Financial Management Case Study
ExxonMobil and Chevrontexaco
ChevronTexaco finished the year of 2003 with a profit of $7.2 billion, or $6.96 per share, a more than increase from net income of $1.1 billion, or $1.07 per share, in 2002. Revenue rose to $120 billion, up from $98.7 billion in 2002. ExxonMobil, on the other side, earned $21.5 billion, a record year for the corporation (Todaro 85-86). Full-year 2003 normalized earnings of $17 billion, or $2.56 per share, reflect an increase of $5.5 billion, or 48% over 2002 full-year results. Though ChevronTexaco was found to be more dynamic on the second quarter of 2004 (appendix), ExxonMobil has proved to be more stable in development, more income earning and more diversified product company. It also has more sophisticated retail business web, which decreases industry risks.
In summary, ExxonMobil had an excellent year, both from financial and operating perspectives. The company’s 2003 upstream earnings benefited from a strong price environment, and new production start-ups. Downstream earnings increased on better industry fundamentals, and improved efficiency. In chemicals, ExxonMobil achieved the strongest earnings in five years. The company’s focus is to maintain industry-leading returns. Such focus continues to deliver an attractive yield to ExxonMobil’s shareholders and is inferred to be a good choice for portfolio.
That’s been the conventional wisdom in recent years on Wall Street, where investors favored and rewarded a series of mergers that created a new breed of Oil Company: the supermajor. In 2002, Chevron Corp. became a supermajor with its $38 billion purchase of Texaco Inc. The deal added ChevronTexaco to the list of oil companies not owned by governments that meet the informal supermajor benchmark: combined oil and gas production of at least 2 million barrels a day and 10 billion barrels of reserves.
ChevronTexaco tackled that issue head-on, setting a goal “to achieve the highest total stockholder return in its peer group for the five-year period 2000-2004.” ChevronTexaco Chief Executive Dave O’Reilly, a former distance runner, seems to relish the challenge. “We’ve hit the ground running for a rapid and smooth integration as a world-class global energy company,” he told financial analysts in 2002. It became true later in comparing to ExxonMobil (Appendix).
ExxonMobil, on the other side, is said to be the world’s biggest corporation. The ExxonMobil assets create a powerful, high-quality retail system. When it started after merger, which had more then double ChevronTexaco’s merger price, the new ExxonMobil Corp. was based in Irving, Texas, and employed 120,000 workers. At start, the two merged companies Exxon and Mobil agreed to sell about 15 percent of their retail outlets, or 2,413 service stations in areas where they overlap, which is almost the size of ChevronTexaco retail business in 2002.
Both companies’ core responsibility is to find the oil that’s needed to support economic growth in the world, to efficiently produce it, refine it into products, and make chemicals from it. In this study, we will find out which of them does a better job and appears to be more appropriate for investing. (Words: 294).
Huge oil production and reserve numbers raise the size of new discoveries and developments needed to achieve the high growth rates – 3, 5, even 8 percent – needed to satisfy investors. “The most attractive economics increasingly are being found in regions of high political risk,” said Bruce Schwartz, a Standard and Poor’s bond analyst. “This is especially true for large, integrated oil companies that need to find billions of barrels of new reserves each year to replace production. Working in partnership with host countries, our industry has kept oil and gas flowing despite civil wars in Africa, terrorist incidents in the Middle East and prolonged civil unrest in Southeast Asia”
High growth rates can put uncertainty in the path of ChevronTexaco. But thumb through corporate filings, and an investor finds a money machine that posted nearly $100 billion in revenue and more than $1 billion in profits in 2002 — an off-year by its own standards. Clip on a television, and a consumer encounters advertisements for a maker of gasoline of such high quality that cartoon automobiles sneak away from their owners to visit Chevron stations.
But such risks are worth taking, he added: “Our greatest new risk could be failing to take the old risks (which) include doing major capital projects in unsettled regions and within complex partnerships as well as investing within countries that need to develop their resources even as they struggle to achieve internal stability.”
That’s crucial to ChevronTexaco, because finding and lifting oil from the ground generates a majority of its profits. For decades, Chevron’s crown jewel was its stake in the vast oil fields of Saudi Arabia, where the company pioneered exploration and development in the 1930s. But after Saudi Arabia moved to nationalize those fields in the 1970s, Chevron and Texaco — which was a partner in that venture — had to scramble to replace that treasure. To a large extent, both succeeded. In 2002, ChevronTexaco’s 8.5 billion-barrel worldwide reservoir of petroleum now includes 1.5 billion barrels each in Kazakhstan and West Africa, 1.1 billion barrels in Indonesia, and nearly 500 million barrels in Venezuela (Mincer 12).
Along with other oil companies, ChevronTexaco has found its core business — the production of fossil fuels — under attack as the source of greenhouse gases that scientists view as a probable cause of global warming. Locally, employees protest the transfer of clerical jobs to low-wage countries and neighbors worry about exposure to chemicals from the giant Richmond refinery. The report describes the global footprint left in 2002 as ChevronTexaco produced 638 million barrels of oil and gas. Along the way, the company spilled 55,000 of those barrels, loosed about 60 million tons of greenhouse gases into the atmosphere and lost one of its 53,000 employees and another 15 employees of outside contractors in work-related incidents. The company also paid $4.3 million in environmental fines or settlements (Piller 31-33).
In 2002, ChevronTexaco Corp. posted net loss — $904 million, or 85 cents a share — that included a $1.55 billion hit from the oil giant’s investment in a staggering energy-trading affiliate and operating results that fell substantially short of analysts’ expectations. Chief Executive Dave O’Reilly said disruptions of oil and gas production and weak demand for refined petroleum and chemical products contributed to the poor performance. ChevronTexaco missed Wall Street estimates for the third time in four quarters. Excluding so-called one-time charges, the company posted operating income of $1.24 billion, or $1.17 a share, in the three-month (Mincer 14).That was an embarrassing 13 cents short of the consensus estimate of $1.30 a share compiled by Thomson Financial/First Call in a survey of 18 analysts. ExxonMobil was found to be in the same situation (appendix – charts). The share prices decrease was caused mainly by rumors and also the events at the major areas of oil resources. But, in the last two years, the situation has changed (Todaro 80-84).
The last year, ChevronTexaco’s revenue rose to $30.97 billion in the fourth quarter of 2003, a hefty 22 percent gain from the $25.37 in 2002. Gains in revenue and net income came despite a 9 percent year-to-year decline in domestic petroleum and natural gas output to 917,000 barrels a day. A barrel equals 42 gallons. That output fell short of previous guidance from the company that projected 6 percent annual declines. ChevronTexaco finished the year of 2003 with a profit of $7.2 billion, or $6.96 per share, a more than increase from net income of $1.1 billion, or $1.07 per share, in 2002. Revenue rose to $120 billion, up from $98.7 billion in 2002 (Mincer 14-17). In 2004, ChevronTexaco’s first-quarter earnings climbed 33 percent, continuing the oil giant’s recent run of gushing profits. It earned $2.56 billion, or $2.40 per share, in the three months ended March, up from $1.92 billion, or $1.81 per share, at the same time last year (Todaro 85-86).
ExxonMobil’s net income for 2003 totaled $21.5 billion, a record year for the corporation. Likewise, the normalized earnings of $17 billion are also a record. Fourth quarter earnings of $4.4 billion, or 68 cents per share, were up $630 million from the same quarter in 2002, and up $770 million sequentially. The strong fourth quarter earnings reflect improved results in the upstream and our chemicals businesses. Full-year 2003 normalized earnings of $17 billion, or $2.56 per share, reflect an increase of $5.5 billion, or 48% over 2002 full-year results. All business lines contributed to this strong earnings growth (Hertel 44-48).
The corporation again achieved a number of significant milestones in the planning, development and implementation of major projects. The management believes that their ability to leverage technology, coupled with superior execution, continues to distinguish ExxonMobil from the competition.
Beginning with the upstream, the company continued to progress the global LNG strategy. In November, the pot management announced with the partner, Qatar Petroleum, the acquisition of a 90% interest in the North Adriatic LNG terminal project in Italy. Edison gas signed amended agreements increasing their LNG purchase commitment to 4.7 million tons per year, commencing in 2007.
Fourth quarter upstream earnings of 2003 were $3.3 billion, that’s up $270 million versus the fourth quarter of 2002. Higher realizations improved earnings by more than $550 million. This was partially offset by negative volume impacts of about $100 million. Costs associated with several business restructurings and exploration activities accounted for the remaining variance. Looking sequentially, upstream earnings were up $570 million. Higher realizations for both crude and natural gas contributed $200 million (Adams 9-12).
Increased liquids volumes of over 4% and higher seasonal demand for natural gas added more than $550 million. The combination of exploration expenses of about $150 million and higher production expenses account for the remaining variance. Higher seasonal production levels in Europe and costs associated with new project start-ups were the primary reasons for the company’s increases in expenses. Full-year 2003 upstream earnings were $12.8 billion, an increase of $3 billion, or 30% over 2002. Stronger crude and natural gas realizations added some $3.9 billion to earnings for the year (Hertel 45-51).
Capital expenditures in the fourth quarter were $4.4 billion, up $300 million versus the fourth quarter of 2002. For the full year capex totaled $15.5 billion, an increase of $1.6 billion over 2002. Higher project activity mainly in the upstream, as well as impacts by the weaker U.S. dollar account for essentially all of the increase in capital expenditures. The effective tax rate for the fourth quarter was 31% and the effective tax rate for the full year was 36% (Adams 12-16).
Gains from improved refinery reliability continued in the fourth quarter, however, these improvements were offset by higher planned operating costs. The weaker U.S. dollar reduced earnings by about $50 million. The LIFO inventory effects were about equal to that for the fourth quarter of 2002 (Knight 71).
U.S. downstream earnings of $384 million in the fourth quarter were down slightly versus the fourth quarter of 2002. Refining margins were up $90 million, while marketing margins improved slightly. The margin improvement was partially offset by an increase in planned operating costs, and lower LIFO gains. Sequentially, fourth quarter downstream earnings for the U.S. were about equal to the third quarter, lower refining margins were offset by a positive LIFO impact. Relative improvement in refining margins offset weaker marketing margins. Higher planned operating costs and the impact of the weaker U.S. dollar were partially offset by improved refinery reliability, and favorable LIFO effects. Sequentially, non-U.S. downstream earnings were down by about $190 million, primarily due to lower marketing margins and LIFO gains partially offset higher planned operating costs (Knight 71-76).
North American cogeneration plant investments continue on track, at Bay Town, Beaumont, and Sarnia refineries. As it is known, cogeneration plants increase the overall energy efficiency of the facility, yielding lower cost and substantially reduced emissions. When completed, these facilities will increase the company’s worldwide cogeneration capacity by 30%, to 3800 megawatts of electricity (Adams 16).
Conclusions and recommendations
ChevronTexaco was found to be one of the leading companies at the oil product market, which keeps in pace with the overall industry development. The company should invest in hi technologies, upgrades, and start new projects to obtain bigger market share and reduce industry risks connected with diversification of the oil products and custom services.
Critics often blame ChevronTexaco. The company defended itself against lawsuits that charge it with complicity in the deaths of Nigerian demonstrators and with poisoning the land and water of Ecuadorian Indians. ChevronTexaco has earned a reputation for staunchly defending itself against its critics and their charges. With its new publication, which is backed by a more detailed report posted on-line, the company tries a more balanced approach: making its case while acknowledging its flaws. “You have to have the good and the bad,” Valerie Crissey, ChevronTexaco’s social responsibility coordinator, said at a recent World Affairs Council program. “You’re never going to be considered credible if you don’t have both sides of the coin” (Salter 25-26).
On the brighter side, ChevronTexaco gave $63 million to community development projects, supported a nature preserve inside its oil field on Barrow Island in Western Australia and maintained an aquatic habitat in a former sewage treatment pond at its Richmond refinery (Salter 27).ChevronTexaco needs to change environmental approach (invest in recycling) to a growing segment of the investment community and to increasingly vocal advocacy groups who want to know how companies affect society and the environment.
ExxonMobil, on the other hand, has an unparalleled portfolio of upstream assets, whixh are greater than those of ChevronTexaco’s. Company’s ability to leverage technology and manage large-scale projects in challenging environments, is especially well suited to opportunities in developing areas. The company’s consistent industry-leading results demonstrate the success of the global functional organization, and the disciplined approach ExxonMobil take in all aspects of the business.For the year, downstream earnings were $3.5 billion, that’s an increase of $2.2 billion over 2002. Although improved refining and marketing margins accounted for most of the change, ExxonMobil also had an excellent year from an operating viewpoint. Progress was made on a wide range of efficiency initiatives and margin improvement steps (Hagen 37-41).
In chemicals, ExxonMobil made several recent announcements demonstrating the benefits the company obtained from the focus on breakthrough technology. ExxonMobil is introducing a new line of achieved propylene, that will benefit many markets, beginning with non-woven fabrics. In addition ExxonMobil developed a new family of packaging films called next star. And finally, the company developed an improved version of the xylene [inaudible] catalyst, which is now available for licensing. This catalyst can increase existing paraxylene manufacturing capacity by up to 40% with minimal facility modifications. In 2003, ExxonMobil delivered in excess of $1 billion into four tax efficiencies (Hertel 52). In addition to delivering significant product milestones and new technology achievements, the corporation continues to find ways to deliver savings to the bottom line in all of the industry businesses. All these factors prove that ExxonMobil is the prominent company in the industry to invest in.
Adams, F. ExxonMobil Financial. US Newswire; June, 2004.
Hagen, E. ExxonMobil Oil. The Beaumont Enterprise (Beaumont, Texas) (via Knight-Ridder/Tribune Business News); March, 2004.
Hertel, T. ExxonMobil Upstream. Business Wire; April 15, 2004.
Knight, D. ChevronTexaco’s projects. Inter Press Service English News Wire; May 21, 2003.
Mincer, J. ChevronTexaco. Financial Report. NPN International; January, 2004.
Piller, D. Milestones of Oil Inventory. Knight Ridder/Tribune News Service; March 5, 2003.
Salter, W. ChevronTexaco’s Stocks. Business Wire; June 15, 2004.
Todaro, G. The Future of ChevronTexaco. The Journal of Business Communication; January 1, 2004.
Best Performing Stocks, Second Quarter 2004:
Imperial Oil Limited