Individual Industry Analysis_EM

INDUSTRY ANALYSIS OF OIL AND GAS COMPANY 1

Oil and Gas Industry Analysis

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Industry analysis of oil and gas company 2

Oil and Gas Industry Analysis

ExxonMobil is one of the largest oil and gas company with revenue amounted USD

394.11 billion. This company was known formerly as The Standard Oil Company descended by

John D. Rockefeller and his partners with sales of USD 80 billion. Then by 1999, Exxon and

Mobil were merged into ExxonMobil. Recently, the company was ranked as the second most

profitable company in Fortune 500.

BACKGROUND OF COMPANY

COMPANY PROFILE

Exxon Mobil Corp. (ExxonMobil) is prominent as “Super-Majors” multinational oil and

gas company which headquartered at Irving, Texas. It is claimed to be the largest publicly traded

international oil and gas company as well as the world’s largest integrated refiners and marketers

of petroleum products and chemical manufacturers. It operates in the most of the world’s

countries with leading brands: Exxon, Esso, and Mobil.

ExxonMobil currently engaged in the exploration for and the production of crude oil and

natural gas (upstream), manufacture, transportation and sale of crude oil, natural gas, and

petroleum products (downstream). ExxonMobil committed to be the world’s premier petroleum

and petrochemical company so that it must continuously achieve superior financial and operating

excellence and still adhering to high ethical standards.

NATURE AND HISTORY OF THE FIRM

Basically there are 4 main business operations that consist of upstream, chemical,

downstream, and natural gas and power marketing. Upstream activity which is the exploration

and production includes searching for potential underwater or underground crude oil and natural

gas field and drilling wells. Whilst downstream activity refers to refining / purifying and

distributing the crude oil and natural gas through products such as gasoline, kerosene, diesel oil,

etc.

For each activity, ExxonMobil delivers industry-leading project, like execution on exploring

heavy oil, Liquefied Natural Gas (LNG), tight gas as well as highly integration between those 2

activities followed by strong distribution network that can refine the crude oil and market its

product worldwide through its retail stations and business-to-business segments. ExxonMobil

also provides wide-range of petrochemical products, such as polyethylene and polypropylene for

the chemical operation. For natural gas and power marketing operation, ExxonMobil excels on

growing this market shown by selling more than 14 million net cubic feet / day of gas across 35

countries that delivered more than 62 million tons to global market in 2013.


Long standing reputation of this company was contributed by Rockefeller and his partner

to form Standard Oil Company, headquartered in Ohio with integrated facilities constituting that

largest refinery facilities in 1870. Due to some reasons, Standard Oil Co. was categorized into

Exxon and Mobil under different ownership but eventually by 1999 they were announced to

merge in order to be an effective global competitor in this competitive industry.

THE FIRM TODAY

ExxonMobil today is led by Rex W. Tillerson as Chairman and CEO since 2004. As

greatly known as complete integrated oil and gas company, ExxonMobil prolifically produce 4

million oil-equivalent per day. It continues to successfully advance in some upstream projects in

order to achieve 4.3 million oil-equivalent per day by 2017. Over the past years, it has completed

eight new major projects with more than 250 thousand oil equivalent per day. Some

ExxonMobil’s expertise projects that have been completed are Arkutun-Dagi in Russia; Cold lake

expansion in Canada; Lucius in the Gulf of Mexico. In the United States, it focuses more on

higher-margin liquid production to implement its advance technology across The Permian, The

Bakken, and The Ardmore/Marietta plays. Current start-up project is located in Banyu-Urip,

Indonesia; Kearl Expansion in Canada; and Hadrian South in Gulf of Mexico. While for

downstream and chemical businesses, ExxonMobil emphasize on diversifying feedstock through

integrated system, driving operational efficiency and maximizing sales of petroleum and chemical

products. Below would be shown past years ExxonMobil performance of its each business

activity.

Adapted from ExxonMobil Annual Report, 2015

THE COMPETITION.

Fierce competition happened amongst several big players in this industry like Chevron,

Shell, Total, and British Petroleum (BP). According Table 2 below, it has shown that ExxonMobil

has the largest total revenue and market capitalization followed by Royal Dutch Shell in 2014.


This might be affected by long-standing reputation, widely-available product, and intense

branding activity and promotion. ExxonMobil Corporation owns 3 different brands that are

marketed world-wide, i.e. ExxonMobil and Mobil are marketed across USA and Asia-Pacific

whilst Esso is marketed in European countries.

Table 2

Oil and Gas Companies’ Performance

Performance Indicator ExxonMobil Chevron Royal Dutch Shell

Total BP

Total Revenue (2014)* 411,939 211,970 421,105 212,018 358,678Number of Employees 75,300 61,456 94,000 100,307 84,700Market Capital** 338.155 159.804 173.093 107.485 89.343

Note: *in Million USD – include excise, value-added and similar taxes

** in Billion USD from www.Bloomberg.com 24.Feb.2016 20.24

Porter’s 5 forces model

Through this model we may conclude that oil and gas industry is unattractive due to high entry

barriers, intense competition, and high bargaining power of buyers. In addition, recent years’

industry performance was unstable owing to volatile oil prices that highly affected by the nature

of the business.

1. Industry rivalry

Amongst the large players in this industry, ExxonMobil remained dominant with the

highest revenue obtain in year 2015. Despite being hard to differentiate in product

offerings, ExxonMobil is prominent for ‘quality over price’ product, i.e. lubricant product

of ExxonMobil is the most expensive amid all competitors. Hence, industry rivalry midst

competitors is strong / high.

a. Equally balanced competitors in this industry intensify the competition. For example,

all players do possess similar resources and capability to produce the same products.

In addition, all players do control some territories in the world for oil and gas drilling.

b. Slow industry growth entails each player to seize strongly with current market share.

c. Lack of differentiation in product offerings (similar product portfolio) but distinct in

after-sales service, product quality, and cooperation with OEM. ExxonMobil

attempted to cooperate with most of famous OEM to obtain recommendation using

its product.

2. Threat of new entrants

High barriers to entry restrict mediocre players to grasp on existing market Barriers to

entry in this industry include huge capital requirements, stricter government policy

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mainly due to unstable oil prices and environment issue, as well as cost disadvantages

independent of scale such as government subsidies to existing players, more desirable

locations, and favorable access to raw materials.

3. Threat of substitute

Due to enormous investment and capital needed, renewable energy sources are still

unable to substitute fossil energy usage completely. In addition, the possibility of utilizing

such energy sources are still under more advance research. Therefore, substitutes in this

industry is considered as weak.

4. Buyer’s bargaining power

In this industry, buyers have significantly great power to easily change their option. One

of the reason is they purchase a large portion of ExxonMobil total output. Greater amount

of information available as well as undifferentiated product offerings increase their

bargaining power even further.

5. Supplier’s bargaining power

Supplier’s bargaining power is considered as moderate because both ExxonMobil and

supplier need each other help and support. ExxonMobil can provide the facilities needed

to exploit a country’s natural resources for those that are unable to provide substantially

sufficient facilities. On the other hand, ExxonMobil needs the permission and willingness

from related country to explore and produce its products.


Situation Analysis

INTERNAL ANALYSIS

PERFORMANCE

Sales and profitability

Business performance is highly affected by oil and gas price change worldwide. Due to

several undesirable issues, ExxonMobil overall financial performance improved dramatically in

short period but kept declining over past 3 years. Table 1 shows that between 2013 and 2014,

both company sales and profit declined by 6.4% to USD 394 million and 7.6% to USD 109,977

respectively. However, earnings per share experienced slight increased by 3.1%, with final

dividends increasing to USD 2.7, to the benefit of shareholders. Another indicator performance

that ExxonMobil used specifically to measure historical capital productivity in its capital

intensive, long-term industry, as well as to make investment decisions.

Other factor that is affecting ExxonMobil performance is industry prices that

significantly driven by market supply and demand. On the supply side, industry production is

declining but basically being offset by production from new discoveries and field developments.

OPEC production policies also have an impact on world oil supplies. The demand side is largely a

function of global economic growth.

Table 1

ExxonMobil Financial and Productivity Performance

Performance Indicator 2014 (Million USD)*

2013 (Million USD)*

2012 (Million USD)*

2011 (Million USD)*

2010 (Million USD)*

Sales and Other Operating Revenue

394,105 420,836 451,509 467,029 370,125

-7% -7% -3% 21%Total Revenues and Other Income 411,939 438,255 480,681 486,429

-6% -10% -1% Gross Profit (After Tax) 109,977 118,973 133,565 144,644 121,614

-8% -12% -8% 16%Return On Average Capital Employed (ROCE)

16.2% 17.2% 25.4% 24.2% 21.7%

Net Income 32,520 32,580 44,880 41,060 30,460-0.2% -38% 9% 26%

Earnings / (Loss) per Share 7.6 7.37 9.70 8.43 6.243% -32% 13% 26%

Cash Dividends per Common Share

2.7 2.46 2.18 1.85 1.74

9% 11% 15% 6%Note: * Except per share amounts and ROCE


CORE COMPETENCY

ExxonMobil principal business is energy, involving exploration for, and production of

crude oil and natural gas, manufacture of petroleum products and transportation as well as crude

oil, natural gas, and petroleum products. ExxonMobil is a major manufacturer and marketer of

commodity petrochemicals, including olefin, aromatic, and wide variety of specialty products.

Throughout its businesses, updated and ongoing measures are taken to prevent and minimize the

impact of operations on air, water, and ground which includes substantial investment in refining

infrastructure and technology to manufacture clean fuels, as well as to monitor and reduce the

side-pollutants that it might potentially produce, e.g. nitrogen oxide, greenhouse gas, etc.

Amid all the processes that it had, ExxonMobil distinct itself for being the world’s

premier petroleum and petrochemical company. To that extent, it continuously strives to achieve

superior financial and operating excellence and simultaneously adhering to high ethical standard.

By executing its structured business plans, following the guiding principles, striving to improve

efficiency as well as advance in research and development, ExxonMobil Corporation aims to be

at the leading edge of competition in each business units.

EXXONMOBIL GENERIC VALUE CHAIN

Primary activities

Inbound logistics – sourcing oil, gas, and petrochemical products from rich natural sources

countries, e.g. Middle East with whom they have long-standing relationship and built up efficient

supply chain facilities

Operations - operates facilities and markets products worldwide across six continents. Upstream

base is geographically diverse with E&P acreage in 36 countries, production sites in 23 countries,

and sales of natural gas in 32 countries. It also has interests in 36 refineries in 21 countries plus

51 wholly owned and joint venture manufacturing of chemicals locations.


Outbound logistics – ExxonMobil provides retail sites e.g. gas station and workshop to reach the

end customers. Also, selling through OEM (Original Equipment Manufacturer) for serving the

business-to-business market.

Marketing and sales – Traditionally rely on the reputable brand of Exxon, Mobil, Esso, and Mobil

1 through its retail sites. Most of times ExxonMobil also sponsored and contributed as part of

corporate social responsibility.

Service – ExxonMobil’s method to distinct itself from other competitors is high-quality service to

its end customers.

Supporting activities

Firm infrastructure – they have well designed and tidy retail sites. They also have capable people

serving in different subsidiaries and necessary job functions such as legal, finance and accounting

to support their activities.

Human resource management – Great benefits, employee empowerment, and the corporate

culture makes ExxonMobil drive efficient management in human capital.

Technology development – Substantial amount of investment to enhance their operations in terms

of efficiency and reducing pollution.

Procurement – ExxonMobil procures its petroleum products from different E&P sites across the

world.

EXTERNAL ANALYSIS

SWOT ANALYSIS

Strength❖ ExxonMobil’s favorable reputation as the

oldest and mature player in the industry❖ Differentiation strategy through “quality over

price” builds its differentiation over other players

❖ Advance in technology development could enhance its position and competitive strategy

❖ Widely spread branches, offices, and E&P sites contributes to even more advantages for boosting its brand image

Weakness❖ More expensive pricing compared to other

players in several product portfolio❖ Several controversies regarding high-level of

contamination and pollution produced as well as imposed by US law


❖ Outstanding project management capability that can operate effectively and efficiently, manage expenses, and improve production yields.

Opportunity❖ Globalized market reduces boundaries to

explore more energy market

Threat❖ Unstable and volatile oil price reduce its

strategic position due to oil, gas and petrochemical business’ nature itself is fundamentally commodity business

❖ Renewable energy development would threat fossil energy utilization and exploration hence would also risk ExxonMobil resources

❖ Environmental issue also threats ExxonMobil existence in this industry

❖ Access limitations implemented by some countries to do investment of their oil and gas reserves tend to increase the high commodity price and affect ExxonMobil financial performance

❖ More countries concern over the risk of pollutants produced by oil, gas and petroleum companies that now these countries adopted higher taxes and restrictive policies that would cause higher price in oil, gas and petroleum products.

RECOMMENDATION


References

www.Bloomberg.com 24.Feb.2016 20.24

ExxonMobil Annual Report Series.(2014). Annual Report of ExxonMobil Corporation. US

Securities and Exchange Commision

Ireland, Hoskisson, Hitt.(2012). The Management of Strategy Concept 10th Edition. Canada:

South-Western Cengage Learning

http://www.Bloomberg.com/

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