ExxonMobil and the Petroleum Industry

EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 1

ExxonMobil in the Petroleum Industry

Thesis

Istvan Jambor

Master of Business Administration

September 9, 2013

Istvan Jambor – Project Manager - MBA / DoD TS/SCI Virginia Beach, Virginia, United States

[email protected] http://www.linkedin.com/pub/istvan-jambor/7b/643/b35


Table of Contents

Abstract……………………………………………………...page 3

Part 1 – Introduction………………………………………..page 4

Part 2 – Strategic Initiatives (fracking, page 13)………….page 5

Part 3 – Financial Performance…………………………….page 16

Part 4 – Market Analysis……………………………………page 24

Part 5 – Global Strategy…………………………………….page 44

Part 6 – Mergers and Acquisitions…………………………page 49

Part 7 – Ethics at ExxonMobil………………………………page 51

Pat 8 – Summery / Conclusion……………………………....page 53


Abstract - Numerous books have been written about petroleum and its economic power as it

emerged from the industrial revolution originating from a few secluded corners of the Earth. The

unfolding story of gigantic oil companies has been made only more intriguing by the ever increasing

demand for oil, and oil equivalent products, driving global production to near a 100 million barrels per

day, a truly staggering volume of crude causing a person living on the Earth today believe that the world’s

cities, highways, and oceans are stretched over endless oil fields, embedded in the crust deep below the

surface. This matrix of complex international interests, watching over these fields, were carefully weaved

by the leading powers of mankind, which has recently been seen pursuing once more a common goal

pointing towards a renewed global marketplace; a place where the chase for favorable quarterly reports

has become no more significant than a single piece of a mosaic as it is held in isolation, away from other

colorful shapes and forms, all awaiting to be fitted according to their common purpose. The attempt to

connect these pieces has resulted in the discovery and alignment of information, which when properly

assembled paints a very new future for most of us who hoped to live under the blessings of green energy,

as it has been popularized by the oratory of extremist politicians and activists. This report invites the

reader to filter through the mountain of data reported on the topic, addressing only what is most relevant.


Part 1. Introduction – The controversial reputation of our biggest corporations are rarely

matched with more jumbled up histories than one would expect to find in the energy sector. Negotiating

their way through mergers and subsequent antitrust currents these companies have been receiving more

limelight than some of the best known celebrities in show business. ExxonMobil is known for such a

history, acquiring the company the undisputed right to pose as the prime

example, an excellent specimen sporting industry trend. ExxonMobil’s

current logo tells the story of such merger from 1999 when Exxon

absorbed Mobil for $81 billion (the second largest oil company in the

United States boasting a vast network of consumer gas stations). The deal

left the new company with a long list of divesting obligations conditioned by the Security and Exchange

Commission in its attempt for controlling the deal, and maintaining the illusion of an invisible leash

deemed necessary ever since the uneasy breakup of the Rockefeller family owned Standard Oil Co. in

1911. The parties of the merger were nearly equal heavy weights in their own

rights, each possessing powerful brands worth uncounted millions of dollars in

marketing investments. It only made sense to combine them into one brand name, Exxon first followed by

Mobil, ensuring to make known who bought whom. The new name and the company’s updated logo has

caught on quickly, fitting well with the sequence of success stories ExxonMobil was now destined to

follow. Amongst other things, its success is made visible to the public by the establishment of the

ExxonMobil Foundation in 2002, as the company was giving generously back to the community hundreds

of millions of dollars reaching the public through a number of charity programs. These philanthropy

projects include the “Save the Tiger” program which were designed to support efforts to preserve a rare

large cat specie before it completely disappears from the wild, while others promote educational programs


and generous internship opportunities, improving the teaching profession in a land where the institution

suffered severe degeneration following the reconstruction years of the 60s’. From seemingly unlimited

resources at the disposal of management, and an unwavering destiny for success, topped off with an

undisputable resolve for more

power, ExxonMobil has forged its

mission to be simple, clear, and

unmistakable, emphasizing the

company’s core business;

upstream exploration and

extraction of oil and natural gas.

Part 2. Strategic

Initiatives - A business’ strategic

plan is its blue print to what

exactly it needs to do in order to

comply with its vision statement.

The vision itself describes lofty

ideas, an imagined future state, usually the product of market opportunities perceived by top executives.

However a strategic plan applies to the present with more pragmatic steps and guidelines. It comprises

elements such as “setting objectives”, “crafting practical strategy”, and providing steps for the actual

implementation of directives issued for current and near future activities necessary to move forward in the

desired direction. Part of good implementation processes are the monitoring of current activities as the


company executes periodic self-assessments ensuring that no part of the business is sidetracking from its

mainstream policies without sufficient evaluation and approval.

A good strategy unifies a business bringing together all of its employees, managers, and outside

stakeholders in one common interest, providing direction with a purpose, brewed into a common

denominator for decision making, where nobody is above the rules, conveying that strategy which is

meant to last must also be all inclusive. Operating activities inherently invite disagreements prompting

management to choose from a handful of available options for tracking ahead. There could be financial

strains from a slowing down economy, new products or services can enter the market, developments in

technology can render existing successful products obsolete, or federal and state regulations can impact

otherwise promising operations. New opportunities can lead to entering unchartered regions in foreign

lands taking advantage of offshored projects where favoring local tax laws, low labor costs, convenient

locations to new markets, or lucrative economic spur and political stability are all pointing to more

offshore ventures. These are all major contributors to the decisions top managers face to make every year.

When managers are confronted with such choices they rely on the firm’s values, plans, and guidelines

quantified in the operating objectives guiding first and foremost middle management through the firm’s

strategy. Therefore strategy is planning, both at higher and low levels, offering clear directions to business

units distributed to each department and work center. While strategy making is synonymous with

planning, and the practices employed are interchangeable between them, strategy, like any good plans,

should never be designed or expected to be stagnant. Flexibility should be used to conform to new market

conditions, and also to unexpected needs of the company, and as such, good strategy is the one which is

most flexible in supporting managers with need for responding to internal or external changes affecting

their firm (Thompson, Strickland, & Gamble, 2009).


Strategic measures are the result of careful deliberations of top management constructed to ensure

that the company has a purpose expressed through practical methods for achieving its short and long-term

goals. If planning would not take place, companies would find themselves to be disorganized, wasting

resources through inefficient investing that do not support a common direction. Companies without a

consistent, well thought out strategy would waste their managerial talent to dispute, petty quarrels, and

contradicting decisions affecting operations on all scales. Such issues cannot be sustained, and usually

result in decreasing value. ExxonMobil Corporation is a highly diversified business requiring a relatively

complex strategy for moving the company forward among its competitors. Its business units range from

manufacturing petrochemicals to everyday plastics, independently operating divisions under brand names

such as ExxonMobil, Esso, Exxon, or just Mobil. Its products are widely used in the United States and

worldwide. While the company has aimed to diversify, its main operations are rooted in the exploration

and extraction of natural gas and crude oil, and more recently, in the processing and transportation of


Liquefied Natural Gas (LNG) (The New York Times, 2013).

Exxon’s strategy must support both the company’s vision and mission, which are also the image

by which ExxonMobil intends to be seen by the public. ExxonMobil’s strategy is also the method which

is to project the company’s character, its reputation, its values, and outlines its bylaws and practices. In

the bigger scheme of things this unseen and sometimes unwritten mix of directions sets the norm through

which the company responds to anticipated and unexpected events, reacting to environmental protection

initiatives, and managing its crises response in times of need. But most importantly, ExxonMobil is

defined through its fundamental strategy put to work for increasing shareholder’s value. Among its most


fundamental strategic layouts there are plans for expanding operational areas and for better utilizing

existing resources (oil or natural gas fields). These methods on implementing cost saving measures

without jeopardizing future operations are practical steps outlining directions for making the company’s

various components work better responding with increased efficiency to competition. Examples for

strategic objectives can include increasing market share by either overtaking competitors using mergers

and acquisitions, or opening new markets by investing new capital, increasing revenues on assets, and last

but not least improving the quality of the company’s customer relations. Therefore setting quantifiable

goals is a vital part in strategy building as this gives directions and marks milestones along the way (The

New York Times, 2013).

ExxonMobil has shaped its strategy for its oil exploration unit in order maximize risk management

for high operational outputs while maintaining relative safety. The identification and acquisition of high

quality resources; exceptionally well-orchestrated cost management and the development and application

of state-of-the-art technologies has led to very high profitability for ExxonMobil’s operations preparing

the stage for entering the attractive LNG market (ExxonMobil, Upstream Operations, 2012).

Russia - Russia is vast and most of its oil and natural gas reserves were left untapped during the

Soviet era despite the old regime’s existence was dependent on crude oil

extraction. The landscape is much different today; new companies

emerged from the ruins of the old ones as they are channeling power to

Putin which he has managed to wield as the Russian Federation has

become the EU’s primary supplier of natural gas. The Russian prime minister is making ever more

realistic plans to become a key player in helping to quench the world’s 83 million barrel per day thirst for

crude oil. However, much of the upstream potential remains undeveloped and the capital does not seem to


be coming from within the ailing economy of the Russian Federation. ExxonMobil certainly has cash to

invest, and it might be just the right amount the Russians need. Modeling the workings of a regular

corporation which trades equity for much needed capital, the Russians are quick to give away large

portions of future benefits from this large potential in order to get the required developments underway.

The ongoing negotiations between ExxonMobil and Rosneft are currently outlining projects at the Arctic

regions well to the North from Siberia, while preparing similarly large deals in the Russian Far East and

in the Black Sea (Media Relations, 2013). As such the real value that ExxonMobil can muster for the

Russian joint venture is capital with a special boost; the proven adaptation of new technology.

The recent discovery of hydro-fracture applications “fracking” in drilling for natural gas and oil has

simply revolutionized the industry much like using mud for securing well walls has done throughout the


oil boom years, transforming the 20’s to some of the most exciting times in America (Kashi, 2013). In

fact fracking is so effective that it has already reduced the price of gas in the U.S. by three forth when

compared to global gas prices (increasing LNG transportation is slowly restoring equilibrium) (Louisiana

Oil and Gas Association, 2013). More importantly for ExxonMobil, the Russians are not capable to use

this technology yet, which quite upsetting for Putin who already nervously tracking the number of LNG

shipments heading for Europe. As European natural gas consumption is becoming less and less dependent

on Russian supply (mostly due to a continuous flow of LNG shipments) the Russians are forced to

reevaluate their global strategy (the Russian prices of over 12 USD per Mcf -1000 Cubic Feet- cannot be

expected to compete against prices improved through fracking in the ballpark of 4 USD per Mcf).

Many of the topics presented in this thesis benefit from the use of visual aids. One such concept is

the process of fracking mentioned above (image inserted is depicting fracking using horizontal wells,

page 13). While the concept is still unknown to many both in the US and around the world, it is by far the

most promising innovation discovered in America, looking to be possibly the most important invention

welcomed by mankind since the advent of computers. American engineers in 2011 developed this

process, and soon they put it to successful use in California and Pennsylvania. The image on page 13

illustrates how engineers modified an already successful drilling method called “horizontal drilling”

applying explosive charges to the horizontal segment of the well, blasting holes into the shale, then filling

the well with over a million gallons of liquid which they suddenly put placed under extreme pressure.

This pressurized liquid in turn immediately expend the cracks from the earlier explosion effectively

cracking and opening the shale containing the bulk of the oil or natural gas left inaccessible through

regular drilling (Louisiana Oil and Gas Association, 2013). The new technology does present a number of

risks however which is much debated in the media along with its spectacular success (More, 2012).

Recently fracking has been seen as the cause of smaller earthquakes, and it is also suspected that the use


of toxic fracking liquid is responsible for water table contamination, the layer in the strata from which

most residential potable water is obtained from.

Once this fracking liquid is recovered (over a million gallon per well) it is subject to a whole charade of

additional environmental scandals. The liquid is usually kept in open artificial ponds from where it slowly

evaporates into the atmosphere making the locals seriously concerned. Some of them will eventually join

the camp of those who already oppose the process. Nevertheless the new technology works and it seems

to be extremely profitable. While at the present the biggest and most popular opposition to fracking is no


other but the Russian Prime Minister Putin himself (seeing his European gas operations disturbed by low

U.S. gas prices), there is no doubt that he plans to use fracking in the Arctic as he expects ExxonMobil

bringing the technology to the Russian negotiating tables (The Wall Street Journal, 2012).

It can be speculated that successful completion of such Russian American joint venture can lead to

significant change in the way oil is supplied around the world today (change of such kind is most

certainly undesirable from the perspective of OPEC countries as it leads to diluted markets and

anticipated decrease in energy prices). ExxonMobil’s largest and immediate competitor in the United

States is British Petrol PLC (BP), led by its CEO Bob Dudley, who is certainly looks to be on the losing

end of these developments after being replaced by ExxonMobil as far as the Russian deals go. BP’s


interest, which was tied to its financial

capabilities, has dwindled in Russia following

the aftermath of the Deep Water Horizon oil

spill as the ordeal was unfolding in the Gulf of

Mexico a year earlier. If the diagnosis is right

the company has given in to pressure from its

investors who have been preferred to see the oil

giant refocusing on upstream operations, an

often recommended remedy prescribed to ailing oil companies (The Wall Street Journal, 2012). The more

inroads ExxonMobil makes in Russia, the more the company secures its future leading role among its

U.S. competitors, whereby BP is heading to the opposite direction reducing operations, and thereby

giving up market share to ExxonMobil. Moreover, successful joint ventures in Russia combined with new

oil discoveries in America has a serious potential to undermine OPEC’s already fading role as a global

industry leader, moving BP backwards in the catching up game.

While here in America our budget has been

dramatically reduced by large payments coming due on our

national debt, and where companies left and right lose their

customers and thus go out of business regardless of their

size or past track record, ExxonMobil has embraced the

new technology hydraulic fracturing, and with it a

promising way to navigate through the recession. By

showing Washington that the new technology is the chief

cause of their new success (Royal Dutch Shell has quickly followed suit in promoting the new process)


they imply that the new drilling technique might also be the cure for our ever weakening domestic

economy. Their lobbying is slowly paying off as many Americans on Capitol Hill, including the

president, see eye-to-eye with ExxonMobil, and have already pledged their support for fracking. As the

harms caused by fracking are steadily negated by the excitement for a potential economic boom, similar

maybe to what our country has experienced in the 1920’s, ExxonMobil’s long term goals are brought in

alignment with much

bigger national

strategies and political

campaigns. As the

march for fracking

continues and the

difficulties are shored

up with strong quarterly

reports promising a

brighter future for more and more Americans, ExxonMobil is expected to be receiving a steady supply of

support from Washington. A perfect strategy brought about by brilliant engineering seemingly arrived just

in time to help our oil companies redefine American economic power as the country slowly turns back

from the recession. Furthermore, cheap oil and gas from the United States and Russia will eventually

reduce global energy prices plunging below sustainable levels for many state-owned OPEC producers,

making them book losses and thus rendering them inefficient beyond the point where they can no longer

honor their obligations for supporting their country’s social programs, feared that it can lead to worldwide

unrest if left unchecked. Most OPEC producers, African, South American, and Middle Eastern companies

fall into this prediction, companies who will have little more options but to seek less than favorable deals


with ExxonMobil and its future partners. In less than a decade new synergies will be making inroads into

OPEC territory (causing many state-owned oil producers in OPEC to operate far below the current crude

prices, while they are struggling to cover expenses at 90 – 80 USD BBL) (Administration, 2013),

(Helman, 2012).

Part 3

Financial Performance – Public corporations are obligated to issue annual reports which includes

a detailed balance sheet, income statement, statement of cash flows, and retained earnings statement.

These reports are developed and published quarterly and

made available to anyone as “quarterly reports”. What

makes them interesting is not whether a company meets

its forecasted expectations from a period earlier but to see

how changes from within or outside the company

influence these reports. In the case of ExxonMobil these

changes took effect in joint ventures developing with the Russian oil company Rosneft. ExxonMobil

aimed to infuse at least $40 billion capital into oil / natural gas explorations in Russia. The three pronged

venture is relying on investments intended to be used in the Kara Sea near the Arctic Circle, deep water

drilling in the Black Sea, with drilling ops more underway using fracking on Sakhalin Island. When we

compare ExxonMobil’s market capitalization from 2010 (the most devastating year for businesses

impacted by the recession) with

more recent data, we can observe a

rebound followed by stable influx of

common stockholder’s equity. It is


obvious that mergers are in part responsible for the boost, but it is also hard to argue that ExxonMobil

needed (and found) additional investor capital in the wake of readying the company for the new Russian

American era (Yahoo Finance , 2013). From the perspective of ExxonMobil’s investors the company is

offering moderate risk / moderate return investments for the foreseeable future. The question remains how

far into this future an average investor is able to see. From what is available today investors and company

analysts are tempted to deduct that ExxonMobil might just become the type of power that was wielded

110 years earlier by the Rockefeller family through their ownership of Standard Oil Co.

Comparing market capitalization with cash flow per share also reflects an impressive recovery and

growth; looking back to 2009 this index was $6.20, which dramatically increased to $13.10 by 2012

faithfully mirroring the company’s EPS growth $7.95 (NASDAQ, 2013).


Presently the market mean for this index is

below $2, indicating that ExxonMobil’s

management has wasted no time to rebuild the

cash reserves of the company, much of which

were used up during the recession. In addition,

ExxonMobil’s current total number of shares

outstanding are 4.40B, well above the market

average of 600 million, giving us no reason to worry about investor interest (ft.com, 2013). Revenues are

also moving

upwards $482

billion far above

the market’s

average which is

barely over $20

billion

(NASDAQ,

2013).


Operating expenses are stable indicating a conscious effort for cutting costs, but also a much

more conscious effort to be ready for the negotiating tables. And doing so, ExxonMobil has gained a

tremendous momentum. Company leaders predicted that what they needed for effective negotiations are

to be found in straightforward financial reports, all supporting the effective use of technology Putin wants

to acquire at any

cost. As we see in

the next section

numbers do tell a

story and

ExxonMobil’s

story seems to

start promising.

The ratios reflect

more than just a

healthy condition,

something that

could be

compared to the pre-war Germany’s war industry preparing for over a decade to be in perfect shape and

strength for its ultimate showdown, operation Barbarossa, the invasion of the Soviet Union. While today

this monumental struggle is not meant to be unfolded on WWII battlefields, the sides representing their

historical interest are real, the stake is similarly high, and the trust meant to be lubricating the gears of this

enterprise is as dry as an old rusty wheel.


Ratios –

XOM’s

capital

intensity

ratio (total

assets / sales)

is 0.69

(333B / 482B)

in 2012. This

ratio in 2011

was 0.68 and

0.78 in 2010

indicating that ExxonMobil needs less than a dollar asset for every dollar of revenue it generates.

Controlling this number effectively assures management that projects selected by the company have high

to very high NPV.

Return on Equity - (Net Income / Revenue x Revenue / Total Assets x Total Assets / Equity) or

(net income / shareholder’s equity) is increasing. From the data ExxonMobil’s 2010 net income was 30B

responsible for a healthy ROE of 20.43%, 2011 ROE further increased to 26.55% (41B / 154.4B), and

kept on rising to 27.02% (44.8B / 165.8B) in 2012 (Yahoo Finance , 2013).

In comparing ExxonMobil’s net income with its revenues we see that the index in 2010 is 9.29%

(44.8B / 482.2B), decreasing to 8.42% in 2011 (41B / 486.5B), and further declining in 2012 down to

7.94% (30.46B / 383.2B). ExxonMobil’s profit margin confirms the story of a multinational oil


powerhouse successfully going through the recession years and gearing up to take on a new round of

major investments. The largest impact on revenues are from operating cost, 63% (303.6B / 482.2B),

selling and general admin expenses 17% (81.8B / 482.2B), which were followed by other not specified

expenses 3.27% (15.8B / 482.2B) in 2012 (Yahoo Finance , 2013).

During this analysis ExxonMobil’s upstream business is

assumed to be operating at full capacity since it is difficult to get

detailed operation records for each oil well and exploration unit.

Dividends – ExxonMobil has been paying steady

dividends to its investors throughout the course of the last

decade, using a yield rate that is reliable, while causing no undue

stress on the company, and most importantly appeal to most

investors. Those who prefer to receive their earnings in capital gains can see this as compromise with

ExxonMobil’s dividend policy. Others who do not mind paying a little more tax can also find the terms

acceptable due to high reliability of the

stock and it’s POR (payout ratio). From

the charts posted on this page dividend

rates are just under 3%, which converts

just over $2 per share in 2012.

The company’s current ratio

(current assets / current liabilities) or

(64.4B / 64.13B) is 1.0, just balancing on

top of the liability fence. This number was under 1.0 both in 2011 and 2012 telling us that ExxonMobil

has faith in its operations and boldly applied the debt shield against corporate tax liability. This index


without inventory is dangerously low; 0.78% (64.14B – 14.5B / 64.13B) which would normally put most

investors into an uneasy state. While the alarmingly high rate of debt is usually translates into debt

holders competing with stock holders for attention, the truth is that as long as ExxonMobil is able to

maintain strong quarterly reports nobody really pay attention to this aspect of the company. Moreover, in

the case of ExxonMobil, high debt is often seen as value due to its inherent tax benefits. In fact, the total

asset turnover ratio 1.445 (Total Revenue / Total Assets) ensures investors that debt has been put to

good use at ExxonMobil, generating 44.5 cents on the dollar (debt and equity combined). Similarly,

management’s ability to churn out 13.42% ROA (Net Income / Total Assets) or (44.8B / 333.8B) further

reassures ExxonMobil’s investors.

Stock analysis – ExxonMobil’s stock price is influenced by

a number of key ratios which we take a closer look at below.

Revenue per share (“ttm” or twelve months tracking) is 109.5 for

2012, a healthy number by any standards. The index is calculated

from total sales over shares outstanding. This metric indicates that 1.

ExxonMobil’s revenues are strong, 2.that ExxonMobil has no reason

to hesitate not to take advantage of the tax benefit debt inherently

offers, and 3. That ExxonMobil, as most other oil exploration

companies has almost continuous asset utilization and rapid

inventory turnover.

Earnings per share (EPS) is 10.18 (ttm) for 2012 as

calculated from net income minus dividends on preferred stock (if there is any) over average outstanding

shares (44.8B – 0 preferred stock / 4.4). ExxonMobil’s impressive 10.18 EPS index indicates that the


company is using unusually large amount of liabilities (167.9 billion are liabilities out of 333.8 billion

assets), which is a major contributor for above average stock performance.

If we intend to take a closer look into ExxonMobil’s financial statements, we must not leave out

the book value of shares or we would do no justice for the stockholder. The index here serves one

important purpose; it suggests the true liquidation value of the stock that can be paid out to stockholders

in the event the company would ever go under, provided claims from debt issuers have been satisfied

previously. ExxonMobil’s $37.63 book value for 2013 is far below the current share price $87

(September, 2013) (market value added) suggests that book value, while less than half of market value, is

still significant while most likely never be used for compensation purposes.

The debt ratio of ExonMobil’s captial structure normally would magnify risk for most firms.

However distress from potential bankruptcy can be negated with strong and stable earnings, in which case

high levearage only boosts investor returns. As acceptable debt levels vary from industry to industry, most

would agree that the pretroleum industry is at the more forgiving end of the debt tolerance spectrum

despite fluctuating oil prices. As such ExxonMobil is committed to maximize stockholder value, and it is

inevitable that one of the ways to achieve that is through the use of debt. Nevertheless, too much debt,

even for a company like ExxonMobil, will tend to cause competition between stockholders and

debtholders, which can be a conflict stockholders cannot win. In order to negate liquidation related losses

stockholders tend to increase cost of equity in their attmept to compensate for substantial debt financing,

which in turn has a direct effect on the weighted average cost of

capital (WACC), a scenerio ExxonMobil’s

management is well aware of.


Part 4

The Petroleum market - The petroleum industry is huge and extremely complex to say the least.

The factors that influence the fate of any company in oil business has to do with a number of things,

among them, there is one that stands out; the position of the company as it ranks in the marketplace. The

energy sector, within which the oil and natural gas industry takes the biggest segment, is by far the most

significant component of modern civilization as it

was defined from the early years of the twentieth

century. The most recent formation of energy

companies dotting the landscape of the world vary

from small corporations providing drilling services

to the largest heavy weight giants usually dubbed as

“Big Oil” in the United States (a name popularized

through the mergers of the 70’s and 80’s) (Helman,

2012). These mega corps are jealously defending

their positions and reluctant to let newcomers ascend to their heights. In the present the companies

comprising this group are ExxonMobil, British Petrol (BP), Chevron (formed from Texaco, Standard Oil

Co, and Gulf Oil), Royal Dutch Shell (Shell), and a recently joined member of the group; ConocoPhillips

(These companies are listed further down in this thesis as they rank among their global peers, arranged by

production per day ranging from the maximum of 12.0 to 1.4 million barrel of crude oil). We will focus

on this group from the perspective of ExxonMobil Corporation, the company which is primarily looked at

in this writing.


While these companies certainly look gigantic with staggering revenues and seemingly unlimited

cash reserves, they are not the biggest players of the industry, and certainly their cash inflows are well

matched with nearly as high expenses. Civil litigation is always a major set-back for most of them,

environmental and social issues ranging from the Exxon-Valdez oil spill and Texaco’s dumping 18 billion

gallons of toxic sludge into the Amazon in the South American country Ecuador, to recent ones as the

Deepwater Horizon oil spill caused by BP settling between 25 - 40B USD. The cost to BP was not just the

company’s entire cash

reserve but also some

of its most important

joint ventures were

doomed to go awry in

other parts of the world.

BP is discussed in more

detail later in this work

as ExxonMobil’s direct

competitor. However

there are other factors

which tend to keep members of Big Oil on their toes. In a world where international trade of all kinds

connect producers and buyers through well-established trade routes (LNG and oil tankers moving natural

gas and oil across the seas, pipelines providing a constant flow of oil and gas over land) ExxonMobil do

not operate in a vacuum of space and time. Amongst its peers ExxonMobil is compared with similar

publically traded companies while this entire group is barely more than the 15% of total oil and natural

gas business if global state oil companies are also added to the mix (Helman, 2012). These state owned


giants are under the control of governments, kings, and other potentates mostly located in developing

countries. The oil industry is one where the movement of interest and the formation of companies tend to

be more stable and predictable. These firms are fewer in numbers than those making up the retail or

manufacturing sectors, and because of that, this so called simplicity can be credited to the fact that most

assets (estimated to be 85%) in the sector, are under the control of their state owned counterparts. This

85% is split among Russian companies headed by Gasprom and Rosneft (known for their hardliner

leadership) , Statoil (Norway), and many other nationalized companies throughout the OPEC countries

such as Iran, Iraq, Kuwait, Saudi Arabia and Venezuela followed by a longer but more recent list of

member states with lesser capacities (under 1 million barrel per day) (OPEC, 2013). Some other larger

players outside OPEC (Organization of the Petroleum Exporting Countries) significantly contributing to

the global supply of oil and natural gas include companies from Mexico, South America, Africa, and

Indonesia. The world map for oil companies is relatively consistent. The steady existence and slow

moving activities of well-known industry members seem to guarantee stability for the world’s energy

needs which also reflected in the key player’s ability to identify dominant controls among themselves.

Expenses of vast explorations and drilling operations are often seen to be offset by long-term partnerships

in joint ventures designed to trade access oil and gas shale formations for investment in capital and

technology. Such joint ventures have the potential for tipping the balance in the existing oil markets,

though results come slow and progress is not always assured. The business-community tracking this

sector is currently focusing on 10 to 15 relevant developments worldwide. Some of these are in Mexico

promising reforms for Pemex where the country’s current government invests heavily in attempting to

prepare this nationalized behemoth to invite a new wave of foreign capital. Other developments can be

seen across the Ural Mountains, where Vladimir Putin’s influence seems to dictate the pace for Rosneft, a

Russian oil company built from the expropriation of Yukos which was known to be an immediate


predecessor for many of the newest oil and gas companies in modern Russia. Yukos Oil Company

represented significant western interest at the time of its expropriation putting Rosneft today in an uneasy

state when attempting to find effective defense against still lingering western claims. This protectionist

thinking materialized in a most unexpected form when British Petrol decided to form partnership with

Rosneft (and on equal bases with the Russians as for sharing predicted benefits). It seemed to matter little

that this deal have gone awry in merely two years after BP infused no less than $20B capital into the

venture. BP’s misfortune in the Mexican Gulf set off a series of events which eventually lead to severing

the partnership and left BP with no choice but to leave without a proper exit strategy. Its costly

withdrawal was conditioned on ploughing back 1/5 of the sale from assets already on the ground into

Rosneft through purchasing shares making Rosneft all of a sudden technically immune to annoying

western claims chasing long expropriated private capital (The Wall Street Journal, 2012). In the mind of

Putin, this new BP interest vested in Rosneft is the trump card that the Russians needed for making much

larger plans with ExxonMobil, the most prominent global competitor to BP. Putin is making the new

ExxonMobil / Rosneft partnership attractive by not only offering a bargain in Russia’s vast upstream

opportunities but also weakening ExxonMobil’s competition, an opportunity that ExxonMobil’s CEO Rex

Tillerson must have seen as a perk that could not be completely ignored (Media Relations, 2013). The

deal is largely supported by the inclusion of the second largest Russian state-owned oil and gas company;

Gasprom. Lukoil, third in rank, while operating under private ownership is very close to the Kremlin

suggesting that the reins of these three companies can be traced back to one source. The risk is certainly

high as this was hard learned by western capital both in the past and the present, but the stakes are just too

high to ignore, or worse, allow the deal to be picked up by the competition. In the recent past we have

seen British Petrol and ExxonMobil making a number of deals with Rosneft and its subsidiaries aiming to

undertake large number of projects in Russia. Some of these new explorations are stretching from the


Arctic Circle around the Kara Sea; while more project open up in West Siberia and the Russian Far East.

Part of this initiative new technology is enabling deep water drilling in the Back Sea. As these events are

unfolding we should note that the losses BP has suffered are measured in billions of dollars which are not

far behind the losses attributed to BP’s Deepwater Horizon oil spill. Such an investment environment can

be seen quite controversial to many observers and participants alike. ExxonMobil has quantified the risk

and stacked the associated benefits making the decision for moving ahead in Russia (Media Relations,

2013). The company is currently financing much of the preliminary exploration costs in the ballpark of

3.2B USD which was invested in accordance with drafting and subsequent signing of new contracts (the

deals are split between 33.33% for ExxonMobil and 66.67% for Rosneft) (Media Relations, 2013). These

deals promising yields on newly surveyed shale formations unheard of

until now; the business have already been referenced as the world’s largest

untapped oil and gas reserve exploration with far bigger potential than the

combined estimated yield from the newly discovered North American

Bakken shale formation and the current yield from ongoing operations in

the Saudi oil fields.

Competitors - Large corporations inherently have long and complex histories often highlighted

with mergers with major brands each representing their unique perspective of their sector. The way we

recognize British Petrol today is an excellent example for this industry trend. The oil giant’s current logo

and name is the recent variant derived from large mergers in 1999, when the company had taken on

Amoco (American Oil Co.). The magnitude of the change was large enough to both divert BP from its

core business (which it will regret later) and also influence the company’s branding. In euphoric

excitement BP has tried out several variants for a new name including the word “Amoco” in order to


indicate the newly gained network of U.S. gas stations when the company finally reverted back to the

original form and set out to strengthen the old name with a new logo. BP’s advertising agency Ogilvy &

Mather and PR Consultants designed and popularized the two letters “b” and “p” above BP’s new green

and yellow sunflower logo recognized around the world when displayed on the company’s endless

number of oil wells, off-shore facilities, transportation and storage assets, refineries, gas stations, and

administrative offices (BP PLC Case Study, 2012).

BP was originally founded by William Knox, a British entrepreneur who successfully searched for

oil in Persia (Iran) in the early 1900s. The company was first known as Anglo-Persian Oil, suggesting

power and influence. This heavy weight member of “Big Oil” has spent its first 50 years of existence

representing significant western interest in the Middle East. By 1935 Anglo-Persian oil was exclusively

controlled by the British government having operations not only in the Middle East but also in Europe,

Africa, Canada, South America, and Papua New Guinea. Since large and successful businesses are not

without their enemies coveting their attractive revenues, the early BP could not remain an exception.

Surviving the war and the turmoil that followed it in England, the company was caught off-guard when its

largest assets were nationalized in Iran in 1951, a loss of no less but England’s largest overseas

investment causing a shockwave that reverberated not only throughout the company’s business units but

also across England’s post war economy. The events were seen controversial as Iran received its first

democratic Prime Minister Mohammad Mosaddegh who sincerely wanted to help his people (became

enormously popular in Iran). Unfortunately for Mosaddegh (and his country) the nationalization of oil

companies could not be tolerated by the western powers and they promptly called for a regime change

allowing the Shah (Reza Khan) controlling power who after returning ruled the country as a ruthless

dictator for the next several decades helping westerners shipping more oil out of Iran. While this was

happening in the Middle East in 1954, BP (or rather British Petroleum Company at the time) began new


explorations in the surrounding regions quickly making a name in Kuwait, Libya, and Iraq followed by

newer operations in the United States, and in and around the British North sea. During the last years of the

cold war Margaret Thatcher’s England ended socialist ideas and privatized much of the country’s

businesses. BP became a solely privately owned company once again, shedding its government shares and

embarked on a journey undertaking ambitious goals. This is the BP we know today, a British energy giant

often listed among the world’s 10 largest companies (within the petroleum industry), a company with

operations in over 80 countries and estimated crude production of 2 million barrels per day (in 2000).

BP’s crude production boosted throughout the first decade of the 21st century reaching 4.1 million barrels

per day, which is about 4.9 % of the daily required global supply of crude oil and oil equivalent products

(of 82.2 + million barrels per-day global consumption) primarily provided by 21 dominant energy

companies (mostly state owned). While these other suppliers will not be discussed here in detail, it is

important to mention their names together with a short reference for their size in daily production of crude

oil or oil equivalents (millions of barrel); Saudi Aramco – 12.5, Gazprom (Russia) – 9.7, National Iranian

Oil Company – 6.4, ExxonMobil – 5.3, Petro China – 4.4, BP – 4.1, Royal Dutch Shell - 3.9, Pemex

(Mexico) - 3.6, Chevron – 3.5, Kuwait Petroleum - 3.2, Abu Dhabi National Oil Company – 2.9,

Sonatrach (Algeria) – 2.7, Total (France) – 2.7, Petrobras (Brazil) – 2.6, Rosneft (Russia) – 2.6, Iraqi Oil

Ministry – 2.3, Qatar Petroleum – 2.3, Lukoil (Russia) – 2.2, Eni (Italy) – 2.2, Statoil (Norway) – 2.1,

Conoco Philips (United States) – 2.0 (Helman, 2012).


Operations – The majority of BP’s upstream assets are water-flooded oil and gas reservoirs in

North and South America, the North Sea, Australia, Asia, and a number of other lesser known regions of

the world (Fryar & Looney, 2011). Recently the North American sector received attention due to large

scale environmental disaster in the Mexican Gulf, and the Asian sector due to BP’s subsequent loss of

strategic deals in Russia.

This thesis will focus on the upstream (exploration and extraction) segment of this sector, using

secondary research

in introducing BP

as ExxonMobil’s

primary competitor,

while also

reflecting on the

company’s current

position in the

marketplace. The

data used have been

extracted from multiple reports describing the performance of BP in the year 2012 and first quarter of

2013.

BP’s vulnerability - Following the boom years of the 2000s, British Petrol has become one the

flagships of the economy not only in the UK but also in the United States. It had vast global operations,

mostly in the upstream sector of the company. As the world’s economies cycled through the deepest

points of the 2008 / 2009 recession oil companies seemed to be less affected. While during the recession


the slowing of the economy lead to decreasing interest rates (making borrowing easier). Unfortunately

easy borrowing came too late and the demand for energy decreased which resulted in plummeting crude

oil prices, a double edged sword which caused stagnation for oil companies like BP and ExxonMobil.

While a raging recession is equally bad for most players of the economy, it is reasonable to conclude that

the boom years’ high demand tend to drive prices up earning billions of dollars for energy companies but

eventually these high energy prices slow down economic activity in other sectors contributing to the

trouble that leads to recessions like the one we saw culminating in 2008 / 2009. From the perspective of

oil and gas producers the more important question is how much wealth these companies were able to save

up during the boom years, and will it be enough to help them across the recession years avoiding distress

to their own operations, and consequently to the recovering global economy. Carefully managed publicly

traded (privately owned) oil companies are able to estimate these cycles and use their cash reserves to get

through them without too much loss of revenue to shareholders. On the other hand state companies like

Petrobras, Pemex and others in smaller OPEC countries operate with the help of large government

subsidies and enjoy benefits of tariff and taxation exemption. However these state companies are also

weighed down with heavy social obligations. In short, these companies are unable to save earnings as

they are required to give up their net income indirectly supporting social programs and government

services, many of them vital in maintaining the status quo between social unrest and relative stability. If

oil prices were to fall and stay low for an extended period due to either prolonged recessions and / or slow

economic activity (strong competition can also push prices down) then it is still possible to rebound for a

short period through the application of new technologies like hydro-fractioning (fracking) allowing for

more efficient extraction of natural gas and oil if it were to spread around the globe (however, the larger

supply of cheap energy would drive prices downward even further). If newly found oil reserves do not

come to the rescue either, then the failure of these more vulnerable oil producers can easily tip the balance


in the favor of those who came prepared in taking part (and control) of the first part of the 21st century.

(Association, L. O., 2013). Peak Oil and the Recessionary Cycle theory predicts that one day we will pass

the mark where we need more oil than we can produce, from which point onward increasing energy prices

will lead to irreversible socioeconomic degradation. So as it might seem too high oil prices carry the

danger for destabilizing businesses providing jobs to billions of people worldwide while too low energy

prices endanger a multitude of smaller oil companies supporting the social fabric in many third world

(and some industrialized) nations. These state-owned energy companies are badly in need for high oil

prices floating at least above $80 per barrel. The recent invention of fracking in the energy upstream

sector (largely contributing to cheap natural gas and its worldwide distribution as LNG) and the addition

of gigantic new fields in projects jointly undertaken by ExxonMobil and Rosneft in Russia is one example

and will most likely result in decreasing prices, a serious challenge for OPEC, which the organization will

soon have to deal with if the unfolding events in Russia turn out to be successful (Association, L. O.,

2013). However, BP, ExxonMobil, Royal Dutch Shell, a few others who own the right and the know-how

for the new technology have not bagged victory just yet. As time

pass from the 2011 discovery of the revolutionary technology

responsible for causing billions of fractures in the oil and gas shale

barely a mile under the surface is not fully cleared yet. Studies

show extreme toxic exposure from the use of fracking fluids making its way up and contaminating the

ground water tables (the most common source of potable water), other research shows alarmingly high

level of poison content in the air around open storage ponds sustaining airborne fumes evaporating from

millions of gallons of highly poisonous hydraulic fluids recovered from each well (also leaking back into


ground water), and finally

studies show artificially

induced earth quakes, a

new addition to the list of

serious environmental

hazards blamed on the use

of fracking (Lucas , 2011).

The issue of fracking has divided the nation from its inception, where one camp is eager to support the

potential for a true economic revival, while the other is in opposition and cannot accept compromise until

the environmental problems have been resolved. Fracking is a technology that has managed to amplify

production for companies which own it and able to apply it. As such ExxonMobil and British Petrol’s

upstream business has completely been

revamped to accommodate its use, making

the company dependent on the outcome of

various current litigations concerning the use

of fracking. Fracking is an American

invention and most of us, including President

Barrack Obama, are proud of it. It has

managed to drive down gas prices to ¼ from

global prices making the United States an increasingly important LNG supplier to Europe (next to Qatar

Gas).


Safety - Oil trading, and consequently making bets on the industry for the most part meant

gambling in the most common use of the term until just recently when the forming trends have become

easier to interpret. In 2010 BP understood this trend and correctly suggested that oil and natural gas prices

will be falling in the coming years. Responding to this pressure in a desperate attempt for piling up cash

reserves which would be used to offset low crude and gas prices, the oil giant has given green light to the

use of numerous unsafe procedures relaxing, violating, or simply contradicting its own safety standards

that inevitably lead to the known Deepwater Horizon oil spill in April of that year (the company had a

long history of violations that raised public concern prior to the spill). As a result BP almost immediately

lost its cash reserves to a $20 billion trust fund which had to be set up for claims, was forced to spin off

many mid and downstream operations, and sold many of its global assets including oil fields and

refineries to support the clean-up and related costs in the Gulf eventually moving towards a staggering

total of near $40 billion. Last but not least its weakened position was taken advantage of by its Russian

partners as BP had to back out from deals drawn for exploring the Russian Arctic, Russian Far East, and

the Black Sea. BP was replaced by ExxonMobil (the Russian condition for BP was tied to reinvesting $4

billion worth of shares in Rosneft, helping the Russians to buffer against western court ruling for the

Russian expropriation of the Yukos’ western capital, which served as the foundation for Rosneft with

Putin at the controls as mentioned earlier). In the aftermath, BP was able to muster enough cash to pay for

the Gulf but left with no choice but to submit to investor pressure and restructure the company focusing

on its upstream segment. Today BP has gone from being a vastly diversified company to one that is

strictly focused on exploration and extraction, a new beginning for this energy giant, which recently have

started paying healthy dividends and boasting of current and forecasted increased earnings. The next

section will show how BP, as ExxonMobil’s global competitor, is doing today and where the new capital

structure has taken the company.


BP Financial Performance - While the Gulf spill was truly tragic in many ways for all who were

affected by it, the event did not cause irreversible damages to either the region or to BP. When we

compare BP’s market capitalization in 2010 being close to $200 billion, and the company’s total assets

which were valued to be $272.262 billion, BP’s loss affixed to the Gulf looks manageable (BP PLC Case

Study, 2012). BP’s current market cap is $129,008 billion, comfortably in the category for “too big to

fail” judged by most wielding a much more humble portion of the market. In the aftermath of the Gulf

crisis BP has certainly become a more focused company, and most of this focus was directed towards its

spill related obligations, which we can say with certainty, BP has overcome and paid its dues in full.

Furthermore, not long after its market cap and its stock price plummeted in 2010 the company managed to

stabilize both, and by now moving ahead for new increased earnings (Yahoo Finance, 2013).

From the standpoint of BP’s investors the company is offering moderate risk / high return

investments backed by strong cash flows well above the market mean. Its cash flow per share was $1.30

in 2012, which increased to $12.36 by Assessments & Analysis Based on August 22, 2013 (NASDAQ,

2013). At this time the market mean for this index was $1.53, far below BP’s, showing that company


management is wasting no time to rebuild the cash reserves which dwindled for almost a year in the

aftermath of the spill. In addition, BP’s total number of outstanding shares are currently 3,185 million,

well above the market average of 600 million, indicating that the company is still able to attract a large

investor base (ft.com, 2013). BP’s sales are also moving upwards $395 billion far above the market’s

average which is barely over $20 billion (NASDAQ, 2013).

BP’s cost of goods sold is rising with the implementation of its new investments, interesting

enough, also in the Gulf. Determined to get a fresh start in the region BP has just initiated its new oil

project dubbed “Mad Dog Phase 2” is more than promising as it is built over a 4 billion barrel oil field.

The costs from this project is embedded in BP’s 2012 operating cost proving that oil exploration /

extraction could be many things but not cheap. The result shows BP’s relatively stable revenues ending up

yielding a relatively thin net income. Since the expansion costs in the upstream sector can be seen as a

positive signal by most who follow BP’s rising path closely, the prediction for BP’s future growth is not

without merit (ft.com, 2013).

Key Ratios – BP’s capital intensity ratio (current assets / current sales) is 0.77 (300B / 388B) in

2012. This ratio in 2011 was 0.76, and in 2010 0.88 indicating that BP is attempting to massage this

number to be as low as possible in order to help the upstream business, where cost of new additions can

be staggering if left unchecked.

Return on Equity (or net income / shareholder’s equity) was negative in 2010, upwards in 2011,

and reflecting new investments and the change of direction in 2012. Illustrating this with data BP’s 2010

net income was $-3,7B, but 2011 ROE increased to 23.05% (25B / 111B), and just recently ROE fell back

again due to new reinvestments of capital 9.78% (11B/118B) (ft.com, 2013).


BP’s profit margin spells out a trend showing the company managing cost during the restructuring

period. In comparing BPs net income with its revenues we see that the index is not measurable in 2010 (-

3B / 308B), increasing to 6.65% in 2011 (26B / 386B), and declining again in 2012 down to 2.98% (12B /

388B). BP’s profit margin and asset structure clearly tells the story of how BP is funding its crisis

management efforts in the Gulf, and how the company was able to find new purpose in realigning with its

core business in the upstream sector. The shedding of BP’s seemingly endless array of assets is paving the

way from the abyss of environmental recovery and lost Russian deals as the company has been able to sell

off refineries and oil fields reducing its worth from close to 300 billion in 2010 to barely over 100 billion

in 2012 and in 2013 (it would be interesting to see a track record compiled for the migration of these

assets). Hence profitability ratios are lower than expected with interest charges kept at bay. Currently the

largest impact on revenues are from operating cost, 84.2%, selling and general admin expenses 5.54%,

which were followed by depreciation and amortization of 3.21% tracked in the year 2012 (ft.com, 2013).

BP’s business units overall operate at full capacity, especially after selling off its Texas City

refinery, which was representing the segment of the business being

more prone to operate under less than full capacity. Since it is difficult

to get detailed operations reports for each oil well and exploration unit,

we are going to assume that most of BP’s upstream segment is utilized

at near or full capacity.

BP’s dividends were frozen during the crisis, and its stock

market capitalization has witnessed a steep dive from near 200 billion

to around 100 billion. From this low point BP has not only managed to recover its POR (Payout Ratio)

but ranked as one of the star companies paying the largest dividends in 2013. Dividends were down (but


paid) in 2011, 17.4% (4,4B / 25,7B), up in 2012 50.12% (5,8B / 11.5B), indicating a steady climb for the

foreseeable future (ft.com, 2013).

The company’s current ratio (current assets / current liabilities) is 1.43 (110,9B / 77,5B) indicates

a better than average liquidity hinting

that BP is far from running into

problems paying its obligations. This is largely due to

BP’s selling off assets in order to fix the Gulf rather than

acquiring exclusively debt (the option of acquiring any

more debt has already been exhausted if WACC is to be

maintained at its current level). While the selling of assets

was making the current ratio fall, it is still maintaining the

number well above 1.0. This index without inventory is

somewhat lower; 1.071 (110,9B – 27,8B / 77,9B) still

keeping BP’s head above the water. Emerging from the

mountain of compensation claims, BP has dedicated all of its attention, know-how, and resources, under a

unified effort which saved the company from losing much more than it already has. In fact, the total asset

turnover ratio (1.293) were one of the first signs of this new revival pointing to generating 29.3 cents on

every invested dollar in the company (388,2B / 300,2B), a staggering number in oil industry perspective.

Similarly the management’s ability to churn out 3.86% ROA (11,5B / 300,2B) after all the excitements of

the last few years gives us clear insight that this giant is not ready to throw the towel in.

Stock analysis – BP’s stock price is driven by some additional key ratios described in this section.

Revenue per share (ttm or twelve months tracking) is currently 117.85, a number unusually high for any


company. The number is derived from total sales divided by average shares outstanding. This metric

indicates that 1. BP’s has strong and stable sales, 2. That the company capital budget has a more than a

healthy infusion of debt shoring up the value of its stock price, and 3. that BP is a very active company,

which is no surprise to anybody who is familiar with BP’s history in the Gulf.

Diluted earnings per share (EPS) is 8.23 (ttm), is a good measure to use if investors want to see the

worst case scenario for their investments since it includes all possible stock conversions from debentures

to preferred stock and all in between. Since it is very unlikely that all convertibles will be exercised

together, while certainly a good measure, the index is not meant to reflect actual earnings for each share.

BP’s 8.23 index simply indicates that

the company is using a large amount of debt (181 billion are liabilities out of 300 billion assets), which

largely responsible for the strong stock indexes. While over 50% of debt can be alarming for many

companies, BP might just get away with it due to its strong and reliable revenues. Earnings per share is

calculated from BP’s profit divided by its number of shares, and in this area BP is strong.

It is worth listing the book value for shares from which investors derive a feeling of security. BP’s

40.87 index tells its investors that just in case things go wrong (common stockholders are last to get paid)

their compensation will be worth the book value of their shares, a figure almost equal to BP’s current

stock price $41.82.

Overall BP’s leaverage magnifies both risk and returns. Its high debt is certainly responsible for

confident numbers for stock holders while driving up the cost of equity together with BP’s beta and

WACC exposing the company to bankrupty risk if any more deals like the Russian endevour with Rosneft

would go awry. BP is definatelly playing with fire, moving fast and sometimes bold at the same time. The

captain of the ship Bob Dudley seemingly has no other option but navigate its ship to far out the ocean

where high expected returns go together with bold moves and increased risk. BP has survived the Gulf for


now. It has emerged from the conflict as a much riskier investment while able to pomise matching returns

offseting this risk. While remains powerful, BP is no more a serious threat to ExxonMobil, but this notion

can only be sustained if the future holds no more suprises for any of these two companies.

Market revisited - We base our notions on the premise that applicable demand for our natural gas

investments are clearly identified in the European segment of the market. The EU’s number one goal in

recent years has become the stabilization of this market orchestrating a forming synergy among its largest

natural gas suppliers. Furthermore the EU has clearly chosen its position concerning the issue of global

warming recognizing that natural gas is the cleanest fossil fuel available, an obvious choice for best

meeting future environmental standards. This choice

has turned out to be been quite a vision due to

dramatic fall in natural gas prices, large improvements

in LNG shipping, and the widespread popularity of

natural gas fracking. By 2013, gas is the number one

energy source in every sector within the EU’s

economy, which is supplied predominantly from

Norway, Russia, and increasingly from the United States. We look at the EU as a test market, a sort of

pilot project, much like a springboard for reaching world-

dominance in the industry. There is much to learn and

much to predict. The world is not standing idle either and

as Asian competition (PetroChina) rising in the Far East

with increasing tempo ExxonMobil is treading ahead in

North America, Europe, and in the Russian Federation.


The EU market is particularly well suited to be an ideal target for ExxonMobil. The region is the

leading proponent in the advocacy for global warming, and most of the energy sector has been rebuilt for

gas consumption, while its own gas reserves are known to be dry or near exhausted. Its history for

overwhelming reliance on Russian monopoly has driven prices up from the 90’s making global warming

and clean energy the best money maker for Putin’s government. The EU is ready to participate in a more

transparent, balanced, and interconnected market which promising to provide a more stable financial

platform better suited to steer clear the world’s developing economic crisis already plaguing a number of

its member states (European Commission Public Relations, 2013). As such, ExxonMobil seems to be the

right company to help complete the European socioeconomic transfer, arriving at the right time, and

initiating its new operations at the right place. European gas market has never seen to be this volatile and

the task for bringing peace and stability fell in the lap of ExxonMobil and its strategic partners. The

company’s LNG operations so far has proven without doubt that even relatively small amount of LNG

shipments are capable to disturb the current equilibrium leading to the quick formation of low priced spot

markets. The popularization of LNG was born out of the global recession in 2008 / 2009 and has been

seen to be responsible for increasing demands for natural gas. Plummeting prices are further intensified

by dwindling U.S. gas imports due to revolutionary work in the American upstream natural gas industry.

As a result timing and place for ExxonMobil cannot be any better; Russian ambition in oil exploration

requiring ExxonMobil’s capital combined with the EU market up for grab in the wake of American (much

technology comes from Qatar) LNG advances has been seen to offer ExxonMobil a prime opportunity for

success (Qatargas, 2012). Qatargas must be mentioned as one of the first large scale developers of LNG

shipping and regasification techniques (Exponent Public Relations, 2013).


“There is almost a century's worth of natural gas in shale rock formations all over the United States,

enough to make a significant change in the debate about America's energy future. Gas locked into dense

rock deep beneath Pennsylvania, New York, West Virginia and Ohio could supply the entire East Coast

for 50 years. But freeing it requires hydraulic fracturing, or

"fracking," with toxic chemicals that may pollute water, deplete

aquifers and perhaps endanger health and the environment.”

Risks associated with fracking - No undertaking with

large return is without risk, though the risk associated with ExxonMobil’s strategy in dramatically

expanding its domestic and global gas operations is seemingly minimal and largely technical in nature.

Apart from the uncertainty in working together with foreign partners with questionable track record, the

foundation for the gas revolution itself, natural gas fracking has been challenged. As earlier described, the

process comes from the United States; it has been tested there, and by now is in widespread use,

Pennsylvania, Ohio, and California being some the first states to receive attention. While the majority of

the U.S. population is firmly

opposing the process there is a

widespread support among

industrialists and regular

citizen alike (Grace

Communication, 2013).

Movements have been started

to publically denounce the

harmful effects fracking


carries within itself. The groups are clearly divided by those who immediately benefit from quarterly

earnings and long-term strategic gains (ExxonMobil and other oil and natural gas companies) who

support the process, and the public who do not derive immediate profits but is forced to bear the

consequences of toxic chemicals entering water tables, and the harmful effects of the fluid which is

brought back from the wells and stored in hastily made open surface ponds allowed to evaporate into the

atmosphere or slowly seep back underground causing further damage to ground water. The proceedings

underlying fracking are closely monitored by the investor community, the companies relying on the

technology and the public attempting to make their case against the new polluter. One amazing response

emerging from much of the debates is most surprising to any who are just coming through it. Our

engineers did not stop at one miracle but proved worthy in satisfying the environmental aspect of the

mater by negating the toxic characteristics of fracking liquid, the number one culprit causing most of the

chaos. The improvement has been advertised to be so effective that Halliburton Oil and Natural Gas

Exploration Company went so far to have one of their workers publicly drink from the fluid in their

campaign rallying for reevaluation of the environmental impact their drillings effect on their area of

operation. The outcome is yet to be tested by time, but it is certain

that such improvements are welcome by both the public and

industrialists alike (Bush , 2011).

Part 5


Global strategy in ExxonMobil’s mission and vision statements - The mission and vision

statements discussed in this section are word for word excerpts from ExxonMobil’s official website where

it was available for public viewing at the time this thesis was written. In them ExxonMobil sees one

underlying mission for all of its upstream activities, a statement that is easy to understand, easy to agree

with, and worthy to rely on. The following is the mission statement for the company’s fundamental

business activity; the oil and natural gas exploration and extraction unit.

“The disciplined execution of ExxonMobil’s Upstream strategies, underpinned by a relentless focus on

operational excellence, drives delivery of our competitive advantages and superior results” (ExxonMobil,

Upstream Operations, 2012)

As we see from the upstream exploration unit’s mission statement, its main focus is a deliberate

pointing to the importance of executing the unit’s strategy which largely deals with quantifiable

deliverables. These deliverables are the lifeline for the upstream exploration unit and as such the unit’s

mission is verbalized on the lines which is most likely to

stimulate performance pointing all stakeholders toward

practical steps emerging to be evident when put in context

with executive directives.

Similarly the vision statement offers a clear

agreement matching the drive for success, a fundamental

building block from the earliest years of the company, with a hint that success should be attainable only if

ethical standards were simultaneously upheld;

"Exxon Mobil Corporation is committed to being the world's premier petroleum and petrochemical

company. To that end, we must continuously achieve superior financial and operating results while

simultaneously adhering to high ethical standards." (ExxonMobil, Upstream Operations, 2012)


From this statement several facts can be quickly refined; 1. ExxonMobil is intending to remain

one of the world’s largest and most powerful oil and natural gas exploration, processing, and

transportation company; 2. It intends to achieve this goal by focusing on profitability, shareholder’s value,

and operating excellence while not forgetting about upholding ethical standards. ExxonMobil directly

addresses the following groups;

To Shareholders

“We are committed to enhancing the long-term value of the investment dollars entrusted to us by our

shareholders” (Farfan, 2013).

The purpose of corporate management is to maximize shareholder’s value. This rule of business is

no different in the case of ExxonMobil, though the company finances its operations (339B) largely

through debt (172B) (due to high tax benefits and the inherent bankruptcy risk being negated by steady

earnings), and an almost equally

large part of equity (167B) (Y-

Charts, 2013).

To Customers

“Success depends on our ability to

consistently satisfy ever changing

customer preferences” (Farfan,

2013).

No legit company can exist without reliable customers and growing markets. ExxonMobil

understands this premise propelling the company to own and control the largest portion of the market

within the private sector.

To Employees


“The exceptional quality of our workforce provides a valuable competitive edge” (Farfan, 2013).

Happy employees make successful companies. ExxonMobil recognizes this by attempting to treat

all of its employees fairly by fostering quality training and operating environments where knowledge,

learning, and communication receive priority over entrenched incompetence, contributing to cost-saving

initiatives, profitable projects, and overall company success. Recently some of these achievements have

been questioned through a series of employee unrest, exposing management’s true nature and in some

cases their shortsighted practices.

To Communities

“We commit to be a good corporate citizen in all the places we operate worldwide" (Farfan, 2013).

No company can operate in a vacuum. The physical environment, the communities, and the host

countries say as much about any business as the press releases and executive statements. Good public

relations have the power to influence stock prices, so if not

for any other reason, ExxonMobil’s best long-term interest

remains to become a good corporate citizen.

To Local Governments and Legislative Bodies

“We are committed to comply with the laws of the United

States and all other countries where we conduct our

operations”

Finally complying with standing laws and regulations

is the primary focus of any corporation’s legal team.

ExxonMobil is most exposed to antitrust laws in the United States, and pending environmental and human

rights cases world-wide.


The objectives above ensure that long-term operations will be sustained, which is the underlying

reason for all mission, vision, and strategic statements for any company wishing to remain in business.

These five objectives are designed to strengthen strategic practices, which in turn, support the company’s

mission, and ultimately its vision. The company had ambitious goals, most of them have already been

achieved. ExxonMobil’s current key objectives are designed to reinforce existing practices indicating no

need for restructuring the company for the foreseeable future. This reassures investors that the company’s

current management intends to make only the necessary changes deemed necessary for staying ahead of

competition. One exemption from the mainstream strategy is the newly developing LNG line of the

company.

Where not to diversify - It is clear that

diversification into alternative energy would be a 180

degree turn and as such cannot be recommended in

any form or shape for oil companies or a nation

gearing up for winning the war on energy. Renewable

energy projects fail en masse; it is common economic

sense today to avoid them much like avoiding

dependency on the earnings of airlines or even worse

going into business with airlines. Renewable energy

was a push from the turn of the new century, mostly fueled from the panic over greenhouse effects and

global warming, the fears over limited fossil fuels, and the craving for energy independence. These


factors together seemed to be insufficient to win the argument against fossil fuels as high cost and low

ROI discouraged investors and businesses alike. Renewables proved to be economically inefficient, their

high cost design, difficult placement, and permit related issues killed many projects before they could take

off, while those who did make it through their implementation phase are struggling to survive without

their government subsidies. With hindsight we can

look back and report on renewable energy and see the

remaining supporters grasping for air. The myriad of

fancy innovations have seen their time, and just as

many other exciting ideas caused momentarily

change in the course of normal business from as early

as the first years of the industrial revolution, the

sector is quietly dying. Fossil fuels have reemerged

victorious from the wake of this intermission

promising to stay with us for another long stretch of

human history (Noon, 2013).

Part 6

Mergers and Acquisitions - Oil business can be extremely risky for those who dare to undertake

trading in crude oil, and when such trading does improve over a steady course, the measure of this

improvement can be painstakingly slow. The momentum behind upstream operations can be likened to an

oil tanker trying to accelerate from 0 to 60 attempting to achieve such a feat with the speed of a sports car.

The possibility of success is no better than our chances would be for speeding up the tempo in closing


strategic deals with the Russians over Arctic explorations, where much of our promised opportunities

depend on currently ongoing explorations of vast regions, mostly no man’s land, an undertaking requiring

virtues like patience, blind guesses, and tedious diplomatic relations warning us to endless toxic

consequences. Such defining

attributes are not of those our

investors appreciate. After seeing

the global markets crash the second

time in barely two decades, today’s

investors do not intend to plan

further than a few years ahead. The community’s mentality changed, and we should identify with this

change if we wish to stay in step with this new world, as ExxonMobil has most always done in the past. In

short, ExxonMobil’s stockholders need faster returns on their investments than the company can sustain if

it uses resources overwhelmingly in favor to oil exploration and extraction (Patel, 2013).

What has happened in 2010 during the merger of XTO Energy and ExxonMobil were just a

precursor for the events which are now reshaping the energy industry. The world’s demand for energy is

increasing at an unprecedented pace and it is only natural to align supply with demand. It was well known

to most market watchers that the global energy landscape is emerging, continuously resetting long-held

expectations in the most important areas of the sector; oil, natural gas, coal, and nuclear power (exception

are renewables). By carefully analyzing past trends and present data, we can relatively safely predict this

demand for the next couple decade. While the demand for energy may be chartered with relative

precision, predicting how it will be met is a much more subjective research. The currently developing

agreements among the world’s leading energy providers forming synergies and strategic partnerships are

the most important inputs for drawing today’s global energy map, a guide for analysts attempting to


predict our not too distant future. Beyond the known factors, trends in Southeast Asia, the Middle East,

and in Brazil will be heavily contributing to much of the predictions yet to be published. The globally

emerging LNG transportation routes and ports is the other significant factor that most analysts will be

following closely. The more talented ones will understand how these drivers are intertwined and will

make their conclusions for the millions of investors to follow and consequently oil companies to receive

much needed capital, a task which inevitably carry enormous risk. Since ExxonMobil is in the business of

betting on the formation of these energy markets it owes its investors to reduce this risk to a minimum by

making aggressive advances in areas which can be forecasted with relative predictability. The NLG sector

is one such arena, in which ExxonMobil has already secured a more than prestigious position. The chart

inserted in the previous page depicts the immediate benefit ExxonMobil has gained through the merger

with the nation’s largest natural gas provider, XTO Energy, in 2010. This single act has put ExxonMobil

in a very respectable position allowing the company to bargain for the most lucrative deals among the

world’s synergies in the petroleum and natural gas

industry. As the industry participants continue to march

forward in the second decade of the 21st century, it is

becoming increasingly clear that ExxonMobil’s forming

alliances with Russian (Rosneft and Gasprom) and

Norwegian (Statoil) oil will be bringing a rich infusion of

change to much of the sector (PenWell Corporation, 2010).


Part 7

Ethics - The promise of an economic revival is so timely and desired that many forget to listen to

lesser stakeholders who are asking to be heard on relevant matters but end up on the margins. Energy

business is plagued with alarming events (some

downright revolting), and many of them quite recent.

It seems that the larger the stake the more people are

willing to cross the line over ethical standards, the

fundamental building blocks of business itself. What is

the worth of a man’s life in Myanmar when billions of

dollars can potentially be at stake? When companies

get caught and get away with their mistakes (meaning they survive), we see expansive campaigns with

resounding slogans, doing all in their power trying to regain the trust of their customers, creditors, and in

the case of larger companies; public confidence and opinion. Classics here are Enron Corporation, the

rising star of Gas and Electricity Provider for almost 30 years, headed by their infamous CEO Jeff

Skilling, President and Chairman Ken Lay, and CFO Andy Fastow. A few decades ago Texaco has

shocked us in the South American country Ecuador when their illegal dumping of over 3 billion gallons of

toxic sludge came to light. ExxonMobil received its own share of attention in Myanmar when company

employees gunned down local villagers who were obstructing costly operations. Recent company-wide

employee unrest does not seem to help restoring brand image, something money cannot buy. British

Petrol’s long track record for violating its own safety standards has gained a controversial reputation for

the oil producer. By the occurrence of the Deepwater Horizon oil spill the company was well known for


exposing its workers to a strong likelihood of accidents (claiming numerous lives) dealing with possibly

the longest list of its kind containing court investigations most of them to this day clogging the system

which is insufficient to investigate them all. But in other areas, such as the controversies associated with

hydraulic-fracturing in the United States, and in Russia where British Petrol were locked into deals which

were perhaps designed from their beginnings to protect government expropriation of western capital,

which despite being ruled against by western courts, are considered unimportant in the course of

developing partnerships between ExxonMobil and its Russian counterpart Rosneft. The progress from

these deals can also be seen as an approval for overlooking not only ethical dilemmas but also legality. As

we research the known cases the question remains; can individuals made responsible for these acts or

their companies themselves are inherently responsible? What makes the perpetrators playing their parts in

these cases decide to follow unethical choices? Could ExxonMobil abandon its current deals with

Rosneft and in consequence possibly hurt millions of American shareholders? The answer must be a

resounding no, but ExxonMobil must play its part in these partnerships as we Americans would expect to

see ourselves represented outside our borders. If we just keep close those fundamental values which

earned our country the respect of so many nations in the past, then our corporations will earn the

reputation they so desire to attain through their recovery campaigns.

Part 8

Conclusion - Overall ExxonMobil seems to be the winner of this current age following the

misfortunes of BP and the Deepwater Horizon fiasco. The unfolding events of that tragic year caused a

chain reaction that is still unfolding today moving ExxonMobil towards wielding more power and market

share while forcing BP to continue surrendering its business. Hydraulic fracturing is definitely a game


changer causing smaller companies to report growth rates with earnings that the larger oil and gas giants

simply cannot follow and as such introducing new mechanics in the workings of stock markets in the

sector. Nevertheless the undisputed rulers of the arena remain the biggest behemoths who will inevitably

grow dangerously powerful in the near future. As demand for energy is growing with the industrialization

of the third world adding 3 billion people to the population by 2030, the energy companies possessing the

largest shale formations with adequate technology to tap them will dictate the direction for mankind,

which most likely will include more drilling, more fracking, and relatively low energy prices.


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ExxonMobil and the Petroleum Industry

Economy & Finance

Transcript of ExxonMobil and the Petroleum Industry