a financial examination of exxonmobil (2008-2012)
DESCRIPTION
This paper examines key financial ratios of Exxon Mobile Corporation between the years 2008 and 2012. We focus on five ratio classifications: profitability, efficiency, market, liquidity, and solvency; then compare the company’s performance against Chevron Corporation, a leading domestic competitor. We discuss the fiscal health of the organization, and make a recommendation as to whether or not to invest in the company’s stock.TRANSCRIPT
Running head: 1
A Financial Examination of ExxonMobil (2008-2012)
Matthew Cherry, Brian S. McDaniel, and Patrick Sumara
Benedictine University
Author’s Note
This paper is in partial fulfillment of Financial Accounting (MBA/MSA-500).
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Table of Contents
Abstract................................................................................................................................3
Introduction..........................................................................................................................4
ExxonMobil Corporation.....................................................................................................4
Chevron Corporation...........................................................................................................5
Two Responses to the Same Problem..................................................................................5
Leverage Ratio.................................................................................................................7
Debt Ratio........................................................................................................................8
Net Working Capital........................................................................................................9
Inventory Turnover........................................................................................................10
Return on Equity............................................................................................................12
Dividend Yield...............................................................................................................13
Conclusion.........................................................................................................................14
Recommendation...............................................................................................................14
References..........................................................................................................................15
Appendix A: ExxonMobil Financial Ratios......................................................................16
Appendix B: Chevron Financial Ratios.............................................................................17
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Abstract
This paper examines key financial ratios of Exxon Mobile Corporation (ExxonMobil) between
the years 2008 and 2012. We focus on five ratio classifications: profitability, efficiency, market,
liquidity, and solvency; then compare the company’s performance against Chevron Corporation
(Chevron), a leading domestic competitor. We discuss the fiscal health of the organization, and
make a recommendation as to whether or not to invest in the company’s stock.
Keywords:
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A Financial Examination of ExxonMobil (2008-2012)
Introduction
Two thousand and nine was a traumatic year for the world economy. Already fourteen
months into the Great Recession, world economic output fell for the first time since the 1930s
(Weber, 2009). The worldwide baking system stumbled as several major institutions failed.
Government regulators in several nations forced mergers between banks, and even partially or
completely nationalized banks as a tactic to stabilize the global financial system. Unemployment
in the United States rose to 10%, a height not seen in a generation. In addition, speculation in the
commodities market drove crude oil prices to record levels.
It is against this historical context that we make a financial examination of one of the
world’s largest integrated oil companies, and then compare it to its principal domestic rival.
ExxonMobil Corporation
ExxonMobil is a direct descendant of Standard Oil Company, having arrived at its
present corporate status following the merger between Exxon Corporation and Mobile Oil
Company in 1999 (Hoyos, 2007). ExxonMobil is involved in the exploration, production, and
distribution of crude oil, natural gas, and petroleum products. ExxonMobil had a market
capitalization of $406.2-billion in 2011, making it the largest publically traded company in the
world (Financial Times, 2011). When ranked against the gross domestic product of individual
nations, ExxonMobil, if a nation itself, would be the 29th largest world economy (United Nations
Statistical Division, 2012).
ExxonMobil functions across several global operating divisions, each grouped into three
categories: Upstream, Downstream, and Chemical. The Upstream Division, which accounts for
approximately 70% of company revenue, oversees oil exploration, extraction, shipping and
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wholesale operations. The Downstream Division is responsible for marketing, refining, and
retail operations. The Chemical Division manages the company’s research and development
(ExxonMobil Corporation, 2011).
Chevron Corporation
Chevron is an indirect descendent of Standard Oil Company, having arrived at its present
corporate status following the merger is Standard Oil of California, a “Baby Standard Oil,” and
Gulf Oil in 1984. Chevron is involved in every aspect of the oil, gas, and geothermal energy
industries, including exploration, production, refining, marketing, distribution, and power
generation. Chevron had a market capitalization of $211.8-billion in 2011, making it the eighth
largest publically traded company in the world (Financial Times, 2011). When ranked against
the gross domestic product of individual nations, Chevron, if a nation itself, would be the 46th
largest world economy (United Nations Statistical Division, 2012).
Like other integrated oil companies of its size, Chevron functions across several global
operating divisions. In addition to Upstream and Downstream operations, which encompass
exploration and refining, Chevron actively participates in the development of alternative energy
sources, including geothermal, solar, wind, bio-fuel, fuel cell, and advanced hydrogen fuel.
Two Responses to the Same Problem
As previously discussed, the Great Recession hurt a wide swath of economic interests.
Both ExxonMobil and Chevron suffered substantially in FY2009. At the time, ExxonMobil
chief executive Rex Tillerson said the company faced “difficult global economic conditions”
highlighted by “lower refining and fuel margins and lower natural gas [prices]” (MarketWatch,
2010). Weakening prices were a contributing factor in the year-over-year decline of net income
for both companies as depicted in Figure 1.
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2008 2009 2010 2011 2012 $-
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
$45,000
$50,000 $45,220
$19,280
$30,460
$41,060
$44,880
$23,931
$10,483
$19,024
$26,895 $26,179
XOM CVX
Figure 1: Net Profit, ExxonMobil and Chevron, 2008-2012 (in Millions)
Facing tremendous market uncertainty and declining profit margins, both companies
responded with strategies that respected the strengths of each individual organization.
ExxonMobil adopted an expansionary approach, aggressively acquiring companies and
partnerships in FY2009. ExxonMobil also implemented a stock buyback program designed to
stabilize the company’s stock price (ExxonMobil Corporation, 2009). Chevron, on the other
hand, took a different approach, choosing to deleverage itself from debt by reducing operating
expenses and improving workplace safety (Chevron Corporation, 2009).
As we will discuss, both approaches were successful in mitigating financial damage
inflicted upon them by economic and market forces. Our analysis covered eighteen financial
ratios across five categories.1 We will focus on seven ratios: leverage ratio, debt ratio, net
working capital, inventory turnover, receivables turnover, return on equity, and dividend yield.
1 Financial Ratio calculations for ExxonMobil and Chevron are in Appendix A and Appendix B respectively. We obtained all data for our calculations from MorningStar and MSN Money.
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Leverage Ratio
The first financial ratio we examined is the Leverage Ratio. Our goal in examining this
ratio is to determine how much each company relies on debt financing. As depicted in Figure 2,
it is evident that ExxonMobil relies more heavily upon debt financing than Chevron.
With more total liabilities on its books than stockholders’ equity, ExxonMobil has a high
concentration of debt. If the company had below industry averages for Interest Coverage, it
might be cause for concern. The Leverage Ratio, however, does not trouble us, as it does not
exceed a ratio of 2:1. Equally, the company has an Interest Coverage Ratio that is four-times
higher than the industry average, indicating that ExxonMobil has enough cash to discharge its
debt expenses.2
2008 2009 2010 2011 20120.0%
20.0%
40.0%
60.0%
80.0%
100.0%
120.0%
140.0%
101.9%111.0%
106.0%114.4%
101.2%
86.0%79.1% 75.8% 72.6% 70.7%
XOM CVX
Figure 2: Leverage Ratio, ExxonMobil and Chevron, 2008-2012
2 See Appendix A. Interest Coverage improved from 122.47 to 241.75 between 2008 and 20012. The industry average was 62.1 in 2012; four times lower than ExxonMobil’s ratio in 2012.
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Chevron, with its deleverage strategy, reduced its debt-to-equity 15.3 points over the
five-year period. The company enjoyed a 57.6% increase in shareholders’ equity during this
period. When coupled with tighter control over expenses, Chevron successfully deleveraged.
Debt Ratio
The next financial ratio we examined is the Debt Ratio. The purpose of this examination
is to determine how easily a company can pay off its debt during an economic recession. In
FY2008, both companies had more total assets than total liabilities, with ExxonMobil being
slightly higher of the two companies. In FY2009, we noticed that Chevron’s debt ratio declined
to 44.2% because of a $1.8-billion reduction in total liabilities. Chevron managed to reduce
operating costs at a pace greater than the decline in total assets.
The debt ratio of ExxonMobil increased by one-tenth of a percent as the company
expanded its total assets by investing heavily in research and development, capital improvement
and the acquisition of XTO Energy. An increase in total liabilities, particularly growth in the
company’s accounts receivables of $2.9-billion, offset the increase in total asset.3
Given the strategies employed by each company, we expected the changes in this ratio.
3 See Appendix A: Accounts Receivable Turnover
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2008 2009 2010 2011 20120.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
52.3% 52.4% 51.5%53.4%
50.3%46.2%
44.2% 43.1% 42.1% 41.4%
XOM CVX
Figure 3: Debit Ratio, ExxonMobil and Chevron, 2008-2012
The downward trend for Chevron is pronounced. Over the five-year period, Chevron
successful deleveraged itself by reducing operating costs by 15% (Chevron Corporation, 2009).
ExxonMobil also reduced its debt ratio over the five-year period. However, the company
increased total liabilities by $5.2-billion during the same period as the company expanded. The
decrease in debt ratio is a mathematical improvement because of the increase in total assets.
Net Working Capital
The Net Working Capital Ratio provides a stark illustration of how these two strategies
affect a company’s operation. If a company’s current assets do not exceed its current liabilities,
then it may run into trouble paying back creditors in the short-term (Investopedia, 2013).
Working capital also gives investors an idea of the company’s underlying operational efficiency.
Money tied up in inventory, or money that customers still owe to the company, cannot pay off
any of the company’s obligations.
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Beginning in FY2009, the expansionary strategy employed by ExxonMobil devastated
the company’s working capital. By the time the company ended the downward trend in FY2011,
ExxonMobil lost $27.7-billion working capital. These losses were the result of significant
decreases in current assets, primarily cash and cash equivalencies needed to pay for acquisitions,
dividend payments and stock repurchases (ExxonMobil Corporation, 2009).
2008 2009 2010 2011 2012
$(10,000)
$(5,000)
$-
$5,000
$10,000
$15,000
$20,000
$25,000 $23,166
$3,174
$(3,649) $(4,542)
$321
$4,447
$11,005
$19,829 $19,634 $21,508
XOM CVX
Figure 4: Net Working Capital, ExxonMobil and Chevron, 2008-2012
For Chevron, the trend was the opposite. The company managed to reduce its current
liabilities, specifically short-term debt. The company also increased its payables, which further
reduced Chevron’s current liabilities.
Inventory Turnover
We now turn our attention to the measure of a company’s ability to sell inventory. The
Inventory Ratio indicates the number of times a company sells its inventory during a year.
Given the different strategies of ExxonMobil and Chevron, we expect each company to have
different approaches inventory efficiency but achieve similar results.
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For ExxonMobil, the approach was to increase inventories at a faster pace than the cost of
goods sold. By FY2012, ExxonMobil grew inventories to $14.5-billion from $11.6-billion, a
24.8% increase. Cost of goods sold, on the other hand, only increased to $336-billion from
$288.8-billion, a 16.3% increase during the same period. These two factors shortened the
number of days in inventory from 19.9 days in FY2008 to 16.06 days in FY2012.4
2009 2010 2011 2012 -
5.00
10.00
15.00
20.00
25.00
30.00
18.26
21.39 21.91 22.73
16.10
21.13
27.17
24.09
XOM CVX
Figure 5: Inventory Turnover, ExxonMobil and Chevron, 2009-2012
Chevron’s approach was to reduce the cost of goods sold, a core component to reducing
costs company-wide. By FY2012, Chevron reduced the cost of goods sold to $140.7-billion
from $193.4-billion in FY2008, a 25.6% reduction in five years. Inventories fell 10% during the
same period. Like ExxonMobil, Chevron improved the number of days in inventory from 22.7
days in FY2008 to 15.2 days in FY2012.5
4 See Appendix A: Days’ Sales in Inventory5 See Appendix B: Days’ Sales in Inventory
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Return on Equity
At this point, we must ask the question: What effect did these strategies have on the
company’s performance from a stockholder’s perspective? To answer this question, we turn to
two market ratios: return on equity and the dividend yield.
Return on Equity allows an investor to determine how much income a company can earn
from capital raised through stock issuance. More importantly, the ratio provides an “apples-to-
apples” comparison between two companies in the same industry. Because we are most
interested in observing the performance of ExxonMobil and Chevron after adopting their
respective strategies, we focus only on the years FY2009 to FY2012 in this comparison.
2009 2010 2011 20120.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
17.3%
23.7%
27.3% 28.0%
11.7%
19.3%
23.8%
20.3%
XOM CVX
Figure 6: Return on Equity, ExxonMobil and Chevron, 2009-2012
A central tactic of the ExxonMobil strategy was a stock repurchase program
(ExxonMobil Corporation, 2009). As expected, we see significant improvement in stockholders’
equity after FY2009.6 ExxonMobil increased stockholders’ equity by 46.8% by FY2012. This
6 See Appendix A: Return on Equity
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factor led the Return on Equity to increase to 28% by FY2012, despite flat net income growth
during the same period.
Return on Equity increased nearly at the same pace for Chevron. Like ExxonMobil,
Chevron improved stockholders’ equity, but Chevron’s net income grew more substantially than
ExxonMobil. The differentiating factor for Chevron was a 57.9% increase in retained earnings.
Chevron’s focus on reducing costs not only improved the company’s net income; it allowed
management to deploy available cash to reducing and refinancing debt. Chevron achieved the
same market result as ExxonMobil but using different financing and managerial strategies.
Dividend Yield
Our last ratio also gives insight on how these strategies affected each company’s
performance from a stockholder’s perspective. The Dividend Yield shows how much of the
stock’s market value returns to a stockholder in the form of dividend income. This information
is important because equity investors consider both ExxonMobil and Chevron to be “value”
companies. Value stocks trade at a lower price relative to its fundamental performance. These
companies have higher Dividend Yields, as a result, a factor preferred by “Value Investors.”
As depicted in Figure 7, both ExxonMobil and Chevron had changes in their Dividend
Yield because both companies increased the dividend paid to shareholders each year. The
dividend increase corresponded with higher market prices for each company’s stock. For
Chevron, its stock price appreciated 46.1% in five years, which impared Chevron’s Dividend
Yield on a mathematical basis. In practice, however, ExxonMobil and Chevron provided
shareholders with both investment and income growth despite the difficult economic conditions
brought on by the Great Recession of 2007-2009.
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2008 2009 2010 2011 20120.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
1.94%
2.43% 2.38%2.18%
2.52%
3.42% 3.45%
3.11%2.90%
3.25%
XOM CVX
Figure 7: Dividend Yield, ExxonMobil and Chevron, 2009-2012
Conclusion
Our examination of ExxonMobil and Chevron clearly demonstrate that management can
achieve similar ends by using different means. Facing uncertain economic, business, legal, and
social conditions, ExxonMobil and Chevron used their core strengths to guide their companies to
successful outcomes. The result for both companies was greater market share, increased
profitability, and stronger shareholder performance five years after the recession began.
Recommendation
Based upon our analysis, we believe that ExxonMobil Corporation is well-positioned to
meet the financial goals stated in the Management Interview. We believe both companies are
financially stable organizations, with a slight nod to Chevron based purely upon its ability to use
working capital to build its business in the short-term. We also believe that both companies can
continue at its present growth rate. As a result, we recommend both companies as a “Buy” with
respect to acquiring shares of stock for investment purposes.
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References
Chevron Corporation. (2009). 2009 Annual Report. San Ramon: Chevron Corporation.
ExxonMobil Corporation. (2009). 2009 Summary Annual Report. Houston: ExxonMobil
Corporation.
ExxonMobil Corporation. (2011). 2011 Summary Annual Report. Houston: ExxonMobil.
Financial Times. (2011, December 31). FT Global 500 December 2011. Retrieved from
Financial Times: http://www.ft.com/intl/cms/73f82726-385d-11e1-9f07-
00144feabdc0.pdf
Hoyos, C. (2007, March 11). ExxonMobil. Retrieved from Financial Times:
http://www.ft.com/intl/cms/s/0/0b2f7b36-cda0-11db-839d-000b5df10621.html
Investopedia. (2013, March 11). Working Capital Definition. Retrieved from Investopedia:
http://www.investopedia.com/terms/w/workingcapital.asp#axzz2N5QBlBgJ
MarketWatch. (2010, February 1). Exxon Mobil's 2009 profit of $19.42 billion off 56 percent
from 2008. Retrieved from Tampa Bay Times:
http://www.tampabay.com/news/business/energy/exxon-mobils-2009-profit-of-1942-
billion-off-56-percent-from-2008/1069924
United Nations Statistical Division. (2012, December 31). GDP and its Breakdown at Current
Prices in US Dollars. Retrieved from National Accounts Main Aggregates Database:
http://unstats.un.org/unsd/snaama/dnltransfer.asp?fID=2
Weber, M. (2009, December 31). The Year in Business: 2009. Retrieved from BBC News:
http://news.bbc.co.uk/2/hi/business/8432184.stm
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Appendix A: ExxonMobil Financial Ratios
17
Appendix B: Chevron Financial Ratios