Exxon Corporation financial analysis

¶ … worldwide energy market, focusing on one of its largest players, Exxon Corporation, and its influence over the overall economy. There are a number of key issues and challenges that have to be highlighted and analyzed in the context of change, globalization and political instability relevant to the topic. The global energy market has such an impact on all areas of activity, that its future is an issue that regards the entire business world. All long-term strategic plans have to take into consideration energy issues, hence forecasts and comments on this subject are extremely helpful for a thorough understanding of the mechanisms and underpinnings that characterize this industry.

Due to its size and implications, the energy market is of both public and private interest. Because the stakes are extremely high, and have the power to influence the future development of many fields, special policies that facilitate energy development have to be designed and implemented. There are three levels of discussion: the impact on society, the influence on the business world and the relationship between technological development and of the energy market (in terms of opportunities and constrains). Exxon, as a major player on the market, as both the interest and the responsibility to take an active role in developing energy outlooks and designing solutions.

The future as far as the energy market is concerned seems a little uncertain due to shortage in the global reserves and an exponential increase in the demand. What is sure is that the economic growth is conditioned by adequate energy and the growth will cause further increase in the demand. The world is addicted to energy is growing ever more demanding. The present imperatively demands action for the future.

The forecasts predict an increase both in the demand and in the efficiency of energy use. But the growth isn't uniform throughout the globe, as developed and developing economies account for the major part of the use. Progress is dependent on energy, hence emerging economies, such as China and India, to cite only the largest examples, are likely to become heavy users influencing the equilibrium on the market.

In order to meet the increasing demand, alternative sources of energy are required. Various options will be briefly discussed, with focus on their impact on Exxon's operation and on the overall development of the market. However, the fastest growing segments remain, according to all predictions, oil and natural gas - expected to provide 60% of the energy use in 2020 (Raymond 2004). This paper will provide a frame of analysis to the development of the energy market, comprising the challenges that the present and future bring, putting focus on the impact that Exxon and its business performance have on the economy.

Trends and Challenges of the Energy Market

The premise of any judgment in relation to this topic, that is becoming more and more obvious today, is that resources are limited. Put in terms of demand/offer, the situation may seem alarming. And it is. Compared to the situation of 1930, when the use of oil was 1.5 barrels, corresponding to 15% of the quantity of found resources, more recent statistics show an almost inverted situation of a 30 billion barrels use out of 5-6 billion barrels located in 2003 (Maxwell and Feshbach). The rapid augmentation in demand is mostly due to the increase in number of cars in developed countries. Although at present the resources are capable to meet the growing demand, solutions have to be found for further exploitation and alternative sources. This is where technology comes into play, widening the array of options.

Source: Exxon Mobil 2005 Company Report

The best alternative to oil as a source of energy, at this time, is natural gas. Forecast predict that it will capture about 30% of the demand growth over the next decade, offering advantages such as lower emissions of CO2 over other options such as coal.

One major problem that the market is facing is locating further resources. Although the major consumers of energy - U.S. And Europe - still have available resources, they rely greatly on imports. This is even more of an issue for China and India, that require large quantities of energy to support their continual economic growth. The main providers are the Middle East, Africa, Russia and the Caspian.

Exxon is a the largest player on the American energy supply market. Its strategic plans have to address the challenge of growing energy needs. For this purpose, the company has to coordinate its efforts with private and public initiatives, focusing on three different levels: the access to resources, investments in energy and technological progress (Raymond 2004).

As far as locating new resources is concerned, one issue that comes to mind in a restrictive way is the special care for the environment. The exploitation of natural reserves has to be rational and devoted to maintaining the natural equilibrium. The efforts of activists oppose corporate interests (as far as Exxon is concerned), pressing for proficient environmental risk management.

This calls for special investments in new technologies and operating practices. In order to have energy to support the economic growth, the industry needs access to resources. Conjugates efforts are required to defend all interests at stake. Governmental initiatives have to offer support to private parties in this area, by encouraging investments. The level of expenditure required for development in the global oil and gas sector is estimated at around $200 billion/year. Public policies should create favorable fiscal, legal, and regulatory conditions for attracting private funds and projects.

The technological progress of the last decades has enabled unseen development in all fields. It is difficult to foresee the rate of future discoveries. However, it is safe to say that the society and economy of the present depend highly on this aspect. The research and development of new technologies is a strategic need in all industries, including energy. The pattern of progress in this field shows that the private sphere accounts for most advances, hence it should be supported more by public action. In order to assure the transfer to more efficient and less intrusive technologies, Exxon as joined the Global Climate and Energy Program at Stanford University. The initiative aims at reducing the quantity of CO2 emissions without tampering with economical progress. Technological improvements and innovations are key drivers for Exxon's ability to face the toughest energy challenges. The company invested every year more than $600 billion in research and development.

Emerging Economies and Their Impact on the Energy Market

China and India are two emerging economies that are predicted to play major roles on the energy market over the next decade. Because economic development requires large quantities of energy, the two counties are thought to become heavy users in the following period. The rapid growth in the region is due to the fact that these countries have represented an extremely useful workforce in the process of outsourcing activities that were previously developed in the North countries' economies.

Since early 1990s, India has gradually opened its market through economic reforms by reducing government controls on foreign trade and investment. Despite political uncertainty, bureaucratic conflicts, shortage of power and infrastructural deficiencies, India is believed to be a good location for the European investors. Success in India depends on the correct estimation of the country's potential because an underestimation of its complexity or an overestimation of its possibilities can lead to a failure. India is the fifth largest economy in the world and has the largest gross domestic product (GDP) in the entire continent of Asia.

Despite the fact that this country is one of the few markets in the world that offers high perspectives for growth and earning in almost all areas of business, India has failed to get the attention generated by other emerging economies such as China. As far as the energy consumption is concerned, China uses approximately 4 million barrels a day, out of the 78 million barrels a day produced globally. The country's GDP increases at a constant rate of 7-8%/year, and at this rate it cannot be yet considered a major consumer on the energy market. In the larger picture of the global demand, China and India are not yet big players. However, if they choose to create (as China has already announced) strategic reserves of oil, than a special element of demand would be created.

Alternative Energy

To the above presented challenges that the energy market is facing, alternative sources may present an option. These solutions include wind, solar or biofuels, and represent a segment that develops rapidly also due to great environmental advantages. However, they face limitations. Wind, for example, as a source of energy can be implemented only in a some areas where it is concentrated and has enough power. Large scale projects yet have to prove their profitability. Solar energy has the same problem of geographical and climatic restrictions. Water is another option, but it isn't sufficient as almost all venues in the U.S. are taken already. In the outlook of the next decade these sources of alternative energy are not significant compared to the global demand and taking into consideration the required investments. However, they are worth considering on the long haul. Since the oil and gas reserves are suffering from a chronic shortage, a major company such as Exxon should think strategically and expand into this area. The discussion is more complex, in the sense that intensive research and development efforts are needed to both improve the above mentioned alternatives and to discover new sources of energy.

Exxon Financial Results

Due to the high crude-oil and natural gas prices, in the context of a busy hurricane seasons in the Gulf of Mexico, Exxon has reported record figures for 2005, mounting up to $36 billion in net income and 31% return on average capital.

Source: Exxon Mobil 2005 Company Report

The results Exxon reported for the 2005 fiscal year are impressive:

record earnings of $36 billion, up 46%;

net income per common share of $5.76;

net income to average shareholder's equity of 339% (Annual Report 2005).

The outstanding financial results have led to a wave of public concern, especially in the context of the not so old Enron scandal. Exxon is now likely to appear before a Congressional committee to investigate its pricing and other operations. The worries relate to the accuracy of the numbers, as well as to the high oil products and energy prices.

The company has taken action to defuse public, media and congressional concern. As far as the public is concerned, its biggest fear is a rise in the energy price. This fear should be cast away. The media's interest is to have scandal coverage, so it is expected that the Exxon communication at least limit the negative perspective on the matter. A special segment is formed by the Exxon shareholders. They should be reassured of the company's stability and of their shares' financial security. The Congressional committee is interested in popular support. From the Exxon's point-of-view this means that the company should make its position heard and reduce the tensions through open communication.

Some pessimistic forecasts predict harsh times for Exxon in the following decade. Most of the worries focus on the company's approach to the existing challenges that the energy market is facing. Exxon is characterized by a rather rigid culture that has difficulties in adapting to rapid change. The best description for the company is gigantic, with a tradition of authority situated at the top of the pyramid.

Changes are essential elements of the business world and everyone has to change unless it is too late. The pace of change today, because of globalization, technological innovation, and information access, is both dizzying and dazzling. Companies are forced to adapt or they lose. This is even more so at Exxon's level. It is significant to find out the types of change required to keep up the pace with the dynamic energy market. Organizations do not stay stagnant. They are constantly facing external factors such as market or customer demands and internal factors such employee or stakeholder demands. Internal changes can be influenced by external factors. In this case, the circumstances of the market should translate into reactive and proactive strategies. Organizations have planned strategies that are revised based on short-term and long-term goals. Each planned strategy needs a change initiative. According to Armstrong (2003), there are two main types of change in a business environment: strategic and operational. The scholar believed that strategic change is concerned with organizational transformation, which deals with broad, long-term, and organization issues. It is not a simple or linear process. It is an ongoing continual assessment and requires multiple adjustments. On the other hand, operational change is related to new systems, procedures, structures or technology. Exxon undergoes both types of change. And its history of excellent management has shown that when times are difficult the company can find the good path out.

The question is the following: why, in the context of real challenges of the energy market, hasn't Exxon shown more interest to alternate exploitation methods? Apparently, while its competitors rushed to lease rigs and to invest into developing other exploitation techniques, Exxon is not taking on any leases for deep-water drilling after 2008. Could it be the action of a careful player holding an ace up his sleeve or is it simple inertia? The answer to this question could have significant consequences on the global energy market. Critics say that the giant company is drunk on its overwhelming success of the last year and fails to seize an opportunity.

Financial Underpinnings

What is of special interest in this paper is the relation between the financial results of the largest player and the development of the overall energy market. The overall energy market is characterized by good opportunities for the short-term, but also by great threats for the long-term. In the short-term all players are enjoying large profits, due to high oil and natural gas prices, as well as a consequence of natural hazards (busy hurricane seasons). Exxon follows this trend of impressive returns, using its expertise and market position to make the best out of the present opportunity. The market goes well, and so do the major energy producers.