Exxon Mobile Corp.

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Exxon Mobile Corp.

There are hundreds of financial decisions made every day. What is the basis for these decisions, and is there any way to avoid uncertainty? What thought process do buyers and sellers utilize when attempting to make sound investment decisions? These are questions asked by many. Finances are a great concern for most Americans, especially for those planning for their future after retirement. It is not a lack of concern that prevents many from investing money today to make money tomorrow. The hesitation comes from a lack of knowledge. It is advantageous to carefully research a potential investment company and compare it to similar companies in its industry. It is my attempt in this paper to provide the reader with a basis for valuation techniques. I will be focusing on only one actively traded security, and will ultimately decide on the value of the stock.

Project Environment






The security that I have chosen is Exxon Mobile Corporation. I feel that this company belongs to a unique industry that exemplifies uncertainty and volatility. Like others, the energy industry has been feeling the effects of the slow economy. Consumers have certainly felt these effects, as a result. I will attempt to discuss the environment of the energy industry to obtain a better understanding of the financial outlook for Exxon.

This industry’s functions are the exploration, production, manufacture, transportation, and sale of crude oil, natural gas, and petroleum products. The world’s largest non-government oil companies consist of Exxon, Royal Dutch/Shell, BP, Total Fina, ENI, and Texaco.

The Organization of Petroleum Exporting Countries (OPEC) has a lot of control over the supply and price of gasoline. The organization is made up of several countries that hold a majority of the world’s proven oil reserves. During 000, around 46% of our oil came from OPEC nations. The top suppliers of oil to the United States are Canada, Saudi Arabia, Venezuela, and Mexico. We depend on them for our oil supply to maintain a reasonable inventory.

The industry is on the rebound from the cuts made during the oil price collapse of 17/18, and has responded with higher prices. A variety of factors started the oil crisis. Asian economies that had once dominated the oil industry suffered as they felt the effects of an economic collapse. The Northern Hemisphere experienced a warmer than usual winter, which reduced demand. Surpluses developed, which made prices fall. OPEC became very involved, encouraging countries to better manage their production. These higher prices have reached most of the industry, including producers, refiners, pipeline companies, equipment makers, field service providers, and gas station attendants. All are reaping the benefits and enjoying new profits. Twenty-seven major energy companies reported overall net income of $14.1 billion on revenues of $1.4 billion during the fourth quarter of 1. These higher prices are enabling the industry to develop new oil fields, accelerate production, and store more refined products.

Oil is known as a commodity. Commodities are basic materials available from a wide variety of suppliers whose prices are very subject to the laws of supply and demand. Prices of commodities have fallen in recent months. In dollars adjusted for inflation, gas sells for about the same as it did 0 years ago. This means that the increase in prices is just an economic normality. In general, the commodities environment of today is one of heightened competition, excess capacity and lower operating costs, and an abundant supply. As oil prices began to fall in 17, the entire commodities index fell significantly over recent history. This shows the dominance of oil prices.

Project Analysis

To properly analyze an oil company, you must begin by looking at general industry factors. Once you have established an outlook for the entire industry, you should begin to review company specific factors. This gives the analyst the opportunity to compare individual company results with those of the industry on a whole. I will present several key ratios for Exxon to eventually determine its financial outlook. I will be using the most current data that I found on Exxon to compare with the same effective dates of other companies.

DuPont Equation

The DuPont Equation is very useful in determining two key ratios. These two are Return on Equity (ROE) and Return on Assets (ROA). A company’s ROE is calculated as follows

ROE= Asset Turnover x Net Profit Margin x Leverage

By breaking ROE down into three parts an analyst can evaluate how well a company is managing assets, expenses and debt. The last reported ROE for Exxon was 14.7%. If we compare this to its fierce competitors, it fares well. Chevron, Texaco, Royal Dutch, and Exxon all seem to have experienced steady increases in ROE in the years leading up to the oil price collapse. Surprisingly, Exxon did not experience as much of a decrease as did all of the other companies. From 17 to 18 the return fell only 5 percentage points, as compared to Texaco, who fell almost 1 percentage points, and Royal Dutch, who fell almost 1. Exxon appears to make a great return on its equity, and is the only asset with any consistency.

A firm’s ROA is similar to the ROE, except the interest expense is added back to net income in the ROA calculation. Again, the most recent reports show Exxon with a steadily increasing return up until the oil collapse. All other companies dropped significantly. Recent figures show Exxon with a 6.6% return on assets. This seems to be about the average for the industry. By evaluating these two ratios, it appears that the oil collapse of 17 did not affect Exxon as much as it did every other company in the industry. There are many scenarios as to why this is. Perhaps they did not maintain a large quantity of oil; therefore they were not stuck with a surplus. Exxon could have had a very seasoned and knowledgeable team of financial planners that could foresee the oil crisis. Whatever the case, Exxon has proven to avoid the economic blows that affect the remainder of the industry.

The price/earnings ratio can tell prospective investors a lot about the asset. It essentially indicates the value that investors place on the company’s earnings. The last reported P/E ratio for Exxon had a high of 8 with a low of 8. This is the only company in the industry that saw an increase from the previous year. It has actually experienced a steady increase every year. The difference between the high and low market price is minimal, as compared to the span of other firms. This tells me that there is not as much price volatility as with other companies. The market price appears to be around the average for the industry.

A pertinent measure of operating efficiency is the profit margin. Exxon has a profit margin of . this year, and . last year. That makes the company consistent. Chevron has a little bit higher margin with .7, with last year being .4. The fact that other companies maintain a higher profit margin could mean a multitude of things. One possibility could be that Exxon has a lot of operating expenses. This could actually be advantageous to the company. Exxon may possess more operating equipment and may do more drilling than the other companies in the industry. This would create more expenses for Exxon, but in turn, may also create more revenue. Exxon has been looking to expand its drilling projects and this lower profit margin could very well be a short run effect.

Dividend Discount Model

A popular model used to value a stock is the dividend discount model. This method of estimating value sums all expected future dividend payments. For this purpose, I will be using the stable model. I feel it is best suited for Exxon because the company is experiencing long-term stable growth. All projected ratios for the firm show continued growth for Exxon. The company’s recent decision to incorporate more drilling should prove advantageous to its growth. Generally, these types of firms grow at a rate equal to the growth rate of the economy. For illustration purposes, we will use a growth rate of 6%. (inflation of % plus real growth in GDP of %) I will also use another growth rate of %, which is equal to the projected EPS growth rate for Exxon. The current dividend for the asset is $1.76. For ks, the required rate of return for the investment, we will use the formula as follows

return = risk-free rate + (market risk premium) beta

We will use the rate for a t-bill for the risk-free rate. The market risk premium is the expected return of the market in excess of the risk-free rate. For our purposes, we will use a percentage of 6.8%, which was suggested in an article about the dividend discount model. We will be using a beta of .41, given by the company’s stock information. If we plug these figures into our formula, we get a return of 8.7%.

ks = 6% + (6.8%) .41

To determine the value of the stock, we must incorporate the expected growth rate mentioned previously.

v = 1.76 (1.06) / .0870 - .06)

We find that the value of the stock is $6.10. If we compare this to the current selling price of $85, we can see that customers will pay a premium price for the Exxon name and brand.

If we use a growth rate of %, that equal to the projected EPS growth rate, we end up with a value of $68.51. There is not much difference between the total if using a 6% rate of growth or using a % growth rate. It is still well below the selling price of the security.

Capital Asset Pricing Model

Another formula that is useful when valuing a stock is the Capital Asset Pricing

Model (CAPM). This shows the expected return for the asset. There are three factors to consider in this computation the time value of money, the reward for bearing risk, and the amount of systematic risk. We used this formula previously when deciding the market risk premium. We can conclude from our result of an 8.7% reward-to-risk ratio, that there is more reward for bearing risk. 8.7% tends to be a bit higher than the industry average, but this could be because Exxon bears more risk.

Economic Value Added

The Economic Value Added (EVA) focuses on managerial effectiveness. It provides a good measure of the extent to which the firm has added to shareholder value. The common goal of all firms is to maximize shareholder wealth, and by monitoring and interpreting EVA, managers can do just that. EVA for Exxon was negative last year. This could be because the amount of capital grew more than Net Operating Profit

After Taxes. This pulled the EVA way down. This is not necessarily a bad thing, however. The value of the asset to shareholders has been fairly substantial in previous years, and we have proven already that existing stockholders deem the asset very valuable.

I have covered the most pertinent ratios and evaluation techniques that will enable us to value Exxon. The current selling price for the asset is approximately $85. We valued the stock using several different models. In using the dividend discount model, we found that the stock price was much higher that the value that we calculated. This is not necessarily a bad thing, however. I do not feel that Exxon has over-valued its asset. I think the company realizes that they are the leader in the oil industry, and investors are willing to pay a premium price for the brand. Our findings have proven Exxon to remain stable and consistent in an ever-changing, volatile environment. Investors trust the firm to continue to maximize their wealth, even in times of economic hardship. As we compared Exxon to competitors in the industry, we found that Exxon was the only company to remain fairly stable and strong through the oil collapse of 17/18. Exxon has continued to show growth in each year following the crisis. The Profit to Earnings ratio showed us that investors have faith in the future of the asset. There is not much of a spread between the high and low price. Investors trust that the stock will give them a good return. The company’s profit margin was slightly lower than other firms in the industry. We came to conclude, however, that this was probably a result of its recent plan to incorporate more drilling. The company may have more operating expenses than other firms, but this may work to Exxon’s advantage in the long run.

By analyzing these ratios and interpreting the meaning behind them, we can find the true value for an asset. We were able to conclude from our findings that Exxon is a leading company in the oil industry, and will only continue to grow in the next several years. We can see that existing investors hold a lot of hope in the firm’s ability to maximize stockholders’ wealth. As we begin to see revitalization in the economy, we will also see Exxon leading the way for the other companies in the oil industry.





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