Exxon Mobile Financial Analysis - Example

Exxon Mobile Exxon Mobile Introduction This company is a major lubricant and producer of other specialties. It has three outstanding market brands that include Mobile SHC, mobile Devlag and mobile 1 lubricant. Many equipment and vehicle manufacturers trust Exxon for delivery of technologically superior products. The company has a dense network of stations and distributor channels throughout the world where its products can be found. Exxon mobile is the biggest super majors, which gives it a very strong competitive edge. Its large production operations reserves and diversity, possession of one of the largest E&P portfolios and its technological superiority are some of the benefits attributed to its efficiency. Exxon Mobile markets its products under three brands including Esso, Mobil, and Exxon. The company also owns smaller subsidiary such as Sea River Maritime and Imperial Oil Limited. The biggest cash flow is, however, dominated by the upstream divisions, which account for about 70% of the total revenue (Exxon Mobile Corp, 2011). Company and industry characteristics Primary products Exxon mobile’s primary products include fuels, chemicals, natural gas and lubricants and special products. The fuel products, which is its core activity, is produced in a variety of types including gas oil for industrial applications, heavy fuel oils for power stations, domestic fuel oil for heating in buildings and houses, LPG and diesel for cars and gas oil for industrial applications and heavy fuel oils for power stations. Exxon also manufactures lubricants and fuels for the aviation industry. Lubricants and special products are sold under the Mobil brand, which comes in a wide range of amounts and types. The chemicals are classified as petrochemicals, which are produced from petroleum and include the common chemicals that are used in everyday life, such as synthetic rubber, packaging materials, solvents, plastic bottles and other consumer products. Lastly, ExxonMobil produces natural gas, which is in pure form of LPG used as a propellant for manufacturing cosmetics. Competitiveness of the industry The oil and gas industry is operating under a challenging and a dynamic global marketplace and a progressively more adamant group of participants. The regulatory demand is increasingly putting pressure on the operations, and the demand growth is becoming sluggish, while the existing reserves are more expensive and difficult to generate. As the demand to meet future demand builds up, worldwide alliances are becoming more significant. Over the recent years, oil price fluctuation has become the order of the day. In spite of this, the companies in this industry have a challenging task of ensuring they focus on the medium to long-term conditions if they are to make credible decisions and achieve their growth targets. Investing in people, technology and R&D are critical in ensuring a lasting competitive edge. Exxon Mobile’s primary competitors include Chevron Corporation and BP. Chevron is an American multinational energy Corporation with the presence in more than 180 nations. Its operations cover all aspects of gas, oil, and geothermal energy industries that include mining; refinement, marketing and transportation; sale and manufacture of chemicals; and also generation of power. Chevron is among the top 6 major oil companies. (U.S. Energy Information Administration, 2011). Financial statements and ratio analysis Financial statement analysis In financial statements analysis, we have used year 2008 to 2011 comparatives. Total revenue reported in year 2008 amounting to $ 433,526,000 dropped to $ 275,564,000 in 2010 (Exxon Mobile Corp, 2011). This significant decline in revenues could be attributed to the effects of global economic depression that had just started to bite and due to sharp rise in prices of fuel products - this forced many people and businesses to use alternative sources of energy. To guard against losses occasioned by reduced economic activity, the management followed stringent budgetary process, which saw significant reduction in cost of goods sold. This helped in realizing profits, which had dwindled between year 2009 and 2010 at the height of the economic recession. Further, the operating expenses reported shows a decline between year 2008 and 2010, which can be attributed to the management decision of cutting costs in line with reduced revenues to guard against significant losses. Surprisingly, the management idea seems to have worked well since the firm did not report losses during this period of economic hardship. More so, the data as derived from financial statements show the firm has once again started to improve as indicated by profits of $ 45,220,000 reported in 2011. Ratio analysis In analyzing Exxon mobile short-term liquidity, we look at both current and quick ratio. Current ratio has improved from year 2009 to 2011 (see appendix 3). It reached a high of 1.49 in year 2011 compared to the industry level of 1.32. As noted, the short term liquidity ratios from 2009 to 2011 are all greater than one, meaning that the company holds sufficient cash to offset its current obligations as they fall due. The plenty cash held can be attributed to surplus cash flow received from operating activities. However, the plenty cash inflows from operations helped Exxon offset the negative effect of both financing and investing activities. The operating profit margin ratio shows an upward trend from year 2009 to 2011. This is in line with net profit margin ratio, which dramatically rose from 6.39 in 2009 to 8.79 in 2011. However, this rise in profit margins can be attributed to rise in global oil prices mostly occasioned by inflation due to economic recession (Exxon Mobile Corp, 2011). Both returns on equity and assets have tremendously risen for the past three years, which is well above the industry average. This shows that Exxon has laid good investment strategies that are giving back good returns to the shareholders’ worth. Further, the company has invested wisely in assets, which have also aided in realizing high returns. The leverage ratio remained almost constant over the period of three years under consideration. The figures reported ranged between 0.08 and 0.10 indicating that Exxon total assets are almost twice its total debt. Based on this, it can be concluded that the firm is utilizing the debt part of its capital structure mix. Cash Flow Forecast and Analysis Cash flow refers to movement of firm cash from the point of receipt to all the payments made. Further, free cash flow (FCF) refers to that cash which remains after a firm makes payments in relation to various capital expenses. However, free cash flow has gained popularity over earning per share since it cannot be easily manipulated by firms that intend to show pre-determined financial results. Nonetheless, companies still find ways of influencing cash flows. First, a company may apply lag tactics in payment of bills-a method through which excess cash is reported. A firm can also delay in paying its creditors hence reporting excess cash. In determining cash flow balances for the three years under consideration, Exxon Mobile has classified its activities into three; that is, operating, investing and financing activities. Referring from appendix 4, net income has substantially risen from year 2009 to 2011 (Exxon Mobile Corporation, 2011). Further, much of the cash received can be attributed to the firms operating activities as shown by rise in net cash from operating activities from $ 28,438,000 in year 2009 to $ 55,345,000 in year 2011. However, both investing and financing activities recorded negative cash flows between year 2009 and 2011. These negative cash flows are, however, offset by the positive cash inflow from operating activities giving positive net cash position. The opening cash positions have been declining from year 2009 to 2011. This decline could be attributed to financial commitment in financing activities. However, it should be understood that decreasing cash flows are not always a bad sign as the company could be making significant capital investments. On the other hand, high free cash flow portrays a sign of healthy firm (Exxon Mobile Corp, 2011). In determining projected cash flow balances for the next three years, Exxon Mobile has prepared forward looking cash flows classified into three activities; that is, operating, investing and financing activities. Referring to appendix 4, net income is projected to substantially rise between years 2012 and 2014. Moreover, much of the anticipated cash is attributed to the firms operating activities as shown by rise in net cash from operating activities from $ 28,438,000 in year 2012 to $ 55,345,000 in year 2014. However, both investing and financing activities shows projected negative cash flows between year 2012 and 2014. These negative cash flows will be offset by the positive cash inflow from operating activities giving positive net cash position. The opening cash position is expected to decline between years 2012 to 2014. This decline is attributed to the current financial commitment such as share buybacks and mergers and acquisitions. However, it should be understood that decreasing cash flows are not always a bad sign as the company could be making significant capital investments. On the other hand, high free cash flow portrays a sign of healthy firm. WACC Analysis Weighted average cost of capital (WACC) represents the overall cost of capital based on the firm’s capital structure mix. WACC shows the return that the company should expect to break even if not to realize profits. To compute WACC, all components of capital structure are taken into consideration, which includes ordinary share capital, preferred share capital, bonds, debt capital and retained earnings. The following formula is used in calculating WACC: WACC=Re * E +Rp (1-Tc) * D E+D E+D Where; Re- cost of capital Rp- Cost of debt E- Market value of firm’s equity P- Market value of firm’s debt Tc- Firm’s tax rate Exxon Mobile Corporation has a WACC of 8.22% meaning that it must pay an interest of similar percentage for every dollar it takes in financing its operations. Further, this rate means that, the firm’s management should only accept projects that give a return greater than the 8.22% and thus reject any project promising a lower rate of return. Moreover, the management should bear in mind that the providers of capital would be expecting greater returns which on the other hand could increase the company’s financial risk. Stock Price Calculations and Comparison Analysis At the close of year 2009, Exxon’s common stock was trading at a high of $ 68.19 per share. The stocks were trading within this range for the better part of the year. However, bearing the feelings that the company’s growth potential is limited, we assume conservative growth rate to be approximated 2 percent. This rate could lead to firm’s sluggish growth due to the effects of global economic recession (Exxon Mobile Corp, 2010). The most appropriate model considered for stock valuation is the Discounted Cash Flow (DCF) model (See appendix 1). However, the variables considered in computation of expected stock price comprise of both historical values derived from the financial statements and also predicted values for the coming years. To arrive at the present value of equity, we subtracted the present value of debt, obligations arising from operating leases, employee share ownership plan from the present value of free cash flow and non- operating cash inflows. Further, this amount was then divided by the total number of outstanding shares to arrive at the expected share price. Referring to appendix 1, the expected share price is $56.29, which is lesser that $ 68.19 reported in year 2009. This decrease could be attributed to the effects to global economic recession and the current mergers and acquisitions, all leading to dilution of the firm’s stocks price. Conclusion and Recommendations Since Exxon is one of the world largest dealers in petroleum products, we do not expect it to be severely affected by global economic recession. From the above financial analysis, Exxon Mobile has proved to be financially stable and to strengthen its market domination. Exxon has embarked on share buyback, mergers and acquisition. However, engaging in mergers and taking over other companies have seen the company share price decrease, though this do not mean poor performance. Nonetheless, Exxon mitigated the effects of global economic recession by exercising stringent financial planning that saw steady rise in revenues from its operating activities. Interestingly, the detailed financial analysis carried out based on both historical and projected data has proved that Exxon financial health is well beyond many companies in the same industry and therefore the providers of capital should not shy away from investing in it (Exxon Mobile Corp, 2010). From the financial information accessed, Exxon has embarked on share buyback and mergers and acquisition. However, due to the projected decrease of share price, I would recommend to the management to consider share buyback due to the effect of mergers on the share price. Moreover, the outstanding number of shares is significantly reduced and it could be rational for the management to consider increasing it. References Exxon Mobile Corp (2010). 10-K/A Annual Report, filed with the SEC. (28 February 2011). Retrieved from http://ir.exxonmobil.com/phoenix.zhtml?c=115024&p=irol-sec. Exxon Mobile Corp. (2011). Annual Balance Sheet. (July 17, 2011). Retrieved from http://finance.yahoo.com/q/bs?s=XOM+Balance+Sheet&annual Exxon Mobile Corp. (2011). Annual report and publications. (June 5, 2011). Retrieved from http://www.shell.com/home/content/investor/financial_information/annual_reports_ and_publications/ Exxon Mobile Corp. (2011). Corporate Governance Guidelines. (May 19,2011). Retrieved from http://www.exxonmobil.com/Corporate/investor_governance_guidelines.aspx Exxon Mobile Corporation. (2011). Citizenship Report. (May 19, 2011) Retrieved from http://www.exxonmobil.com/Corporate/Imports/ccr2009/pdf/community_ccr_2009.p Ret U.S. Energy Information Administration. (2011). Monthly Spot Crude Oil Prices. (16 May 2011). Retrieved from http://www.eia.gov/dnav/pet/pet_pri_spt_s1_m.htm. Appendix-1: Stock Valuation Model Figures in ‘000 2012 2013 2014 2015 FCF 16,500 16,524 15,513 15,115 PV (FCF) 13,020 12,049 10,452 9,411 PV (FCF) 252,875 +PV (Non-operating) 33,079 -PV (Debt) 9,605 -PV (Operating leases) 9,056 -PV (ESOP) 1,212 PV (Equity) 266,080 Shares outstanding 4,727 Target price $ 56.29 Appendix-2: Cost of Capital WACC 8.22% Equity Debt Total outstanding shares 4,700,000,000 Book value of debt 9,605,000,000 Stock Price 60.78 (1) Market value of equity 285,666,000,000 % of firm market value 96.75% % of firm market value 3.25% Beta 0.950 Risk free rate 4.14% (2) Market risk premium 4.50 (3) Tax rate(Tc) 47% Cost of equity (Re) 8.42% Cost of debt (Rd) 4.36% (4) Pre-tax cost of debt 2.31% Appendix- 3: Financial statements and Ratio Analysis Currency in Millions of US Dollars Dec 31 2011 Dec 31 2010 Dec 31 2009 Dec 31 2008 Revenues 425,071.0 275,564.0 341,578.0 433,526.0 TOTAL REVENUES 425,071.0 275,564.0 341,578. 433,526.0 Cost of Goods Sold 284,724.0 183,816.0 231,513.0 304,035.0 GROSS PROFIT 140,347.0 91,748.0 110,065.0 129,491.0 Selling General & Admin Expenses, Total 16,455.0 16,021.0 16,056.0 16,260.0 Depreciation & Amortization, Total 12,379.0 11,917.0 14,760.0 15,583.0 Other Operating Expenses 45,223.0 37,571.0 39,127.0 43,544.0 OTHER OPERATING EXPENSES, TOTAL 74,057.0 65,509.0 69,943.0 75,387.0 OPERATING INCOME 66,290.0 26,239.0 40,122.0 54,104.0 Interest Expense -673.0 -548.0 -259.0 -247.0 Other Non-Operating Expenses, Total 13,961.0 8,598.0 11,695.0 16,558.0 Other Non-Operating Income (Expenses) 3,023.0 1,455.0 1,018.0 1,269.0 Gain (Loss) on Sale of Investments 62.0 - - - Gain (Loss) on Sale of Assets 3,757.0 488.0 1,401.0 2,842.0 EBT, INCLUDING UNUSUAL ITEMS 83,397.0 34,777.0 52,959.0 73,257.0 Income Tax Expense 36,530.0 15,119.0 21,561.0 31,051.0 Minority Interest in Earnings -1,647.0 -378.0 -938.0 -1,146.0 Earnings from Continuing Operations 46,867.0 19,658.0 31,398.0 42,206.0 NET INCOME 45,220.0 19,280.0 30,460.0 41,060.0 NET INCOME TO COMMON INCLUDING EXTRA ITEMS 45,220.0 19,280.0 30,460.0 41,060.0 NET INCOME TO COMMON EXCLUDING EXTRA ITEMS 45,220.0 19,280.0 30,460.0 41,060.0 Appendix-4: projected Cash flows Note Reference Number Cash flows from operating activities 2014 2013 2012 (millions of dollars) Net income including non-controlling interests $ 42,206 $ 31,398 $ 19,658 Adjustments for noncash transactions Depreciation and depletion 15,583 14,760 11,917 Deferred income tax charges/(credits) 142 (1,135) – Postretirement benefits expense in excess of/(less than) net payments 544 1,700 (1,722) Other long-term obligation provisions in excess of/(less than) payments (151) 160 731 Dividends received greater than/(less than) equity in current earnings of equity companies (273) (596) (483) Changes in operational working capital, excluding cash and debt Reduction/(increase) – Notes and accounts receivable (7,906) (5,863) (3,170) – Inventories (2,208) (1,148) 459 – Other current assets 222 913 132 Increase/(reduction) – Accounts and other payables 8,880 9,943 1,420 Net (gain) on asset sales 4 (2,842) (1,401) (488) All other items – net 1,148 (318) (16) Net cash provided by operating activities $ 55,345 $ 48,413 $ 28,438 Cash flows from investing activities Additions to property, plant and equipment $(30,975) $(26,871) $(22,491) Proceeds associated with sales of subsidiaries, property, plant and equipment, and sales and returns of investments 4 11,133 3,261 1,545 Decrease/(increase) in restricted cash and cash equivalents 224 (628) – Additional investments and advances (3,586) (1,239) (2,752) Collection of advances 1,119 1,133 724 Additions to marketable securities (1,754) (15) (16) Sales of marketable securities 1,674 155 571 Net cash used in investing activities $(22,165) $(24,204) $(22,419) Cash flows from financing activities Additions to long-term debt $ 702 $ 1,143 $ 225 Reductions in long-term debt (266) (6,224) (68) Additions to short-term debt 1,063 598 1,336 Reductions in short-term debt (1,103) (2,436) (1,575) Additions/(reductions) in debt with three months or less maturity 1,561 709 (71) Cash dividends to ExxonMobil shareholders (9,020) (8,498) (8,023) Cash dividends to non-controlling interests (306) (281) (280) Changes in non-controlling interests (16) (7) (113) Tax benefits related to stock-based awards 260 122 237 Common stock acquired (22,055) (13,093) (19,703) Common stock sold 924 1,043 752 Net cash used in financing activities $(28,256) $(26,924) $(27,283) Effects of exchange rate changes on cash $ (85) $ (153) $ 520 Increase/(decrease) in cash and cash equivalents $ 4,839 $ (2,868) $(20,744) Cash and cash equivalents at beginning of year 7,825 10,693 31,437 Cash and cash equivalents at end of year $ 12,664 $ 7,825 $ 10,693 Read More