Analysis of Exxon Mobil Corporation - Case Study Example

The price of oil is an important commodity benchmark for the success and failure of the entire world economy, due to the inextricable link and financial dependence much of the world has on this valuable resource. Oil is produced to aid in the production of a number of consumer goods, the fueling of necessary capital resources, and the creation of new markets (Seager). At the center of this production is the ExxonMobil Corporation: the largest privately-owned energy supermajor and the world’s second largest publically traded company by market capitalization. The tremendous success ExxonMobil has enjoyed since the merger of Exxon and Mobil in 1999 is tied to this place of oil in the global economy. This place has been revealed recently by recent fluctuations in the world economy, and the place of the price of oil as a leading indicator of such radical changes. Higher prices of oil and commodities in general have a negative effect on equity investment and on world economic growth. ExxonMobil’s success is thus intricately linked to the success of all industries that engage in some kind of production, regardless of whether that production incorporates oil. Following the trend of its past success, it seems the short- to medium-term future of the corporation is bright; nevertheless, beyond these intermediate future successes in the oil industry, what lies beyond in the far future, as oil demand spikes and then wanes, is a matter of speculation. It is too difficult to take into account the multifarious variables necessary to forecast the effects of such obstacles as green energy legislation and the peak oil hypothesis on the future stock price and market capitalization of ExxonMobil. Despite this lack of long-term clarity, ExxonMobils current industry dominance ensures that it will remain among the largest multinational corporations in the near future, allowing it to invest and reinvest in research allowing it to adapt to changing energy demands. ExxonMobil has a rich and varied corporate history, founded on a number of predecessor companies joined through merger, which illustrates the interesting history of the American energy sector as a whole. In 1931, the Standard Oil Company of New York—a larger and more generalized oil company—and the Vacuum Oil Company—a smaller, machine lubricant-centered producer—merged to form Mobil. In the postwar United States, cheap gasoline for an abundant supply of automobiles became the norm. The boundaries of cities and communities, in addition to a new system of interstate highways, were expanded. By 1958, the Socony Mobil Oil Company had reached approximately $2.8 billion dollars in revenue, which, by 1968, was$6.5 billion. Throughout the 1960s, Mobile expanded its drilling into the Middle East, the southern United States, the North Sea, and Alaska. In this time, however, the Organization of Petroleum Exporting Countries (OPEC) expanded to develop its quickly growing global cartel, which, of course, negatively affected the course of the corporation’s business throughout the world. During the Oil Crisis of the 1970s, Mobil’s profits soared dramatically. OPEC’s embargo caused the price of oil to quadruple overnight, and energy awareness came in vogue. Mobil’s oil sales tripled between the years of 1973 and 1977, the peak years of trouble during the crisis. 1974’s extraordinary profits brought Mobil to the center of public and congressional criticism, as the public continued to suffer the effects of a weakened global economy. After the success of the 1970s, Mobil found itself locked into contracts with the ever increasingly expensive price of Saudi crude in the 1980s. This resulted in substantial losses and cuts to reduce debts. These challenges for Mobil continued into the 1990s, as the Persian Gulf War and instability in the Middle East threatened the company’s relationship with the Saudis. The recession continued into 1992, which brought further losses and negative estimates. However, by 1994, the company’s position stabilized, putting it in a good position to consider offers for a merger and a restructuring of its business organization. The 1990s had brought a substantial expansion in the company’s retail presence. Like the history of Mobil, the history of Exxon is one of numerous challenges and successes. John D. Rockefeller’s Standard Oil came into existence in 1839, and by 1870, had formed a monopoly on the oil sector in the United States. Standard Oil Company continued its growth into a major player in the oil sector both within and without the United States. It maintained a number of smaller subsidiaries to create a mix of refined products that invariably catered to and advanced social and technological changes throughout the world, such as the use of kerosene in the 1950s, the sale of gasoline in the 1960s, and the proliferation of retail gasoline distribution centers throughout the 1980s and 1990s. In 1972, Standard Oil changed its name to Exxon, and, with the burgeoning oil crisis, faced a number of issues. Corporate sales skyrocketed, with revenue doubling between 1972 and 1974 from $20 billion to $40 billion, and then to $100 billion in 1980. This unbelievable growth was countered starting in 1981 when oil began to drop in price, and the company’s success began to wane. By the end of the 1980s, the disaster of the Exxon Valdez severely hurt the company both with bad public relations and the damages the company was forced to pay for the accident. Their legal troubles continued throughout the 1990s, giving environmentalists fuel to continue their fight against the oil sector’s major players. Near the dawn of the 21st century, Exxon and Mobil agreed to merge in a 1998 deal for Exxon to buy Mobil for about $75 billion. Combined with their 1998 results, the company accounted for $168.8 billion in revenues, with $8.1 billion in profits, making it the largest and most profitable oil company in the world. In 1999, the merger the approved, and later in the year, the deal passed antitrust committees. Mobil Corporation thus became a subsidiary of Exxon Corporation, which changed its name to ExxonMobil. In the first decade of the new century, EM engaged in cost-cutting measures to trim the new company. It promised to expand its output of production and continue to invest in innovative technologies to anticipate future trends within the energy sector. Only 5 years after the passing of the merger, ExxonMobil had clearly demonstrated the success of the acquisition, with nearly $75 billion in net profits and $123 billion in cash (Weston). This capital expansion corresponded with an expansion in the company’s portfolio in Africa, the Middle East, and Russia from 20 to 40% of oil and gas production in 2004. This expansion placed the corporation at the top of publically-traded oil-producing countries in the world (Funding Universe). The history of the Exxon and Mobil corporations is intimately connected to the history and present state of the oil-producing sector and the price of the commodity itself. Particularly important for the oil industry today and in the future is the concept of peak oil and the current supply squeeze. With respect to peak oil, the problem is reflected in the estimate that there is currently 42 years of oil left (Rogue). However, this characterization of oil production as a linear line with a stop at 42 years in the future is incorrect; there are still opportunities for huge profits for the energy sector as the peak oil point approaches along a bell curve. Scarcity in the oil-producing world is a real, approaching reality, which favors a demand squeeze at a certain point in the far future on a level far above the current supply squeeze in which the refining capability of companies has not been able to keep up with supplies (Rogue). Estimates put the amount of Saudi oil consumed every day is twice the amount discovered; at least 54 of 65 oil-producing countries are in irreversible decline; and three barrels is consumed for every one discovered. These considerations mean global oil production could decline by as much as half from its currently level by 2030 (Rogue). From the perspective of ExxonMobil’s corporate governance, the Corporation has retained some of the most qualified leaders in the energy sector. Going into the latter half of 2000s, one of the most significant questions regarding Exxon’s corporate governance dealt with the expected retirement of Lee R. Raymond and replacement with Rex Tillerson. From 1999, Tillerson had managed oil and gas development activities under the title of executive vice-president. In 2004, Tillerson became CEO and chairman of the Corporation. Serving under him currently are Mark Albers, Michael Dolan, and Donald Humphreys, all of whom serve as senior vice presidents in a corporate officer structure without typical positions like the chief financial officer or the chief operations officer. This is interesting given the dominance of this structure within the corporate world, and how paradigmatic it is of corporate governance. Using a system of senior vice presidents and vice presidents provides a less structured, less hierarchical concept of the corporation’s leadership. In terms of an investment, the outlook for ExxonMobil looks bright in the near future. On top of industry-leading results reported in 2009, EM continues to focus on investment, proprietary technology, integration, and industry performance. The business segments of EM are broken down into upstream, downstream, and chemical. The upstream segment is a matter of its oil production, which is forecasted in late 2009 to increase 3 to 4% year-over-year. In addition to a pending acquisition of XTO Energy, Inc., EM projects a 2 to 3% increase in its market share from 2009 to 2013. ExxonMobil continually reinvests capital in the start of new projects, eight of which were started in the past year. So far, five additional projects are scheduled for 2011 and 2012. The downstream segment projects a rough year for refining; however, the excesses in supply of unrefined crude has led EM to invest more in expanding refining capacity, which will increase the production of lower-sulfur diesel by roughly 6 million gallons per day more. The chemical segment continues to grow on top of a nearly $3 billion investment in 2009, which shows EM’s anticipation of future energy industry trends toward the chemical production of energy , as opposed to the acquisition and refining of naturally existing resources (Zacks). Investments like $300 million in algal fuel prove there are enormous opportunities for a capital giant like ExxonMobil for a new kind of proprietary energy technology (Addison). From all of this information, the near-term and intermediate outlook on the stock price of ExxonMobil seems to be bright. Investment experts like EM because of the company’s knack for reliably generating industry-leading returns. To that end, any success that the price of oil is having must be reflected in the stock price of EM. For investment theory applied to the future long-term growth of oil, the prospects are bright; that is, with the rise of a middle class in emerging markets, demand for oil is expected to growth radically. Supplies to match these doublings in demand must occur from the largest privately- and publically-owned companies. ExxonMobil, like only a few other energy producers, actually has the capital reinvestment structure to handle this future growth. For EM in particular, the company has a long history of leading the energy pack in terms of returning cash to shareholders by means of buybacks and strong dividends. The XTO Energy acquisition and continual reinvestments made throughout the past decade put ExxonMobil puts the corporation in a strong equity position going forward into 2010 and 2011 (Zacks). Yet, governmental and public concerns about both the product ExxonMobil produces, and the ways it must produce it might prove problematic for the long-term, dividend-centric investment outlook on EM. The company’s environmental record is notoriously poor, with the Exxon Valdez oil spill, the Exxon Brooklyn oil spill, and its well-known record of financially supporting anthropogenic global warming skepticism. Additionally, the company has been criticized for its dealings with foreign heads of states, violations of human rights, and discrimination (Kage). All of these events engender a negative view of what the company is doing; these negative views, although incapable of adversely changing the company’s near-term growth and stock price, these negative views can influence government action unfavorable to the company’s position in the energy space. Subsidies to green energy and public concern over anthropogenic global warming may pose a serious threat to the corporate structure. Though EM is well-positioned to adapt to a changing energy sector, this will take considerable capital repositioning to accomplish and to produce competition with other companies. This industry change is extremely difficult to predict, especially decades before it starts to happen. However, this kind of long-term forecasting is necessary for reinvestment in greener production to work once it is implemented. This capital reinvestment, if paired with a successful public relations refocusing, will put ExxonMobil in position to maintain its industry dominance in the future. Both in terms of its past and its future, the concept one might use to describe ExxonMobil and its predecessors is “dominant”; that is, the Corporation’s history is full of supremacy within the energy sector, and its outlook is equally as impressive. In terms of an investment, EM seems like it will continue its success into the future, even as the prospect of peak oil approaches. ExxonMobil has proven itself capable of dealing with changes within the industry, both through reinvestment and restructuring. Given the fundamental changes the oil-industry will undergo in the coming decades, it is necessary for EM to continue this extensive reorganization through capital reforms. One cannot underestimate the importance of oil commodity prices within the structure of the global economy, which relies on the resource for fuel and production in all industries. If oil prices spike once again, ExxonMobil will be in a great position, as the largest privately-held, publically-traded oil-producing corporation in the world. Works Cited Addison, John. Despite Challenges, Serious Money Bets That Algae Will Become a Major Biofuel Source. 3 March 2010. 28 March 2010 . Funding Universe. International Directory of Company Histories, Vol 67. Boston: St. James Press, 2005. Kage, Ben. American Enterprise Institute allegedly offers bribes to scientists for disputing UN climate change report. 15 February 2007. 28 March 2010 . Rogue, Tom. Peak Oil for Dummies. 9 August 2009. 28 March 2010 . Seager, Ashley. Oil threat to world economy. 5 August 2004. 29 March 2010 . Weston, J. Fred. "The Exxon-Mobile Merger: An Archetype." 1999. BYU. 2010 . Zacks. Exxon Mobil: Well Positioned for Future Growth. 14 March 2010. 14 March 2010 . Read More