UNIVERSITY OF THE WEST INDIES

CAVE HILL CAMPUS

DEPARTMENT OF MANAGEMENT STUDIESFACULTY OF SOCIAL SCIENCES

Financial Analysis of ExxonMobil Corporation

Lecturer: Mrs. Stacey Estwick

Prepared By:

Quinn Weekes

Dwayne Parris - Editor

Date: March 22nd, 2015

MGMT 2023 FINANCIAL MANAGEMENT

2

Big Rock Corp.Financial

Solutions Finance + Research

Big Rock Corp.Financial

Solutions Finance + Research

Produced by: Department of Financial Research, Big Rock Corp.Produced by: Department of Financial Research, Big Rock Corp.

ExxonMobil Corporation2011- 2014 Financial Analysis Report

Presented to Client:

Mr. Federick Lovell,

Investor

Table of Contents

Title Page

Introduction………………………………………………………….............4

Background…………………………………………………………………...4

Economic Environment……………………………………………....4

Socio-political Environment…………………………………………4

Legal Environment …………………………………………………..5

Financial Analysis…………………………………………………………....6

Sources and Uses of Funds…………………………………………..6

Short-Term Solvency………………………………………………....7

Long- Term Solvency………………………………………………....8

Asset Management…………………………………………………....9

Profitability………………………………………………………….10

Market Value………………………………………………………...10

Conclusion…………………………………………………………………...11

Recommendations………………………………………………………......12

Bibliography………………………………………………………………....13

Appendices…………………………………………………………………..14

I. Figure 1, Table 1………………………………………………...14

II. Table 2, Table 3………………………………………………….15

III. Table 4, Figure 2………………………………………………...16

IV. Figure 3, Figure 4……………………………………………….17

3

Produced by: Department of Financial Research, Big Rock Corp.Produced by: Department of Financial Research, Big Rock Corp.

V. Table 5, Figure 5………………………………………………...18

Introduction The company being analyzed is ExxonMobil Corporation (XOM). This report is aimed at analyzing the

environment and the overall financial status of ExxonMobil Corporation with the use of its financial

statements information from the period 2011 to 2014. Financial ratios will be used to compare and to

investigate the relationships between different pieces of financial information. Such ratios will allow for

examination of the company’s strengths and weaknesses resulting from its activities. The company will

be also compared to a benchmark formulated by our analysts using data from Exxon’s top competitors.

Background The first successful oil well was drilled in Titusville, Pennsylvania in 1859 by Colonel Edwin Drake and

Uncle Billy Smith. This monumental discovery sparked an oil boom that paralleled the gold rush of the

1840’s. That single well began what 125 years later would be the United States’ (U.S.) largest entity

publicly trading in petroleum and petrochemical, known as ExxonMobil. Taking an evolutionary leap

from supplying the U.S. market with its kerosene, its most profitable product in that era, ExxonMobil in

the late 1930s brought to the world the first commercial production of alkylate – a key component in

cleaner burning gasoline. Today, Exxon operates in almost every country, and is known by its brands

Esso and Mobil, and is also a manufacturer for products which drive modern transportation, powers

cities, and provides petrochemical building blocks that lead to thousands of goods for consumers.

ECONOMIC ENVIRONMENT ExxonMobil is considered a global commodity-based company simply because its levels of operations

and earnings are significantly affected by changes in prices of oil, gas and petrochemicals, as they are

dependent on factors which affect supply and demand. Economic activity like recessions or periods of

4

low or negative economic growth would undoubtedly have a direct impact on the company’s bottom

line. On the other hand, economic booms, both medium and long term, would result in increased

business activity leading to great product sales. The General Electric (G.E.) sponsored blog The

Economist Explains highlights in a December 2014 post how companies such as ExxonMobil are

impacted by such economic activity. It explains how supply and demand are positively correlated to

market expectations and its overall activity. If these factors show promise, they would yield favourable

prices for the energy company. In a thriving economy, persons are more willing to spend on air

conditioning during the summer, and heating during the winter season (Why the Oil Price is Falling,

2014). This increases the level of demand and hopefully the price of these commodities as well. Other

factors such as dramatic changes in population growth rates, financial crisis or currency exchange rate

fluctuations, periods of civil unrest and government austerity programs impact the demand for energy

and petrochemicals. These factors could alter the risk for returns on the company’s assets and the ability

of ExxonMobil to satisfy its shareholder commitments.

SOCIO-POLITICAL ENVIRONMENT Multinational companies such as ExxonMobil can reap rewards or be forced to exit a particular region

due to political or regulatory developments affecting its operations. Decisions made by any one

government or body regulating an industry have the potential to limit access, or even restrict companies

from conducting operations within its jurisdiction. According to a 2015 article in the Oil and Gas

Financial Journal ExxonMobil Papua New Guinea (PNG) received a licence to develop and supply up to

20 million cubic feet a day (MMcf/d) of domestic natural gas for 20 years to support government plans

to improve the capacity and reliability of the country’s power supply (Pennwell Corporation, 2015). The

report quoted ExxonMobil’s PNG managing director Peter Graham as saying that the agreement enables

a reliable long-term supply of natural gas to support Port Moresby’s urgent power generation needs.

Any government initiatives to promote alternative energy usage change the landscape of the normal

course of business. Exxon itself cites that some countries “limit access to their oil and gas resources, or

may place resources off-limits from development altogether.” (ExxonMobil). More attractive returns

could be realized by the policies the company adopts. As part of its strategic community investments,

ExxonMobil seeks to train and educate the local workforce, develop existing vendors to provide needed

goods and services, as well as improve surrounding communities. These and similar efforts can create

greater brand loyalty. 5

LEGAL ENVIRONMENTThere are a number of factors in the legal environment which ExxonMobil pays close attention to that

could bring about significant change in their profits. As a registered U.S. company, ExxonMobil is

prohibited from conducting business in particular territories, while in other territories their level of

investment and business activity is restricted. These and other legal barriers provide fair competition for

local or other companies with an alliance with the host country.

ExxonMobil always faces the risk of a host country altering the legislation that governs the industry it

operates; thus, there can be a tremendous impact from changes in laws that result in:

1. Increases in taxes or government royalty rates (including retroactive claims);

2. Changes in environmental regulations or other laws that increase cost of compliance or

reduce or delay available business opportunities. The New York Times reports that

ExxonMobil quietly settled a lawsuit for an approximate $250 million with the State

Department of Environmental Protection for its contamination and degradation which caused

the loss of use of more than 1,500 acres of wetlands, marshes, meadows and waters in

northern New Jersey (Weiser, 2015);

3. Adoption of regulations mandating the use of alternative fuels or uncompetitive fuel

components;

4. Adoption of government payment transparency regulations that could require ExxonMobil to

disclose competitively sensitive commercial information, or that could cause violation of

non-disclosure laws of other countries;

Financial Analysis

All Amounts expressed in United States Dollars (USD $) except otherwise noted.

Benchmark: Top 4 companies in the industry with available records for the period 2011-2014.

(ExxonMobil Corporation, Chevron Corporation, Suncor Energy Inc and BP p.l.c (ADR)

This is a financial analysis of ExxonMobil over a four-year period, 2011-2014.

6

SOURCES AND USES OF FUNDS

ExxonMobil Corporation was formed in 1998 by a merger of two oil companies – Exxon and Mobil –

under a US$37.7 billion agreement. Recently, the company entered into a $41 billion merger agreement

with XTO Energy, inclusive of debt. Under the terms of the agreement, ExxonMobil issued 0.7098 of

common shares to common shareholders of XTO Energy. At the end of 2014, ExxonMobil had a cash

balance of $4.7 billion which was generated from its operations and also had a recorded asset sales

balance of $7.7 billion. Moreover, the company’s capital structure indicated that total debt was $29.1

billion and equity totalled $174.4 billion. Exxon closed on an $8 billion bond deal, the largest tranche of

which was a 10-year issue priced at 2.71% or 58 basis points above the comparable Treasury note in

early March, 2014 to support its dividend pay-out and spending on growth. In most recent years, 2013

and 2014, the company had a positive net issuance of debt, totalling 11,504 and 6,994 Million USD

respectively. This implies that the company issued more debt than it repaid. ExxonMobil’s purchases of

property, plant and equipment generally increased over the period, spending in 2011 was 30,975 Million

USD compared to 32,952 Million USD in 2014. The company in general can obtain funds very easily

especially compared to its competitors, according to Forbes (Forbes, 2015).

SHORT-TERM SOLVENCY

Short-term solvency ratios (see Appendix I, Table 1 and Figure 1) are used to measure a company’s

ability to meet its short-term debt and other obligations.

The Current ratio matches current assets with current liabilities and indicates whether the current assets

are enough to settle current liabilities over a short-term period. ExxonMobil current ratio for 2012 was

the highest over the four year period 2011 to 2014 where the company received a ratio of 1.01 times.

This implies that ExxonMobil had $1.01 in assets for every dollar in current liabilities or its current

liabilities were covered 1.01 times over. However, in 2014 the company was covered 0.82 in current

liabilities which was the lowest amongst the four years. This illustrates inefficient use of cash and other

short-term assets. The management team of ExxonMobil seems to be borrowing over the long term to

raise money. The benchmarks were 1.39 and 1.30 in 2012 and 2014 respectively in which case

ExxonMobil fails to come close.

7

The Quick Ratio measures the ability of the company to pay its current liabilities when they come due

with only quick assets. ExxonMobil received its highest quick ratio of 0.66 times in the years 2011 and

2012. However, in both years its quick ratio is below the benchmarks of 0.89 times in 2011, and 0.94

times in 2012. The company’s quick ratio decreased continuously over the years down to 0.50 times in

2014 compared to the benchmark ratio of 0.92 times. In 2014, the company had its biggest deviation

from the benchmark which was a difference of .42 times. This implies that ExxonMobil cannot cover its

current liabilities with only its most liquid assets.

The Cash Ratio measures the ability of ExxonMobil to repay its current liabilities by only using its cash

and cash equivalents. The company’s cash ratio, in 2011 was 0.17 times but decreased throughout the

four year period, amounting to 0.07 times in 2014. Based on these figures ExxonMobil is not in a

position to repay its short-term debts with its cash since all the results are below 1. ExxonMobil falls

below the benchmarks for the period 2011 to 2014 with its four year average being approximately three

times lower than the benchmark.

ExxonMobil’s Defensive Interval Ratio began with an average of 0.62 days and increased to 0.69 in

2012, before decreasing in the subsequent years to 0.60 days. This indicates that ExxonMobil cannot

cover a single day of daily operating expenses without the use of long-term assets. However, that is the

usual case in the industry as the benchmark four-year period average is merely 1.23 days. This is

because these types of companies have higher long-term assets to current assets ratio than other

industries.

LONG-TERM SOLVENCY

Long-term solvency ratios (see Appendix II, Table 2) are used to measure a company’s ability to meet

its long-term debt and other long-term obligations.. When a company's solvency ratio is low there

is a greater chance that it will default on its debt obligations.

ExxonMobil had a Debt-Equity Ratio of 0.06 times in 2011 which steadily decreased to 0.04 times in

2013. However, in 2014 the debt-equity ratio increased to its highest over the observed period to 0.07

times. This indicates that in 2014, for every dollar owned by the shareholders of ExxonMobil

Corporation, the company owed $0.07 to its creditors. A debt-equity ratio over 2 times is unfavourable

and ExxonMobil Corporation had one of 0.07 times which, even though it increased, is still very

desirable compared to the four-year period average benchmark of 0.20 times. ExxonMobil’s debt-equity

8

ratio average for the period is almost 4 times smaller. This result means that the company is depending

less on external lenders. However, as debt-equity ratio has increased, percentages of ExxonMobil’s

assets which are financed by debt have increased as well.

The Long-Term Debt Ratio of ExxonMobil decreased over the period of 2011 to 2013 from 2.82% to

1.99%. However, there was a slight increase in 2014 to 3.33%, but compared to the benchmark of

11.05% ExxonMobil is within good standing. Long-term debt can be profitable if the money earned is

more than the interest rate on the long-term debt. This long-term debt ratio indicates that the company’s

assets are not generally financed by long-term debt.

ExxonMobil’s Times Interest Earned Ratio was 247.59 times in 2011 and drastically increased to its

highest in 2013, 6413.33 times, which is almost three times the benchmark of that year. This could be

attributed to the decrease in debt payments and the increase in revenue in 2013. The ratio however

drastically decreased to 181.52 the following year. This low ratio is a result of ExxonMobil’s fall in

revenue due to the drastic decline in oil prices and also the company’s increase in interest payments.

ASSET MANAGEMENT

These ratios are intended to describe how efficiently ExxonMobil Corporation is using its assets to

generate sales (see Appendix II, Table 3 and Appendix III, Figure 2).

The Inventory Turnover ratio measures ExxonMobil’s efficiency in turning its inventory into sales. It

measures the liquidity of the inventory. Over the observed four-year period, the company achieved its

highest inventory turnover ratio of 21.91 times in 2011 in comparison to the industry’s ratio of 16.58

times. A high inventory turnover ratio implies either strong sales or ineffective buying. A high inventory

turnover ratio may also indicate a shortage or inadequate inventory levels, which may lead to a loss in

business. In the case of ExxonMobil it implies strong sales and excellent liquidity. However, over the

period, the company’s ratio continuously decreased until it was 16.26 times in 2014. Although its

turnover has decreased, it is just slightly less than the benchmark high of 16.58 times.

The Receivables Turnover ratio measures ExxonMobil’s efficiency in collecting its credit sales and its

collection policies. The company achieved its highest receivables turnover ratio in 2014 of 18.50 times,

increasing from 13.72 times in 2011. This is compared to the benchmark of 12.04 times. The fact that

the receivables turnover is higher than the benchmark implies either that ExxonMobil operates on a cash

9

basis or that its extension of credit and collection of accounts receivable are moreefficient compared to

the benchmark.

The Fixed Asset Ratio measures if ExxonMobil is able to generate net sales from fixed assets

investments. The fixed asset turnover of the company decreased continuously over the period 2011 to

2014 from 2.35 times to 1.66 times. This means that there was a decline of $0.69 in sales for every

dollar in fixed assets over the four-year span. Although there was a decline, ExxonMobil still beats the

benchmark in 2014 by $0.24 in sales for every dollar in fixed assets.

PROFITABILITY RATIOS

Profitability ratios indicate the profit earning capacity and the overall efficiency of the business (see

Appendix III, Table 4 and Appendix IV, Figure 3).

The Profit Margin Ratio measures how much net income ExxonMobil earns out of every dollar in

sales. In 2012, the company obtained its highest profit margin ratio of 9.31% and then decreased to its

lowest in 2013 to 7.43%. Compared to the benchmark, at the beginning of the four-year period the

company was below by 0.69% in 2011, but surpassed it at the end of the period by 1.72%. This indicates

that even though the company’s profit margin has been decreasing it is still more profitable than its

competitors (see Appendix IV, Figure 4).

The Return on Assets Ratio (ROA) indicates how efficient ExxonMobil’s management is in utilizing

its assets to generate earnings. From 2011-2012, the ratio increased from 12.96% to 13.50%. This could

be attributed to the increase in total sales revenue during those years. However, from 2012 to 2014, the

ratio decreased from 13.50% to 9.34% but ExxonMobil remained above the benchmark for the entire

four-year period. This was the result of a combination of an increase in operational expenses, and a

decrease in oil prices in the respective years.

The Return On Equity (ROE) Ratio indicates how much net income is returned to the company’s

shareholders. Similar to its ROA ratio performance, ExxonMobil’s ROE increased from 27.26% in 2011

to 28.03% in 2012. This was the result of the increase in total sales revenue. However, from 2012 to

2014 the ratio decreased from 19.17% to 18.67% but remained above the benchmark for the entire

period. This was a result of another combination of an increase in operational expenses as well as a

10

decrease in oil prices. This decline is usually undesirable by shareholders as it means they are losing

value. However, the figure still exceeded the benchmark by more than 8% in 2014.

MARKET VALUE RATIOS Market Value ratios evaluate the economic status of the company in the secondary market (see

Appendix V, Table 5).

The Earnings Per Share (EPS) is the amount of money each share of stock would receive if all of the

profits were distributed to the outstanding shareholders at the end of the year. Over the period, the

company surpassed its benchmark. However, from 2011 to 2012 the company’s EPS increased from

$8.42 to $9.70 but then decreased to $7.37 in 2013. From 2013 to 2014 ExxonMobil’s EPS increased by

$0.23 to $7.60 while the benchmark EPS decreased by $1.91 to $5.20 which was favourable to investors

and their shareholders as ExxonMobil EPS was higher by over $2.00.

The Price Earnings (PE) Ratio shows what the market is willing to pay for a stock based on its current

earnings. In Dec 2012, the PE ratio dropped from 10.07 times in Dec 2011 to 8.93 times but increased to

13.72 times in Dec 2013 and then decreased to 12.18 times in Dec 2014. However, it seems

ExxonMobil’s PE ratio is on a general up trend as estimates for 2015 show an approximate value of

20.59 times. Given that this ratio changes very frequently, a four-year average was used to compare to

the benchmark. ExxonMobil’s average PE ratio for this period is 11.37 times compared to the

benchmark’s 10.28 times. This indicates that investors are willing to pay more than 11 times the

company’s earning for shares in the company. This shows that this company is highly valued by

investors and even more valuable than its competitors, which is beneficial to the shareholders.

The Market-to-Book Ratio measures the valuation of the stock relative to the underlying asset of the

company. Given that this ratio also changes frequently, a four-year average was again used to compare

the company with its benchmark. A value more than 1 means the firm has been successful in creating

value for its stockholders. ExxonMobil’s four-year average market to book ratio is 2.44 times compared

to the 1.67 times of the benchmark. This ratio shows that the company is still creating value to its

shareholders and at a better rate than its competitors.

11

Conclusion

ExxonMobil is generally in good financial standing despite the drop in oil prices over the 2011-2014

period. Its short-term solvency ratios are generally below 1, which indicates that the company tends

towards short-term insolvency. However, it is common for companies in this industry to have low short-

term solvency ratios due to their assets being mostly long-term assets and having little current assets.

The company’s long-term solvency is remarkable even though there has been a slight increase in debt

financing. The company is very capable of covering all of its long-term obligations. From the analysis, it

should also be pointed out that the company’s main source of financing is through equity of which they

have in 2014 a negative net issuance of stock meaning that they bought back more stocks than issued.

However, oil prices are downward-trending and since profits of the company and oil prices are

positively correlated, it should be expected that ExxonMobil will see decreases in revenue from its

operating activities until oil prices become stable or increase. According to an oil and gas analyst, Mr

David Alton Clark, there is an upcoming oil boom in the near future in which ExxonMobil is in the best

position compared to its competitors to benefit from the boom (SeekingAlpha 2015).

However, although an oil boom may be in the near future overall demand for oil may decrease due to

governments moving towards alternative energy sources. The United States of America which

represents over 37% of ExxonMobil’s total revenue is moving towards renewable energy as they try to

cut back on oil and gas expenses. Although they are moving towards renewable energy, natural gas

energy capacity will still exceed renewable energy sources even in 2040, according to estimates by the

U.S Energy Information Association (see Appendix V, Figure 5). Thus ExxonMobil will still likely have

sustainable profits and demand in the future and, continue to maintain its dominant position in the

industry.

RecommendationAs Mr.Lovell prefers dividend income stocks, ExxonMobil Corporation is recommended. Over the four

year period, the company’s dividend per share increased from $0.47 in 2011 to $0.69 in 2014 even with

a decrease in earnings. According to Forbes, ExxonMobil is ranked in the top 25 safest dividend paying

stocks with over a decade of annual increases in dividend per share payments (Forbes 2015).

12

ExxonMobil’s CEO, Rex Tillerson, noted that in 2015 they will be a decrease in stock buybacks to $1

Billion USD in quarter 1 compared to 2014 full year of $13.2 Billion USD. This allows for the investor

to possibly buy more stocks. Also according to Forbes, it is expected for the company to increase its

dividend per share in 2015 as, the board of directors care very deeply about rewarding shareholders via

dividends (Forbes 2015). In conclusion as ExxonMobil is ranked as a very low risk stock and prioritizes

dividend payments, Big Rock Corp. highly recommends this stock to Mr Lovell.

13

Bibliography

ExxonMobil. (n.d.). Managing Climate Change - Risk Factors. Retrieved March 19, 2015, from

Corporate.ExxonMobil.com: http://corporate.exxonmobil.com/en/environment/climate-

change/managing-climate-change-risks/risk-factors?parentId=fbec4340-be1d-41ff-b55b-

988cc9e44881

KRAUSS, C. (2015, February 2). ENERGY & ENVIRONMENT: Exxon Mobil Revenue and Profit Off 21% on

Oil Decline. Retrieved February 14, 2015, from THE NEW YORK TIMES:

http://www.nytimes.com/2015/02/03/business/energy-environment/exxon-mobil-q4-

earnings-decline.html?ref=topics&_r=0

Pennwell Corporation. (2015, January 19). Retrieved February 15, 2015, from Oil and Gas Financial

Journal: http://www.ogfj.com/articles/2015/01/exxonmobil-png-receives-license-to-develop-p-

nyang-field.html

Weiser, B. (2015). Exxon Settles $9 Billion Pollution Case in New Jersey for Far Less. The New York

Times .

Why the Oil Price is Falling. (2014, December 8). Retrieved March 19, 2015, from The Economist

explains: http://www.economist.com/blogs/economist-explains/2014/12/economist-explains-4

CLARK, D. ( 2015, March 20). Exxon Mobil: Seeds Of The Next Oil Boom Are Being Sown As We Speak.

Retrieved March, 20, 2015, from Seeking Alpha : http://seekingalpha.com/article/3015806-exxon-

mobil-seeds-of-the-next-oil-boom-are-being-sown-as-we-speak

Fundamentals of Corporate Finance Alternate Edition Hardcover – February 24, 2009

by Stephen Ross (Author), Randolph Westerfield (Author), Bradford D. Jordan (Author)

Sources for Benchmarks and Financial information: Forbes, energy.gov, csimarket.com, .apec.org,

financials.morningstar.com.

14

Appendices

Appendix I

Figure 1: ExxonMobil’s Short-term Solvency Ratios

Table 1: ExxonMobil’s Short-term Solvency Ratios compared to their benchmarks

15

Appendix II

Table 2: ExxonMobil’s Long-term Solvency Ratios compared to their benchmarks.

Table 3: ExxonMobil’s Asset Management Ratios compared to their benchmarks.

16

Appendix III

Figure 2: ExxonMobil’s Asset Management Ratios over the period 2011 to 2014.

Table 4: ExxonMobil’s Profitability Ratios compared to their benchmarks.

17

Appendix IV.

Figure 3: ExxonMobil’s Profitability Ratios over the period 2011 to 2014.

Figure 4: ExxonMobil’s Profit Margin compared to its benchmark over the period 2011 to 2014.

18

Appendix V

Table 5: ExxonMobil’s Market Value Ratios compared to their benchmarks.

Figure 5: Estimates of Electricity generation capacity by fuel type over a period of years.

19