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Xom Analysis

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Submitted By steph519
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Our company and stock of choice is Exxon Mobil Corporation (ticker: XOM, NYSE). Exxon Mobil is a U.S. based publically traded oil and gas distributor that operates domestically as well as globally, and is one of the most well known companies within the industry. Currently, Exxon Mobil is the world’s largest publicly held oil and gas corporation, and also ranks as the second largest publicly held company across the globe, as classified by market capitalization, just behind Apple Inc. In addition to its high market capitalization, the corporation also falls within the top ten revenue-generating companies across the globe.
We have chosen to scrutinize this particular industry and stock due to shared interests in the technological advancements of hydraulic fracturing, or “fracking”, and how this technology affects Exxon’s current market price and overall company growth. Given these new technologies within the industry, we will utilize various valuation models to assess Exxon Mobil’s financial records and share data in order to determine whether their current market price is an accurate representation of intrinsic value, and also to assess company outlook. We will use XOM as a potential investment vehicle, in hopes to ascertain a better understanding of the company and to best predict what’s in store for Exxon Mobil as well as the oil and gas industry. As mentioned before, “fracking” has been prominent. Hydraulic fracturing, which emerged around 2005, has given the United States precedence in the oil and gas industry. In 2013, the Economist stated that “America is expected to overtake Russia and Saudi Arabia to become the world’s largest producer of oil and gas combined”. Although this technology has enormously sped up gas production and output, it does have negative ramifications as well. Shale oil production has caused oil prices to drop significantly, and allows us to question whether this technology can thrive at low costs. “Optimists argue that the fast decline rate has come as no surprise, and that the technology, and the industry’s experience in deploying it efficiently, are improving fast enough to mitigate much of the effect of weak prices” (The Economist). Although some analysts remain positive, there is solid evidence that proves low prices are hurting the industry. As of October 2014, the amount of active rigs U.S. has declined reaching its lowest number in six weeks: 1590. (OilPrice). Low costs have not proved fruitful enough to support the rigorous demands of the oil industry; thus, the outlook for the industry is an ambivalent state. With “fracking” not even 10 years old, only time will indicate whether shale oil production will stay alive.
The positives and negatives of “fracking” do not only affect Exxon Mobil, but also affects its major competitors. Some of which include BP (BP), Chevron Corp. (CVX), and Royal Dutch Shell (RDS). Other economical factors that hold influence on Exxon as well as its competition include the production of electric vehicles. Although manufacturing of electric cars has not swarmed the nation at an accelerated pace, its something the industry should not ignore. In the past the oil industry along with its supporters have set forth campaigns against electric cars; thus, even though only a fraction of Americans own hybrid vehicles, the industry is preparing, and fighting back.
The fundamental industry outlook for the integrated oil & gas industry is neutral. Integrated oils usually offer strong dividend and buyback potential. However, current crude oil prices will not recover quickly from the affected and relatively sudden decline that began in late 2014 and beginning 2015. Production growth has been difficult, but we think project start-ups and natural gas and LNG growth, particularly in Asia, will drive growth over the next five years. Likewise, The International Energy Agency (IEA) estimates that global oil demand should rise by 1.0 million barrels per day (MMb/d) in 2015 to 93.5 MMb/d. With non-OPEC production on the rise, projected to grow 0.7 MMb/d in 2015 to 57.4 MMb/d, and the expectation is the call on OPEC to stay flat at 29.5 MMb/d.
Financial ratios are foundational to comparing and understanding a firm’s operations. These ratios can allow us to compare multiple companies. Within this market BP serves as a viable contender for control of the public market share. Exxon is expected to earn $3.65 in 2015 and $5.12 for 2016 as it relates to earnings per share (XOM Earnings Forecast, 2015). BP will by contrast only rate an earnings per share of $2.03 and $2.96 for 2015 and 2016, respectively (CNN, 2015). Both of these coincide with our initially temporary falling growth rate due to the current market landscape. We utilized the Dividend Discount Model, Operating Free Cash Flow, and the Free Cash Flow to Equity models in order to gain a comprehensive understanding and valuation of XOM. An average of these three models was then compared against the most recent market price of $86.93 so as to determine intrinsic value and worth. This average valuation came in at $79.41: a difference of $7.52. In order to assess current value future projections were made. Each model in turn required different projections so as to determine XOM’s market price. To that end we will highlight the various suppositions made. WACC serves as the foundation that affects nearly all of these valuation methods. To that end we must ensure that the weighted average cost of capital is as accurate as possible going into the future. The three primary projections made were the corporate tax bracket, beta, and XOM’s capital structure. With oil prices falling and revenue decreasing, it is of our opinion that XOM will not be in that higher tax bracket. As it applies to beta, as renewable energies continue to expand and legislation is written regarding fuel and oil efficiency, the oil market will become increasingly volatile. Finally, XOM has hovered near a capital structure of 90% equity to 10% debt. We expect this trend to largely continue. Once WACC has been determined we can proceed to DDM. DDM required projections for a terminal growth rate, ROE, and retention rate. We expect the terminal growth rate to decrease to a level below that of the natural market growth rate. As oil slowly transitions to renewable sources we anticipate a gradual growth to that of less than the market. This slow growth will require XOM to repurchase stock to increase ROE so as to create value for their shareholders. Finally, we speculate that XOM will slowly increase their retention rate by 5%. This value will allow them to pursue other options as the market for oil slowly decreases. In the end DDM calculated market price to be $70.95. Moving on toward the Operating Free Cash Flow calculations there is primarily one variable that is outside of Exxon’s control: sales growth. As the “fracking” boom slowly comes to a close over the next few years we anticipate Exxon slowly regaining more of the market share to eventually coming to a low, albeit, positive growth rate. The other projections utilized for this valuation method, (CAPEX/sales, W/C % of sales, non-cash expense of sales), are already minimal in value through the nature of their business and the lean operations of the firm. This method provided us with a value of $12.09. Our final valuation method was the Free Cash Flow to Equity. Projections required were growth rate and net income margin. Since growth rate was discussed previously we will focus on the net income margin. Exxon will require of their firm drastic measures in order to remain competitive and create value for their shareholders. This is already evidenced by the oil firms purchasing other firms in order to generate cash flows for their shareholders. To that end we speculate they will through necessity be required to double their net income profit margin. Such a measure will not be easy- yet it will provide them with content shareholders and a stable source of equity.
Our recommendation is to HOLD Exxon Mobil Corporation (XOM). Primary, the merger of oil and gas assets and production volumes, we estimate that XOM is the largest publicly traded integrated oil company in the world, serving customers in over 200 countries. XOM maintains the largest portfolio of proved reserves and production in North America, and is the biggest net producer of oil and gas in Europe. In addition, Exxon Mobil employs edge-oil technology such as fracking, which has proven to XOM generates future earnings growth in the short and long-term. Finally, Exxon Mobil’s fundamental and financial performance has performed better than industry during the past five years. However, currently low oil prices remain a negative factor affecting not only Exxon Mobil price shares but also the entire oil/gas industry. Q1/2015 expected earnings on 4/30/15.
Based on our fundamental valuation of the company, financial performance and other key drivers such as strategic projects, developments and industry outlook, we may conclude that Exxon Mobil’s price share, created in 1999 as a merge, is in-line with our recommendation to HOLD. Positive factors such as strong earnings, financial ratios, capitalization, low levels of financial leverage, new developments around the world, maintains XOM as oil Leader Company and potential firm for generating futures earnings in short-term. Risk factors remains such as low oil levels, but we consider that those levels could change in the near term as summer season is approaching, middle-east stabilization is under control and oil demand should rise by 1.0 million barrels per day, according to International Energy Agency.

Works Cited
2011 Form 10-K Exxon Mobil Corporation. (n.d.). Retrieved April 17, 2015, from U.S. Securities and Exchange Commssion: http://www.sec.gov/cgi-bin/viewer?action=view&cik=34088&accession_number=0001193125-12-078102&xbrl_type=v#
2013 Form 10-K Exxon Mobil Corporation. (n.d.). Retrieved April 18, 2015, from U.S. Securities and Exchange Commission: http://www.sec.gov/Archives/edgar/data/34088/000003408814000012/xom10k2013.htm
2014 Form 10-K Exxon Mobil Corporation. (n.d.). Retrieved April 17, 2015, from Bloomberg Business: http://www.bloomberg.com/research/stocks/financials/drawFiling.asp?docKey=136-0000034088150000131CQ1JBGB8CAMGVEK9O2FC1JPD5&docFormat=HTM&formType=10-K
American Industry and Fracking: From Sunset to New Dawn. (16 Nov 2013). Retrieved April 19, 2015, from the Economist: http://www.economist.com/news/business/21589870-capitalists-not-just-greens-are-now-questioning-how-significant-benefits-shale-gas-and
BP. (n.d.). Retrieved April 19, 2015, from CNN Money: http://money.cnn.com/quote/forecast/forecast.html?symb=BP
CSFB. (n.d.). Retrieved April 19, 2015, from ETrade: https://www.etrade.wallst.com/v1/common/pdf.asp?docKey=453-CSFBW50_621027-1&User_SessionID=D32E25022F054036B2ED42E0229AB0C6&researchProvider=CSFB
Exxon Mobil Corp Data. (n.d.). Retrieved April 17, 2015, from Bloomberg Business: http://www.bloomberg.com/research/stocks/charts/charts.asp?ticker=XOM
Exxon Mobil Corporation Bonds. (n.d.). Retrieved April 18, 2015, from Morningstar: http://quicktake.morningstar.com/stocknet/bonds.aspx?symbol=xom
Exxon Mobil (n.d.). Retrieved April 19, 2015, from Wikipedia: https://en.wikipedia.org/wiki/ExxonMobil
Low Oil Prices Hurting U.S. Shale Operations. (21 Oct 2014). Retrieved April 19, 2015, from Oil Price: http://oilprice.com/Energy/Oil-Prices/Low-Oil-Prices-Hurting-U.S.-Shale-Operations.html
Our History. (n.d.). Retrieved April 18, 2015, from Exxon Mobil: http://corporate.exxonmobil.com/en/company/about-us/history/overview
Oil Price Forecast. (n.d.). Retrieved April 19, 2015, from Forbes: http://www.forbes.com/sites/billconerly/2014/12/18/oil-price-forecast-2015-2016/
REUTERS. (n.d.). Retrieved April 19, 2015, from ETRADE: https://www.etrade.wallst.com/v1/common/pdf.asp?docKey=1581-A2144-2QE2MPNQS1QTMA9DU3TJNJCFQG&User_SessionID=D32E25022F054036B2ED42E0229AB0C6&researchProvider=REUTERS
What Will it Take to Get Americans Buying Electric Cars? (24 Jan 2014). Retrieved April 19, 2015, from Fool: http://www.fool.com/investing/general/2014/01/24/what-will-it-take-to-get-americans-buying-electric.aspx
XOM Key Statistics. (n.d.). Retrieved April 17, 2015, from Yahoo! Finance: http://finance.yahoo.com/q/ks?s=XOM+Key+Statistics
XOM Stock Dividend Data. (n.d.). Retrieved April 18, 2015, from Dividend: http://www.dividend.com/dividend-stocks/basic-materials/major-integrated-oil-and-gas/xom-exxon-mobil/
XOM Annual Reports. (n.d.). Retrieved April 18, 2015, from Exxon Mobil: http://ir.exxonmobil.com/phoenix.zhtml?c=115024&p=irol-reportsAnnual
XOM Forecasts. (n.d.). Retrieved April 19, 2015, from CNN Money: http://money.cnn.com/quote/forecast/forecast.html?symb=XOM
XOM Earnings Forecast. (n.d.). Retrieved April 19, 2015, from NASDAQ: http://www.nasdaq.com/symbol/xom/earnings-forecast

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