Sector

Energy

Background

Arjun Murti is a long-time energy analyst and investor. We cover Exxon's rich history dating back to John D. Rockefeller, the Supermajor supply chain, and what the future of the energy market might look like.

Cover

Date

July 7, 2021

Episode Number

16

Exxon Mobil Business Breakdown

Background / Overview

Exxon Mobil, a global energy titan, traces its roots to John D. Rockefeller’s Standard Oil, founded in 1870. After the 1911 antitrust breakup, Standard Oil of New Jersey became Exxon, and Standard Oil of New York became Mobil. The two merged in 1999, forming Exxon Mobil, a super major integrated oil company. Headquartered in Dallas, Texas, it operates across exploration and production (upstream), refining (downstream), and petrochemicals, employing approximately 62,000 people as of recent data. Its century-long dominance stems from operational excellence, scale, and adaptability through economic cycles, wars, and energy transitions. However, the past decade has seen underperformance due to poor capital allocation and strategic missteps.

Ownership / Fundraising / Recent Valuation

Exxon Mobil is publicly traded (NYSE: XOM) with a market capitalization of approximately $250 billion. No specific recent fundraising or private equity transactions were mentioned, as it generates significant cash flow to fund operations and investments. Historically, it has been a dividend aristocrat, prioritizing shareholder returns. Valuation multiples were not detailed, but its decline from the world’s largest market cap in 2013 to 21st in the S&P 500 reflects challenges in maintaining profitability and investor confidence amidst ESG pressures and a commodity downturn.

Key Products / Services / Value Proposition

Exxon Mobil’s value proposition lies in its integrated model, leveraging scale and efficiency across the oil and gas value chain to deliver energy and chemical products globally. Its key segments include:

1. Upstream (Exploration and Production): Finds and extracts crude oil (2.3 million barrels/day) and natural gas (9 billion cubic feet/day). Value lies in low-cost production and asset optimization.
2. Downstream (Refining): Converts crude into gasoline, diesel, jet fuel, and other products via one of the largest refining capacities globally. Value comes from margin capture and operational reliability.
3. Chemical (Petrochemicals): Produces ethylene, polyethylene, and other materials for plastics and industrial uses. Competes with firms like Dow Chemical, offering high-margin products tied to oil and gas feedstocks.

The integrated model historically ensured supply chain control, but its necessity has diminished as markets matured, making Exxon’s structure partly a legacy of its origins.

Segments and Revenue Model

Exxon Mobil operates three economically separable segments:

• Upstream: Revenue from selling crude oil and natural gas at market prices (e.g., WTI at $69/bbl, Brent at $71/bbl). Highly sensitive to commodity price volatility.
• Downstream: Earns margins by refining crude into products sold to wholesalers or marketers. Margins depend on the spread between crude and product prices.
• Chemical: Revenue from selling petrochemicals, with pricing tied to global supply-demand and input costs.

The upstream segment drives the majority of revenue and EBITDA due to its scale and commodity price leverage, while downstream and chemical segments provide diversification and stability.

Splits and Mix

• Channel Mix: Upstream sells to refiners or midstream firms; downstream to wholesale marketers; chemical to industrial clients. Gas stations are franchised, not owned, reducing direct retail exposure.
• Geo Mix: Operations span globally, with significant presence in the U.S. (Permian Basin), Canada, Middle East, and Asia. The U.S. has grown in importance post-shale revolution.
• Customer Mix: Diverse, including refiners, wholesalers, industrial clients, and governments. No single customer dominates due to commodity nature.
• Product/Segment Mix: Upstream (60-70% revenue), downstream (20-30%), chemical (~10-15%). High-margin upstream drives profitability.
• End-Market Mix: Transportation (oil for gasoline, diesel, jet fuel), industrial (petrochemicals), and power generation (minimal due to residue oil decline).

Mix Shifts: Historically, Exxon divested U.S. assets pre-shale boom, missing low-cost opportunities. Recent focus is on Permian Basin and high-return assets, with divestitures of high-cost fields planned.

KPIs

• Production Volumes: 2.3M bbl/day oil, 9B cf/day gas, stable but reliant on new investments.
• Refining Utilization: High, but margins volatile based on spreads.
• Return on Capital Employed (ROCE): Historically 15-30% (top quartile), now closer to industry average (~10%), signaling capital allocation issues.
• Cost Curve Position: Critical for upstream profitability; Exxon targets low-cost fields but missteps (e.g., XTO) raised costs.

No clear acceleration/deceleration trends were noted, but improved capital discipline could drive ROCE recovery.

Headline Financials

• Revenue: Flat to modest growth, driven by 1-2% global oil demand growth and price volatility. Upstream dominates, with downstream and chemical stabilizing.
• EBITDA: $50 billion, with 20% margin, down from historical highs due to lower ROCE and poor investments. Upstream contributes ~70-75%.
• FCF: Not detailed, but likely pressured by high capex and dividends. Cash conversion challenged by commodity cycles.
• Long-Term Trends: Revenue and EBITDA growth stalled post-2013 due to commodity downturn and missteps. Margins compressed from historical 25-30% to 20%.

Value Chain Position

Exxon Mobil spans the oil and gas value chain:

• Upstream: Extracts crude and gas, competing on cost curve position and technology (e.g., fracking, seismic modeling).
• Midstream: Limited direct ownership; relies on third-party pipelines (MLPs) for transport.
• Downstream: Refines crude into usable products, adding value through processing and reliability.
• Chemical: Converts feedstocks into high-margin petrochemicals, leveraging integration with refining.
• Marketing: Minimal direct retail; gas stations are franchised, focusing on wholesale distribution.

GTM Strategy: Sells commodities to refiners, wholesalers, and industrial clients, leveraging scale and reliability. Integration ensures supply chain control but adds complexity.

Competitive Advantage: Scale, operational expertise, and low-cost asset focus historically drove value. Recent missteps diluted upstream advantage.

Customers and Suppliers

• Customers: Refiners, wholesalers, industrial firms, and governments. No significant concentration due to commodity markets.
• Suppliers: Equipment providers, service firms (e.g., drilling rigs), and landowners for acreage. Upstream relies on technology and service partners; downstream on crude supply (internal and external).

Pricing

• Upstream: Market-driven (WTI/Brent, $69-$71/bbl). No long-term contracts; spot pricing dominates.
• Downstream: Margin-based, with spreads ($5-10/bbl) varying by crude type and product demand.
• Chemical: Market-driven, tied to global supply-demand and feedstock costs.
• Drivers: Commodity prices, supply-demand dynamics, and operational efficiency. No significant branding or differentiation; mission-criticality ensures demand.

Bottoms-Up Drivers

Revenue Model & Drivers

• Upstream: Revenue = Volume (2.3M bbl/day oil, 9B cf/day gas) × Price ($69-$71/bbl, $2-4/MMBtu gas). Sensitive to price swings and production efficiency.
• Downstream: Revenue = Refining volume × Margin. Margins volatile, driven by crude-product spreads and utilization rates.
• Chemical: Revenue = Volume × Price, with pricing tied to industrial demand and feedstock costs.
• Aftermarket: Minimal; no significant recurring revenue post-sale, unlike equipment industries.
• Volume Drivers: New field development, technology (e.g., fracking), and asset optimization. Shale boom missed initially but now a focus.
• Pricing Drivers: Global supply-demand, OPEC actions, and geopolitical factors. No pricing power due to commodity nature.
• Mix: Upstream dominates, but downstream/chemical stabilize during price downturns. Geo shift to U.S. (Permian) ongoing.

Cost Structure & Drivers

• Variable Costs:
• Upstream: Lifting costs ($6-10/bbl), drilling, and acreage acquisition. Varies by field productivity.
• Downstream: Crude feedstock costs (majority), energy, and chemicals for refining.
• Chemical: Feedstock and energy costs.
• Drivers: Commodity input prices, field efficiency, and technology adoption (e.g., fracking reduced costs).
• Fixed Costs:
• Upstream: Exploration, seismic modeling, and infrastructure (pipelines, rigs).
• Downstream: Refinery maintenance, labor, and overhead. High fixed costs (~70% of total) limit flexibility.
• Chemical: Plant maintenance and R&D.
• Drivers: Scale economies, operational efficiency, and capex cycles.
• Cost Analysis:
• % of Revenue: Upstream variable costs ~20-30%, fixed ~30-40%. Downstream variable ~60-70% (crude), fixed ~20-30%. Chemical similar to downstream.
• % of Total Costs: Fixed costs dominate (~60-70% group-wide), providing operating leverage but requiring high utilization.
• EBITDA Margin: 20%, down from 25-30% historically. Margin expansion requires low-cost upstream assets and refining efficiency.

FCF Drivers

• Net Income: Driven by EBITDA ($50 billion) less interest, taxes, and depreciation. Commodity volatility impacts predictability.
• Capex: High, supporting exploration, drilling, and refinery upgrades. Maintenance capex significant; growth capex (e.g., Permian) critical for volume.
• NWC: Inventory and receivables cycles tied to commodity prices. Cash conversion cycle moderate due to quick turnover.
• FCF: Likely constrained by capex and dividends, with improvement tied to ROCE recovery and divestitures.

Capital Deployment

• M&A: XTO acquisition ($45 billion) was a high-profile failure, overpaying for shale gas assets. Future M&A likely focused on Permian or low-cost fields.
• Buybacks/Dividends: Historically prioritized dividends; buybacks reduced post-downturn.
• Organic Growth: Investments in Permian Basin and high-return assets to replace depleting fields.
• Synergies: Limited M&A synergies due to commodity nature; focus on operational efficiency.

Market, Competitive Landscape, Strategy

Market Size and Growth

• Global Oil Market: 100M bbl/day, ~$2.5 trillion at $70/bbl. Exxon’s 2% share (2.3M bbl/day).
• Growth: 1-2% annually, driven by population and economic growth in developing nations (e.g., Africa, India).
• Price Growth: Volatile, tied to OPEC, geopolitics, and supply-demand. Recent range: $50-80/bbl.
• Industry Drivers: Population growth, GDP growth, urbanization, and energy access for ~2 billion underserved people.

Market Structure

• Competitors: Thousands, including state-owned (Saudi Aramco, 8-9M bbl/day) and super majors (Chevron, Shell, BP, Total). Fragmented but consolidating.
• MES: High due to capital intensity, favoring large players. Maximum competitors = Market Size / MES (~100M / 1M bbl/day = ~100 viable players).
• Cycle: Post-15-year downturn (2006-2020); potential upcycle starting 2021 due to underinvestment.
• Traits: Cyclical, capital-intensive, regulated, and sensitive to ESG/climate pressures.

Competitive Positioning

• Matrix: Competes on cost curve position and scale, targeting low-cost upstream assets and efficient refining.
• Disintermediation Risk: Low; scale and expertise deter new entrants.
• Market Share: 2% globally, significant among private producers. Losing ground to Chevron and Total.

Competitive Forces (Hamilton’s 7 Powers)

1. Economies of Scale: High MES favors Exxon’s integrated model, but legacy structure adds complexity. Diseconomies possible if mismanaged.
2. Network Effects: None; commodity markets lack customer lock-in.
3. Branding: Weak; Exxon’s brand tied to reliability, not consumer loyalty.
4. Counter-Positioning: Missed shale revolution, lagging peers like Chevron in adopting new technologies.
5. Cornered Resource: Access to Permian Basin and global assets, but XTO misstep diluted advantage.
6. Process Power: Historical strength in optimizing fields and refineries; weakened by centralized decision-making.
7. Switching Costs: Low; customers (refiners, wholesalers) switch based on price.

Strategic Logic

• Capex Bets: Shift to Permian Basin and low-cost assets; divest high-cost fields (e.g., oil sands, Russia).
• Vertical Integration: Legacy model ensures supply chain control but less critical today. Focus on upstream profitability.
• M&A: Cautious post-XTO; potential for bolt-on Permian acquisitions.
• Geo Expansion: U.S.-centric shift post-shale; selective international exposure.

Unique Business Model Dynamics

Exxon Mobil’s integrated model is both its strength and a legacy burden. Unlike pure-play E&P firms (e.g., ConocoPhillips) or refiners (e.g., Valero), Exxon’s end-to-end presence mitigates commodity price volatility but dilutes focus. Key dynamics include:

• Capital Intensity: Upstream requires massive capex for exploration and drilling, with long payback periods. Downstream’s high fixed costs (refineries built pre-1976) limit flexibility but enable scale economies.
• Commodity Exposure: Upstream drives 70-75% of EBITDA, making Exxon a bet on oil prices despite diversification. Downstream margins (~$5-10/bbl) stabilize but rarely outperform.
• Asset Depletion: Oil fields naturally decline (5-30%/year), requiring constant reinvestment. Exxon’s failure to pick “golden goose” assets (e.g., XTO, oil sands) eroded ROCE.
• Centralized Decision-Making: The “God pod” culture ensured discipline under Lee Raymond but stifled adaptability post-2003, leading to groupthink and missteps.
• ESG/Climate Tension: Exxon’s focus on being the “best oil company” contrasts with peers like BP, which pivot to renewables. This bet hinges on sustained oil demand from developing nations.

Standout Insights:

• Historical Resilience: Exxon’s 150-year dominance through wars, embargoes, and cycles highlights its ability to adapt—until recently. Its fall from top-tier ROCE (15-30%) to average (~10%) underscores the cost of strategic inertia.
• XTO Misstep: The $45 billion acquisition at peak valuation, misjudging shale gas prices and field costs, was a rare deviation from ROCE focus, signaling cultural rigidity.
• Shale Catch-Up: Missing the shale boom due to overseas focus pre-2010 was a critical error. Exxon’s scale now aids Permian optimization, but peers like Chevron lead.
• Refining Legacy: No new U.S. refineries since 1976 highlight high fixed costs and barriers to entry, making Exxon’s downstream a stable but low-margin anchor.

Valuation and Outlook

• Valuation: $250 billion market cap, ~5x EBITDA ($50 billion). Low multiple reflects commodity risk and ESG concerns, but potential upcycle could lift valuations.
• Bull Case: Market cap doubles to $500 billion in 10 years if Exxon restores 15-20% ROCE via Permian focus, divestitures, and tighter oil markets from underinvestment. EBITDA could reach $75-100 billion with margin expansion to 25%.
• Bear Case: Market cap halves to $125 billion if oil demand falls rapidly (e.g., BP’s rapid adoption scenario) or Exxon fails to divest high-cost assets, keeping ROCE at ~10%. EBITDA could stagnate or decline.

Conclusion

Exxon Mobil’s business model, built on scale and integration, thrived for over a century by mastering low-cost production and operational efficiency. Its recent struggles stem from poor capital allocation (e.g., XTO, oil sands) and a centralized culture that missed the shale revolution. The upstream segment drives profitability, but its commodity exposure and depleting assets demand constant reinvestment. Downstream and chemical segments stabilize but lack growth. Fixing ROCE through Permian focus and divestitures is critical, with ESG pressures and oil demand trends shaping the next decade. Exxon’s story is a lesson in balancing legacy strengths with adaptability to structural shifts.