350 Xlo-vlo

Williams 1 Rhett Williams Jerry Patton Finance 350 Section C September 22, 2008 INTRODUCTION TO EXXON-MOBIL (XOM) Since its inception in 1882, Exxon Mobil Corporation has aimed to become the world’s most successful petroleum, and petrochemical company. For this purpose, they continuously strive to achieve the most superior financial and operating results. With the growing expectations, shareholders, employees, and customers expects only the best out of Exxon Mobil, and that is exactly what they provide to them by maintaining the highest standards of business conduct. Exxon and Mobil decided upon a merger, and signed an agreement in 1998 to form a new company with the name; Exxon Mobil Corporation. The Chairmen, and Chief Executive officers of Exxon, and Mobil were thrilled with the merger and they should their enthusiasm with the following words; “This merger will enhance our ability to be an effective global competitor in a volatile world economy and in an industry that is more and more competitive (“BBC News”).” On November 30, 1999, the merger was finally completed after the approval of shareholders and regulatory. Exxon and Mobil became a part of the American industry during the late 19 th century, when the country was booming in various sectors of the economy including; railroads, steel, and banking. Moreover, the petroleum industry rapidly developed with the growing demand for lubricants, greases, and kerosene. During that period, the infamous John D. Rockefeller, acquired an assortment of

Williams 2 petroleum interests under the banner of Standard oil Trust. The same year the two main successors of Exxon and Mobil namely; Standard Oil Co. of New Jersey and Standard Oil Co. of New York, or more commonly known as ‘Jersey Standard’ and ‘Socony,’ were introduced as refining and marketing organizations. Both companies aimed to expand internationally, and large ‘kerosene clippers’ made their job easy since they facilitated the shipments of products overseas in large quantities of bulk. Soon, they were able to spread across Europe and Asia. In 1911, the U.S. Supreme Court, ordered to terminate Standard Oil Trust, which resulted in sudden disarray, and 34 four companies including Jersey Standard and Scoony went into complete dismay. Moreover, the kerosene output of the country was withheld by a formal product; gasoline, for the very first time. Hence, with the growing automotive market, Mobil oil registered by Scoony in 1920 was able to make its place in the market. The exploration opportunities are identified, pursued, captured, and then evaluated on a large scale by the ExxonMobil’s Exploration Company. Resource certainty is ensured by assessing concepts, and tests of new plays, and long term resource growth is assessed. Furthermore, the already established plays are assessed which commonly have potential for near-term additions to the basis of the resource. Finally, the undeveloped, or partially developed plays, and discoveries are explored on a mature level of exploration. The company’s affiliates and divisions are largely engaged in the exploration, and production of natural gas, crude oil, and the manufacturing of petroleum products. By market capitalization, Exxon Mobil is the second largest in the world after the Chinese Oil Company, PTR. Due to the shortage in supply because of the geopolitical conflicts in

Williams 3 fairly rich regions, and the rapid growth in demand for oil, Exxon Mobil was able to reach at the time in no time. The company’s earning largely came from the upstream exploration and production of E&P activities, which helped in producing barrels of oil equivalent to approximately 4.18 million. Six ‘super-major’ petroleum companies are headed by Exxon Mobil. Moreover, Exxon had a fairly good year as the revenue increased from $377.6 billion to a record of $404.6 billion. With nationalization treats in Venezuela, the company has just recently experienced trouble intentionally. However, it can be said that the news that the Venezuelan President Hugo Chavez wants Exxon-Mobile Corporation to no longer do business in Venezuela seems like a bluff since the United States is the biggest market for oil exports, and the home for oil refineries which have been especially made to accommodate the Venezuelan brand of heavy, and high-sulfur crude. Moreover, to find another customer to accommodate the Venezuelan needs would be very hard, and such a harsh step could even create serious political problems for them. (“Wilson”) INTRODUCTION TO VALERO ENERGY (VLO) Valero Energy Corporation is one of the largest petroleum refiners present in North America. The company produces gasoline, kerosene, and lubricants by refining, and processing crude oil. Valero mainly operates from the United States, and the company has benefited from the growing demand of petroleum products in the United States. The total revenue of Valero Corporation grew from 29 billion in 2002, to 95 billion in 2007. In order to expand its network of refineries, the company has made many acquisitions. Valero has also aimed to enter new segments of business such as opening retail gas stations. Till date Valero has approximately 5,800 retail gas stations, and

Williams 4 wholesale branded outlets under the most well-known brand names other than Valero which include; Diamond Shamrock, Ultramar, and Beacon. With a combined capacity of approximately 3.1 million barrels per day, Valero Energy has successfully been able to operate 17 refineries in the United States, Canada, and Aruba.

Selection/Companies:

Williams 5 Calculation of Basic Ratios: Exxon-Mobil (XOM) Per share TTM: 9.57 Dividend: 2.07 5yr Growth rate: 6.11 Quick Ratio MRQ: 1.35 Valero Energy (VLO) Per share TTM: 7.52 Dividend: 1.82 5yr Growth rate: 22.74 Quick Ratio MRQ: 0.91 BRIEF DISCUSSION OF INITIAL THOUGHTS/REACTIONS After doing my initial research on both companies Exxon-Mobil and Valero I have learned so much in just a few hours than I have known before. Overall many people think oil companies are evil villains in society.

In retrospect Exxon-Mobil is a high

technology based company that protects the environment first and foremost before any drilling is started.

Then as I continued on my research on Valero I learned that they

owned many retail petrol stations around the US. I feel that this will not only be a great finance project, but a learning experience on oil companies as well. Furthermore I also see how politics’ can make a huge or substantial impact on these two companies. Valero is more vulnerable due to the political instability in the US and being purely based company in the US. EXXON VS. VALERO

Williams 6 When one is referring to the oil and gas sector, it includes the oil and gas extraction as well as refining. The United States is ranked 3 rd in the petroleum producing countries, having more than 500,000 producing wells and a whopping 4000 oil and gas extraction platforms in the water. Oil and gas provide 65% out of all the energy consumed in the United States. Also, over more than 17 million barrels of crude oil are processed every day. There are 16000 establishments being a part of the oil and gas sectors and the value of total shipments of the oil and gas sector is $134 billion. The companies that are involved in the oil and gas extraction industries are responsible for operating and developing oil and gas field properties. Activities that encompass this segment include exploration of crude oil and gas fields, drilling, developing and equipping the wells, operating separators, desilting equipment, emulsion breakers, and all such arrangements and installations that are necessary for the shipment from the producing properties. The crude oil or petroleum refining segment or industry on the other hand is responsible for breaking the crude oil into the useful components such as naphtha, gasoline, diesel, kerosene etc. (Mcintyre 233)

Valero Energy Corporation is one of the major players of the oil refining industry of the United States. The corporation processes crude oil through its refineries and produces products such as gasoline, kerosene, lubricants, and numerous others. The company is unique that despite being an oil giant, its operations are mainly concentrated in the US which nevertheless is one of the biggest markets of petroleum products. The refining industries market has become even more lucrative recently since there has been a shortage of refining capacity in the United States and that no new refinery has been added

Williams 7 in a long time. In fact it has been more than or around thirty years since any new refinery has been built. Whatever expansion in refining capacity has been produced has been due to the up gradation of existing refineries through technological advances and other ways. One of the reasons no refineries have been added is due to the high cost involved and also the strict environmental regulations that have been imposed. Nevertheless there has been a shortage of refining capacity and this has lead to a higher price. Hence it has not been surprising to find that this has resulted in rapid growth for Valero. It is shocking to find that the company’s revenues have almost tripled in 5 years to 95 billion dollars from 2002 to 2007. Not only is the company boasting this heavy accolade, but also it claims to have a cost advantage over its rivals. It says that it refines sour crude oil which has higher sulpher content and is cheaper. Thus this gives the company lesser input costs and thus it can price its products more competitively. Other refineries process sweet crude which is more expensive. The company seems determine to capitalize on this cost advantage and is willing to go as far as to sell its Aruba refinery which processes sweet crude. Not only is Valero into reefing but is also has one of the largest retailing networks in the country. In fact its network is the largest. It also operates in Canada and the Caribbean under various brand names (Sampson 69). This widespread network gives it a close contact to the customer. As the company is itself involved with distribution it does not have to pay anything to distributors as commissions which would eat into its revenues and this one of the contributing factors in its revenue growth. However such a sector is highly correlated with the economic growth and slow economic growth is detrimental to the company. The company also faces other challenges such as natural disasters,

Williams 8 regulatory issues and environmental hazards. For example hurricanes Rita and Katrina both proved disastrous for the company’s bottom line and also the company had to face safety regulations from the federal regulatory commission. Exxon mobile is yet another energy company but it is not just any other. It has revenue that is four times that of Valero and a ranking that tops the six big energy giants of the world. Furthermore, it has the highest value of any company in the world and at a time it was valued at over 500 billion us dollars. Not only that, its recent net income was 40 billion dollars, the highest ever in America’s corporate history. But all of this has not completely been its own doing. The company is actually riding a wave of good omen. A number of factors contribute to Exxon’s success. For example there has been no major alternative of Petroleum as an energy source. Apart from that, petroleum process in the world has not only been increasing but consumption has also been increasing despite the supply being low. Also, its geography diverse portfolio means that it is less affected by any discrepancy in a given part of a world. However despite all the gaga, the company is at a mercy of the major energy producers that is OPEC which controls about 40% of the world supply and thus has great control over prices. However Exxon has gone through one of the amazing years of its financial life (Bender and Bender 44). Exxon Mobil Corp. is featuring as one of “blend” stocks within the large-cap firms in Business Week article by Beth Piskora. This strongly supports the idea of buying Exxon Mobil Corp. since it is expected to be one of the sixteen companies to hit the highest upside scale in next 12 months period. The reason for the substantial success of Exxon Mobil Corporation lies beneath the record profit of $40.6 billion, because of Exxon Mobil’s growing technology. Due to the massive advancement in technology,

Williams 9 Exxon Mobil has been able to refine heavier petroleum with higher sulfur content than any of its competitors which make them distinctive, and gives them a higher competitive advantage because of which they have been able to increase their capital expenditure to further expand. Exxon increased its profits y $1.1 billion in Fiscal 2007 as compared to Fiscal 2006. According to a recent analysis, Exxon Mobil Corp. currently has $12.14 P/E Ratio where the industry average is $11.19. P/B Ratio is 3.91 where the industry average is 3.01. In last three years period 2004-2007 a $10,000 investment in Exxon Mobil has grown up to $25,000 where an alternate investment in S&P 500 has grown up to only $15,000. As of March 18, 2008 Tuesday with 0.75% cut in interest rates by Federal Bank; Exxon Mobil Corp. (XON) stock was traded at $88.47 with a $2.68 increase or +3.12% from previous day’s closing where the main competitors BP’s and Chevron’s performance was limited to +2.06% and +2.29% respectively.

Works Cited

Williams 10 “Business: The Company File Oil Merger Faces Monopoly Probe.” BBC News. 2 December, 1998. 7 Sep 2008 . Bender, Rob, and Tammy Cannoy-Bender. An Unauthorized Guide to: Mobil Collectibles — Chasing the Red Horse. Atglen, Pennsylvania: Schiffer Publishing Company, 1999. McIntyre, J. Sam. The Esso Collectibles Handbook: Memorabilia from Standard Oil of New Jersey. Atglen, Pennsylvania: Schiffer Publishing Company, 1998. Sampson, Anthony. The Seven Sisters: The 100-year Battle for the World’s Oil Supply. New York: Bantom Books, 1991. Wilson, Peter. “Chavez’ Big Oil Bluff.” BusinessWeek. 11 February, 2008. 7 Sep 2008 .

Williams 11 FINANCIAL ANALYSIS

EXXON CASH FLOWS Millions of U.S. Dollars Net Income/Starting Line Depreciation/Depletion Amortization Deferred Taxes Non-Cash Items Changes in Working Capital Cash from Operating Activities Capital Expenditures Other Investing Cash Flow Items, Total Cash from Investing Activities Financing Cash Flow Items Total Cash Dividends Paid Issuance (Retirement) of Stock, Net Issuance (Retirement) of Debt, Net Cash from Financing Activities Foreign Exchange Effects Net Change in Cash

2,007.00 40,610.00 12,250.00 -124.00 (2,175.00) 1,193.00 52,002.00 (15,387.00) 5,659.00 (9,728.00) (579.00) (7,621.00) (30,743.00) 598.00 (38,345.00) 1,808.00 5,737.00

2,006.00 39,500.00 11,416.00 -1,717.00 (3,512.00) 165.00 49,286.00 (15,462.00) 1,232.00 (14,230.00) (270.00) (7,628.00) (28,385.00) 73.00 (36,210.00) 727.00 (427.00)

2,005.00 36,130.00 10,253.00 -(429.00) (1,263.00) 3,447.00 48,138.00 (13,839.00) 3,569.00 (10,270.00) (974.00) (7,185.00) (17,280.00) (1,502.00) (26,941.00) (787.00) 10,140.00

2,004.00 25,330.00 9,767.00 -(1,134.00) 825.00 5,763.00 40,551.00 (11,986.00) (2,924.00) (14,910.00) (430.00) (6,896.00) (8,991.00) (1,951.00) (18,268.00) 532.00 7,905.00

2,003.00 21,510.00 9,047.00 -1,827.00 (3,723.00) (163.00) 28,498.00 (12,859.00) 2,017.00 (10,842.00) (677.00) (6,515.00) (5,447.00) (2,124.00) (14,763.00) 504.00 3,397.00

Williams 12

VALERO CASH FLOWS Millions of U.S. Dollars Net Income/Starting Line Depreciation/Depletion Deferred Taxes Non-Cash Items Changes in Working Capital Cash from Operating Activities Capital Expenditures Other Investing Cash Flow Items, Total Cash from Investing Activities Financing Cash Flow Items Total Cash Dividends Paid Issuance (Retirement) of Stock, Net Issuance (Retirement) of

2007 5,234.00 1,376.00 (131.00) (752.00)

2006 5,463.00 1,155.00 290.00 (452.00)

2005 3,590.00 840.00 255.00 83.00

2004 1,804.00 605.00 345.00 23.00

2003 622.00 511.00 287.00 (432.00)

(469.00)

(144.00)

1,082.00

203.00

429.00

5,258.00 (2,260.00)

6,312.00 (3,187.00)

5,850.00 (2,133.00)

2,980.00 (1,292.00)

1,417.00 (976.00)

1,678.00

216.00

(2,767.00)

(1,393.00)

(355.00)

(582.00)

(2,971.00)

(4,900.00)

(2,685.00)

(1,331.00)

287.00

143.00

(13.00)

(8.00)

10.00

(271.00)

(184.00)

(106.00)

(79.00)

(51.00)

(5,629.00)

(1,898.00)

(389.00)

201.00

276.00

Williams 13

RATIO ANALYSIS Valuation Ratios P/E Ratio (TTM) P/E High - Last 5 Yrs. P/E Low - Last 5 Yrs. Beta Price to Sales (TTM)

EXXON

VALERO

Company

Industry

Sector

S&P 500

Company

Industry

Sector

S&P 500

9.93 16.29 10.4 0.93 0.88

9.8 5.45 2.76 1.13 1.09

6.53 3.47 0.97 0.94 2.79

26.36 30.62 9 0.98 2.37

7.68 13.85 5.08 1.39 0.15

2.51 0.06 0.04 1 0.3

42.81 1.97 0.55 0.53 3.59

26.37 30.67 9.01 0.98 2.37

Company

Industry

Sector

S&P 500

Company

Industry

Sector

S&P 500

1.99 8.29 17.9

2.44 12.98 28.89

0.55 20.44 21.83

2.48 11.64 49.51

1.78 36.85 11.3

0.08 27.21 6.38

0.31 11.63 12.42

2.49 11.69 49.56

Company

Industry

Sector

S&P 500

Company

Industry

Sector

S&P 500

26.31

24.38

191.11

13.17

37.55

13.24

108.75

13.21

14.62 15.83 35.09 6.11

16.69 -32.02 13.92

25.86 -30.42 28.56

14.98 -19.4 13.41

26.83 -54.17 106.08 22.74

18.67 -32.61 17.41

14.71 -17.3 16.25

15.01 -19.44 13.45

Company

Industry

Sector

S&P 500

Company

Industry

Sector

S&P 500

1.14 1.35 5.87 7.72 42.43

0.89 1.18 18.16 25.21 15.37

1.05 1.34 50.69 70.6 4.35

1.05 1.28 113.45 159.71 17.38

0.81 1.19 33.53 34.66 37.34

0.84 1.33 86.12 125.9 0.67

0.75 0.99 311.84 507.29 2.47

1.05 1.28 113.56 159.9 17.38

Company

Industry

Sector

S&P 500

Company

Industry

Sector

S&P 500

20.63 21.42 16.64 15.93

24.96 28.01 16.45 15.24

23.11 35.68 9.74 20.06

36.87 36.94 14.83 17.91

5.51 9.72 2.97 6.57

17.16 19.86 6.32 7.48

24.46 20.29 8.82 11.41

36.9 36.96 14.87 17.94

Dividends Dividend Yield Dividend 5 Year Growth Rate Payout Ratio(TTM)

Growth Rates Sales (TTM) vs TTM 1 Yr. Ago Sales - 5 Yr. Growth Rate EPS (TTM) vs TTM 1 Yr. Ago EPS - 5 Yr. Growth Rate Capital Spending - 5 Yr. Growth Rate

Financial Strength Quick Ratio (MRQ) Current Ratio (MRQ) LT Debt to Equity (MRQ) Total Debt to Equity (MRQ) Interest Coverage (TTM)

Profitability Ratios Gross Margin (TTM) Gross Margin - 5 Yr. Avg. Pre-Tax Margin (TTM) Pre-Tax Margin - 5 Yr. Avg.

Williams 14 Net Profit Margin (TTM) Net Profit Margin - 5 Yr. Avg.

9.21 9.57

9.48 9.1

6.67 10.32

10.9 12.61

2.06 4.42

4.98 5.56

6.06 5.87

10.93 12.63

Management Effectiveness Return on Assets (TTM) Return on Assets - 5 Yr. Avg. Return on Investment (TTM) Return on Investment - 5 Yr. Avg. Return on Equity (TTM) Return on Equity - 5 Yr. Avg. Receivable Turnover (TTM) Inventory Turnover (TTM) Asset Turnover (TTM)

Company

Industry

Secto r

S&P 500

Company

Industry

Secto r

S&P 500

17.63 16.35

12.17 9.7

6.81 9.89

8.14 7.52

5.74 11.74

7.38 7.9

6.61 5.63

8.17 7.53

23.85

17.41

9.44

11.19

7.81

9.87

11.14

11.23

21.56

13.14

13.55

10.06

15.31

11.83

7.71

10.07

36.19 31.57

26.94 21.41

13.9 19.43

20.08 20.32

13.1 27.04

14.11 17.21

89.76 11.05

20.13 20.34

13.14 25.29 1.91

12.29 14.16 1.37

7.79 5.29 0.57

10.77 9.52 0.79

18.84 23.31 2.78

5.85 4.04 0.67

8.74 7.74 0.85

10.78 9.53 0.79

Williams 15

DUPONT ANALYSIS

Net Profit Margin (TTM) Asset Turnover (TTM) EQUITY MULTIPLIER ROE

ROE

EXXON 9.21

VALERO 2.06

1.91

2.78

1.99

2.31

= (Net profit / Sales) * (Sales / Assets) * (Assets / Equity) = (Profit margin) * (Asset turnover) * (Equity multiplier) 35.006289

13.228908

The ROE clearly reflects that Exxon is far ahead from Valero in terms of stability and risk absorption. Even though high return comes with high risk, Exxon has the buffer to absorb such risks with larger equity base earning more profits which increase retained earning. Thus adding more value to its stockholders

BALANCE SHEET FOR 2007

Williams 16 CALCULATION OF NET WORTH EXXON PERIOD ENDING Assets Current Assets Cash And Cash Equivalents Short Term Investments Net Receivables Inventory Other Current Assets

VALERO

31-Dec-07

31-Dec-07

33,981,000 519,000 36,450,000 11,089,000 3,924,000

2,495,000 7,938,000 4,184,000 175,000

Total Current Assets Long Term Investments Property Plant and Equipment Goodwill Intangible Assets Deferred Long Term Asset Charges

85,963,000 28,194,000 120,869,000 7,056,000

14,792,000 21,709,000 4,061,000 290,000

-

1,870,000

Total Assets Liabilities Current Liabilities Accounts Payable Short/Current Long Term Debt Other Current Liabilities

242,082,000

42,722,000

55,929,000 2,383,000 -

11,173,000 402,000 339,000

58,312,000 21,549,000 13,278,000

11,914,000 6,470,000 1,696,000

22,899,000 4,282,000

4,135,000 -

Total Liabilities Stockholders' Equity Common Stock Retained Earnings Treasury Stock Capital Surplus Other Stockholder Equity

120,320,000

24,215,000

4,933,000 228,518,000 -113,678,000 1,989,000

6,000 16,914,000 -6,097,000 7,111,000 573,000

Total Stockholder Equity

121,762,000

18,507,000

Total Current Liabilities Long Term Debt Other Liabilities Deferred Long Term Liability Charges Minority Interest

Williams 17 For a company, total assets minus total liabilities. Net worth is a vital and very important determinant of the value of a company, especially considering it is composed mainly of all the money that has been invested since its inception, as well as the retained earnings for the duration of its operation. Net worth can be commonly used to determine creditworthiness because in a way, it provides us with a snapshot of the company's investment history. Also called shareholders’ equity, net assets, or owner’s equity. Common Stock Retained Earnings Treasury Stock Capital Surplus GOODWILL Other Stockholder Equity NET WORTH

4,933,000 228,518,000 -113,678,000

6000 16914000 -6097000 7111000 4061000 573000 22,568,00

1,989,000 121,762,00 0

VALERO

0

Williams 18 Analyst Recommendations and Revisions 1-5 Linear Scale

1 Month

2 Month

3 Months

Current

Ago

Ago

Ago

(1) BUY (2) OUTPERFORM (3) HOLD (4) UNDERPERFORM (5) SELL

7 1 8 1 1

7 1 9 1 1

8 1 9 0 1

7 2 10 0 1

No Opinion

0

0

0

0

2.33

2.37

2.21

2.3

Mean Rating

EXXON Analyst Recommendations and Revisions 1-5 Linear Scale

(1) BUY (2) OUTPERFORM (3) HOLD (4) UNDERPERFORM (5) SELL No Opinion Mean Rating

1 Month

2 Month

3 Months

Current

Ago

Ago

Ago

4 3 8 0 1 0

4 3 9 0 0 0

3 3 10 0 0 0

5 5 8 0 0 0

2.44

2.31

2.44

2.17

Suggestions For Post Acquisition Scenario

Williams 19 1. EXXON must resolve the issues that affect its public face, issues such as the Valdez Spill and the Venezuelan conflict. Once resolved these issue would add value to its stocks due to a better socio-financial manifestation in the market. 2. Since financing an expansion is not an issue for Exxon (due to a good net worth and credit worthiness; as proven by its historical data and ratios), it should further diversify its operations and try to capture some of the refinery business. Valero is not a competition for Exxon for now, but refinery is not affected by oil prices and this has ensured Valero’s high profits in recent years. A refinery for Exxon would be a measure leading to costeffectiveness and smoother flow of operations while adding value to its stock. 3. Oil stocks are not volatile as finance stocks, thus stability is a strength which should be utilized by Exxon to give a much more stringent competition to industry. We see that the gross margin low as compared to industry, it may be improved by bluff transactions to move towards economies of scale. 4. Bad press, resentment for high prices, internal issues and transportation problems trouble the company. All these can be resolved by a more welfare oriented approach towards society and employees.

CONCLUSION From the above analysis it can be said that, even though, Valero seems more

Williams 20 favorable to acquire as its market value is considered strong and rising, the equity base of Exxon is an undeniable strength. Moreover, Exxon is a more diversified entity and with the help of its better equity base, it enjoys the liberty of a better expansion and operational optimization capability when compared to Valero. The size does matter when it comes to buffer against risk. The return associated with the forecasts of the revenues and risks a mitigated due to a large equity base which enables Exxon to absorb more risks. Past difficulties such as the oil spilt case of Valdez has been met with least impact on rising stocks of Exxon. Valero, on the other hand, has had to discontinue some of its operations. To sum it all up, our choice is Exxon due to its large equity base, ability to absorb risks and stable returns which enables it to continuously add value to its stockholders.