals. The source of cash flow used for financing activities netted to $26.9B, which is driven by total dividend and debt payments.
Cash dividend payments on common shares increased nine percent from 2006 to $1.74 a share, which is positive for common shareholders, however, this yield is common within the combined oil & gas industry. Total debt payments of $15B were primarily attributed to existing debt with the merger of XTO Energy. Total cash spent on financing activities were not fully funded by operating cash and contributes to a year-over-year $2.9B decrease in net cash and a low 17% ratio to adjusted net income. However, the merger with XTO will complement ExxonMobil’s future growth plans in unconventional gas and oil resources.
The principal summary measure of ExxonMobil’s performance is its return on equity (ROE), which measures the profit the company has generated with the amount of money the shareholders have invested. The ROE for 2010 was positive at 23.67%, which is above the combined oil and gas industry at 22.23%, and well above the energy sector and S&P 500 index at 14.62% and 14.82%, respectively. However, ExxonMobil’s ROE has experienced an eleven point decline over the past four years due to lower sales volume attributed to the recent global economic recession and challenging profit margins in the downstream segment.
ExxonMobil’s return on its total invested assets, measured as ROA, was 11.37% in 2010, which reflects a six point decline over the past four years and is approximately seven points lower than the industry standard. The chart below depicts the declining revenue and profit margins over the past four years and their impact on the ROE and ROA ratios. Total assets have also outpaced revenue and followed the same trend at 1.43 in 2010 compared to 1.75 in 2006, however, it is still healthy when comparing to the industry, sector, and overall index.
The information provided in ExxonMobil’s Long-Term Business Outlook projects that the demand for primary energy will reflect a 35% increase by 2013, due to increases in population and worldwide economic growth. The demand for electricity and energy required for transportation will drive this increase. Increased penetration of energy-efficient and lower emission fuels such as natural gas is expected to triple by 2030 and overtake coal as the second-largest energy source. Oil is expected to remain the largest energy source, with growth expected in new discoveries as well as current reserves due to increased technology.
The outlook predicts that the investment in exploration and development activities in the upstream segment will keep the company poised for future revenue growth. However, the challenge in the downstream and chemicals environments is expected to continue due to escalation in commodity prices, increased competition, and decreased growth in global demand. This long-term outlook may hinder future earnings for the company.
ExxonMobil’s financial and operating results are subject to a variety of risks inherent in the oil, gas, and petrochemical industry that are beyond their control. This includes market fluctuations in supply and demand and changes to government and political policies. However, the company does have management control of major exploration and development programs and complex projects. The investing activities required for these projects may require non-owner financing, which can affect the creditworthiness and long-term liabilities of the company.
In 2010, Moody’s and Standard & Poor’s assigned the highest credit rating (Aaa) to ExxonMobil’s financial obligations, which gives the company flexibility to pursue various investment opportunities. The debt-rating is based on positive profitability, cash flow, and solvency ratios, as well as secured collateral and protective covenants and options. At the end of 2010, ExxonMobil’s long-term debt obligations totaled $12.2B through 2040, with approximately 45% maturing in the next five years. This contributes to healthy long-term solvency with a low Long-term debt-to-equity ratio of 8.56% and positive coverage with high Cash from operations to total debt ratio of 3.22 (1.43 less capital expenditures).
In today’s challenging economic environment, ExxonMobil is a leader in its industry with regards to financial strength and technological advancement, which makes it well-positioned for future growth. The consistent “Aaa” credit rating reflects strong debt management and the five-year growth rate in capital expenditure in its upstream business reveals a positive long-term strategy. The dividends paid to shareholders are generous and are funded by operating cash, and the investments in new businesses such as XTO will further solidify its position and capitalization in the market. After assessing key financial, operational, growth, and risk factors, I have determined that ExxonMobil is a secure long-term investment.