Corporate Performance and Top-Down Approach - Case Study Example

Security Analysis: Corporate Performance Analysis of the Exxon Mobil Using "Top Down" Approach I. Reason for the Selection of the Exxon Mobil Company Conducting research provides comprehensive understanding of the information of the financial markets of the company, the economy and all the data essential in recommending successful investments. Top-Down Approach as one of the two directions of research could give clear picture of the economic and market analysis of the chosen corporation, the Exxon Mobil Company. This approach presents information from the highest to the lowest arranged from general to particular. This is a design methodology provides formal mechanism for breaking complex process designs into functional descriptions, reviewing process, and allowing necessary modifications.1 Since according to research the Exxon Mobil Company is the world’s largest integrated oil company, it is interesting to know and analyze the performance of the Exxon Mobil Company. The Exxon Mobil have superior dividend yielding stocks as it is engage with exploration, transportation, and sale of crude oil and natural gas. Its interest in the electric power generations for domestic supply will be a great advantage.2 As Top-Down Approach has the perspective to assess the over-all climate to formulate market strategy and identify industry niches, themes and trends,3 Exxon Mobil will be the appropriate company that have gained experiences as they survived the gains and odds from the grass root level. II. Company Background The Exxon Mobil Company is the world’s largest integrated oil company, ahead of BP and the Royal Dutch Shell. Based on research, it engages in oil and gas exploration, production, supply, transportation as well as marketing worldwide. Moreover, it has proved reserves of about 13.6 billion barrels of oil equivalent. Forty refineries of Exxon Mobil in twenty countries according to studies have a capacity of producing 6.4 million barrels per day. In one hundred countries, the company supplies refined products to more than 35,000 service stations. In addition to that, it also provides fuel to seven hundred airports as well as to more than two hundred ports. It is also a major petrochemical producer. For annual corporate earnings for 2005 and 2006 as well, the company had posted consecutive U.S. records.4 According to “Exxon Mobil Corporation (XOM) Q2 2006 Earnings Conference Call” (2006), the second quarter net income of Exxon Mobil and normalized earnings were $10.4 billion, or $1.72 per share, which represents an increase of 2.5 billion, or 32 percent as compared to second quarter 2005 normalized earnings. By strong crude prices, and refining margins, and by continued focus on operational excellence as well as cost-containment, this performance was driven. The State of Qatar and Qatar Petroleum have announced in July, the launched of Al Khallej Gas Phase 2 project which is being developed to supply natural gas to domestic markets while recovering associated condensate and natural gas liquids for export. Start-up of Phase-2 is scheduled for 2009. On the other hand, Phase-1 of Al Khaleej Gas, with a capacity of 750 million cubic feet per day of gas, began in November, 2005 and Exxon Mobil had produced one hundred percent interest in the said project.5 III. Assumptions Made, Range of values, and Final decision about the Value of the Company Actual Values (104) from Start Date EXXON MOBIL (~U$) High 37.8125 ( 1/ 5/98) Low 29.0625 ( 9/ 1/98) WEEK MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY COMMENCING 12/8/1997 31 12/15/1997 31.4063 31.7813 31.375 30.8438 30.125 12/22/1997 30.1563 30.0938 30.0625 30.0625 30.3438 12/29/1997 30.7813 31.1563 30.5938 30.5938 30.9375 1/5/1998 30.5938 29.5 30.4375 29.7813 29.0625 1/12/1998 29.375 30.0313 30.4063 29.75 30.4063 1/19/1998 30.4063 30.4375 30.5313 29.7813 29.5313 1/26/1998 30.125 30.1875 29.5938 30.375 29.6563 2/2/1998 30.25 30.4063 30.7813 30.9688 31 2/9/1998 31 31.0313 31.3438 31.5313 31.5625 2/16/1998 31.5625 31.0625 31.9063 31.8125 32.1563 2/23/1998 31.25 31.375 31.4063 31.5313 31.875 3/2/1998 31.75 32.125 31.7188 31.4688 31.375 3/9/1998 31.25 31.7188 31.9688 31.9375 32.1563 3/16/1998 32.0938 31.4688 32.3125 32.4063 33.5625 3/23/1998 34 34.1875 33.875 34.0938 33.8125 3/30/1998 33.9688 33.8125 34.4688 34.9375 34.5938 4/6/1998 34.2188 33.875 33.0625 33.375 33.375 4/13/1998 33.8438 33.5938 34.3438 35.1563 36.0313 4/20/1998 36.4688 36.6563 36.4688 36.875 36.75 4/27/1998 37.1563 36.6875 36.4688 36.5313 37.8125 5/4/1998 37.375 37 37.2188 Source: Datastream Actual Values (104) from Start Date EXXON MOBIL (~U$) High 65.0000 (21/ 4/06) Low 55.8700 (27/12/05) WEEK MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY COMMENCING 12/12/2005 58.86 59.06 59.86 59.49 58.06 12/19/2005 57.7 57.93 57.6 57.1 57.1 12/26/2005 57.1 55.87 56.25 56.24 56.17 1/2/2006 56.17 58.47 58.57 58.28 59.43 1/9/2006 59.4 59.86 60.27 59.64 60.97 1/16/2006 60.97 61.54 60.68 61.5 60.53 1/23/2006 61.2 60.96 60.21 59.95 61.29 1/30/2006 63.11 62.75 61.95 61.95 61.39 2/6/2006 61.97 60.55 60.39 59.92 59.43 2/13/2006 59.6 59.55 59.76 60.25 60.55 2/20/2006 60.55 60.76 60.26 59.83 60.42 2/27/2006 59.92 59.37 60.34 60.85 60.98 3/6/2006 59.98 59.85 59.71 58.92 59.18 3/13/2006 59.64 60.81 61.02 61.64 61.05 3/20/2006 60.66 60.72 61.05 61.25 61.17 3/27/2006 61.29 60.95 61.28 61.12 60.86 4/3/2006 61.03 61.75 62.16 62.09 61.33 4/10/2006 61.94 62 61.46 61.56 61.56 4/17/2006 62.05 63.54 64.3 63.92 65 4/24/2006 64.41 63.95 63.1 62.42 63.08 5/1/2006 63.42 64.67 63.77 63.31 Source: Datastream Actual Values (104) from Start Date EXXON MOBIL (~U$) High 81.3800 ( 8/ 5/07) Low 69.8600 (16/ 3/07) WEEK MONDAY TUESDAY WEDNESDAY THURSDAY FRIDAY COMMENCING 12/11/2006 76.25 77.36 78.73 77.3 12/18/2006 75.51 76.99 76.08 75.87 75.41 12/25/2006 75.41 76.05 76.96 77.33 76.63 1/1/2007 76.63 76.63 74.11 72.72 73.24 1/8/2007 72.65 72.09 70.99 70.98 72.66 1/15/2007 72.66 71.63 72.46 71.96 73.53 1/22/2007 72.9 74.49 74.9 73.52 73.61 1/29/2007 73.2 74.39 74.1 75.08 75.54 2/5/2007 75.67 75.46 74.79 75.46 75.22 2/12/2007 74.6 75.45 75.6 75.34 75.29 2/19/2007 75.29 74.87 74.78 75.08 75.22 2/26/2007 75.4 71.83 71.68 70.99 70.01 3/5/2007 69.98 71 71.64 71.85 71.12 3/12/2007 70.87 69.91 71.02 70.69 69.86 3/19/2007 71.1 72 73.23 74.36 75.0242 3/26/2007 75.47 75.71 75.56 76.24 75.45 4/2/2007 76.16 76.8 77.11 77.22 77.22 4/9/2007 76.8 77.57 76.77 77.39 77.41 4/16/2007 78.17 78.4 78.2 77.46 79.76 4/23/2007 79.2 78.6 79.92 80.55 80.36 4/30/2007 79.38 79.66 79.82 80.68 80.55 Source: Datastream At the tail of 1997 up to the first month of the 2nd quarter of 1998, Exxon Mobil has proved a steady increase in its profit. The lowest reading was recorded on September 1, 1998 as 29.0625. The highest was recorded as 37.8125. The second week of the 1st quarter has produced the lowest market value 29.375 which was later recovered by the last week of the reading, which ranged from 37.0 to 37.3. This proved the steady but sure growth of a promising company. After six years of the merger of the two companies (Exxon and Mobil) in 1999, there is a noticeable change for the range of values for the company. From a range 37 to a whooping 58+, at the last part of the Q4 of 2005 to the Q1 of 2006, the company had $10.3 billion in Q4 of 2005, which is 23% higher than the profits of same quarter in 2004. From this point, that the company has been creating record breaking profits. Even at the third quarter of 2004, Exxon Mobil produced a quarterly profit of $9.92 billion.6 The company’s highlights for that year include their highest at 65.000 by the start of Q2 of 2006 and the lowest at the Q4 of 2005 with 55.8700. The actual value of Exxon Mobil slid up by the end of the 2006 to the start of the following year. From the 55 to 65 range of the previous year, it moved up to a 69 to 81 range value. It ended up with the highest at 81.3800 at September 5, 2007 and the lowest at 69.8600 on March 16, 2007. Exxon Mobil's fourth quarter net income for 2006 was $10.3 billion. Thus, Exxon Mobil is considered as the world’s leading company. It is well-established that the company will be of a quality value. Some analyst even predicted that the company will be on steady growth as the oil and gas industry grows. IV. Analysis of the economy, market and industry sectors According to Jim Newsom (2006), usually industries where raw products increase the price then the products itself would also increase, thus the profit margins of companies would increase. But it seems that Exxon Mobil is unaffected by the increase. The oil industry over the years has prospered due to the demand of the consumers. At this point, there is no way the world would be able to function without oil. It is like the water of the world. The world is consuming 30 billion barrels of oil every year. So imagine the increase of the price, would there still be the same demand? It looks as if the answer is yes. As one would dig deeper the world has gone crazy for oil which now controls the economy and politics in every other country. Sometimes it is also the greatest cause of conflict in international relations.7 At the end of the 2006, the oil and gas industry has experiences shortages: thus, it includes, (1) in the oil supply per se; (2) the refining capacity of the companies, (3) talent of the human investments, and (4) in the competence of service and supply of the oil companies. Dr Ali Samsam Bakhtiari was a higher-ranking retired consultant for the National Iranian Oil Company in Tehran. He predicted that by 2006 to 2007, the world would start feeling the demands for oil. This is where supply would not be able to meet the demands, thus, an even higher price for the product will be needed. In a speech in Sydney in 2006, he said the oil industry had hit the highest point production of 81 million barrels per day, which would decline to 55 million barrels per day up to 2020.8 This industry has been harvesting profits, sad as it may sound, from the recent conflicts and wars in the world. The industry also had a big turnover during the hurricanes and other natural calamities. The year 2002 seems like a remote year because during that time the oil industry had declining profits, especially in refining. In 2005, income growth among the integrated oil companies was driven by increases in the price of crude oil. Even though many companies experienced a decline in oil production and a decline in natural gas production, there are still some who managed to increase their revenues on an average by 24.5% in 2005. With all these declining, it is possible that the source of income growth was due to the price increases.9 The oil industry also has its fair share of critics and thus past issues. Many times, the oil industry is critiqued due to its harsh environmental effects as well as the bite it takes on the other economic concerns. The Exxon Mobil had past environmental issues also, so does the whole oil and gas industry. Some of these are not given much attention, but most are widely rallied against. One of the big benefits of the industry, from the US, includes the 2005 Energy Bill. This is where they are given more tax breaks and additional power over putting new facilities in several places, even if the local community would disagree. This also includes several provisions of the new energy policy which will abate the Clean Water Act and Safe Drinking Water Act, tolerating oil companies to pollute America’s drinking water.10 And to borrow words from the Environment America organization, albeit that Exxon Mobil will get great benefit from this energy policy, the company has the supremacy to direct the whole oil industry. Even the American decision-makers will be forced toward a new energy expectation. Exxon Mobil’s decisions can have an effect on the entire industry for a very long time. Some of the nation’s prevalent environmental and public interest groups call on Exxon Mobil to use its headship pose to create a new energy strategy that goes beyond drilling.11 Some are calling for the company to funding researches for finding new, renewable and more environmental friendly sources of energy. On the other hand, international oil company Shell says that environmental impact of the oil and gas industry can be significantly reduced through the use of technology and information gathering. Another point raised is the importance of using an electronic hardware called 'smart discovery' and software to easily find the location of oil and gas reserves, which will minimize the disturbance of drilling, as well as the cost of it.12 On that note, the CEO of El Paso Corp, Doug Foshee, wants to extend his wishes to expand the land for drilling and for it to coexist with conservation. While David Trice of Newfield Exploration is hoping for some environmentalist to believe in the coexistence of gas and oil and of an excellent environmental policy.13 V. Reasons as to whether and why it is favorable to invest taking into account the macroeconomic and chosen industry conditions. The factors that are studied by macroeconomics and microeconomics will often influence each other. The current level of unemployment in the economy, national income, and inflation affects the oil industry. It has often been mentioned that Exxon Mobil has a longer track record in the market. The company had proven to be tough even in dire times. Unemployment The oil industry is actually a great help in improving the unemployment problem which seems to be occurring everywhere. According to Robert Phillips, CEO at Enterprise Products Partners LP, they have been competing with other firms in terms of hiring good engineers and other technical positions. Their firm is always looking for more college graduates who have the talents to be a part of a high ranking company. In 2006, unemployment actually dropped from 4.6 per cent to 4.4 per cent, the lowest since 2001. These are non-farm jobs. The oil industry gives the impression that it plays a big role in addressing this problem. Consequently, with the approval of the 2005 Energy Bill, that allows more tax breaks for the oil industry, there is a decrease in unemployment rate. Inflation At one point in this year (2007) stocks reported an increase as a 2 percent gain in oil prices which boosted shares of Exxon Mobil Corp. and other oil companies. This is while reasonable inflation hauls up optimism about the economy. It is not surprising that the company got its fair share of attention due to the profits it claims despite the record-breaking inflation in the US. The company was reported to have a type of inventory accounting system, "last-in, first-out" as called as LIFO that softens the impact of inflation on their profits. It is where that the last goods acquired are the first goods sold.14 Thus, such accounting system also has a relatively great impact on the company such as the difference of such from other companies. There are only a relatively few companies who use the system, and there is even an ongoing negotiation to abolish the same type of accounting system. National Income With the national income of the United States, it affects the stock market. However, the Exxon Mobil company is unaffected by the plunge in the Gross Domestic Product, whether nominal or not. The company has remained strong despite the 2 per cent decrease. VI. Conclusion With all the factors that are evaluated, Exxon Mobil has proven strength that live longer than any economic factors that affects us. And that the company would be a superior company to invest in. Although the company is indeed in a leadership position on the oil and gas industry, the company still has room for more investors due to some of their future needs, and hopefully this is included in their agenda. The company is keen on investing for alternative fuels. The company is aware that they can develop an alternative, renewable fuel to meet the demands of consumers. Considering the statement of Park Shaper, President of Kinder Morgan, “Over the next several years I see a continued need for investment. Stability is what this industry needs, and I hope that is what will happen…”15 The company needs more investors to patch up the remaining 6 per cent of their assets that is covered by debts. Thus, there is still a room for investment on Exxon Mobil to make it a more stable company. Another consideration also falls on the hands of the oil industry as a whole. The current situation of the industry proves to be strong and steadily growing. With the current help of the government it makes the industry more stable. Thus, future plans include new machineries as new oil, natural gas, and natural gas liquids supplies in the US because they are beginning to change their current locations. The oil industry is also currently, straining the service industry to provide them with more technical people to be partner-employees in their companies. Works Cited Assets & Politics in the Oil Industry.(2007). Energy Business Reports. http://www.energybusinessreports.com/shop/item.asp?itemid=1106 Barrington Research. (2000). Barrington Research Associates, Inc. Big Money to Big Oil: How Exxon Mobil and the Oil Industry Benefit from the 2005 Energy Bill. (2005). September http://www.environmentamerica.org/home/reports/report-archives/new-energy future/new-energy-future/big-money-to-big-oil-how-exxonmobil-and-the-oil industry-benefit-from-the-2005-energy-bill. Blum, J., Exxon Mobil Profit Soars 75% (2005). Washington Post, Friday, 28 October 28. Page D01. Exxon Mobil Corporation (XOM) Q2 2006 Earnings Conference Call. (2006). Seeking Alpha: Stock Market Opinion and Analysis. 27 July. Hoovers. 2007. Exxon Mobil Corporation Company Information. Manta: Essential Business Information on Demand. U.S: Dun and Bradstreet, Inc. Pirog, R. Oil Industry Profits: Analysis of Recent Performance, Oil Industry Profit Review (2005). http://www.energybusinessreports.com/shop/item.asp?itemid=1106 Porter, B., (2006). Oil Industry Hits Peak Production. ABC TV. Australia: July. http://www.abc.net.au/pm/content/2006/s1683169.htm Sci-Tech Dictionary. (2003). McGraw-Hill Dictionary of Scientific and Technical Terms. Shell Applies Technology to Reduce Environmental Impact of Oil Industry. (2005). Kuwait: Monday, 26 December. http://www.ameinfo.com/74711.html. Stock Analysis-Exxon Mobil Corporation (2007) Posted US Stock Reports. 16 November. Trippon, J., (2006). CEOs Discuss Top Issues Impacting Oil Industry in 2006. Oil and Gas Financial Journal. Volume 3, Issue 1. January 2006. http://www.ogfj.com/display_article/244851/120/ARTCL/none/none/8/CEOs-discuss-top-issues-impacting-oil-industry-in-2006/ University of Washington Business School, Exxon Mobil Corporation: the Politics of Profits. http://foster.washington.edu/PDF/ExxonMobil_noQ_Apr_07.pdf. Read More