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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 1
ExxonMobil in the Petroleum Industry
Thesis
Istvan Jambor
Master of Business Administration
September 9, 2013
Partially revised on July 15, 2014
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 2
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 3
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.
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 4
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 5
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-
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 6
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).
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 7
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 8
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 9
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.
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 10
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).
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 11
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 12
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 13
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.
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 14
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 15
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.
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 16
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.
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 17
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 18
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 19
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.
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 20
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 21
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.
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 22
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 23
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.
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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.
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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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 26
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 27
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 28
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 29
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 30
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).
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 31
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 32
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 33
in the favor of those who came prepared in taking part and control 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. Too high oil prices carry the danger of destabilizing businesses
providing jobs to billions of people worldwide, while too low prices endanger a multitude of smaller oil
companies supporting the
social fabric in a number
of nations mostly located
throughout the third world.
These state-owned energy
companies are in need for
high oil prices which need
to be floating at $80 per
barrel or above. The recent invention of fracking in the upstream branch of the fossil energy sector
(largely credited to cheap natural gas and new plans for worldwide distribution of LNG) promising to be a
game changer. The addition of gigantic new oil and gas fields in projects jointly undertaken by
ExxonMobil and Rosneft in Russia is possible today because of this new technology, a stellar example of
new momentum which 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 has not bagged the prize yet. As time progress from the
2011 discovery of the revolutionary technology known for causing
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 34
billions of fractures in the oil and gas shale barely a mile under the surface is not fully cleared yet. Studies
show toxic contamination of fracking fluids as it is making its way up to the ground water tables (the most
common source of potable water). Research shows high level of poison presence in the air around open
storage ponds sustaining airborne fumes evaporating from millions of gallons of hydraulic fluids
recovered from each well which are simultaneously leaking back into the soft ground. Finally studies
show artificially induced earth quakes, a new addition to the list of serious environmental hazards blamed
on the use of hydraulic fracturing (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 paving
the way for the United States becoming an important LNG supplier to Europe and other parts of the world
(along with Qatar Gas, current LNG pioneer).
Safety - Oil trading, making bets on the market, for the most part is high risk gambling. Until just
recently trends were less clear and current or near future events were more difficult to interpret or predict.
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 an all out attempt for stocking up cash reserves which
would be later used to offset low crude and gas prices related budget gaps. The oil giant has given green
light to the use of numerous unsafe procedures relaxing, violating, or simply contradicting its own safety
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 35
standards that inevitably lead the company to the well-known Deepwater Horizon oil spill in April of
2010 (the company had a long history of safety violations that has already been raising public concern
prior to this event). As a result BP almost immediately lost its built cash reserves to a $20 billion trust
fund responding to public outcry, later forcing BP to spin off many mid and downstream facilities in the
US to less than profitable sales. BP also sold many of its larger global assets at other parts of the world
including oil fields and refineries to support the clean-up and related costs in the Gulf eventually moving
towards a staggering total of nearly $40 billion. Its weakened position was exploited in Russia as
dealmakers for large future Russian operations started to see BP more of a liability and lost opportunities
elsewhere, than the partner Putin and Russian oil and gas company directors envisioned BP prior to Deep
Horizon Spill. These closures ended in BP having to back out from deals masterminded for exploring the
Russian Arctic, Russian Far East, and the Black Sea. BP soon found itself replaced by ExxonMobil which
was able to come forward with more assets than what BP lost in the Persian Gulf, an easily predictable
economic reaction as the events in 2010 / 2011 were unfolding. It’s worth to mention that the Russian
condition for BP to save face was to reinvest $4 billion worth of shares in Rosneft, a heaven sent gift for
the Russians to buffer against western court rulings concerning the Yukos’ lost western capital as
mentioned earlier. This event later served as the foundation for Rosneft to offer securities in the newly
forming Exxon / Rosneft deals. 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 renewed beginning for this energy giant, which recently started
paying healthy dividends and boasts of current and forecasted positive 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 in the years following the Deep Horizon Oil Spill.
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 36
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 $272.26 billion, BP’s loss
affixed to the Gulf looks manageable (BP
PLC Case Study, 2012). BP’s current market
cap is $129.01 billion, still comfortably in the
category of “too big to fail” though controlling a much more humble portion of the market compared to 2
years earlier. In the aftermath of the Gulf crisis BP has certainly become a more focused company, and
most of this attention was directed towards its spill related obligations, which we can say with certainty,
BP has overcome and paid its dues in full.
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 37
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 towards refreshed retained 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 that 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 outstanding shares are currently 3.185 B, 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 of $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 illustrating that oil exploration /
extraction could be many things but not cheap. The result shows BP’s relatively stable revenues
indicating a proposed thin net income. Since expansion costs in the upstream sector can be seen as a
positive signal by those who follow oil companies the positive prediction for BP’s future growth is not
without merit (ft.com, 2013). Edited to this point.
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.
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 38
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).
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 39
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 40
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.
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 41
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 42
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
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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.”
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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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 45
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 46
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,
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 47
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,
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 48
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 49
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 50
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 51
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 52
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).
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 53
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
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 54
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.
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EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 55
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 IN THE PETROLEUM INDUSTRY – THESIS 56
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