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Exxon Mobil (XOM)Stock (Energy Industry, Oil & Gas Majors Industry)
 Exxon generated the majority of its earnings from upstream exploration and production (E&P) activities, producing 4.18 million barrels of oil equivalent (MMBOE) every day in 2007. Its 2006 output amounted to 3% of the world's oil and 2% of global energy production. The geographical diversity of Exxon's E&P activities makes it less vulnerable to the regional production uncertainties that plague the industry. The company is also an international leader in the downstream refining industry, with 35,000 retail stations and over 5.7 million barrels per day of refining capacity. ExxonMobil leads a pack of six global "supermajor" petroleum companies which explore for, produce, refine, and market oil and gas. Of these six (including BP (BP), ChevronTexaco (CVX), Total (TOT), ConocoPhillips (COP), and Royal Dutch Shell), ExxonMobil has consistently produced the highest revenue, income, and returns on capital employed (31.8%). Exxon also excels in technological advances, and its safety record led the industry in 2006. Despite these strengths, Exxon remains largely at the mercy of market maker OPEC, an organization of petroleum-producing nations that controls global oil prices by holding about 40% of the world's crude oil supply. And while rising oil prices may be a boon to Exxon and other supermajors, increasing petroleum costs encourage the development of alternative energies such as biofuels, posing a longer-term threat to the oil industry. 
[edit] Business and Financials Exxon had a strong year, with revenues increasing from a record $377.6 billion to a record $404.6 billion. Fourth quarter income increased from 2006 to 2007 by $2 billion and full year net income increased by over $1.1 billion. The company's U.S. operations shrank over the year, with U.S. upstream earnings falling by around $300 million and U.S. downstream and chemicals each falling by about $100 million. Internationally, the company grew tremendously, with upstream earnings increasing by around $600 million, downstream increasing by $1.2 billion, and chemicals increasing by around $350 million[1]. Overall earnings growth was fueled by spiking oil prices across the the year, with the strongest margins growth occurring in the fourth quarter. Because Exxon produces so much of its own crude, the company was able to avoid some of the margins decreases that were experienced by much of the refining industry. Exxon is also in the oil and gas transport business; on April 11th, 2008, it announced that it would join the partnership with ConocoPhillips and Chevron to build a pipeline that would span from the North Slope of Denali in Alaska through Canada and into the U.S. The total cost of the project is estimated at $20 billion, and will require over 1000 government permits in both countries, but the returns could be massive, as the gas shipped by the line has the potential to meet 8% of total U.S. gas demand[2]. In the first quarter of 2008, Exxon saw net income grow $1.6 billion year on year, to $10.9 billion. Most of this growth stemmed from the company's upstream segment, as rising oil prices carried its exploration and production operations up $2.7 billion year on year to profits of $8.8 billion, despite a 10% (270,000 BPD) decline in production from the first quarter of 2007. Income growth was offset by the company's downstream segment, however, as rising oil prices decreased margins and caused income to fall $750 million from 1Q07 for refining and $210 million from 1Q07 for chemicals. Net income for the second quarter of 2008 was a record $11.7 billion, up $1.4 billion year-on-year.[3] Crude realizations were $119.29, accounting for the record $10 billion upstream income[4]; refining margins were down by over 50% for the same reason.[4] Production decreased 8% year-on-year[4]; liquids production was down 10%.[4] In its treasury, Exxon holds 2.736 billion shares of its own stock - $123 billion worth. Overall the company owns about $238 billion of its own stock. While this takes shares off the market, increasing share prices, it prevents the company from investing that money in E&P and other operations that could aid the company's business in the long term. In March 2003, James Giffen of the Mercator Corporation was indicted, accused of bribing President Nursultan Nazarbayev of Kazakhstan with $78 million to help ExxonMobil win a 25 percent share of the Tengiz oilfield, the third largest in the world. On April 2, 2003, former-Mobil executive J. Bryan Williams was indicted on tax charges relating to this same transaction. The case is the largest under the Foreign Corrupt Practices Act.[55] This series of events is depicted in the film Syriana. In a U.S. Department of Justice release dated September 18, 2003, the United States Attorney for the Southern District of New York announced that J. Bryan Williams, a former senior executive of Mobil Oil Corporation, had been sentenced to three years and ten months in prison on charges of evading income taxes on more than $7 million in unreported income, "including a $2 million kickback he received in connection with Mobil's oil business in Kazakhstan." According to documents filed with the court, Williams' unreported income included millions of dollars in kickbacks from governments, persons, and other entities with whom Williams conducted business while employed by Mobil. In addition to his sentence, Williams must pay a fine of $25,000 and more than $3.5 million in restitution to the IRS, in addition to penalties and interest.[56] [edit] Exxon's Oldest Shareholder Group is Calling for the Company to Develop Renewable Energy SourcesRex Tillerson is both CEO and Chairman of the Board for Exxon Mobil. On April 30th, 2008, a majority of the Rockefeller family, the oldest group of the company's shareholders, voiced concerns about the company's focus on oil and gas in a "changing energy environment",[5] and called for an independent Chairman to be hired in order to take the company in a direction that would maximize long-term shareholder value. The family is very much concerned with the diversification of other oil companies into renewable energy sources, and Exxon's decisions thus far to remain in traditional energy. On May 28th, 2008, at the annual shareholders meeting for the company, nearly 60% of the votes passed were against splitting the CEO/Chairman position. Investors rejected the Rockefeller's proposal because, no matter how bad the company's environmental record, Exxon is very profitable in the current high-price environment. Tillerson reiterated the company's focus on oil and natural gas, implying that Exxon has little-to-no plans to invest in renewable energy technologies. [edit] International Relations IssuesInvestigative reporting by Forbes Magazine raised questions about ExxonMobil's dealings with the leaders of oil-rich nations. " ExxonMobil controls concessions covering 11 million acres (44,500 km²) off the coast of Angola that hold an estimated 7.5 billion barrels (1.2 km³) of crude.[53] In 2003, the Office of Foreign Assets Control reported that ExxonMobil engaged in illegal trade with Sudan and it, along with dozens of other companies, settled with the United States government for $50,000.[54] In March 2003, James Giffen of the Mercator Corporation was indicted, accused of bribing President Nursultan Nazarbayev of Kazakhstan with $78 million to help ExxonMobil win a 25 percent share of the Tengiz oilfield, the third largest in the world. On April 2, 2003, former-Mobil executive J. Bryan Williams was indicted on tax charges relating to this same transaction. The case is the largest under the Foreign Corrupt Practices Act.[55] This series of events is depicted in the film Syriana. In a U.S. Department of Justice release dated September 18, 2003, the United States Attorney for the Southern District of New York announced that J. Bryan Williams, a former senior executive of Mobil Oil Corporation, had been sentenced to three years and ten months in prison on charges of evading income taxes on more than $7 million in unreported income, "including a $2 million kickback he received in connection with Mobil's oil business in Kazakhstan." According to documents filed with the court, Williams' unreported income included millions of dollars in kickbacks from governments, persons, and other entities with whom Williams conducted business while employed by Mobil. In addition to his sentence, Williams must pay a fine of $25,000 and more than $3.5 million in restitution to the IRS, in addition to penalties and interest.[56] [edit] Trends and Forces[edit] Exploration and Production (E&P) Emphasis Most of ExxonMobil's profits come from exploration and production, which in 2007 accounted for 65% of earnings. The company's very large portfolio of exploration and production opportunities allows it to avoid the biggest political and technical risks and choose only the most profitable investments. With oil production declining in North America and Europe, Exxon has turned instead to regions like the Middle East, West Africa, China, and Russia for further growth. Exxon currently has seven major developments scheduled; together they are expected to produce about 250,000 oil equivalent barrels per day during their peak. Examples include an offshore Angola project that started production in January 2008 and is predicted to yield 600 million barrels of oil equivalent[6], as well as recently awarded rights to drill off the coast of Greenland. The company discovered reserves off the coast of Congo, though political turbulence in the area could weigh on the future of the project. In China, during 3Q07, the company has entered into a joint venture with Sinopec and Saudi Aramco to provide petroleum products to the economically growing Fujian region.  The main reason for Exxon's spread across the world is that much of the world's oil originates from OPEC-controlled countries that block the entry of foreign oil companies. Because of this, companies like Exxon must continuously search for reserves in countries that will allow the company to invest and operate without major risk of nationalization and terrorism. The most recent example of this spread is the proliferation of drilling in Africa. While many African countries are less than stable, the continent has 8% and 10% of the world's proven gas and oil reserves, making it an especially important resource as we approach peak oil and supplies drop. Most of Exxon's major competitors have much less diversified holdings. BP explores and produces mainly in Russia, for example, while Total confines itself to West Africa. [edit] Kearl Oil Sands Project: tough oilLocated in Alberta, Canada, the Kearl oil sands are estimated to contain almost 175 billion barrels of oil, a content volume second only to Saudi Arabia's. However, oil from sand deposits is very thick, and it must be highly processed before it can flow and be distributed for use. The Kearl recovery project will be financially viable only if oil prices remain at the current relatively high levels. Should oil prices drop, Kearl will become a liability for Exxon, instead of a boon. [edit] E&P supremacyOil is becoming harder and harder to find, and many of the remaining unexplored oil fields are trapped in terrain that is difficult to develop. Rising oil prices make the extraction of this oil key to reaping huge profits. ExxonMobil's E&P technology is among the best in the industry, as its Goliath stature allows it the CapEx leeway to spend large amounts on research and development. Examples of its innovations:
[edit] Fluctuating oil prices Higher oil prices translate into higher profits for ExxonMobil;s E&P segment, which far outweigh the profit declines that are caused in the refining and chemicals segments from rising input prices. The market price for oil depends largely on world oil supply. Increasingly, oil production has been decreasing; Exxon reported a decrease in liquids production from 4Q06 of 160,00 barrels per day in 4Q07[7]. Furthermore, the actions of the Organization of the Petroleum Exporting Countries (OPEC) have a huge impact on oil prices. OPEC accounts for approximately 40% of the world's crude oil supply and can increase or decrease the amount of oil on the market to maintain attractive oil prices for its member countries. However, OPEC has been increasingly losing control over the oil market--oversupply from non-OPEC production has cut away at OPEC's influence. Oil prices may also decrease because of the recent spike in interest towards alternative fuels like ethanol (see below, Alternative Energy). Together with oversupply and loss of OPEC control, competing alternative fuels could force a downturn in oil prices. A slowdown in economic growth could also reduce demand for energy and lower oil prices.
[edit] Environmental ConcernsFossil fuels, though highly cost-efficient forms of energy, are heavy polluters when burned. Increasing environmental concern over environmental degradation and global climate change is fueling a consumer-driven push away from dirty forms of energy toward cleaner forms like wind energy and solar power. These concerns are also causing political movements, which are leading to increased regulation in the fossil fuels market. Government regulations like emissions caps, renewable energy subsidies, and carbon trading schemes all facilitate transitions away from dirty, nonrenewable fuels. Natural gas is being touted by a number of sources (few of them environmental advocates) as "the" alternative to oil and coal, for being cleaner, cheaper, and more abundant (Exxon's gas production increased 1.1 bcf per day, but liquids production fell 160,000 barrels per day[9]). While natural gas does burn more cleanly than either oil or coal, and releases fewer greenhouse gases than either, natural gas is still a carbon-emitter. The current international focus on slowing carbon emissions is very likely to slow the market for both oil and natural gas, hurting Exxon's business immensely. While the company is well behind competitors like BP and Chevron in preparing for an oil-free future, it is making moves to catch up; recently, the company developed new film technologies that have the potential to improve battery life in electric and hybrid cars, putting the company one step closer to profitable eco-friendliness. Exxon was forced to pay $507 million to clean up after the 1989 Exxon-Valdez oil spill. The company was being sued by Alaskans for $5 billion in punitive damages, but in June 2008 the Supreme Court limited the company's payment to another $507 million.[10] On May 7th, 2008, BP, Shell, ConocoPhillips, Chevron, Marathon Oil, Valero, and Sunoco agreed to pay $423 million in damages for contaminating groundwater with methyl tertiary butyl ether, an oxygenate used to increase octane levels in gasoline that has been replaced in recent years with ethanol. Exxon, along with five other companies named in the lawsuit, are not settling and will continue to contest. [edit] Alternative energy threatThe rise of petroleum prices has been slowly countered by the increasing financial feasibility of alternative energy replacements for traditional oil products. Alternative energy is still some years off from widespread adoption; alternative energy challenges like low production volume, low of production efficiency, and lack of infrastructure (some new fuels require distribution infrastructure separate from existing oil pipelines) all have yet to be overcome. However, energy sources such as ethanol, solar or wind end up taking off, the negative impact on the oil and gas industry could be huge. Exxon is well aware of this, calling modern attempts to achieve energy independence "futile and counterproductive" at the 2007 World Energy Congress in Rome [edit] Asia's Rising DemandThe greatest driver of petroleum demand is economic growth. Burgeoning underdeveloped economies like China are expected to make the Asia Pacific natural gas market grow faster than any other regional gas market in the world. However, ExxonMobil is not now tapping into these growth centers--80% of its Asia Pacific sales are from developed countries like Japan, Australia, and New Zealand. In the near future, ExxonMobil plans to expand its market penetration in China and India because of their high growth potentials and current state of market deregulation. China's demand for oil is currently lower than other countries' at 2 barrels per person per year (bpy)--America's is 25 bpy and Japan/South Korea's is 15 bpy. Exxon is planning on increasing its investments for its Chemicals segment to $1.8 billion in 2008 - twice the 2007 amount. Most of this will go to expanding its chemicals segment in Asia. [edit] Natural DisastersNatural disasters can significantly disrupt Exxon’s oil production operations. For instance, hurricane activity can damage and destroy refineries, oil rigs, pipelines, and other equipment. In 2005, production declined 15% and Exxon lost 33 MBOED (million barrels oil equivalent per day) of production due to the impact of Hurricanes Katrina and Rita on Gulf Coast oil production operations owned by the company. [edit] Global presence: blessing or burden?ExxonMobil is continually threatened by large tax increases and tightening of environmental protection legislation from the US government. There are currently three pieces of legislation that would have a negative impact on Exxon and other U.S. integrated oil companies which are currently in the Senate expected to pass. While Exxon is less at risk than some of its US competitors from restrictive legislation because Exxon is not focused only in the US, this global presence may bring problems from foreign politics as well. About 60% of the world’s supply of oil comes from geopolitically unstable countries including Saudi Arabia and Venezuela (the latter is Exxon's largest Latin American producer with 47 MBOED in 2005), and high prices for oil have given some of these troubled oil exporting countries greater power to demand contract changes, tax raises, or oil nationalization. In 2007, Exxon paid $5 billion in taxes to the U.S. government; it paid $25 billion to foreign governments.[11]
[edit] Venezuela and Nationalization of Exxon's AssetsIn 2006, Hugo Chavez of Venezuela nationalized Exxon's holdings in the country, a move that has had a major negative effect on the company's overall earnings and margins. The company has filed for international arbitration of the dispute, but the process will be costly and time-consuming. On February 7th, 2008, a U.K. court ordered the freezing of $12 billion worth of assets currently owned by Petroleos de Venezuela SA, that were previously owned by Exxon. This followed a similar, $12 billion freeze-order by a Netherlands court, as well as a $300 million freeze by a U.S. court. Then, in late March, a British judge canceled the freeze order, setting Exxon's efforts back significantly. On February 10th, Venezuelan President, Hugo Chavez, publicly stated that if Venezuelan assets were frozen and the Venezuelan business was harmed, he would freeze oil exports to the United States; given that Venezuela accounts for 12% of the United States' oil imports[12], this threat appears to have very sharp teeth - though the idea that Chavez would halt sales to his biggest customer is one that many analysts scoff at. In another retaliatory move, on February 13th, Petroleos de Venezuela SA cut off crude sales to Exxon, in an attempt to stop the oil giant from pushing its case in other courts; with so much of its business focused on exploration and production, however, and with an international crude purchasing arm that buys oil in 35 different varieties[13], no one expects Exxon to feel any negative effects from Chavez's embargo. [edit] CompetitorsExxon Mobil is the biggest of the supermajors, the six largest energy companies in the world - Royal Dutch Shell, Chevron, BP, Total S.A., and ConocoPhillips. Exxon's efficiency is attributable to several advantages over its competitors:
But unlike some of its foreign competitors, the American ExxonMobil is constrained by economic sanctions that ban it from doing business with some of the world's largest oil states, including Iran, estimated to have the second largest reserves of conventional crude oil in the world. Another major challenge may be in the works int he form of a possible merger between two British supermajors, Royal Dutch Shell (RDS) and BP (BP). The recent merger talk may threaten Exxon's position as the largest supermajor. In an industry where economy of scale, diversified holdings, and extensive infrastructure are all hugely important, a combined BP-Shell could dethrone Exxon.
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