You are on page 1of 16

(

FIN 4310-001 Company Valuation


04/08/2015
Market Profile
52 Week Price Range

66.55-97.20

Average Daily Volume

15,954,700

Beta

0.88

Dividend Yield (Estimated)


Shares Outstanding

2.92(3.60%)
4.17B

Market Capitalization

342.85B

Institutional Holdings

50.10%

Insider Holdings

50.2

Book Value per Share

41.41

Debt to Total Capital

7.00%

Return on Equity

13.33%

Stock Info
Ticker

XOM

Current Price

82.23

Recommendation

HOLD

!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!

CVS'Stock'Price'
Current(Price:($103.65(

Second'Quarter'Highlights'

'

Group Members
Hon$Ho$
Modupe$Dina$
Jane$Nwalie$
$$Puja$Kalyani$

Earnings(of($4.2(billion(decreased($4.6(billion(or(52(percent(from(
the(second(quarter(of(2014.(
Earnings(per(share,(assuming(dilution,(were($1,(a(decrease(of(
51(percent.(
Capital(and(exploration(expenditures(were($8.3(billion,(down(
16(percent(from(the(second(quarter(of(2014.(
OilEequivalent(production(increased(3.6(percent(from(the(second(
quarter(of(2014,(with(liquids(up(11.9(percent(and(natural(gas(down(
5.8(percent.(
Cash(flow(from(operations(and(asset(sales(was($9.4(billion,(including(
proceeds(associated(with(asset(sales(of($629(million.(
The(corporation(distributed($4.1(billion(to(shareholders(in(the(
second(quarter(of(2015,(including($1(billion(in(share(purchases(to(
!
reduce(shares(outstanding.(
Dividends(per(share(of($0.73(increased(5.8(percent(compared(with(
the(second(quarter(of(2014.(
A(significant(oil(discovery(was(made(in(Guyana(on(the(6.6E
million(acre(Stabroek(Block(that(is(located(120(miles(offshore.(The(
well(was(safely(drilled(to(17,825(feet(in(5,719(feet(of(water(and(
encountered(295(feet(of(highEquality(oilEbearing(sandstone(
reservoirs.(
Production(at(the(companys(Kearl(oil(sands(expansion(project(in(
Alberta,(Canada,(started(ahead(of(schedule,(doubling(gross(capacity(
to(220,000(barrels(of(bitumen(per(day.(
Bitumen(production(began(on(schedule(at(the(Cold(Lake(Nabiye(
project(expansion(in(northeastern(Alberta,(Canada.(The(expansion(is(
producing(about(20,000(barrels(per(day(and(volumes(are(expected(
to(reach(peak(daily(production(of(40,000(barrels(later(this(year.(

Exxon$Company$Valuation$ !"#$%
(

Table%of%Contents%
Business Description ..................................................................................................... 3
Business Model .............................................................................................................. 3
Recent Financial Performance..................................................................................... 5
Peer Group Analysis ..................................................................................................... 6
Porters Five Forces ...................................................................................................... 7
Ratio Analysis ................................................................................................................ 7
Profitability Ratios ........................................................................................................ 8
Analysis of Future Performance ................................................................................ 10
Forecast Assumptions ................................................................................................. 10
Analysis of WACC ...................................................................................................... 12
Capital Structure ........................................................................................................ 12
Discounted Cash Flow Analysis ................................................................................. 14
Dividend Discount Model Calculations..................................................................... 14
Relative P/Es Including PEG .................................................................................... 15
Recommendation......................................................................................................... 15
Bibliography ................................................................................................................ 16
''''

'

Exxon$Company$Valuation$ !"#$%
(
(

Business Description
Exxon Mobil Corporation engages in refining and marketing crude oil and natural gas in
the United States, Canada/South America, Europe, Africa, Asia, and Australia/Oceania. It
also manufactures and markets commodity petrochemicals, including olefins, aromatics,
polyethylene and polypropylene plastics, and specialty products; and transports and sells
crude oil, natural gas, and petroleum products. Exxon Mobil Corporation was formerly
known as Exxon Corporation and changed its name to Exxon Mobil Corporation in
November 1999. Exxon Mobil Corporation was founded in 1870 and is headquartered in
Irving, Texas.
Primary and Secondary Markets/Products
Exxons clients range from consumers, to large businesses and firms such as airlines,
retailers, and industrial groups throughout the United States and Globally. Exxon offers
primarily petroleum based products, mainly gas for transportation. Other products include
chemical products such as packaging materials, bottles, and synthetic rubbers along with
lubricants used by businesses and consumers alike for various needs.
Business Risks/Outstanding Litigation
On March 29, 2013, a ExxonMobil pipeline carrying Canadian Wabasca Heavy
crude ruptured in Mayflower, Arkansas, releasing at least 12,000 barrels of oil and
forcing the evacuation of 22 homes. The Environmental Protection Agency has classified
the leak as a major spill. Local officials performing disaster relief requested that the FAA
impose a no-fly zone, with relief efforts headed by an aviation advisor for ExxonMobil
being exempt. After it was imposed it was amended to allow aerial news crews to fly
over the area.
In April 2014, ExxonMobil released a report publicly acknowledging climate change risk
for the first time. ExxonMobil predicts that a rising global population, increasing living
standards and increasing energy access will result in lower greenhouse gas emissions.[118]
On October 14, 2015, Ted Lieu and Mark DeSaulnier, Democratic members of The
United States House of Representatives from California, wrote to the United States
Attorney General requesting an investigation into whether ExxonMobil violated any
federal laws by "failing to disclose truthful information" about climate change. The New
York Attorney General is investigating whether ExxonMobil mislead the public or stock
holders regarding the impact of climate change.

Business Model
Exxon Mobil is a company that deals with oil and gas, a brand that most if not all
households in the world are very familiar with. They have built their brand and reputation
on quality, convenience and cost. It is involved in refining, transporting of oil and natural
gas. The company can be split up into three different segments:
Upstream:
Involves the transportation of oil and natural gas, also included in recovery and search of
Oil spills should one occur.
Downstream:
This part of the segment deals with manufacture, marketing and distribution of their
various products.
Projects and Technology:

Exxon$Company$Valuation$ !"#$%
(
Projects and Technology segment acts as a support for the two segments, upstream and
downstream which are the where the companys core business takes place.

Revenue Drivers:
Most of its revenues come from recurring payments, as customers are willing to pay for
quality. Exxon Mobil relies heavily on oil, fuel, petrochemicals and natural gas.
Variations in the way products are sold drives up revenues. It is also good to note that
they are have the largest market capitalization among all other oil companies.

Expense Drivers:

Exxon$Company$Valuation$ !"#$%
(
Exxon Mobil does have a high Cost of Goods Sold, relative to Sales. The majority of
their expenses stem from COGS, research and development, drilling and equipment.

!
!

!
Gross Margin Trend:
Looking at the analysis of the profit margin, we can see that Exxon Mobils profit margin
continues to declines. It shows that the cost of doing business has gone up while profit
and sales have either gone down or remained at the same level. This can be contributed to
factors like decrease in gas prices and competitive prices among companies in the oil &
gas industry.

Recent Financial Performance


!
!

First Quarter (2015) Performance:


!
!
!

Earnings decreased 46% from the first quarter of 2014(


EPS (assuming dilution) decreased by 44%(
Dividends per share increased 9.5% compared with 2014 first quarter(

Second Quarter (2015) Performance:


!
!
!

Earnings(decreased(52%(from(the(second(quarter(of(2014(
EPS (assuming dilution) decreased by 51%(
Dividends per share increased 5.8% from the second quarter of 2014(

Past Year (2014) Performance:(


(
Overall 2014 was not the best year for Exxon, similar to previous years the Revenues and
Earnings of the company steadily decreased.

!
!
!
!
!

Revenues: 2014 Revenues dropped 6.35% from 2013.


Earnings per common share: increased 3.12% from the previous year.
Earnings: Earnings decreased 0.18% from 2013.
Total liabilities: increased 1.27% from the previous year.
Cash and Cash equivalents: decreased 0.6% from the previous year.

Exxons Revenues have gradually decreased over the past 5 years, but there was a
significant drop in 2014 because of declining oil prices. Even though there was a drop in
2014, it was better than the 2013 drop of 6.79%. in Revenues.
Past'5'Years:(
((

Exxon$Company$Valuation$ !"#$%
(

The past 5 years have shown Exxons Revenues and Profits declining, but in 2010
revenues of 370,125 increased to 467,029 in 2011, which is a 0.26% increase. After 2011
revenues have continuously decreased over the years. Despite, the decrease in Revenues,
Exxon has been able to continuously increase it dividends per common share. They were
able to increase dividends per common share by 6.32% from 2010-2011, 2.56% from
2011-2012, 12.8% from 2012-2013, 9.7% from 2013-2014. There was a drop of 3.1%
from 2013 to 2014, but it was still a substantial increase compared with 2010-2012. This
increase in dividends could mean reward for shareholders, who have been known to
complain about wanting a more generous dividend from Exxon.
(
Past'5'Years'Income'Statement:(
((
The income statement shows that while revenue decreased, total cost and net income also
decreased. Total cost decreased by 5.3% and net income decreased by 0.18% from 20132014. Regardless of the decrease in net income, EPS From 2013 did increase from 7.36 to
7.60 in 2014.
Past'5'Years'Balance'Sheet:(
((
While the company sees a steady decrease in revenues, their Assets, Liabilities, and
Equity have increased. Total assets increased 0.77%, total liabilities increased 1.27%, and
total equity increased 0.31% from 2013 to 2014.
(
Past'5'Years'Cash'Flows:(
((
Cash flow from Operations fell by $11.2 billion from 2012 to 2013, but had a $2.02
million increase from 2013-2014. Cash flow from Investing increased by $8.6 billion
from 2012 to 2013 and fell by approximately $7.2 billion from 2013 to 2014. There is not
a consistent pattern in the net changes in cash flow.
(

Peer Group Analysis


(
The above five companies (Exxon Mobil, Royal Shell Corp, Chevron, BP, and Total
S.A.) make up the largest publicly traded integrated oil and gas firms in the world. They
each make up part of the term big oil. As such, they all have similar structures and are
affected by global and consumer events in similar way. All five companies are
multinational oil firms with resources and facilities all over the world with their own
histories, spanning back close to a hundred years.
(

(
(
Product'Differentiation'and'Market'share'
(
Exxon currently ranked as the worlds fifth largest company by revenue and also the third
largest company by market cap. It was founded in 1999 after the merger of Exxon and
Mobil, both were descendant of the Standard Oil Company owned by John D.
Rockefeller. Today; with 37 refineries in 21 different countries in the world, it is also the
largest refiner in the world with a daily refining capacity of 6.3 million barrels.
Exxon is organized into a number of operating divisions around the world, marketed
under the brands Exxon, Mobil, and Esso. Although it also has several smaller segment
such as coal & minerals, Exxon has three primary divisions: upstream (oil exploration,
extraction, and wholesales operations), downstream (marketing, refining, and retail
operations), and chemical (manufacturing and selling petrochemicals.) Exxon is the

Exxon$Company$Valuation$ !"#$%
(
largest oil producer of the big oil companies with a daily production of 3.921 million
barrels equivalent each day. That alone equals close to 4% of the global 95 million
barrels daily production and demand.
Within each of its segments, Exxon has a 20.2% market share in its upstream segment, a
35.9% market share in its downstream segment of the industry, and a 24.67% in its
chemical division. With the exception of the chemical division, Exxon Mobil is the
largest market shareholder in its main operating segments and will most likely hold that
position for the foreseeable future.!

Porters Five Forces%%


(

(
Threat of New Entrants
Exxon Mobil is the largest manufacturer of crude oil and petroleum in its industry and its
peers are also backed by billions of dollars of investments. With the exception of
competition from the alternative fuel market, it is highly unlikely for a newly formed
company to be a material concern for Exxon Mobil. The cost of developing technology,
establishing operations in various countries, and building infrastructure to support a new
venture into oil and gas and the competition created by Exxon Mobil and its peers make it
unfeasible for investment.
Threat of Substitutes
The biggest danger to the oil industry is the possibility of alternative fuels like electric
and hybrids. However, the investment into the methods are tremendous and far off into
the future. At the current moment, highly rated electrics still have huge drawbacks. The
range is limited per charge, significant charge times, and comparably more expensive for
cost-conscious consumers. Also, as of 2013, the average age of driven cars in the US is
11.4 years. This means that even when alternative sources are more feasible; the
adjustment for consumers to switch to a fuel efficient alternative could take well over a
decade. While the concern is material, it can be mitigated given more investment into the
alternative fuel industry.
Bargaining Powers of Suppliers
Because crude oil is a natural resources, Exxon Mobil has to deal with various countries
around the world for access to resources. Because of this, several risk factor affect the
companys overall growth. One concern at the moment is OPEC raising the supply of oil
produced forcing prices to fall dramatically compared to past years. As the prices, Exxon
Mobil along with its peers may find it difficult to produce and profit from the production
of oil. Other factors can include regions refusing access to their reserves and political
restrictions.
Buying Powers of Consumers
Since gas is such a necessity for many people, consumers have less buying power than
other products. Much of daily requires access to a vehicle and the cost of buying and
fueling an alternative fuel-based car is too high for many consumers. Consumers can
always buy from a different source other than Exxon Mobil which require Exxon to
maintain a competitive price and reputation but driving being a heavy requirement of
daily life, Exxon Mobil is more likely to be affected by international than consumer
concerns.
Competitive Rivalry within the Industry
Exxon is the largest firm in the integrated oil and gas industry. Because of this, it has a
strong competitive advantage over its peers. It still has competition as there are many
competing oil and gas firms with different investments in the industry in terms of
infrastructure and technology. Given the current market, however, industry peers may be
more concerned with financial stability rather than finding competitive advantages over
other firms.

Ratio Analysis
(

Exxon$Company$Valuation$ !"#$%
(

Our(group(decided(to(use(a(ratio(analysis(to(better(compare(the(peer(group(of(Exxon.(
We( focused( on( 4( major( areas( of( comparison;( Profitability,' Turnover,' and'
Liquidity'and'Debt.(Our(purpose,(after(comparing(each(firms(relative(ratios,(is(to(
better(understand(Exxons(position(in(the(industry.(

Profitability Ratios

In general, Exxon Mobil has a clear advantage over its competitor. Over the last five
reported years, Exxon Mobil has exceeded the industry average in each of the four listed
categories. A strong ROA means Exxon has used its resources efficiently while a good
return on capital means it has invested in strong long term plans. A Higher than average
return on equity means more investors and current investors worrying less about Exxons
long term growth, and a stronger than average gross margins means that Oil firm has
enough to cover expenses, protect against any unforeseeable events and fund future
investments.

Exxon$Company$Valuation$ !"#$%
(

Turnover Ratios
(

(
Strong turnovers means that show a good level of operational efficiency. Higher than
average asset turnover means that for every dollar invested into assets, Exxon is making
1.3x times the initial cash outflow which is higher than the industry. A higher than
industry inventory turnover means that Exxon Mobil is selling their inventory faster over
than the year than its peers. A smaller than average cash conversion cycle means Exxon
is generating inventory, paying their suppliers, and generating revenues quicker than
most of the industry.

Exxon$Company$Valuation$ !"#$%
(

Liquidity Ratios

A debt analysis does show some concerns for Exxon Mobil but given its size, it could be
very minor. Exxon Mobil has a lower than average current and quick ratio, meaning it
does not have enough current assets to pay off liabilities if they were immediately coming
due. This could be a risk in recessionary times where revenues are declining. Exxon
Mobil does, however, has a lower debt to equity ratio and less leveraged than its peers so
for investors, Exxon Mobil is considerably less risky.

Analysis of Future Performance


The 5 year forecast (2015-2020) of the income statement, Balance Sheet, and Statement
of Cash Flows for Exxon Mobil are included in the next few pages along with the
forecast assumptions.

Forecast Assumptions
The following assumptions were made in the six year forecast of Exxon Mobil. The
forecast began from end of year 2014 to an estimate assumption forecast of the remaining
2015 year and a five year outlook from 2016 to 2020.

!
!

Exxon was at full operating capacity as of 2014.


Because the industry is in decline, assets, long term investments and cash will
go at a modified rate to match a heavy decline in revenue and gradual return to
match the rate of revenue.
o! Growth for 2015 = -6.00%
o! Growth for 2016 = 3.08%
o! Growth for 2017 = 6.50%
o! Growth for 2018 = 6.00%
o! Growth for 2019 = 5.00%

Exxon$Company$Valuation$ !"#$%
(
!
!
!
!
!
!
!
!

(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(
(

o! Growth for 2020 = 4.00%


All current assets, current liabilities, and long term liabilities will go in
proportion to changes in revenue growth, Any short term debt is constant
throughout
Interest rate is 1.1%, the historical average
Depreciation Expense is 4.74% of gross fixed assets
Tax rate is 38.47%
Dividend Payout Ratio will be steady at 28.3% .
All items not part of Exxon core business will remain constant or infrequent
items have a zero impact on the income statement
Any changes in equity will come from retained earnings
Assumption for growth rate:
o! Growth for 2015 = -30.00%
o! Growth for 2016 = 6.08%
o! Growth for 2017 = 11.37%
o! Growth for 2018 = 8.00%
o! Growth for 2019 = 6.50%
o! Growth for 2020 = 4.50%
If AFN is negative, cash will be place into marketable securities, any positive

Exxon$Company$Valuation$ !"#$%
(

Analysis of WACC
(
The(weighted(average(cost(of(capital(is(a(method(of(calculating(whether(a(company(
is( earning( a( sufficient( return( to( satisfy( those( providing( its( capital,( i.e.( its( creditors(
and(investors.(Each(element(is(weighted(according(to(its(proportionate(share(of(the(
total( capital.( It( is( the( cost( of( debt,( equity( and( other( types( of( capital( weighted(
according(to(their(relative(contribution(to(total(capital.(
(
For the period ending December 31, 2014 with an estimate of 2015, Exxon Mobils
capital structure is weighted with 93.01% total equity and 6.99% total debt.. The beta
0.88 is less than 1.00; therefore, implying that Exxon had less risk than the market. The
CAPM model is used to acquire the cost of equity of 8.79% and a cost of debt of
1.1038% resulting in a weighted average cost of capital of 8.22%.
(
Our(method(for(calculating(the(WACC(of(ExxonMobil:(
(

Capital Structure
(
Based on the WACC weights, the capital structure for Exxon is 93.014% equity and
6.986% debt. Compared to their competitors, Exxon has the lowest percentage of debt
and the highest percentage of equity.
!

Exxon$Company$Valuation$ !"#$%
(

!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!
!

Exxon$Company$Valuation$ !"#$%
(

Discounted Cash Flow Analysis


!
Free$Cash$Flows
Sales&Revenues&(net)
Cost&of&Goods&Sold
Gross&Margin
Operating&Expenses
&&&EBIT
Interest&Expense
&&&EBT
Taxes&(35%)
NOPAT
Net&Capital&Investment
Net&Working&Capital&Investment
Free&Cash&Flow

2016
275,526
174,395
101,132
75,501
200,025
I195.21
38,606
13,512
25,094
35,052
I13,311
46,834

2017
306,323
194,223
112,100
83,080
223,243
I195.56
41,995
14,698
27,297
I14,525
24,995
37,767

2018
330,455
209,761
120,694
89,236
241,220
I195.83
44,434
15,552
28,882
I31,407
17,887
15,362

2019
351,632
223,396
128,236
94,644
256,988
I196.07
46,567
16,298
30,269
I30,482
17,646
17,433

2020
367,245
233,448
133,796
98,728
268,517
I196.25
48,043
16,815
31,228
I26,916
21,581
25,893

35,052

I14,525

I31,407

I30,482

I26,916

2015
38,496
I5,562
I5,473
14,150
13,311

2016
21,422
789
776
I2,007
24,995

2017
10,799
1,565
1,540
I3,982
17,887

2018
12,092
1,227
1,207
I3,120
17,646

2019
16,708
1,076
1,059
I2,738
21,581

Net$Capital$Investment
Net$Operating$Working$Capital
Cash
Receivables&&&Deferred&Taxes
Inventories&&&Other&Current&Assets
Current&Liabilities
Net$Working$Capital
WACC
Horizon&Value&at&2020

8.22%
&&&&&&&&&&&&&&&&727,365

Value&of&operations
Debt&outstanding
Value&of&Equity
Terminal&Value&
Terminal&Value&growth&rate
Current&shares&outstanding&(millions)
Price$per$share

2020
21,140
794
781
I2,019
24,733

$590,376
$126,524
$463,852
$27,058.00
4.50%
4316
$$$$$$$$$$$$$$$$$107.47

The discounted cash flows shows that Exxon free cash flow decreased over the
years. The current stock price is about $107.47 which lets us know the companys
stocks is currently undervalued.
Assumption:
The terminal growth rate is 4.50%.

Dividend Discount Model Calculations


Year
Dividends(Paid
Growth
WACC
Shares(Outstanding

2014
2015
2016
2017
2018
2019
2020
$(((((11,577.12 $((8,071.74 $(((((8,456.55 $(((((((9,198.91 $(((((9,733.03 $((((((((10,200.35 $((((10,523.63
>30.28%
4.77%
8.78%
5.81%
4.80%
3.17%
Terminal3Value $(214,818.74
8.22%
$(225,342.37
4,316
NPV
$176,156.18
Price3Per3Share
$40.81

Exxon$Company$Valuation$ !"#$%
(

Relative P/Es Including PEG


Year
2014A
2015E
2016E
2017E
Average

Relative2P/E
Exxon
Chevron
BP
11.16
9.32
21.31
27.57
20.94
23.12
16.28
15.23
17.4225
18.81

8.98
16.61
16.93
10.07
13.1475

Exxons(average(P/E(ratio(for(the(next(4(years(is($17.42,,(which(means(
investors(will(pay(($17.42(for(every(dollar(that(Exxon(earns.(Their(P/E(ratio(
is(on(average(higher(than(most(of(their(competitors,(which(implies(that(
higher(growth(rate(is(anticipated(in(the(future(for(Exxons(when(compared(
against(its(competitors.

Recommendation%%
(
Based(on(our(analysis(of(the(Discounted(Cash(Flows,(and(the(Dividend(Discount(
Model(our(group(believes(that(the(current(stock(price(is(an(accurate(reflection(of(
future(earnings.((
(
We(believe(ExxonMobil(will(continue(to(generate(excellent(revenues(as(it(is(well(
established(and(has(a(proven(business(model.(While(the(oil(and(gas(market(is(
fiercely(competitive,(we(feel(that(ExxonMobil(has(enough(brand(awareness(and(
product(differentiation(to(remain(stable.(As(ExxonMobil(continues(to(grow(their(
upstream(and(downstream(segment(in(the(global(market,(we(feel(that(future(cash(
flows(will(be(positively(affected,(leading(to(increased(company(value.(We(believe(
that(ExxonMobil(has(steady(growth(as(long(as(it(maintains(a(strong(stability(in(the(
economy(given(macroeconomic(factors,(like(political(issues(in(oil(regions,(the(rise(of(
alternative(fuels,(and(the(changing(landscape(of(the(oil(industry.(We(recommend(a(
HOLD.

(
(

Exxon$Company$Valuation$ !"#$%
(

Bibliography

(
"Average Age of U.S. Car, Light Truck on Road Hits Record 11.4 Years, Polk Says."
Automotive News. N.p., 06 Aug. 2013. Web. 08 Nov. 2015.
"BP P.l.c. (BP) PE Ratio." NASDAQ.com. N.p., n.d. Web. 09 Nov. 2015.
"Chevron Corporation (CVX) PE Ratio." NASDAQ.com. N.p., n.d. Web. 09 Nov. 2015.
"Exxon Mobil Corporation (XOM) PE Ratio." NASDAQ.com. N.p., n.d. Web. 09 Nov.
2015.
N.p., n.d. Web. 09 Nov. 2015.
N.p., n.d. Web. 8 Nov. 2015.
N.p., n.d. Web. 8 Nov. 2015.
N.p., n.d. Web. 8 Nov. 2015.
"XOM: Investors: Business Model and Competitive Advantages." ExxonMobil. N.p., n.d.
Web. 09 Nov. 2015.
(