ExxonMobil and the Petroleum Industry


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MBA thesis focusing on ExxonMobil's position in the oil and natural gas sector describing events and technology such as natural catastrophes, Russian joint ventures, fracking, and the possible fate of green energy.

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ExxonMobil and the Petroleum Industry

  1. 1. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 1 ExxonMobil in the Petroleum Industry Thesis Istvan Jambor Master of Business Administration September 9, 2013 Istvan Jambor – Project Manager - MBA / DoD TS/SCI Virginia Beach, Virginia, United States istvan.jambor@jtfgtmo.southcom.mil http://www.linkedin.com/pub/istvan-jambor/7b/643/b35
  2. 2. 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
  3. 3. 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.
  4. 4. 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
  5. 5. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 5 and generous internship opportunities, improving the teaching profession in a land where the institution suffered severe degeneration following the reconstruction years of the 60s’. From seemingly unlimited resources at the disposal of management, and an unwavering destiny for success, topped off with an undisputable resolve for more power, ExxonMobil has forged its mission to be simple, clear, and unmistakable, emphasizing the company’s core business; upstream exploration and extraction of oil and natural gas. Part 2. Strategic Initiatives - A business’ strategic plan is its blue print to what exactly it needs to do in order to comply with its vision statement. The vision itself describes lofty ideas, an imagined future state, usually the product of market opportunities perceived by top executives. However a strategic plan applies to the present with more pragmatic steps and guidelines. It comprises elements such as “setting objectives”, “crafting practical strategy”, and providing steps for the actual implementation of directives issued for current and near future activities necessary to move forward in the desired direction. Part of good implementation processes are the monitoring of current activities as the
  6. 6. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 6 company executes periodic self-assessments ensuring that no part of the business is sidetracking from its mainstream policies without sufficient evaluation and approval. A good strategy unifies a business bringing together all of its employees, managers, and outside stakeholders in one common interest, providing direction with a purpose, brewed into a common denominator for decision making, where nobody is above the rules, conveying that strategy which is meant to last must also be all inclusive. Operating activities inherently invite disagreements prompting management to choose from a handful of available options for tracking ahead. There could be financial strains from a slowing down economy, new products or services can enter the market, developments in technology can render existing successful products obsolete, or federal and state regulations can impact otherwise promising operations. New opportunities can lead to entering unchartered regions in foreign lands taking advantage of offshored projects where favoring local tax laws, low labor costs, convenient locations to new markets, or lucrative economic spur and political stability are all pointing to more offshore ventures. These are all major contributors to the decisions top managers face to make every year. When managers are confronted with such choices they rely on the firm’s values, plans, and guidelines quantified in the operating objectives guiding first and foremost middle management through the firm’s strategy. Therefore strategy is planning, both at higher and low levels, offering clear directions to business units distributed to each department and work center. While strategy making is synonymous with planning, and the practices employed are interchangeable between them, strategy, like any good plans, should never be designed or expected to be stagnant. Flexibility should be used to conform to new market conditions, and also to unexpected needs of the company, and as such, good strategy is the one which is most flexible in supporting managers with need for responding to internal or external changes affecting their firm (Thompson, Strickland, & Gamble, 2009).
  7. 7. 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
  8. 8. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 8 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
  9. 9. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 9 fundamental strategic layouts there are plans for expanding operational areas and for better utilizing existing resources (oil or natural gas fields). These methods on implementing cost saving measures without jeopardizing future operations are practical steps outlining directions for making the company’s various components work better responding with increased efficiency to competition. Examples for strategic objectives can include increasing market share by either overtaking competitors using mergers and acquisitions, or opening new markets by investing new capital, increasing revenues on assets, and last but not least improving the quality of the company’s customer relations. Therefore setting quantifiable goals is a vital part in strategy building as this gives directions and marks milestones along the way (The New York Times, 2013). ExxonMobil has shaped its strategy for its oil exploration unit in order maximize risk management for high operational outputs while maintaining relative safety. The identification and acquisition of high quality resources; exceptionally well-orchestrated cost management and the development and application of state-of-the-art technologies has led to very high profitability for ExxonMobil’s operations preparing the stage for entering the attractive LNG market (ExxonMobil, Upstream Operations, 2012). Russia - Russia is vast and most of its oil and natural gas reserves were left untapped during the Soviet era despite the old regime’s existence was dependent on crude oil extraction. The landscape is much different today; new companies emerged from the ruins of the old ones as they are channeling power to Putin which he has managed to wield as the Russian Federation has become the EU’s primary supplier of natural gas. The Russian prime minister is making ever more realistic plans to become a key player in helping to quench the world’s 83 million barrel per day thirst for crude oil. However, much of the upstream potential remains undeveloped and the capital does not seem to
  10. 10. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 10 be coming from within the ailing economy of the Russian Federation. ExxonMobil certainly has cash to invest, and it might be just the right amount the Russians need. Modeling the workings of a regular corporation which trades equity for much needed capital, the Russians are quick to give away large portions of future benefits from this large potential in order to get the required developments underway. The ongoing negotiations between ExxonMobil and Rosneft are currently outlining projects at the Arctic regions well to the North from Siberia, while preparing similarly large deals in the Russian Far East and in the Black Sea (Media Relations, 2013). As such the real value that ExxonMobil can muster for the Russian joint venture is capital with a special boost; the proven adaptation of new technology. The recent discovery of hydro-fracture applications “fracking” in drilling for natural gas and oil has simply revolutionized the industry much like using mud for securing well walls has done throughout the
  11. 11. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 11 oil boom years, transforming the 20’s to some of the most exciting times in America (Kashi, 2013). In fact fracking is so effective that it has already reduced the price of gas in the U.S. by three forth when compared to global gas prices (increasing LNG transportation is slowly restoring equilibrium) (Louisiana Oil and Gas Association, 2013). More importantly for ExxonMobil, the Russians are not capable to use this technology yet, which quite upsetting for Putin who already nervously tracking the number of LNG shipments heading for Europe. As European natural gas consumption is becoming less and less dependent on Russian supply (mostly due to a continuous flow of LNG shipments) the Russians are forced to reevaluate their global strategy (the Russian prices of over 12 USD per Mcf -1000 Cubic Feet- cannot be expected to compete against prices improved through fracking in the ballpark of 4 USD per Mcf). Many of the topics presented in this thesis benefit from the use of visual aids. One such concept is the process of fracking mentioned above (image inserted is depicting fracking using horizontal wells, page 13). While the concept is still unknown to many both in the US and around the world, it is by far the most promising innovation discovered in America, looking to be possibly the most important invention welcomed by mankind since the advent of computers. American engineers in 2011 developed this process, and soon they put it to successful use in California and Pennsylvania. The image on page 13 illustrates how engineers modified an already successful drilling method called “horizontal drilling” applying explosive charges to the horizontal segment of the well, blasting holes into the shale, then filling the well with over a million gallons of liquid which they suddenly put placed under extreme pressure. This pressurized liquid in turn immediately expend the cracks from the earlier explosion effectively cracking and opening the shale containing the bulk of the oil or natural gas left inaccessible through regular drilling (Louisiana Oil and Gas Association, 2013). The new technology does present a number of risks however which is much debated in the media along with its spectacular success (More, 2012). Recently fracking has been seen as the cause of smaller earthquakes, and it is also suspected that the use
  12. 12. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 12 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
  13. 13. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 13 other but the Russian Prime Minister Putin himself (seeing his European gas operations disturbed by low U.S. gas prices), there is no doubt that he plans to use fracking in the Arctic as he expects ExxonMobil bringing the technology to the Russian negotiating tables (The Wall Street Journal, 2012). It can be speculated that successful completion of such Russian American joint venture can lead to significant change in the way oil is supplied around the world today (change of such kind is most certainly undesirable from the perspective of OPEC countries as it leads to diluted markets and anticipated decrease in energy prices). ExxonMobil’s largest and immediate competitor in the United States is British Petrol PLC (BP), led by its CEO Bob Dudley, who is certainly looks to be on the losing end of these developments after being replaced by ExxonMobil as far as the Russian deals go. BP’s
  14. 14. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 14 interest, which was tied to its financial capabilities, has dwindled in Russia following the aftermath of the Deep Water Horizon oil spill as the ordeal was unfolding in the Gulf of Mexico a year earlier. If the diagnosis is right the company has given in to pressure from its investors who have been preferred to see the oil giant refocusing on upstream operations, an often recommended remedy prescribed to ailing oil companies (The Wall Street Journal, 2012). The more inroads ExxonMobil makes in Russia, the more the company secures its future leading role among its U.S. competitors, whereby BP is heading to the opposite direction reducing operations, and thereby giving up market share to ExxonMobil. Moreover, successful joint ventures in Russia combined with new oil discoveries in America has a serious potential to undermine OPEC’s already fading role as a global industry leader, moving BP backwards in the catching up game. While here in America our budget has been dramatically reduced by large payments coming due on our national debt, and where companies left and right lose their customers and thus go out of business regardless of their size or past track record, ExxonMobil has embraced the new technology hydraulic fracturing, and with it a promising way to navigate through the recession. By showing Washington that the new technology is the chief cause of their new success (Royal Dutch Shell has quickly followed suit in promoting the new process)
  15. 15. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 15 they imply that the new drilling technique might also be the cure for our ever weakening domestic economy. Their lobbying is slowly paying off as many Americans on Capitol Hill, including the president, see eye-to-eye with ExxonMobil, and have already pledged their support for fracking. As the harms caused by fracking are steadily negated by the excitement for a potential economic boom, similar maybe to what our country has experienced in the 1920’s, ExxonMobil’s long term goals are brought in alignment with much bigger national strategies and political campaigns. As the march for fracking continues and the difficulties are shored up with strong quarterly reports promising a brighter future for more and more Americans, ExxonMobil is expected to be receiving a steady supply of support from Washington. A perfect strategy brought about by brilliant engineering seemingly arrived just in time to help our oil companies redefine American economic power as the country slowly turns back from the recession. Furthermore, cheap oil and gas from the United States and Russia will eventually reduce global energy prices plunging below sustainable levels for many state-owned OPEC producers, making them book losses and thus rendering them inefficient beyond the point where they can no longer honor their obligations for supporting their country’s social programs, feared that it can lead to worldwide unrest if left unchecked. Most OPEC producers, African, South American, and Middle Eastern companies fall into this prediction, companies who will have little more options but to seek less than favorable deals
  16. 16. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 16 with ExxonMobil and its future partners. In less than a decade new synergies will be making inroads into OPEC territory (causing many state-owned oil producers in OPEC to operate far below the current crude prices, while they are struggling to cover expenses at 90 – 80 USD BBL) (Administration, 2013), (Helman, 2012). Part 3 Financial Performance – Public corporations are obligated to issue annual reports which includes a detailed balance sheet, income statement, statement of cash flows, and retained earnings statement. These reports are developed and published quarterly and made available to anyone as “quarterly reports”. What makes them interesting is not whether a company meets its forecasted expectations from a period earlier but to see how changes from within or outside the company influence these reports. In the case of ExxonMobil these changes took effect in joint ventures developing with the Russian oil company Rosneft. ExxonMobil aimed to infuse at least $40 billion capital into oil / natural gas explorations in Russia. The three pronged venture is relying on investments intended to be used in the Kara Sea near the Arctic Circle, deep water drilling in the Black Sea, with drilling ops more underway using fracking on Sakhalin Island. When we compare ExxonMobil’s market capitalization from 2010 (the most devastating year for businesses impacted by the recession) with more recent data, we can observe a rebound followed by stable influx of common stockholder’s equity. It is
  17. 17. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 17 obvious that mergers are in part responsible for the boost, but it is also hard to argue that ExxonMobil needed (and found) additional investor capital in the wake of readying the company for the new Russian American era (Yahoo Finance , 2013). From the perspective of ExxonMobil’s investors the company is offering moderate risk / moderate return investments for the foreseeable future. The question remains how far into this future an average investor is able to see. From what is available today investors and company analysts are tempted to deduct that ExxonMobil might just become the type of power that was wielded 110 years earlier by the Rockefeller family through their ownership of Standard Oil Co. Comparing market capitalization with cash flow per share also reflects an impressive recovery and growth; looking back to 2009 this index was $6.20, which dramatically increased to $13.10 by 2012 faithfully mirroring the company’s EPS growth $7.95 (NASDAQ, 2013).
  18. 18. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 18 Presently the market mean for this index is below $2, indicating that ExxonMobil’s management has wasted no time to rebuild the cash reserves of the company, much of which were used up during the recession. In addition, ExxonMobil’s current total number of shares outstanding are 4.40B, well above the market average of 600 million, giving us no reason to worry about investor interest (ft.com, 2013). Revenues are also moving upwards $482 billion far above the market’s average which is barely over $20 billion (NASDAQ, 2013).
  19. 19. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 19 Operating expenses are stable indicating a conscious effort for cutting costs, but also a much more conscious effort to be ready for the negotiating tables. And doing so, ExxonMobil has gained a tremendous momentum. Company leaders predicted that what they needed for effective negotiations are to be found in straightforward financial reports, all supporting the effective use of technology Putin wants to acquire at any cost. As we see in the next section numbers do tell a story and ExxonMobil’s story seems to start promising. The ratios reflect more than just a healthy condition, something that could be compared to the pre-war Germany’s war industry preparing for over a decade to be in perfect shape and strength for its ultimate showdown, operation Barbarossa, the invasion of the Soviet Union. While today this monumental struggle is not meant to be unfolded on WWII battlefields, the sides representing their historical interest are real, the stake is similarly high, and the trust meant to be lubricating the gears of this enterprise is as dry as an old rusty wheel.
  20. 20. 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
  21. 21. 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. This index
  22. 22. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 22 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
  23. 23. 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.
  24. 24. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 24 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.
  25. 25. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 25 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
  26. 26. 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
  27. 27. 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
  28. 28. 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
  29. 29. 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
  30. 30. 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).
  31. 31. 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
  32. 32. 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
  33. 33. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 33 in the favor of those who came prepared in taking part (and control) of the first part of the 21st century. (Association, L. O., 2013). Peak Oil and the Recessionary Cycle theory predicts that one day we will pass the mark where we need more oil than we can produce, from which point onward increasing energy prices will lead to irreversible socioeconomic degradation. So as it might seem too high oil prices carry the danger for destabilizing businesses providing jobs to billions of people worldwide while too low energy prices endanger a multitude of smaller oil companies supporting the social fabric in many third world (and some industrialized) nations. These state-owned energy companies are badly in need for high oil prices floating at least above $80 per barrel. The recent invention of fracking in the energy upstream sector (largely contributing to cheap natural gas and its worldwide distribution as LNG) and the addition of gigantic new fields in projects jointly undertaken by ExxonMobil and Rosneft in Russia is one example and will most likely result in decreasing prices, a serious challenge for OPEC, which the organization will soon have to deal with if the unfolding events in Russia turn out to be successful (Association, L. O., 2013). However, BP, ExxonMobil, Royal Dutch Shell, a few others who own the right and the know-how for the new technology have not bagged victory just yet. As time pass from the 2011 discovery of the revolutionary technology responsible for causing billions of fractures in the oil and gas shale barely a mile under the surface is not fully cleared yet. Studies show extreme toxic exposure from the use of fracking fluids making its way up and contaminating the ground water tables (the most common source of potable water), other research shows alarmingly high level of poison content in the air around open storage ponds sustaining airborne fumes evaporating from millions of gallons of highly poisonous hydraulic fluids recovered from each well (also leaking back into
  34. 34. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 34 ground water), and finally studies show artificially induced earth quakes, a new addition to the list of serious environmental hazards blamed on the use of fracking (Lucas , 2011). The issue of fracking has divided the nation from its inception, where one camp is eager to support the potential for a true economic revival, while the other is in opposition and cannot accept compromise until the environmental problems have been resolved. Fracking is a technology that has managed to amplify production for companies which own it and able to apply it. As such ExxonMobil and British Petrol’s upstream business has completely been revamped to accommodate its use, making the company dependent on the outcome of various current litigations concerning the use of fracking. Fracking is an American invention and most of us, including President Barrack Obama, are proud of it. It has managed to drive down gas prices to ¼ from global prices making the United States an increasingly important LNG supplier to Europe (next to Qatar Gas).
  35. 35. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 35 Safety - Oil trading, and consequently making bets on the industry for the most part meant gambling in the most common use of the term until just recently when the forming trends have become easier to interpret. In 2010 BP understood this trend and correctly suggested that oil and natural gas prices will be falling in the coming years. Responding to this pressure in a desperate attempt for piling up cash reserves which would be used to offset low crude and gas prices, the oil giant has given green light to the use of numerous unsafe procedures relaxing, violating, or simply contradicting its own safety standards that inevitably lead to the known Deepwater Horizon oil spill in April of that year (the company had a long history of violations that raised public concern prior to the spill). As a result BP almost immediately lost its cash reserves to a $20 billion trust fund which had to be set up for claims, was forced to spin off many mid and downstream operations, and sold many of its global assets including oil fields and refineries to support the clean-up and related costs in the Gulf eventually moving towards a staggering total of near $40 billion. Last but not least its weakened position was taken advantage of by its Russian partners as BP had to back out from deals drawn for exploring the Russian Arctic, Russian Far East, and the Black Sea. BP was replaced by ExxonMobil (the Russian condition for BP was tied to reinvesting $4 billion worth of shares in Rosneft, helping the Russians to buffer against western court ruling for the Russian expropriation of the Yukos’ western capital, which served as the foundation for Rosneft with Putin at the controls as mentioned earlier). In the aftermath, BP was able to muster enough cash to pay for the Gulf but left with no choice but to submit to investor pressure and restructure the company focusing on its upstream segment. Today BP has gone from being a vastly diversified company to one that is strictly focused on exploration and extraction, a new beginning for this energy giant, which recently have started paying healthy dividends and boasting of current and forecasted increased earnings. The next section will show how BP, as ExxonMobil’s global competitor, is doing today and where the new capital structure has taken the company.
  36. 36. 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 $272.262 billion, BP’s loss affixed to the Gulf looks manageable (BP PLC Case Study, 2012). BP’s current market cap is $129,008 billion, comfortably in the category for “too big to fail” judged by most wielding a much more humble portion of the market. In the aftermath of the Gulf crisis BP has certainly become a more focused company, and most of this focus was directed towards its spill related obligations, which we can say with certainty, BP has overcome and paid its dues in full. Furthermore, not long after its market cap and its stock price plummeted in 2010 the company managed to stabilize both, and by now moving ahead for new increased earnings (Yahoo Finance, 2013). From the standpoint of BP’s investors the company is offering moderate risk / high return investments backed by strong cash flows well above the market mean. Its cash flow per share was $1.30 in 2012, which increased to $12.36 by Assessments & Analysis Based on August 22, 2013 (NASDAQ, 2013). At this time the market mean for this index was $1.53, far below BP’s, showing that company
  37. 37. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 37 management is wasting no time to rebuild the cash reserves which dwindled for almost a year in the aftermath of the spill. In addition, BP’s total number of outstanding shares are currently 3,185 million, well above the market average of 600 million, indicating that the company is still able to attract a large investor base (ft.com, 2013). BP’s sales are also moving upwards $395 billion far above the market’s average which is barely over $20 billion (NASDAQ, 2013). BP’s cost of goods sold is rising with the implementation of its new investments, interesting enough, also in the Gulf. Determined to get a fresh start in the region BP has just initiated its new oil project dubbed “Mad Dog Phase 2” is more than promising as it is built over a 4 billion barrel oil field. The costs from this project is embedded in BP’s 2012 operating cost proving that oil exploration / extraction could be many things but not cheap. The result shows BP’s relatively stable revenues ending up yielding a relatively thin net income. Since the expansion costs in the upstream sector can be seen as a positive signal by most who follow BP’s rising path closely, the prediction for BP’s future growth is not without merit (ft.com, 2013). Key Ratios – BP’s capital intensity ratio (current assets / current sales) is 0.77 (300B / 388B) in 2012. This ratio in 2011 was 0.76, and in 2010 0.88 indicating that BP is attempting to massage this number to be as low as possible in order to help the upstream business, where cost of new additions can be staggering if left unchecked. Return on Equity (or net income / shareholder’s equity) was negative in 2010, upwards in 2011, and reflecting new investments and the change of direction in 2012. Illustrating this with data BP’s 2010 net income was $-3,7B, but 2011 ROE increased to 23.05% (25B / 111B), and just recently ROE fell back again due to new reinvestments of capital 9.78% (11B/118B) (ft.com, 2013).
  38. 38. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 38 BP’s profit margin spells out a trend showing the company managing cost during the restructuring period. In comparing BPs net income with its revenues we see that the index is not measurable in 2010 (- 3B / 308B), increasing to 6.65% in 2011 (26B / 386B), and declining again in 2012 down to 2.98% (12B / 388B). BP’s profit margin and asset structure clearly tells the story of how BP is funding its crisis management efforts in the Gulf, and how the company was able to find new purpose in realigning with its core business in the upstream sector. The shedding of BP’s seemingly endless array of assets is paving the way from the abyss of environmental recovery and lost Russian deals as the company has been able to sell off refineries and oil fields reducing its worth from close to 300 billion in 2010 to barely over 100 billion in 2012 and in 2013 (it would be interesting to see a track record compiled for the migration of these assets). Hence profitability ratios are lower than expected with interest charges kept at bay. Currently the largest impact on revenues are from operating cost, 84.2%, selling and general admin expenses 5.54%, which were followed by depreciation and amortization of 3.21% tracked in the year 2012 (ft.com, 2013). BP’s business units overall operate at full capacity, especially after selling off its Texas City refinery, which was representing the segment of the business being more prone to operate under less than full capacity. Since it is difficult to get detailed operations reports for each oil well and exploration unit, we are going to assume that most of BP’s upstream segment is utilized at near or full capacity. BP’s dividends were frozen during the crisis, and its stock market capitalization has witnessed a steep dive from near 200 billion to around 100 billion. From this low point BP has not only managed to recover its POR (Payout Ratio) but ranked as one of the star companies paying the largest dividends in 2013. Dividends were down (but
  39. 39. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 39 paid) in 2011, 17.4% (4,4B / 25,7B), up in 2012 50.12% (5,8B / 11.5B), indicating a steady climb for the foreseeable future (ft.com, 2013). The company’s current ratio (current assets / current liabilities) is 1.43 (110,9B / 77,5B) indicates a better than average liquidity hinting that BP is far from running into problems paying its obligations. This is largely due to BP’s selling off assets in order to fix the Gulf rather than acquiring exclusively debt (the option of acquiring any more debt has already been exhausted if WACC is to be maintained at its current level). While the selling of assets was making the current ratio fall, it is still maintaining the number well above 1.0. This index without inventory is somewhat lower; 1.071 (110,9B – 27,8B / 77,9B) still keeping BP’s head above the water. Emerging from the mountain of compensation claims, BP has dedicated all of its attention, know-how, and resources, under a unified effort which saved the company from losing much more than it already has. In fact, the total asset turnover ratio (1.293) were one of the first signs of this new revival pointing to generating 29.3 cents on every invested dollar in the company (388,2B / 300,2B), a staggering number in oil industry perspective. Similarly the management’s ability to churn out 3.86% ROA (11,5B / 300,2B) after all the excitements of the last few years gives us clear insight that this giant is not ready to throw the towel in. Stock analysis – BP’s stock price is driven by some additional key ratios described in this section. Revenue per share (ttm or twelve months tracking) is currently 117.85, a number unusually high for any
  40. 40. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 40 company. The number is derived from total sales divided by average shares outstanding. This metric indicates that 1. BP’s has strong and stable sales, 2. That the company capital budget has a more than a healthy infusion of debt shoring up the value of its stock price, and 3. that BP is a very active company, which is no surprise to anybody who is familiar with BP’s history in the Gulf. Diluted earnings per share (EPS) is 8.23 (ttm), is a good measure to use if investors want to see the worst case scenario for their investments since it includes all possible stock conversions from debentures to preferred stock and all in between. Since it is very unlikely that all convertibles will be exercised together, while certainly a good measure, the index is not meant to reflect actual earnings for each share. BP’s 8.23 index simply indicates that the company is using a large amount of debt (181 billion are liabilities out of 300 billion assets), which largely responsible for the strong stock indexes. While over 50% of debt can be alarming for many companies, BP might just get away with it due to its strong and reliable revenues. Earnings per share is calculated from BP’s profit divided by its number of shares, and in this area BP is strong. It is worth listing the book value for shares from which investors derive a feeling of security. BP’s 40.87 index tells its investors that just in case things go wrong (common stockholders are last to get paid) their compensation will be worth the book value of their shares, a figure almost equal to BP’s current stock price $41.82. Overall BP’s leaverage magnifies both risk and returns. Its high debt is certainly responsible for confident numbers for stock holders while driving up the cost of equity together with BP’s beta and WACC exposing the company to bankrupty risk if any more deals like the Russian endevour with Rosneft would go awry. BP is definatelly playing with fire, moving fast and sometimes bold at the same time. The captain of the ship Bob Dudley seemingly has no other option but navigate its ship to far out the ocean where high expected returns go together with bold moves and increased risk. BP has survived the Gulf for
  41. 41. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 41 now. It has emerged from the conflict as a much riskier investment while able to pomise matching returns offseting this risk. While remains powerful, BP is no more a serious threat to ExxonMobil, but this notion can only be sustained if the future holds no more suprises for any of these two companies. Market revisited - We base our notions on the premise that applicable demand for our natural gas investments are clearly identified in the European segment of the market. The EU’s number one goal in recent years has become the stabilization of this market orchestrating a forming synergy among its largest natural gas suppliers. Furthermore the EU has clearly chosen its position concerning the issue of global warming recognizing that natural gas is the cleanest fossil fuel available, an obvious choice for best meeting future environmental standards. This choice has turned out to be been quite a vision due to dramatic fall in natural gas prices, large improvements in LNG shipping, and the widespread popularity of natural gas fracking. By 2013, gas is the number one energy source in every sector within the EU’s economy, which is supplied predominantly from Norway, Russia, and increasingly from the United States. We look at the EU as a test market, a sort of pilot project, much like a springboard for reaching world- dominance in the industry. There is much to learn and much to predict. The world is not standing idle either and as Asian competition (PetroChina) rising in the Far East with increasing tempo ExxonMobil is treading ahead in North America, Europe, and in the Russian Federation.
  42. 42. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 42 The EU market is particularly well suited to be an ideal target for ExxonMobil. The region is the leading proponent in the advocacy for global warming, and most of the energy sector has been rebuilt for gas consumption, while its own gas reserves are known to be dry or near exhausted. Its history for overwhelming reliance on Russian monopoly has driven prices up from the 90’s making global warming and clean energy the best money maker for Putin’s government. The EU is ready to participate in a more transparent, balanced, and interconnected market which promising to provide a more stable financial platform better suited to steer clear the world’s developing economic crisis already plaguing a number of its member states (European Commission Public Relations, 2013). As such, ExxonMobil seems to be the right company to help complete the European socioeconomic transfer, arriving at the right time, and initiating its new operations at the right place. European gas market has never seen to be this volatile and the task for bringing peace and stability fell in the lap of ExxonMobil and its strategic partners. The company’s LNG operations so far has proven without doubt that even relatively small amount of LNG shipments are capable to disturb the current equilibrium leading to the quick formation of low priced spot markets. The popularization of LNG was born out of the global recession in 2008 / 2009 and has been seen to be responsible for increasing demands for natural gas. Plummeting prices are further intensified by dwindling U.S. gas imports due to revolutionary work in the American upstream natural gas industry. As a result timing and place for ExxonMobil cannot be any better; Russian ambition in oil exploration requiring ExxonMobil’s capital combined with the EU market up for grab in the wake of American (much technology comes from Qatar) LNG advances has been seen to offer ExxonMobil a prime opportunity for success (Qatargas, 2012). Qatargas must be mentioned as one of the first large scale developers of LNG shipping and regasification techniques (Exponent Public Relations, 2013).
  43. 43. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 43 “There is almost a century's worth of natural gas in shale rock formations all over the United States, enough to make a significant change in the debate about America's energy future. Gas locked into dense rock deep beneath Pennsylvania, New York, West Virginia and Ohio could supply the entire East Coast for 50 years. But freeing it requires hydraulic fracturing, or "fracking," with toxic chemicals that may pollute water, deplete aquifers and perhaps endanger health and the environment.” Risks associated with fracking - No undertaking with large return is without risk, though the risk associated with ExxonMobil’s strategy in dramatically expanding its domestic and global gas operations is seemingly minimal and largely technical in nature. Apart from the uncertainty in working together with foreign partners with questionable track record, the foundation for the gas revolution itself, natural gas fracking has been challenged. As earlier described, the process comes from the United States; it has been tested there, and by now is in widespread use, Pennsylvania, Ohio, and California being some the first states to receive attention. While the majority of the U.S. population is firmly opposing the process there is a widespread support among industrialists and regular citizen alike (Grace Communication, 2013). Movements have been started to publically denounce the harmful effects fracking
  44. 44. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 44 carries within itself. The groups are clearly divided by those who immediately benefit from quarterly earnings and long-term strategic gains (ExxonMobil and other oil and natural gas companies) who support the process, and the public who do not derive immediate profits but is forced to bear the consequences of toxic chemicals entering water tables, and the harmful effects of the fluid which is brought back from the wells and stored in hastily made open surface ponds allowed to evaporate into the atmosphere or slowly seep back underground causing further damage to ground water. The proceedings underlying fracking are closely monitored by the investor community, the companies relying on the technology and the public attempting to make their case against the new polluter. One amazing response emerging from much of the debates is most surprising to any who are just coming through it. Our engineers did not stop at one miracle but proved worthy in satisfying the environmental aspect of the mater by negating the toxic characteristics of fracking liquid, the number one culprit causing most of the chaos. The improvement has been advertised to be so effective that Halliburton Oil and Natural Gas Exploration Company went so far to have one of their workers publicly drink from the fluid in their campaign rallying for reevaluation of the environmental impact their drillings effect on their area of operation. The outcome is yet to be tested by time, but it is certain that such improvements are welcome by both the public and industrialists alike (Bush , 2011). Part 5
  45. 45. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 45 Global strategy in ExxonMobil’s mission and vision statements - The mission and vision statements discussed in this section are word for word excerpts from ExxonMobil’s official website where it was available for public viewing at the time this thesis was written. In them ExxonMobil sees one underlying mission for all of its upstream activities, a statement that is easy to understand, easy to agree with, and worthy to rely on. The following is the mission statement for the company’s fundamental business activity; the oil and natural gas exploration and extraction unit. “The disciplined execution of ExxonMobil’s Upstream strategies, underpinned by a relentless focus on operational excellence, drives delivery of our competitive advantages and superior results” (ExxonMobil, Upstream Operations, 2012) As we see from the upstream exploration unit’s mission statement, its main focus is a deliberate pointing to the importance of executing the unit’s strategy which largely deals with quantifiable deliverables. These deliverables are the lifeline for the upstream exploration unit and as such the unit’s mission is verbalized on the lines which is most likely to stimulate performance pointing all stakeholders toward practical steps emerging to be evident when put in context with executive directives. Similarly the vision statement offers a clear agreement matching the drive for success, a fundamental building block from the earliest years of the company, with a hint that success should be attainable only if ethical standards were simultaneously upheld; "Exxon Mobil Corporation is committed to being the world's premier petroleum and petrochemical company. To that end, we must continuously achieve superior financial and operating results while simultaneously adhering to high ethical standards." (ExxonMobil, Upstream Operations, 2012)
  46. 46. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 46 From this statement several facts can be quickly refined; 1. ExxonMobil is intending to remain one of the world’s largest and most powerful oil and natural gas exploration, processing, and transportation company; 2. It intends to achieve this goal by focusing on profitability, shareholder’s value, and operating excellence while not forgetting about upholding ethical standards. ExxonMobil directly addresses the following groups; To Shareholders “We are committed to enhancing the long-term value of the investment dollars entrusted to us by our shareholders” (Farfan, 2013). The purpose of corporate management is to maximize shareholder’s value. This rule of business is no different in the case of ExxonMobil, though the company finances its operations (339B) largely through debt (172B) (due to high tax benefits and the inherent bankruptcy risk being negated by steady earnings), and an almost equally large part of equity (167B) (Y- Charts, 2013). To Customers “Success depends on our ability to consistently satisfy ever changing customer preferences” (Farfan, 2013). No legit company can exist without reliable customers and growing markets. ExxonMobil understands this premise propelling the company to own and control the largest portion of the market within the private sector. To Employees
  47. 47. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 47 “The exceptional quality of our workforce provides a valuable competitive edge” (Farfan, 2013). Happy employees make successful companies. ExxonMobil recognizes this by attempting to treat all of its employees fairly by fostering quality training and operating environments where knowledge, learning, and communication receive priority over entrenched incompetence, contributing to cost-saving initiatives, profitable projects, and overall company success. Recently some of these achievements have been questioned through a series of employee unrest, exposing management’s true nature and in some cases their shortsighted practices. To Communities “We commit to be a good corporate citizen in all the places we operate worldwide" (Farfan, 2013). No company can operate in a vacuum. The physical environment, the communities, and the host countries say as much about any business as the press releases and executive statements. Good public relations have the power to influence stock prices, so if not for any other reason, ExxonMobil’s best long-term interest remains to become a good corporate citizen. To Local Governments and Legislative Bodies “We are committed to comply with the laws of the United States and all other countries where we conduct our operations” Finally complying with standing laws and regulations is the primary focus of any corporation’s legal team. ExxonMobil is most exposed to antitrust laws in the United States, and pending environmental and human rights cases world-wide.
  48. 48. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 48 The objectives above ensure that long-term operations will be sustained, which is the underlying reason for all mission, vision, and strategic statements for any company wishing to remain in business. These five objectives are designed to strengthen strategic practices, which in turn, support the company’s mission, and ultimately its vision. The company had ambitious goals, most of them have already been achieved. ExxonMobil’s current key objectives are designed to reinforce existing practices indicating no need for restructuring the company for the foreseeable future. This reassures investors that the company’s current management intends to make only the necessary changes deemed necessary for staying ahead of competition. One exemption from the mainstream strategy is the newly developing LNG line of the company. Where not to diversify - It is clear that diversification into alternative energy would be a 180 degree turn and as such cannot be recommended in any form or shape for oil companies or a nation gearing up for winning the war on energy. Renewable energy projects fail en masse; it is common economic sense today to avoid them much like avoiding dependency on the earnings of airlines or even worse going into business with airlines. Renewable energy was a push from the turn of the new century, mostly fueled from the panic over greenhouse effects and global warming, the fears over limited fossil fuels, and the craving for energy independence. These
  49. 49. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 49 factors together seemed to be insufficient to win the argument against fossil fuels as high cost and low ROI discouraged investors and businesses alike. Renewables proved to be economically inefficient, their high cost design, difficult placement, and permit related issues killed many projects before they could take off, while those who did make it through their implementation phase are struggling to survive without their government subsidies. With hindsight we can look back and report on renewable energy and see the remaining supporters grasping for air. The myriad of fancy innovations have seen their time, and just as many other exciting ideas caused momentarily change in the course of normal business from as early as the first years of the industrial revolution, the sector is quietly dying. Fossil fuels have reemerged victorious from the wake of this intermission promising to stay with us for another long stretch of human history (Noon, 2013). Part 6 Mergers and Acquisitions - Oil business can be extremely risky for those who dare to undertake trading in crude oil, and when such trading does improve over a steady course, the measure of this improvement can be painstakingly slow. The momentum behind upstream operations can be likened to an oil tanker trying to accelerate from 0 to 60 attempting to achieve such a feat with the speed of a sports car. The possibility of success is no better than our chances would be for speeding up the tempo in closing
  50. 50. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 50 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
  51. 51. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 51 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).
  52. 52. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 52 Part 7 Ethics - The promise of an economic revival is so timely and desired that many forget to listen to lesser stakeholders who are asking to be heard on relevant matters but end up on the margins. Energy business is plagued with alarming events (some downright revolting), and many of them quite recent. It seems that the larger the stake the more people are willing to cross the line over ethical standards, the fundamental building blocks of business itself. What is the worth of a man’s life in Myanmar when billions of dollars can potentially be at stake? When companies get caught and get away with their mistakes (meaning they survive), we see expansive campaigns with resounding slogans, doing all in their power trying to regain the trust of their customers, creditors, and in the case of larger companies; public confidence and opinion. Classics here are Enron Corporation, the rising star of Gas and Electricity Provider for almost 30 years, headed by their infamous CEO Jeff Skilling, President and Chairman Ken Lay, and CFO Andy Fastow. A few decades ago Texaco has shocked us in the South American country Ecuador when their illegal dumping of over 3 billion gallons of toxic sludge came to light. ExxonMobil received its own share of attention in Myanmar when company employees gunned down local villagers who were obstructing costly operations. Recent company-wide employee unrest does not seem to help restoring brand image, something money cannot buy. British Petrol’s long track record for violating its own safety standards has gained a controversial reputation for the oil producer. By the occurrence of the Deepwater Horizon oil spill the company was well known for
  53. 53. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 53 exposing its workers to a strong likelihood of accidents (claiming numerous lives) dealing with possibly the longest list of its kind containing court investigations most of them to this day clogging the system which is insufficient to investigate them all. But in other areas, such as the controversies associated with hydraulic-fracturing in the United States, and in Russia where British Petrol were locked into deals which were perhaps designed from their beginnings to protect government expropriation of western capital, which despite being ruled against by western courts, are considered unimportant in the course of developing partnerships between ExxonMobil and its Russian counterpart Rosneft. The progress from these deals can also be seen as an approval for overlooking not only ethical dilemmas but also legality. As we research the known cases the question remains; can individuals made responsible for these acts or their companies themselves are inherently responsible? What makes the perpetrators playing their parts in these cases decide to follow unethical choices? Could ExxonMobil abandon its current deals with Rosneft and in consequence possibly hurt millions of American shareholders? The answer must be a resounding no, but ExxonMobil must play its part in these partnerships as we Americans would expect to see ourselves represented outside our borders. If we just keep close those fundamental values which earned our country the respect of so many nations in the past, then our corporations will earn the reputation they so desire to attain through their recovery campaigns. Part 8 Conclusion - Overall ExxonMobil seems to be the winner of this current age following the misfortunes of BP and the Deepwater Horizon fiasco. The unfolding events of that tragic year caused a chain reaction that is still unfolding today moving ExxonMobil towards wielding more power and market share while forcing BP to continue surrendering its business. Hydraulic fracturing is definitely a game
  54. 54. EXXONMOBIL IN THE PETROLEUM INDUSTRY – THESIS 54 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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