Exxon Mobil the Global Energy

Exxon Mobil

The global energy demand continues to increase at an extraordinary rate. The world's energy producers are challenged to increase capacity to support a growing demand. As the global population increases, the demand for energy increases as a result. Given this market scenario, the energy sector appears to be an excellent prospect for increasing portfolios. However, the industry is also faced with the challenge of supplying global energy needs, while doing so with an increasing concern for the environment. Green concerns headline news about the energy sector. This research will explore the recent history of the energy sector and the feasibility of ExxonMobil as an addition to a balanced portfolio.

Description of Company

The ExxonMobil Corporation is a longstanding leader in the exploration, production, transportation, and sale of crude oil and natural gas products. It is also involved in the manufacture, transportation and sale of petroleum products and petrochemicals. These products include olefins, aromatics, polyethylene, and polypropylene plastics. In addition to these products and services, ExxonMobil is also involved in electrical power generation. Exxon's products are diverse, but concentrated on crude and crude products. Their ability to increase capacity to meet demands depends heavily on the success of their exploration efforts. ExxonMobil makes an effort to meet increasing energy needs in a manner that is friendly to the environment. Their philosophy demonstrates a deep concern for the communities that they serve and the larger global community.

Ten Year Industry Analysis

The past ten years have been a series of challenges and opportunities for the energy industry. The energy industry is heavily influenced by the government decisions and regulations. Many times the interests of these two groups are not in alignment. Sharp disagreements between policy-makers and the industry have increased the challenges and demands being placed on leaders in the industry. The energy sector is one of the most heavily regulated sectors of the market, making it different from other sectors that are purely market driven.

Industrial and economic growth could not have occurred in this country without the success of the oil and gas industry (Tillerson, 2007). Continued economic growth is dependent on the ability of the industry to keep up with demand. Rising energy prices affect every sector of the economy. The oil and gas industry is a key driver of the whole of the economy. The world would be a different place without the successes of the oil and gas industry. The world's dependence on the oil and gas industry also places it in a unique position as far as growth is concerned. Oil and gas are a basic necessity for sustained economic growth. This means that as it faces increasing challenges, it also receives support when needed.

ExxonMobil is a leader due to its policy of investing earnings to increase production and to search for new sources of crude (Tillerson, 2007). ExxonMobil has invested $82 billion dollars on six different continents to search for new oil supplies (Tillerson, 2007). Its efforts extend to six continents, concentrating on exploring environmental friendly technologies (Tillerson, 2007). ExxonMobil in addition to reinvesting in exploration, ExxonMobil is also increasing its capacity to refine and transport increasing volumes of products to consumers.

Between 1991 and 2005, ExxonMobil invested half of its market capitalization on increasing capacity (Tillerson, 2007). ExxonMobil and its competitors must utilize a long-term strategy, rather than a short-term outlook in their investment scheme. Profit-taking could jeopardize their future position and ability to supply the world's oil needs. Investing in technology is a necessity in this industry. Energy leaders must increase exploration and production capacity. These efforts are the most capital intensive aspects of the industry. These challenges are shared by every company in the business, from the largest to the smallest.

Technology has been responsible for the ability of the industry to keep up with the increases that they experienced to this point. The first offshore wells were drilled in the early 1960s in only a few hundred feet of water (Tillerson, 2007). Now they are drilled in depths of up to 10,000 feet (Tillerson, 2007). As wells are expended, companies must continually drill deeper and in more difficult places to continue to meet demand. Deep water drilling is expected to become more important in the future.

Today, technology allows oil produces to do things they never thought possible in the early days of the industry. They can now drill horizontally to distances of six miles to obtain sources of crude in a cost-effective manner (Tillerson, 2007). This technology allows producers to meet their primary goals. It allows them to overcome environmental challenges. In addition, it reduces the impact on the environment, compared to older drilling methods (Tillerson, 2007).

Focus on the Future

New technologies allow producers to access a greater percentage of the available energy resources than in the past. The energy industry is dependent on the ability to establish an economy of scale. Those that have the resources to increase production and to explore for new sources emerge as leaders. Those that do not have the resources to compete on a larger scale must be satisfied with lower producing wells. The ability to develop and economy of scale also means access to prime locations. This industry is stratified according to economic scale. There are those that are very large, such as BP, ExxonMobil, and Marathon that compete on an entirely different scale than smaller companies.

One of the keys to understanding the energy industry is that its business cycles speaks in terms of decades, rather than years (Tillerson, 2007). This is the length of time that it takes to obtain new acreage, to explore, and bring new sources into production. Policy makers often want immediate results from the energy industry, causing them to set policies that are not achievable. Investment in the energy sector is a long-term growth proposition. One cannot expect to make considerable money in a short time. The energy sector is an excellent example of a long-term growth stock due to the length of their business cycle. The focus of investing in the energy sector are only for those with a long-term perspective.

Oil is one of the most heavily traded commodities in the world. The oil industry does respond to short-term signals, but its primary focus is on supplying future needs. The ability of the energy sector to supply the world's needs in the future depends on the ability to make projections about future demand far into the future. This is a difficult task for any industry, but the oil and gas industry have become accustomed to speaking in terms of these long-term projections. The accuracy of these projections presents a certain degree of risk and uncertainty. There is not way to predict the future for certain, and a mistake could cost the industry the ability to meet future demand.

Estimates of future energy needs vary. According to ExxonMobil's estimates, the global energy demand is expected to be 40% higher in the year 2030 than it is today (Tillerson, 2007). This will amount to nearly 325 million barrels a day (Tillerson, 2007). This growing demand presents many challenges, but it also presents many opportunities for the long-term investor. Few industries can expect such an attractive increase in demand as the oil industry. This economic growth in the oil industry will fuel other portions of the global economy. Growth in the overall economy means that consumers will have the ability to purchase these new production levels.

Oil and gas now come from a diverse array of producers from all over the world. Estimates are that the earth has more than enough resources to meet the growing demand. Total resources are estimated to include more than 3 trillion barrels of conventional oil (Tillerson, 2007). This estimate continues to grow as new technological advances make it possible to reach reserves that were inaccessible in the past. This is one of the few industries where both supply and demand are expected to grow at an enormous rate in the future.

In the past, the energy sector was dominated by a few key producers, located in only a handful of oil producing countries. This market structure allowed these producers to have almost complete control over production and price. Oil and gas are a necessary commodity, which in the past, has allowed it to be used as a political tool to advance one's own agenda. However, this marketplace has changed and the number of oil producing countries has increased. These changes make the oil industry operate like other market segments. Oil can no longer be used as a political battleground. If one supplier refuses to provide, one only has to turn to another supplier. There will be increasing chances for supplier substitution in the future.

Financial Analysis of ExxonMobil

Mission Statement

The Mission Statement of investment prospects can provide important information on where the company intends to go in the future. ExxonMobil's mission statement states,

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 adhering to the highest standards of business conduct. These unwavering expectations provide the foundation for our commitments to those with whom we interact: " (JLP, 2005).

Financial Goals

ExxonMobil does not explicitly state its financial goals. This is proprietary information that is not published. However, ExxonMobil does suggest that it intends to keep up with global demand. ExxonMobil is focused on long-term growth, rather than short-term gains. One could expect the financial goals of the company to include a plan for long-term steady growth that keeps pace with global demand.

Financial Analysis

Exxon Mobil is traded on the New York Stock Exchange under the stock ticker XOM. XOM ended the day on January 28, 2008 with a closing price of 85.08. It is expected that this price will climb to 101.00 within one year (Yahoo Finance, 2008). It is a high volume stock, in terms of the number of trades. It has a healthy 6.92 Earnings Per Share and a Market Cap of 464.85Billion (Yahoo Finance, 2008). XOM pays a dividend of $1.40 that has experienced a growth rate of 1.70%. (Yahoo Finance, 2008). XOM has a P/E of 12.30. These financials, combined with a positive growth prospect for the long-term future would make XOM appear to be a winner for portfolio growth.

When one compares financial ratios to the Industry, sector and S & P. 500, one can get better picture of how ExxonMobil compares. When one compares the P/E ratio, XOM performs slightly better than the industry average. However, over the past five years, the P/E ration has demonstrated a range from 10.40 to 23.36 (Reuters, 2008). The industry and sector out performed XOM, but this is largely due to the long-term nature of some of ExxonMobil's projects.

XOM has a beta of 0.87, compared to 0.75 for the industry. This beta reflects a comparison with the S & P. 500, rather than the DOW (Reuters, 2008). This is a relatively steady stock that closely follows the S & P. 500, but it could not be considered a tracking stock. Price to sales hovers at 1.23. This is higher that the industry, but lower than the S&P 500.

Gross sales were down -2.33 compared to the previous 12 months. However, the industry was down by -3.72. This is largely a result of rising oil prices resulting in curbed consumer spending. It is a reflection of a downturn in the general economy. This trend may continue for some time, but will once again recover at some time in the future. This short-range downturn does not reflect long-term performance. XOM has demonstrated a 12.16% growth rate over the past five years (Reuters, 2008).