Financial Accounting at ExxonMobil Corporation - Case Study Example

EXXONMOBIL FINANCIAL ANALYSIS Student’s Name Course Name Professor’s Name Date A. Introduction ExxonMobil Corporation is a United States of America-based multinational firm that engages in the exploration, distribution and marketing of both oil and gas-related products. It is headquartered in Irving, Texas. The firm is as a result of a merger that took place in 1999 between two well-known companies; Exxon and Mobil. Presently, the firm is rated as the world’s 7th largest in terms of revenue-base and listed public-trading companies by market capitalisation (ExxonMobil, 2017). By the end of 2008, the company covered approximately 3% of the overall world production. As at 2016, the firm had employed at least 73,500 people across its major operations in the world including its well-known subsidiaries like Aera Energy, Esso Australia and XTO Energy. In general terms, the oil and gas industry extends to such other areas as the mining and extraction of oil; the underlying production of natural gases; as well as the production of crude oil petroleum (ExxonMobil, 2017). In this regards, there has been a continuous degree of cooperation amongst the many different companies within the oil and gas sector as a whole. This specifically can be seen its downstream operations that include; sale of gasoline under its brand names as Esso, Exxon and Mobil. The focus of this paper is thus examining the financial as well as strategic performance of ExxonMobil within the oil and gas sector. B. Company & Industry Analysis SWOT Analysis Strengths: i) Brand Value; according to Brand Finance report, the firm is ranked as 51st in terms across the major global brands. It is estimated that its brand value when monetized is approximately equal to $19B (ExxonMobil, 2017). ii) Market Position: the company is considered to enjoy a significant level of market position given the fact that it is currently the largest refinery across the globe. It is important to note that it operates in most of the countries while it has made sure to explore each and every continent including Africa for possible crude and natural gases. As at 2016, the company is said to possess at least 23 refineries that are distributed across 14 countries while it has a distillation capacity of more than 136,000 barrels per each day of operations (ExxonMobil, 2017). iii) Enormous and far-wide operations; the firm can be seen to have successfully explored and exhausted and sells any possible product that is accessed from crude oil refinery process (IBIS World, 2016). It certainly enjoys a great stride of operations in its upstream and downstream operations. It is further considered to be one of the world’s notable sellers of fuel and lubes. iv) Extensive Research & Development framework; is yet another strength enjoyed by this firm. It is safe to note that ExxonMobil engages in extensive R&D projects in order to maintain its relevance in the overall industry (IBIS World, 2016). Some of the notable R&D projects relate to efficient technological adoption that has ensured easier and affordable mining of such products as bitumen as well as those relating to reduction of greenhouse gas emissions Weaknesses: i) Negative publicity; the firm has continued to face serious and damaging litigations as well as lawsuits across its many operations across the globe. The level of these lawsuits extends to damages, fines and penalties being awarded to the affected victims, which also impacts negatively on the overall image of the company and thereby resulting to enormous financial losses. ii) Weak Financials; the firm has continued to be impacted negatively in regards to its revenues that fell by 34% in 2015 while profits also reduced by at least 50% within the same operational period. iii) Growing debt levels; the firm has continued to seek lots of debt for its operational projects; a factor that would likely dilute its overall control of operations as years goes by. Opportunities: i) Rising Demand; there has been a continued rise in the level of demand for energy-related products across the globe and this would possibly grow into the future period. This presents a significant potential for growth of at least 40% by the end of 2040 (IBIS World, 2016). ii) Significant increase in LNG demand; the company has currently engaged in heavy investments in LNG-related research and development. It is expected that by the end of 2040, there will be nearly close to half of the natural gas demand being wholly met by LNG (IBIS World, 2016). The firm is set to be ready for this future development and commence sales for a similar market. Threats: i) Stiff Competition; the firm is currently operating in a very competitive industry from other companies engage in similar operations. In fact, it is as a result of this enormous level of competition that has resulted to massive decrease in revenues and profits over the years (IBIS World, 2016). ii) Economy; the global economy has continued to face lots of challenges, which has resulted to some of the most notable consumers countries to relatively cut down on oil imports (IBIS World, 2016). In addition to this, the current fall in oil prices across the different markets continues to pose an enormous threat. iii). Supply-related risks; the firm and the industry as a whole continues to face supply of crude and gases challenges that are a result of several factors that include both natural and man-made like in the case of oil spills being witnessed nowadays. Porter’s Five Analysis i) Threat of Entry The level of exploration present in this sector is considered to be a high risk affair and involves enormous capital costs that emanates from purchase of heavy capital equipment and machinery for production process (IBIS World, 2016). Given that there are lots of negotiations that the large companies engage within governments; this has kept smaller companies away from this sector. ii) Threats of Suppliers The firm operates under a Supplier Diversity initiative that only permits suppliers who meet standard set requirements to directly engage with them (IBIS World, 2016). As a result of this, ExxonMobil has been able to deliver products at relatively lower costs while also preventing the possibility of suppliers exerting pressure over the industry. iii) Threat of Substitutes The major alternatives for oil and gas include hydro, wind and solar energies. Despite there being enormous support from the government on the utilisation of these substitutes; they are still less efficient and geographically restricted (IBIS World, 2016). As a result of this, the threats of these substitutes remain low. iv) Threats from Buyers The threat of buyers remains to be relatively low especially since buyers are fairly-interested in aspects related to price and quality. Given that oil and oil prices are dependent on global oil frameworks, buyers do not have the power to affect prices (IBIS World, 2016). Oil and gas products are also inelastic goods hence their demand continues to increase overtime across the globe. v) Competitive threats There is a significantly lower level of market concentration within the industry and since the sector is enormous, major oil companies have continued to face great level of challenges controlling a smaller level of global output thereby resulting to intensive rivalries. In fact, the current largest player within this industry is Saudi Arabian Oil Co that enjoys 16% market share (IBIS World, 2016). C. Financial Ratio Analysis Profitability Ratios 2016 2015 2014 Return on equity 4.68% 9.45% 18.65% Net profit margin (%) 3.96% 6.8% 8.9% Gross Profit margin 28.09% 27.45% 24.85% The overall profitability of the company seems to be decreasing over the three-year period starting from 2014 to 2016. Both the net profit and return on equity ratios decreases over the period significantly. The gross profit margin however; increases slightly over the period from 24.85%to 28.09% in 2014 and 2016 respectively. This mixed performance of the company can be fairly expounded by the increase in revenues sales as a result of the lowering the value of some of its US-based gas assets but an overall fall in profits due to the persistent low oil prices as well as enormous impairment charges suffered over the period. It is important to note that the overall lowly-placed oil prices resulted to a pertinent decrease in the level of profits as most of the revenues was consumed by such pertinent expenses as exploration costs that are currently taking place in Nigeria and, also investments made under the ‘selective investments’ initiative of close to $2.2B. The income statement further ascertains that despite the company’s efforts of maintaining less expenses model, it still uses a significant portion of its revenues in production and sales-based taxes hence undermining the level of income posted within the period. Efficiency Ratios 2016 2015 2014 Inventory turnover 35 days 32 days 21 days Receivables turnover 35 days 27 days 25 days Payables turnover 72 days 63 days 50 days The efficiency ratios of the company have all increased within the three-year period. Inventory turnover increases from 21 to 35 days; receivable turnover also increases from 25 to 35 days while payables turnover also increases from 50 to 72 days. This is an indication that the management has not been able to come up with efficient policies of translating inventories into sales; paying and receiving for goods bought and sold on credit. Liquidity Ratios 2016 2015 2014 Current ratio 0.87 0.79 0.82 Quick ratio 0.65 0.55 0.56 The company’s liquidity position has improved slightly over time but still remains below the recommended standard rate. It thus means that ExxonMobil is not positioned fairly to tackle its short-term obligations as and whenever they fall due. The liquidity position of this company is extensively affected by the mere fact that cash and cash equivalents over the period have decreased significantly due to a lower rate of profits being posted to buffer the company against possible short-term liabilities. It can also be ascertained that the firm has continued to utilise a significant portion of its cash flows to fund long-term investments hence affecting the level of cash that is needed to counter current liabilities at any given moment in time. Capital structure Ratios 2016 2015 2014 Gearing ratio 14.26% 10.12% 6.02% Debt to equity ratio 16.64% 11.26% 11.26% The capital structure ratios increase over the period. The increase in these ratios is an indication that the company has now relied on financing its capital investments with debt funds as opposed to equity. It can be seen that the company has recently engaged in new projects in Guyana and Nigeria; an activity that has resulted to constant dependence on debt financing. Investment Ratios 2016 2015 2014 Earnings per share 1.83 3.84 7.78 The earnings per share have decreased over the period from 7.78 to 1.83 in 2014 and 2015 respectively. The decrease is fairly expounded by the decrease in net income of the company over the period that is attributed to low oil prices. D. Conclusion To sum up the discussion above, I think it will not be safe to invest with this company at this particular period due to a number of reasons. First, it can be seen that ExxonMobil’s net income has continued to dwindle overtime meaning that little or no amounts will be available for paying-off dividends to shareholders. Secondly, the company has now embarked on relying on debt funds for financing its projects. This means that it uses lots of cash flows at its disposal to pay for interest costs, which have continued to increase overtime. Thus, there is a higher chance of investors’ money being used for paying-off interest costs as opposed to engaging in notable business ventures and investments that will increase shareholder’s wealth and returns. It thus goes without saying that the firm is not profitable at the moment hence poses a risky affair for potential investors. References List Brigham, E.F. & Ehrhardt, M.C., 2013. Financial management: Theory & practice. Cengage Learning. ExxonMobil. 2017. 2016 Summary Annual Report. Accessed from http://cdn.exxonmobil.com/~/media/global/files/summary-annual-report/2016_summary_annual_report.pdf IBIS World. 2016. Global Oil & Gas Exploration & Production. Retrieved from: http://clients1.ibisworld.com.proxy.lib.sfu.ca/reports/gl/industry/majorcompanies.aspx?entid=190#MP10249 Appendices Profitability Ratios 2016 2015 2014 Return on equity 7840*100/167325 = 4.68% 16150*100/170811 = 9.45% 32,520*100/174,399 =18.65% Net Profit Margin (%) 7,840/197,518 *100 = 3.96% 16,150/23,6180 *100 = 6.8% 32,520/364,763 *100 = 8.9% Gross Profit Margin 61,420/218,608 *100 = 28.09% 71,220/259,488 *100 = 27.45% 97,932/394,105 *100 = 24.85% Efficiency Ratios 2016 2015 2014 Inventory turnover 15080 * 365/156573 = 35 days. 16245 * 365/185161 = 32 days. 16678 * 365/ 285797 = 21 days. Receivable turnover 21,394*365/218608 = 35 days. 19875*365/259488= 27 days. 28,009*365/394,105 = 25 days. Payables turnover 31193*365/156573 = 72 days 32412*365/185161 =63 days 42227*365/285799 = 50 days Liquidity Ratios 2016 2015 2014 Current ratio 41,416/47,638 = 0.87 42,623/53,976= 0.79 52,910/64,633 = 0.82 Quick ratio 42,623-4,208-2,798/53,976 = 0.65 41416-10,879-4,203/47638 = 0.55 52,910-12,384-4,294/64633 = 0.56 Capital Structure 2016 2015 2014 Gearing ratio 28932*100/(173830+28932) = 14.26% 19925*100/(176810+19925) =10.12% 11653*100/181064+11653 = 6.02% Debt: equity ratio 28932*100/173830 =16.64% 19925*100/176810 = 11.26% 11653*100/176810 =11.26% Investment ratios 2016 2015 2014 Earnings per share 7840/4,282 =1.83 16150/4,196 =3.84 32,520/4,177 =7.78 Read More