Exxon Mobil Corporation

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 5/5

ExxonMobil is a global energy and chemical company involved in oil and natural gas exploration, production, refining, and marketing; it operates a diverse portfolio of businesses, from the upstream segment to the downstream and chemical segments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Moat Assessment: Exxon Mobil’s moat is rated 2 out of 5. While the company possesses some advantages, these are not entirely sufficient to create a wide and sustainable moat.

  • Limited Intangible Assets: While ExxonMobil is a well-known brand, it doesn’t command a strong consumer preference or pricing power over competitors as it is mostly a commodity company.
  • Moderate Cost Advantages: ExxonMobil benefits from economies of scale in its large operations but is not able to have the lowest cost per barrel because it deals with more mature oil fields in more unstable countries. They have some limited pricing power, and a unique scale, but these are not strong barriers.
  • Lack of Switching Costs: The primary product of ExxonMobil is fuel, which consumers tend to view as a commodity, therefore consumers can switch to other brands without much friction or consequence. There is a huge competition and not much pricing power for the company.
  • Weak Network Effects: The product of Exxon Mobil does not use network effects to increase the moat.
  • Dependence on Commodity Prices: Profitability heavily relies on volatile commodity prices. This makes the company highly volatile and it is not a moat.

Legitimate Risks to the Moat and Business Resilience: ExxonMobil faces several risks that could affect its moat and business sustainability:

  • Volatile commodity prices (Oil & natural gas prices) directly impact revenues and earnings, creating financial instability. The geopolitical nature of oil markets leads to unpredictable price fluctuations.
  • Government Regulations & Policy Changes: Environmental policies, tax laws, and regulations in different countries have large impact on prices. The trend towards cleaner energy sources reduces demand for fossil fuels, while the company’s business is based on fossil fuels.
  • Exploration and Production Risk: Oil and natural gas exploration is highly capital-intensive and has a considerable risk of not recovering investments if new wells yield less than expected, which happens a good amount of the time.
  • Technological Disruptions: The transition to electric vehicles and renewable energy poses a long-term challenge to the oil and gas industry. If ExxonMobil doesn’t adapt to these trends or innovate, it may lose market share.
  • Cybersecurity: As is the case with all companies in the digital age, ExonnMobil’s technology assets are subject to cyber attacks that could steal company data and impact their operations.
  • Geopolitical Risk: The global energy market is affected by all kinds of geopolitical situations. These include unstable countries, regional conflicts, war, or changing of governments.
  • Environmental Regulations: Governments across the world are pushing new regulations and targets for carbon emissions. This presents both cost challenges and uncertainty for ExxonMobil’s production capabilities. The company has invested a great deal into Carbon Capture Technology (CCS), but it is unproven.
  • Labor Relations: The company also deals with unions and other such labor problems that can disrupt production, impact margins, and increase costs.
  • Public Opinion: Public opinion is moving away from fossil fuels. This negatively impacts investor sentiment and valuation metrics of fossil fuel companies.

Detailed Explanation of the Business:

Revenue Distribution: ExxonMobil’s revenue is segmented into three main categories:

*   **Upstream:** Involves oil and natural gas exploration, extraction, and production. This segment is often the most profitable segment, but also the most volatile due to dependence on commodity prices. In Q3 2024, upstream accounted for $18.4 billion in revenues, which declined due to lower natural gas prices. The segment focuses on long-term investments and the development of large-scale projects.
*   **Energy Products:** This segment includes refining, blending, and marketing petroleum products like gasoline, diesel, and jet fuel. It relies on price and global demand. The segment has the benefit of a stable refining margin that has improved in 2023. In Q3 2024, Energy Products accounted for $87.8 billion in revenues, down from $94.5 billion the year prior.
*   **Chemical Products:** The chemical segment makes products ranging from olefins to polymers, and specialty products. Earnings for this segment depend on costs and the pricing of these chemicals, with a strong focus on technology to increase margins and create product differentiation. In Q3 2024, Chemical Products accounted for $11.3 billion in revenue, up from $10.3 billion the year prior.
  • Industry Trends:
    • The overall global demand for oil has grown rapidly over the years but the demand for natural gas and other energy sources has also grown. The market is highly competitive with the presence of many major international oil corporations, as well as smaller and newer entrants.
    • There’s a growing pressure from governments and citizens towards transitioning to a cleaner energy future, which creates risk and opportunity for this industry.
    • Technology improvements have enabled some companies to drive down the cost of oil extraction and refining, while innovation has also led to the creation of newer energy sources like solar and wind.
    • A global surplus of both natural gas and oil is currently keeping prices down and may continue to do so for some years to come.

Margins: The overall margins of the company are primarily dependent on the price of oil and natural gas, but other aspects of their business can offer stability as well. The company can see an increase in margins if they lower production and operating costs. A strong trend over the past year is the increasing of refining margins, and while it has decreased from record highs seen in 2022, they have stabilized to more reasonable levels that can boost earnings for the company. * The net margin has been quite volatile for Exxon Mobil, given the commodity nature of their business. In 2021, it reached about 7%, in 2022, it reached 15%, and in the latest fiscal year, it has dropped to 8%.

Competitive Landscape: ExxonMobil operates in a highly competitive sector that includes other large integrated oil companies such as Chevron, Shell, TotalEnergies, BP, and several national oil companies (NOCs). They compete fiercely with each other over resource acquisition, prices, and distribution. New entries such as alternative energy sources are also making the competition more fierce. * Differentiation: The company is a leading global player, and that enables it to have a large distribution network to be able to service different regions of the globe. The company does have considerable reserves of low-cost oil that allow it to sell products for less than its competitors, but this advantage can quickly go away with geopolitical and technology changes.

Recent Concerns/Controversies and Management Comments

  • Exxon Mobil’s recent earnings report shows some interesting changes, including a decrease in revenue despite higher production, due to decreased commodity prices. While the company still has profits, its profitability could be severely impacted if commodity prices don’t bounce back.
  • While Exxon Mobil has reiterated that their oil and gas businesses are still critical in the future, the company is heavily invested in green energy, namely carbon capture. The company has started several ventures across the world, and they plan to continue investments in this sector in coming years. The success of this venture is essential in maintaining profits and providing for a more sustainable future.
  • ExxonMobil is making an effort to cut production costs to keep margins at a high level, irrespective of the changes in prices.

Financial Analysis:

  • Income Statement: The company has had a fluctuating trend of revenue, with its annual revenue moving from $180 billion in 2020 to almost $400 billion in 2022, and then falling to $344.7 billion in 2023. This reflects the commodity nature of the company, and the prices at which oil is sold. The net income had a similar trend, which shows the impact of margins on the total profit. Profits ranged from a net loss of $22 billion in 2020 to a profit of over $50 billion in 2022, but dipped down to 36 billion dollars in 2023. The earnings per share are highly volatile, ranging from a loss of $5.26 per share to an earning of $14.75 per share in the past 3 years.
  • Cash Flow Statement: The company’s cash flow from operations is highly dependent on current commodity pricing. However, the company has maintained a history of having more cash from operations than the cost of new investments. The net cash flow is highly variable and this is a major aspect to consider. In 2022, Exxon Mobil made 63 billion dollars in net cash from operations.
  • Balance Sheet: ExxonMobil has a strong balance sheet with high liquidity and minimal debt. While its total liabilities amount to around $143 billion, it has around $30 billion in cash at hand, and a significant amount of long-term investments worth hundreds of billions. The company’s equity is around $274 billion, which is higher than its total debt and liabilities, indicating it is financially solvent.
  • Capital Expenditures: Despite lower production, they have maintained their aggressive rate of capital spending, particularly for their green energy initiative, which makes the company less dependent on Oil and Natural Gas in the long term.
  • Shareholder Returns: The company continues its policy of returning value to shareholders, increasing dividends and initiating a new buyback plan to increase investor value and the stability of its stock.
  • Debt/Equity: The company’s low debt/equity ratio ensures that it will be able to take risks and expand operations, regardless of the price of oil.

Understandability: ExxonMobil’s business is rated 2 out of 5.

  • While it is clear what Exxon does, it is quite difficult to determine how much profit they make and why. The reasons why revenues and profits fluctuate are difficult to ascertain for an average investor. The industry is heavily influenced by volatile commodity prices, which depend on global situations, geopolitics, and weather. The regulatory regime is also quite complex, and understanding these impacts on the business is not easy. It also has complex financial statements, and an analyst will need strong training to fully comprehend them. The different subsidiaries, product lines, business segments, and geographic locations add further complexity. The company’s operations are far less easy to fully grasp in comparison with other sectors.

Balance Sheet Health: ExxonMobil’s balance sheet is rated 5 out of 5.

  • The company has an extremely solid financial position, with strong liquidity and low debt, making it resistant to fluctuations. Its current cash levels are very high and much higher than the total value of short-term liabilities, as well as enough capital to cover debt, which is ideal from a financial solvency perspective.
  • The company has maintained a stable debt-to-equity ratio for some time, which shows its commitment towards maintaining a healthy financial structure. Also, the level of cash on the balance sheet suggests they are not over leveraged.
  • ExxonMobil has a good track record of handling its financial liabilities well, paying all interest and debt obligation well before maturity, which leads to financial stability.