Running head: A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012)

A Financial Examination of ExxonMobil (2008-2012) Matthew Cherry, Brian S. McDaniel, and Patrick Sumara Benedictine University

Authors Note This paper is in partial fulfillment of Financial Accounting (MBA/MSA-500).

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) 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

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) 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 companys 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 companys stock. Keywords: Chevron, ExxonMobil, Standard Oil, Profitability Ratios, Efficiency Ratios, Market Ratios, Liquidity Ratios, Solvency Ratios

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) 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 worlds 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 wholesale operations. The Downstream Division is responsible for marketing, refining, and

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) retail operations. The Chemical Division manages the companys 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.

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012)

$50,000 $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $2008 2009 XOM 2010 CVX 2011 2012 $23,931 $19,280 $19,024 $30,460 $26,895 $26,179

$45,220 $41,060

$44,880

$10,483

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 companys 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.

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.

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) 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
140.0% 120.0% 101.9% 100.0% 80.0% 60.0% 40.0% 20.0% 0.0% 2008 2009 XOM 2010 CVX 2011 2012 86.0% 79.1% 75.8% 72.6% 70.7% 111.0% 114.4% 106.0% 101.2%

Figure 2: Leverage Ratio, ExxonMobil and Chevron, 2008-2012

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 ExxonMobils ratio in 2012.

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) 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 Chevrons 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 companys 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.

See Appendix A: Accounts Receivable Turnover

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012)

60.0% 52.3% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2008 2009 XOM 2010 CVX 2011 2012 46.2% 52.4% 44.2% 51.5% 43.1% 53.4% 50.3% 42.1% 41.4%

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 companys operation. If a companys 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 companys underlying operational efficiency. Money tied up in inventory, or money that customers still owe to the company, cannot pay off any of the companys obligations.

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) Beginning in FY2009, the expansionary strategy employed by ExxonMobil devastated the companys 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).
$25,000 $23,166 $20,000 $15,000 $10,000 $5,000 $2008 $(5,000) $(10,000) XOM CVX 2009 2010 $(3,649) 2011 $(4,542) 2012 $4,447 $11,005 $21,508 $19,829 $19,634

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$3,174 $321

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 Chevrons current liabilities. Inventory Turnover We now turn our attention to the measure of a companys 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.

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) 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
30.00 25.00 21.39 21.13 20.00 15.00 10.00 5.00 2009 2010 XOM CVX 2011 2012 18.26 16.10 27.17 24.09 22.73

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21.91

Figure 5: Inventory Turnover, ExxonMobil and Chevron, 2009-2012

Chevrons 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 5

See Appendix A: Days Sales in Inventory See Appendix B: Days Sales in Inventory

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) Return on Equity At this point, we must ask the question: What effect did these strategies have on the companys performance from a stockholders 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-toapples 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.
30.0% 25.0% 20.0% 15.0% 11.7% 10.0% 5.0% 0.0% 2009 2010 XOM CVX 2011 2012 23.7% 19.3% 17.3% 27.3% 23.8% 20.3% 28.0%

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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

See Appendix A: Return on Equity

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) 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 Chevrons net income grew more substantially than ExxonMobil. The differentiating factor for Chevron was a 57.9% increase in retained earnings. Chevrons focus on reducing costs not only improved the companys 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 companys performance from a stockholders perspective. The Dividend Yield shows how much of the stocks 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 companys stock. For Chevron, its stock price appreciated 46.1% in five years, which impared Chevrons 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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A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012)

4.00% 3.50% 3.00% 2.50% 1.94% 2.00% 1.50% 1.00% 0.50% 0.00% 2008 2009 XOM 2010 CVX 2011 2012 2.43% 2.38% 2.18% 3.42% 3.45% 3.11% 2.90% 2.52% 3.25%

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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.

A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) 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-11e1-9f0700144feabdc0.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-1942billion-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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A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) Appendix A: ExxonMobil Financial Ratios

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A FINANCIAL EXAMINATION OF EXXONMOBIL (2008-2012) Appendix B: Chevron Financial Ratios

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