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|ExxonMobil Corporation |(XOM-NYSE) | $67.32 |
Note: All new or revised material since the last report is highlighted.
Reason for Report: Developed Advanced Tire Inner Liner Previous Edition: September 12, 2006
Overview
ExxonMobil Corporation (XOM), created through the 1999 merger of Exxon and Mobil Corporation, is the largest publicly traded energy company in the world. The company is involved in all phases of the petroleum integration chain, from the exploration and production of oil and gas to the manufacturing and sale of refined products/chemicals/petrochemicals and other derivative products, in addition to its ownership of interests in electrical power generation facilities. Its other products include lube basestocks and petroleum specialties, such as waxes, process oils, and asphalt. The merger made ExxonMobil the leader by a wide margin among the integrated oil companies. Through its divisions and affiliated companies, ExxonMobil operates or markets products in the United States and in approximately 200 other countries and territories. Nearly two third of XOM’s earnings come from operations outside the US. The company divides its operations into three segments: Upstream, Downstream and Chemicals. It is headquartered in Irving, Texas. For more information, please visit its website: . The company operates on a calendar year basis.
Analysts have identified the following factors for evaluating the investment merits of XOM:
|Key Positive Arguments |Key Negative Arguments |
|Fundamentals |Fundamentals |
|One of the best-positioned major integrated oil companies based on its |Geopolitical risks associated with international operations. Growing |
|strong resource base, geographic and product diversity. |exposure to the potentially unstable West African region. |
|Strong free cash flow. |Inflation impact on production costs. |
|Steadily growing dividends & ongoing share repurchase program. |Competitive Threats |
|Superior operating efficiencies. |Earnings more sensitive to changes in chemical margins compared to peers.|
|Successful in controlling inflationary costs by managing costs through |Due to less leverage to oil prices it may not outperform its peers in the|
|technology, planning, contracting and other initiatives. |current environment of strong commodity prices. |
|Industry has anemic spare production and refining capacity |Sector-leading profitability could be eroded by a shift toward higher-tax|
|Could be flight to quality choice in downturn |production mix. |
|Governments and public benefit from $27 billion paid in taxes |XOM’s dividend yield significantly lags its peers. |
|Competitive Advantages |Macro Issues |
|Less leverage to oil prices compared to peers. |Slowdown or contraction of the global economy could dampen growth in |
|Sector leading return on capital employed. |demand for oil products. |
|Growth Opportunities |Volatile oil and gas prices. |
|Major projects continue to ramp up on or ahead of schedule. |Enhanced competition regarding energy reserves not exploited as yet. |
|Redeploying capital from mature non-core assets into more profitable, |Energy reserves located in increasingly inaccessible places. |
|higher-growth regions. | |
Recent Events
On October 5, 2006, a milestone in the development of improved tire inner liners was announced by XOM Chemical Company and The Yokohama Rubber Co., Ltd. (YRC) following tests to qualify their jointly developed technology for use in passenger vehicle tires in harsh winter conditions. The companies’ development of DVA (dynamically vulcanized alloy) advanced tire inner liner technology is based on proprietary Exxpro polymers and alloys of those polymers developed by ExxonMobil, as well as alloys and application technology developed by YRC. The DVA advanced inner liner technology used in the film liner materials combines the flexibility and elasticity of a rubber with the low-air permeability of a plastic.
On October 4, 2006, XOM announced its plan to drill three exploratory wells in an Indonesian offshore oil block over the next three years. XOM signed an oil contract with the Indonesian government covering 5,339 sq km (2,062 sq mile) of the offshore Surumana block in the Makassar Straits.
On September 20, 2006, XOM Chemical introduced a new version of Santoprene(TM) thermoplastic vulcanizate (TPV) that complies with U.S. Food and Drug Administration (FDA) regulations for food contact and bonds with engineering thermoplastics (ETPs). The new grade is suitable for many types of applications which come into contact with food and liquids including kitchen utensils; cutlery; blenders and processing equipment; food storage containers; small kitchen appliances such as toasters, kettles and microwaves; and caps, seals, and closures.
On September19, 2006, XOM announced that the company will build a new facility at its Baton Rouge, Louisiana, complex to produce specialty compounded products. The investment is part of the company's global compounding strategy and commitment to provide engineered thermoplastic materials to the automotive and consumer products industries. The Baton Rouge plant will have the capability to manufacture a broad spectrum of commercial compounded products including ExxonMobil Chemical's Performance Polyolefin grades (compounded polypropylene), Santoprene(TM) thermoplastic elastomers and other specialty elastomers.
On September 7, 2006, XOM announced that its subsidiary, Exxon Neftegas Limited, has commissioned the crude oil export system for the multiphase Sakhalin-1 project offshore Russia, bringing the total number of ExxonMobil-operated startups within the last 12 months to eight.
On August 30, 2006, XOM announced that Mobil 1 has been selected as the factory and service fill motor oil for the new 2007 Acura RDX luxury SUV. Acura selected Mobil 1, the world's best selling synthetic motor oil, to meet the unique lubrication demands of the first-ever Acura turbocharged and inter-cooled engine. Due to its high-temperature oxidation stability and ability to prevent deposits from building on critical turbocharger and engine components, Mobil 1 will provide maximum protection for the high-performance RDX.
On July 26, 2006, XOM announced that its affiliate, Mobil Producing Nigeria Unlimited (MPN), has started up the East Area Additional Oil Recovery project located approximately 17 miles (28 kilometers) offshore Nigeria. MPN (40 percent interest) is operator of the project with co-venture partner Nigerian National Petroleum Corporation (60%). The project involves the re-injection of natural gas to mitigate normal field decline from East Area reservoirs and will significantly increase ultimate oil recovery from Blocks OML 67 and OML 70. XOM expects that the project will produce 530 million gross barrels of additional oil reserves from the blocks, and will provide a peak volume of 120,000 barrels a day of oil.
On June 28, 2006, XOM announced a long-term extension of its Technology Partnership with Team McLaren Mercedes to supply the Formula 1 racing team with Mobil 1-branded motor oils and high-performance fuels. XOM said the deal will be extended for 12 years. The company did not disclose the value of the deal.
Revenue
ExxonMobil has three core activities worldwide: Upstream, Downstream and Chemicals. Production of crude oil and natural gas makes up the majority of XOM’s earnings and employs most of its capital. Its Downstream and Chemical operations make up approximately 35% of earnings.
The table below details actual results and is updated for the recent changes in forecasts through 2006 and 2007.
|Segment Earnings After Tax |
|Positive |76.5% |
|Neutral |23.5% |
|Negative |0.0% |
|Average Target Price |$72.88↓ |
|Digest High |$78.00 |
|Digest Low |$64.00↓ |
Risks to the price target include a slowdown in global economics, geopolitical risks, lower-than-projected oil and gas prices and/or production rates, higher unit operating costs, negative reserve revisions, volatile commodity prices, delays or production problems, and disappointing exploration results.
Capital Structure/Solvency/Cash Flow/Governance/Other
Capital Spending: Operating cash flow and asset sales were $12.4B, which funded $4.9B in capex, $1.9B in dividends, and $6.8B in share repurchase, including asset sales of $1.1B. Cash balance was $36.7B, while total debt was $8.4B. One analyst (KeyBanc) expects XOM to continue to return cash to shareholders through share buybacks and dividends.
Share Repurchase: During the second quarter of 2006, Exxon Mobil Corporation purchased 111 million shares of its common stock for the treasury at a gross cost of $6.8B. These purchases included $6.0B to reduce the number of shares outstanding and the balance to offset shares issued in conjunction with the company’s benefit plans and programs. Shares outstanding were reduced from 6,050 million at the end of the first quarter to 5,945 million at the end of the second quarter.
Dividends: On July 26, 2006, the Board of Directors of XOM declared a cash dividend of 32 cents per share on the common stock, payable on September 11, 2006, to shareholders of record at the close of business on August 14, 2006. The third quarter dividend is in line with the dividend paid in the second quarter of 2006.
Potentially Severe Problems
A major concern for XOM in the near future is the hurricane season.
Long-Term Growth
Exxon is the undisputed industry leader by every performance metric: size, reserve, production, financial strength, operating efficiencies, and returns. It has more proved reserves, produces more hydrocarbons, and generally leads the group in being the lowest cost producer. It also has the strongest balance sheet in the group and has maintained the highly coveted AAA credit rating for more than 80 years. Exxon’s efficient operations and highly integrated business model provide the template for all other industry players. XOM has the benefit of a very strong cash flow and a solid balance sheet. With more cash on hand than debt, the company is expected to continue its share repurchase program and annual dividend increases. The healthy balance sheet also affords the company the flexibility to make substantial investments or acquisitions. One analyst (Oppenheimer) notes that although a sharp drop in oil prices would depress XOM earnings, the shares could still gain from the flight to quality as energy investors seek safer investments in the sector.
Competition for Exxon centers on opportunities at the Upstream business for property acquisitions as well as outright acquisitions of other companies. BP’s major foray into the Russian market has forced its peers, particularly Exxon, to evaluate their options. The Downstream business, particularly the retail marketing aspect, is also extremely competitive.
One analyst (UnionBankSwitz.) believes XOM is the best-run integrated oil company in the world, supported by its track record of superior ROCE relative to its peers. While returns and free cash flow have exceeded the peer group for years, Exxon’s Upstream production has been flat since the merger. But with a wave of new projects coming on stream late last year and more expected, the analyst believes Exxon is well positioned to deliver 3% plus per annum growth from 2006-09. In addition to an upturn in Upstream production growth beginning in 2006, Exxon is the best-positioned integrated to take advantage of the strong outlook on the chemicals industry.
One analyst (MorganStanley) believes that the company will continue to grow production at a long-term growth rate of approximately 3%. Significant new sources of production will more than offset production declines, rendering positive production growth.
According to one analyst (Bear Stearns), over the last 10 years, XOM’s reserve replacement and average finding and development costs were 114% and $4.89/boe, respectively, which ranks third and first respectively, among the peer group. Based on the Company’s second quarter performance and guidance, XOM will continue to be one of the top performers again in 2006. Additionally, the Company’s financial condition is extraordinarily strong due to which it will continue to return large amounts of cash to shareholders in the coming years.
Upcoming Events
On October 26, 2006, the company is expected to release its 3Q:06 earnings results.
On October 15, 2006, XOM will resume full delivery of Alaska North Slope crude oil from the Prudhoe Bay field. The company said it will lift the clause it invoked nearly two months ago after operator BP PLC discovered a leak and corrosion in the oil pipeline.
Individual Analyst Opinions
POSITIVE RATINGS
AG Edwards – Buy/Conservative ($72) – (10/04/06): The firm reiterated its rating and target price. INVESTMENT SUMMARY: XOM’s strong balance sheet and superior asset base, leading return on capital employed and below-average earnings volatility are reasons behind the firm’s positive outlook. Given XOM’s highly integrated business model and operating efficiencies, the firm said its positive outlook for margins and commodity prices, as well as positive earnings momentum, would continue in the near future.
KeyBanc – Buy ($76) – (07/31/06): The firm maintains its rating and target price. INVESTMENT SUMMARY: XOM performed exceptionally well during the current quarter and more importantly, shareholder distributions continue to increase quarter after quarter. Given the Company’s present cash position and the expectation of a strong earnings outlook in the near future, the firm expects XOM to continue the current rate of share buybacks for the foreseeable future as well as gradually increase its quarterly dividend.
Zacks Investment Research – Buy ($75) – (08/18/06): The firm maintains its rating and target price. INVESTMENT SUMMARY: The firm believes XOM has a strong pipeline of upstream development projects, a chemicals business that is fully integrated with its refining assets, an exceptionally strong balance sheet, and a track record of returning capital to shareholders. XOM’s diversified portfolio of assets, both in terms of business as well as geographic locations, helps to produce stable results throughout the commodity price cycle.
B. of America – Buy ($75) – (10/04/06): The firm maintains its rating and target price. INVESTMENT SUMMARY: Downstream earnings were very good given 15% lower throughput associated with planned maintenance and divestments. While shareholders earned record profits, governments and the general public benefited three times as much as ExxonMobil paid $27bn in various taxes globally. Overall, the shares offer the best combination of value, growth and defensiveness.
Bear Stearns – Outperform ($75) – (09/21/06): The firm maintains its rating and target price. INVESTMENT SUMMARY: Despite a major disruption in oil supplies, the oil prices are expected to remain stable next year. Based on the second quarter performance and guidance, the firm believes that XOM will continue to be one of the top performers in 2006. Additionally, given the company’s extraordinarily strong financial condition, the firm projects that XOM will continue to return large amounts of cash to shareholders in the coming years.
Citigroup – Buy ($76) – (09/26/06): The firm maintains its rating and target price of $76. INVESTMENT SUMMARY: It considers XOM one of the most successful integrated oil and gas companies that has sustained a premium rating to the sector built on capital discipline, a solid balance sheet, and the ability to generate consistent earnings and returns. Additionally, a meaningful share of the Upstream business will retain leverage to higher oil prices. The share price has followed the higher move in oil prices. With XOM’s refining capacity some 60% higher than oil production and some 80% exposed to lower-cost crude feedstock, the firm’s aggressive view of the future trend in light-heavy differentials also positions XOM as a primary beneficiary.
Friedman, Billings – Outperform ($74) – (09/07/06): The firm maintains its rating and increased its target price from $73 to $74. INVESTMENT SUMMARY: XOM’s output growth was strong and refining margins were stronger than expected. XOM is expected to benefit in the upcoming quarters from its global refining strength, Upstream production volume growth, and its status as a low-cost producer in all of its segments.
Goldman – Outperform ($75) – (09/27/06): The firm maintains its rating and target price. INVESTMENT SUMMARY: The firm is bullish on XOM shares on the basis of robust organic E&P volume growth, a track record of execution and robust commodity prices.
Lehman – Overweight ($64) - (10/04/06): The firm maintains its rating but reduced the target price from $70 to $64. INVESTMENT SUMMARY: XOM remains one of the most attractive names on a risk-adjusted basis. The quarterly results strengthened the evidence that it is finally benefiting from the strong pipeline of development projects. Over 2005-10, XOM is expected to grow debt adjusted per share production by more than 8% per annum. It also continues to have a better control on costs relative to peers. XOM also raised its buyback rate and at the current annual run rate, will be returning almost 8% cash to shareholders, compared to the sector average of 3%.
Merrill – Buy ($72) – (10/05/06): The firm maintains its rating and target price. INVESTMENT SUMMARY: XOM has historically demonstrated its ability to reinvest cash flow into higher-return projects than its competitors. This trend is expected to continue, which will support a higher-than-average multiple for XOM shares. XOM is well positioned operationally because Upstream revenues are high at a time of growing production from longer-term projects. Downstream refining margins are also high historically, and could stay above average in 3Q06 and beyond. The chemicals business remains important, profitable and positioned for demand growth in Asia. The balance sheet is positioned to handle virtually any contingency and its buyback program has proved differentiated over time but more current yield is preferred.
MorganStanley – Overweight ($78) – (07/27/06): The firm maintains its rating and target price. INVESTMENT SUMMARY: The firm believes XOM remains the premier longer-term investment story in the global petroleum sector. Robust industry trends are likely to persist in the coming quarters, resulting in continued strong financial performance. Outlook remains favorable for E&P, R&M and Chemicals. Due to the healthy global economy, growth in demand is likely to remain favorable. Utilization rates are also likely to remain strong in 2006.
Prudential – Overweight ($76) – (10/03/06): The firm maintains its rating and target price of $76. INVESTMENT SUMMARY: XOM’s valuation has been attractive, overall shareholder yield has been strong, returns on capital have been sector-leading and the Upstream project portfolio has been robust. Based on its 2006 oil price forecast, the firm believes the company’s return on capital employed could be the best among the integrated oil companies. The firm also estimates that, after declining 3.6% in 2005 due to hurricane shut-ins, divestitures and production sharing contract effects, production will grow by about 5% in 2006 and 4% in 2007, driven by project start-ups in Angola, Nigeria, Malaysia, Qatar, and the Caspian region. The firm believes XOM continues to focus on delivering industry-leading returns at all points in the commodity cycle over the long term.
NEUTRAL RATINGS
CIBC – Sector Performer ($70) – (09/25/06): The firm maintains its rating and target price. INVESTMENT SUMMARY: The company’s stronger-than-expected Q2/06 results were primarily attributed to robust Downstream operations. With the refining indicators pointing to continued strength in Q3/06, the firm has upwardly revised its EPS and CFPS estimates modestly. With its strong balance sheet, XOM is well poised to step up returns to shareholders from Q3/06 onward. Because of XOM’s stellar historical operating performance and solid financial performance, the firm believes the shares deserve a premium multiple among the international integrated oils.
J.P. Morgan – Neutral – (09/29/06): The firm maintains its rating. INVESTMENT SUMMARY: XOM’s Upstream production volumes and average realizations were both modestly above the firm’s forecasts. However, most of the favorable variance in XOM’s Upstream earnings was attributed to asset sales and a tax benefit arising from a change in Canada’s tax laws. It believes XOM would have plenty of cash flow to fund additional capital spending in the future. According to the firm, XOM's valuation fully reflects the company's strong underlying fundamentals.
Oppenheimer – Neutral – (09/11/06): The firm downgraded its rating from Buy to Hold rating but maintained its target price. INVESTMENT SUMMARY: The firm believes XOM’s upside potential is not greater than the downside risk from a further decline in oil and gas prices and refining margins. These industry indicators are likely to remain volatile and unpredictable, and fluctuate in ranges above historical levels.
UnionBankSwitz. – Neutral – ($69) – (07/27/06): The firm maintains its rating and target price. INVESTMENT SUMMARY: XOM is the best-run integrated oil company in the world, a belief that is supported by its track record of superior ROCE relative to its peers. While returns and free cash flow have exceeded the peer group for years, XOM’s Upstream production has been flat since the merger. But with a wave of new projects coming on stream in 2006, the firm believes XOM is well positioned to deliver 3% plus per annum growth from 2006-09. In addition to an upturn in Upstream production growth beginning in 2006, XOM is the best-positioned integrated to take advantage of the strong outlook for the chemicals industry. The firm believes margins will remain well above mid-cycle levels in 2006 and 2007.
NEGATIVE RATINGS
None
Copy Editor: Salma Islam
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October 05, 2006
Research Associate: Sweta Juthani, M.Fin.
Zacks Research Digest Editor: Lynnette Woolery, M.Sc. (Fin), CFA
Sr. Ed.: Ian Madsen, CFA; imadsen@; 1-800-767-3771 x417
155 North Wacker Drive Chicago, IL 60606
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