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Integrated Oil Companies

Exxon Mobil and Chevron Corporation. Integrated Oil Companies. Industry Analysis. Petroleum Industry structure: 5 sectors of operations (Upstream, downstream, marine, pipeline, and service/supply) Extremely high barriers to entry allowing for sustainable profits in the long run

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Integrated Oil Companies

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  1. Exxon Mobil and Chevron Corporation Integrated Oil Companies

  2. Industry Analysis • Petroleum Industry structure: • 5 sectors of operations (Upstream, downstream, marine, pipeline, and service/supply) • Extremely high barriers to entry allowing for sustainable profits in the long run • Supply of oil is controlled by a cartel regime (OPEC) • Economic market form is close to Oligopoly • Few large sellers dominate industry • High barriers to entry, competitors cannot enter to reduce profits of participating firms • Standardized product • Oil and Gas industry is described well by Cournot-Nash Models of competition ( Two equally positioned firms competing on quantity, not price) - Major Players (Integrated): • Exxon, Chevron, Royal Dutch Shell, British Petroleum

  3. Chevron (CVX) Operates as an Integrated Oil Company: -Global exploration, extraction, refinement, transportation and marketing of petrol and chemical Products Market Statistics: -Market Cap (intraday)5:149.60B -Market Value Debt: 10.54 B -Enterprise Value (9-Mar-10)3:151.60B -Trailing P/E (ttm, intraday):14.22 -Price/Sales (ttm):0.94 -Price/Book (mrq):1.63

  4. Chevron Valuation • WACC = [(D/V)*(YTM*(1-T))]+[(E/V)*(rf + β(Erm - rf)] 0.079299 • Cost of Debt = Weighted Avg. YTM (1-Marginal Tax Rate) 0.045924 • Equity = rf + β(Erm - rf) 0.081512 • Pre. Stock = Div/Price (Chevron does not have P.S.) DCF Analysis Results: • 2014 FCF $140,499.52 • Terminal Value $91,995 • PV $2,076,684.74 Millions Per Share Price Approx $ 685 Current Share Price ($74.60) • Analysts Recommendations Buys: 6 Buy/Hold: 8 Hold: 5 Hold/Sells: 0 Sells: 0

  5. Exxon Mobil Valuation Operates as an Integrated Oil Company: -Global exploration, extraction, refinement, transportation and marketing of petrol and chemical Products Market Statistics: -Market Cap (intraday)5:316.23 B -Market Value Debt: 10.54 B -Enterprise Value (9-Mar-10)3:312.61B -Trailing P/E (ttm, intraday):16.84 -Price/Sales (ttm):1.13 -Price/Book (mrq):2.84

  6. Exxon Mobil Valuation • WACC = [(D/V)*(YTM*(1-T))]+[(E/V)*(rf + β(Erm - rf)] 0.0615 • Cost of Debt = Weighted Avg. YTM (1-Marginal Tax Rate) 0.0330 • Equity = rf + β(Erm - rf) 0.0900 • Pre. Stock = Div/Price (Exxon Mobil does not have P.S.) DCF Analysis Results: • 2014 FCF $130,273 • Terminal Value $94,249 • PV $3,997,414 Millions • Per Share Price Approx $ 845 Current Share Price ($67.00) • Analysts Recommendations Buys: 5 Buy/Hold: 3 Hold: 10 Weak Hold: 1 Sells: 0

  7. Future of Oil and Gas • S&P: Fundamental outlook for the Integrated Oil & Gas sub-industry for the next 12 months is positive, on expectations of improved global oil consumption amid an economic recovery. S&P projects that S&P 500 Energy sector operating EPS will drop about 67% in 2009, but rebound about 89% in 2010. • Financial Data Change in 2009 Drop In Net Income • Exxon Mobil Net Income $19,280 for 2009 vs. $45,219 for 2008 (57% drop) • Chevron Net Income $10,483 for 2009 vs. $23,931 for 2008 (56% drop)

  8. Recommendation • Buy Exxon Mobil current price $67 • High price over past three years is $93 (April 2008) and it should head back to that level within the next 18 months with the economic recovery or 63.5% annual return • Buy Chevron current price $74.33 • High price over the past three years $99 (June 2008) and it should head back to that level within the next 18 months or 53.7% annual return

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