exxonmobil paper

MGMT 619: Capstone

Spring 2011

Prof. Darrel Mank

Prepared by:

Kannan Ananthanarayanan

Pranav Bhajiwala

Foram Gandhi

Kristine Garner

Rajesh Goudar

Venkat Iyer

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1. WALL STREET JOURNAL ARTICLE AND THE EXECUTIVE SUMMARY............................................................................ 1

WALL STREET JOURNAL ARTICLE......................................................................................................................................................1

EXECUTIVE SUMMARY ...................................................................................................................................................................2

Major Issues ........................................................................................................................................................................2

Key Analysis.........................................................................................................................................................................3

Final Recommendation .......................................................................................................................................................4

2. EXTERNAL ANALYSIS................................................................................................................................................ 5

INDUSTRY DEFINITION ...................................................................................................................................................................5

SIX FORCES ANALYSIS ....................................................................................................................................................................5

Level 3 Industry Attractiveness ...........................................................................................................................................5

Level 2 Analysis ...................................................................................................................................................................6

Upstream ........................................................................................................................................................................................... 6

Downstream Oil ................................................................................................................................................................................. 8

Chemical............................................................................................................................................................................................. 9

Level 1 Analysis .................................................................................................................................................................10

MACRO ENVIRONMENTAL FORCES ANALYSIS, ECONOMIC TRENDS AND ETHICAL CONCERNS .....................................................................10

Upstream and Downstream Oil and Natural Gas ............................................................................................................................. 10

Petrochemical Industry .................................................................................................................................................................... 14

COMPETITOR ANALYSIS ...............................................................................................................................................................15

Firms Competitors .............................................................................................................................................................15

Oil Industry....................................................................................................................................................................................... 15

Natural Gas Industry ........................................................................................................................................................................ 16

Chemical Industry............................................................................................................................................................................. 16

Primary Competitors .........................................................................................................................................................16

Oil ..................................................................................................................................................................................................... 16

Natural Gas....................................................................................................................................................................................... 17

Chemicals ......................................................................................................................................................................................... 17

Primary Competitors’ Business Level and Corporate Level Strategy .................................................................................17

How Competitors Achieve Their Strategic Position ...........................................................................................................18

Value – Cost Profile ...........................................................................................................................................................19

INTRA‐INDUSTRY ANALYSIS...........................................................................................................................................................19

Strategic Group Overview .................................................................................................................................................20

Strategic Group Analysis ...................................................................................................................................................20

Technology & Innovation ................................................................................................................................................................. 21

Industry Key Success Factors (KSFs) ..................................................................................................................................22

SWOT Analysis...................................................................................................................................................................24

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Oil Industry....................................................................................................................................................................................... 24

Natural Gas Industry ........................................................................................................................................................................ 25

COMPARATIVE FINANCIAL ANALYSIS...............................................................................................................................................26

SUMMARY OF EXTERNAL ANALYSIS ................................................................................................................................................29

3. INTERNAL ANALYSIS .............................................................................................................................................. 30

BUSINESS DEFINITION/MISSION....................................................................................................................................................30

ORGANIZATION STRUCTURE, CONTROL AND VALUES .........................................................................................................................31

Organization Structure......................................................................................................................................................31

Controls .............................................................................................................................................................................31

Values................................................................................................................................................................................31

Ethical Standards and practices ........................................................................................................................................32

STRATEGIC POSITION DEFINITION ..................................................................................................................................................33

Business Portfolio..............................................................................................................................................................33

Corporate Strategy............................................................................................................................................................33

Business Portfolio Performance ........................................................................................................................................33

Acquisitions .......................................................................................................................................................................34

Divestiture.........................................................................................................................................................................35

Joint Venture and Alliances ...............................................................................................................................................35

BCG Matrix ........................................................................................................................................................................36

Business Strategy Mix .......................................................................................................................................................36

BUSINESS LEVEL STRATEGY...........................................................................................................................................................37

Growth Strategy................................................................................................................................................................37

Implications of Strategic move on Business and Growth Strategy....................................................................................37

Implications of Strategic move on Business Investment ...................................................................................................38

RESOURCE AND CAPABILITIES ........................................................................................................................................................38

VRIO Analysis: ...................................................................................................................................................................39

Value Drivers: ....................................................................................................................................................................39

Cost Drivers .......................................................................................................................................................................40

Implications of Strategic move on Value‐Cost Profile .......................................................................................................41

Value Chain Synergies .......................................................................................................................................................41

Customer retention ...........................................................................................................................................................42

Segmentation, Targeting and Positioning.........................................................................................................................42

Value to Customers ...........................................................................................................................................................42

Marketing Mix...................................................................................................................................................................42

FINANCIAL ANALYSIS ...................................................................................................................................................................43

Valuation of ExxonMobil ...................................................................................................................................................44

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Forecasting Model for Scenario Analysis ..........................................................................................................................45

Scenario Analysis...............................................................................................................................................................46

Scenario Analysis Details...................................................................................................................................................46

Sensitivity Analysis ............................................................................................................................................................47

4. ANALYSIS OF THE EFFECTIVENESS OF STRATEGY .................................................................................................... 48

GOODNESS OF FIT TEST ...............................................................................................................................................................48

COMPETITIVE ADVANTAGE TEST....................................................................................................................................................48

PERFORMANCE TEST ...................................................................................................................................................................48

5. RECOMMENDATIONS ............................................................................................................................................ 49

SHORT‐TERM RECOMMENDATION..................................................................................................................................................49

LONG‐TERM RECOMMENDATIONS..................................................................................................................................................52

6. CONCLUSION......................................................................................................................................................... 54

COMPANY PROSPECTS.................................................................................................................................................................54

INVESTMENT ADVICE...................................................................................................................................................................54

7. MAIN APPENDIX.................................................................................................................................................... 55

8. FINANCIAL BACKGROUND APPENDIX..................................................................................................................... 83

9. GLOSSARY OF TERMS........................................................................................................................................... 108

10. END NOTES...................................................................................................................................................... 110

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1. Wall Street Journal Article and the Executive Summary

Wall Street Journal Article

The strategy analysis of ExxonMobil is based on two Wall Street Journal articles: “Exxon

Sees Burgeoning Demand for Natural Gas,” dated 27 January 2011, and “Exxon Tilts Again

Toward Oil Production,” dated 10 March 2011.

ExxonMobil Sees Burgeoning Demand for Natural Gas

ExxonMobil raised market expectations for its revenue growth when it stated that the

demand for natural gas in heating homes and businesses and for generating electricity will grow

by two percent annually between now and the year 2030. This statement, along with the

company’s recent acquisition of XTO Energy for $25 billion, shows the company’s belief in and

commitment to its energy outlook.

ExxonMobil Tilts to Oil Again

The political turmoil in the Middle East, particularly in Libya, has limited the current supply

of oil, resulting in oil prices topping $100 per barrel, whereas the price for natural gas has

slumped, due to an abundance of new reserves. An article from March 2011 relays

ExxonMobil’s decision to reverse course from its January position, and throw more weight

towards oil production, stating that the majority of the company’s production over the next five

years will be heavily oil. This position is seemingly in contradiction to the article mentioned

previously, dated 27 January 2011, in which ExxonMobil announced its increased focus on

natural gas. More specifically, ExxonMobil plans to boost its capital spending in 2011 by six

percent, of which eighty percent of the new production will come from crude oil, bucking the

recent industry trend of increasing production in natural gas.1

The strategic move outlined in both the articles warrants an analysis on ExxonMobil’s short-

term and long-term strategy, and associated competitive, operational and financial implications.

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Executive Summary

Energy is the most fundamental resource that fuels the entire globe. The Energy sector is of

international importance and is widely followed by many national and international

organizations. ExxonMobil, the world’s largest public company in market capitalization, is the

benchmark for companies operating in the Oil & Gas Industry. The actions of industry leaders

like ExxonMobil are closely watched by the entire global Oil & Gas Industry ecosystem.

ExxonMobil recently announced that, “the vast majority of its new production over the next

five years will be oil,” and that it will “increase capital spending on finding and refining energy

to $34 billion this year.”2 This announcement came within months after spending $25 billion in

acquiring XTO, a leading natural gas player.

Given the company’s recent energy outlook report predicting natural gas to be the number

two global energy source by 203016 and its recent acquisition of XTO, ExxonMobil’s tilt towards

oil appears to be a significant strategic move.

Major Issues

ExxonMobil’s strategic move raises a set of critical questions, including the obvious ones:

Are the recent moves of betting big on natural gas and immediately committing to pour a vast

amount of resources to produce oil in the next five years strategically consistent?; Should

ExxonMobil increase its investment in oil, or should it step up its commitment to natural gas

more than ever?; Is ExxonMobil’s action going to help it maintain its leadership, or will this

move give its competitors an opportunity to overthrow ExxonMobil’s dominance?

With rising oil prices and an oversupplied natural gas market, current economics clearly

favors oil production over natural gas production. However, conventional oil reserves are

dwindling, with companies struggling to find new oil; this is recently illustrated by the

unfavorable spotlight that was thrown on ExxonMobil regarding its dubious reserve replacement

ratio. This raises more questions needing to be address: How will ExxonMobil be able to

successfully execute on its mission to produce more oil?; What type of new technological

innovations and infrastructure and process improvements are required to succeed?; What

geopolitical, regulatory and environmental challenges must ExxonMobil overcome to profitably

execute its commitment?

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Key Analysis

Global energy demand is expected to increase 35 percent by 2030.16 The demands for

transportation, residential and commercial use are all expected to rise in the next two decades;

however, the growth rate of the current energy supply is not expected to keep pace with

increasing demand, calling for investment in the discovery and production of energy from all

types of sources.

The natural gas market is currently oversupplied, keeping the price of natural gas low,

resulting in a lower level of sustained profitability. Additionally, the adoption of natural gas

across the globe is part of a very long-term strategy. As the adoption of natural gas increases, it

should drive the prices for natural gas up, making the investment more financially attractive in

the long run.

The energy industry is a mature industry with conventional, fossil-fuel-based energy sources,

such as oil and coal, dwindling slowly. While the supply of conventional light crude oil is

declining, there is still an estimated three trillion barrels of heavy crude oil in the world, equaling

approximately 100 years of global consumption at current levels3. Current technology allows

only a fraction of heavy crude oil (400 billion barrels) to be recovered cost effectively3.

Therefore, boosting investment in unconventional oil exploration and processing technology is

important to building a sustainable competitive advantage. The total cycle for producing oil is

between two and five years for already developed fields, and seven to twelve years in unproven

fields4, so investments in technology need to be far in advance. Currently, the technologies to

extract oil from unconventional sources are not yet fully developed.

Though the goals of “supermajor” oil companies are essentially the same, there is a sharp

contrast in strategy. ExxonMobil made less investment to grow organically and has relied on its

XTO acquisition to boost its reserves; whereas Chevron has spent a significant amount in capital

projects with unwavering commitments to oil. ConocoPhillips, on the other hand, is divesting its

non-core assets to build necessary capital to invest in liquids. Competitors are stepping up their

oil investments, and ExxonMobil should not see itself at a competitive advantage by not acting

swiftly.

ExxonMobil is a long-term oriented company, and as such, it is not unusual for ExxonMobil

to invest in a long-term prospect like XTO, where it can acquire growth cost effectively,

especially in light of the company’s strategic intent to be the leading supplier of global energy.

4

Our analysis suggests that the recent move of focusing on oil for next five years is well aligned

with ExxonMobil’s energy outlook and investments in natural gas. They both are part of a well-

balanced strategy that caters to short-term as well as long-term strategic needs.

Final Recommendation

We recommend the following short-term actions:

1. Increase investments in oil exploration, production and refining

2. Expand chemical operations, especially in emerging markets

3. Focus on increasing commercial sales and retrenching retail sales

We also recommend the following long-term actions:

A. Increase investments in natural gas exploration and production

B. Invest in technology that would enable the company to explore, produce and refine heavy

crude efficiently

C. Invest in renewable energy sources to assert its corporate and social responsibility

D. Continue to improve ethical operating standards to be the recognized leader in the industry

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2. External Analysis

Industry Definition

ExxonMobil (XOM) is a major integrated Oil & Gas (O&G) company with operations in oil

and gas exploration & production, refining, and marketing oil and chemicals.

The Oil & Gas industry value chain5 is as follows:

The entire Industry value chain is broken into three main sections: Upstream, Mid-stream and

Downstream.

Upstream: This part of the value chain is also called Exploration & Production (E&P). The

global E&P market is focused on searching and exploration of oil and gas reserves around the

planet.

Mid-Stream: Oil and gas produced from E&P operations is collected and delivered to a

processing plant, where it is further refined and processed. The midstream industry stores and

transports the finished products to the Downstream industry.

Downstream: The Downstream oil sector industry refines the crude and distributes and sells the

end products in the market.

Six Forces Analysis

Level 3 Industry Attractiveness

Upstream is a moderate to highly attractive industry with a low threat of substitutes, low

threat of new entrants, and moderate supplier and buyer powers. Competition in this industry is

high.

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Downstream is moderately attractive with a low threat of substitutes, low threat of new

entrants, moderate buyer power, and high competition. Vertical integration (i.e. backward

integration) can enable Downstream manufacturers to have a constant supply of crude oil. The

industry attractiveness is higher for integrated oil and gas manufacturers compared to non-

integrated companies due to the role of complements.

Chemical is moderately attractive with a low threat of new entrants, moderate buyer power,

and moderate competition. As stated previously, vertical integration (backward integration) can

enable Downstream manufacturers to have a constant supply of crude oil, and the industry

attractiveness is higher for integrated oil and gas manufacturers compared to non-integrated due

to the role of complements. Exhibit 1 summarizes the industry attractiveness for all business

segments.

Level 2 Analysis

Upstream

Firms in this industry operate and develop oil and gas fields. Activities include: the

exploration and production of crude petroleum; the mining and extraction of oil from oil shale

and oil sands; the exploration and production of natural gas; sulfur recovery from natural gas;

and recovery of hydrocarbon liquids. Firms may operate oil and gas wells on their own account

or for others on a contract or fee basis.6

Supplier Power:

Suppliers are mining and drilling equipment manufacturers. They provide support services

on a fee or contract basis. The demand for oil drilling rises as the price of crude oil rises. As the

demand rises, suppliers can charge a higher price per hour; hence, supplier power is cyclical. In

an up cycle, the suppliers have power; in a down cycle, suppliers see their power lesson.7

Pipe and tube supplier for oil and gas transportation: New oil and gas drilling requires new

pipelines for transporting oil and gas.7 However, since domestic and international competition is

high and the industry is heavily regulated, pipe manufacturers do not exert any pricing pressure

on the oil and gas drilling companies7.

Pumping equipment: Pumping equipment is used to extract oil from the ground.8

Compressors are used to prepare gas for storage and transportation8. These manufacturers do not

exert pricing power on the drilling companies due to high competition and fluctuating demand.

7

Buyer Power:

About 65 percent of output goes to refiners and 14 percent goes to the natural gas distribution

industry, making refiners the key buyers of crude oil.6

Oil Refiners: Since crude oil is a globally traded commodity, buyers favor the provider which

is closest since they have to bear the shipping costs.6 The buyer cannot force the Upstream

supplier of crude oil to reduce the price unless the global demand for oil and gas goes down.

However, the price also depends on the grade of oil (heavy versus light) and impurities

(governed by the amount of sulfur in oil). A lower level of impurities translates into the lower

operating costs for petroleum refiners and also makes complying with environmental regulations

easier. Light crude is easier to refine into gasoline and can be used to make a greater variety of

products; therefore, light crude is naturally more expensive than heavy crude. Refiners have

fixed capacity and are cost-wise better off running their plants at fixed capacity than by keeping

the plant idle and not buying crude in a high business cycle;6 as such, refiners cannot put too

much pressure on drilling companies.

Cyclical demand: If the price is high to the extent that demand goes down, then price goes

down. During a down cycle, the buyer has power and vice versa.

Natural Gas Distributors: The firms in the Natural Gas Distribution industry provide

transport (via pipelines)6. They have to buy gas from the drilling companies at the market price.

Competition in the industry is moderate and does not give these distributors any bargaining

power.

Cyclical demand: If the price is high to the extent that demand goes down, then price goes

down. During a down cycle, the buyer has power; during an up cycle, the buyer experiences less

power. Currently, supply is up, bringing prices down.

Threat of New Entrants:

Risks involved in oil and gas exploration: Out of all the oil fields an oil company researches,

only 10 percent go into production9.

Capital required to bring fields into production: This depends on the price of an oil rig

rental (per day basis). Deep-water drilling rates are around $420,000 a day; for 100 days, the

cost can be around $420 million10.

Regulation: Environmental regulations force companies to reduce emissions, which can be

very expensive. The oil spill in the Gulf of Mexico resulted in the U.S. Government issuing an

order to stop any kind of oil drilling in the area. A new entrant should be able to absorb this

sudden stoppage in drilling activity, and would need to look for newer avenues for exploring.

8

Undertake sensitive negotiations with governments: Major oil and gas companies have

operations globally, and need to be in constant negotiations with the governments of those

countries in which they operate in order to continue doing business in those regions6.

Threat of Substitutes:

In 2009, nuclear energy accounted for about 9 percent of energy supply and renewable

energies accounted for 8 percent of the supply.11 In 2035, the nuclear energy use is expected to

go down to 8 percent, and renewable energies are expected to provide 10 percent of the total

energy consumption.11 As fossil fuels still make up the vast majority of energy supply, the threat

of substitutes to fossil fuels is low.

Competition:

The industry has a high level of competitive rivalry. Based on the commodity nature of oil

and gas, there is little product differentiation that can be achieved. Customers generally prefer

purchasing oil from the oil company which is geographically closest to them since shipping costs

are paid by the customers6. There are five major players in oil (ExxonMobil, British Petroleum,

Shell, ConocoPhillips, and Chevron) and share nearly equal market share (2.7 percent for

ExxonMobil and 10.3 percent for Chevron)6. The major players in natural gas are Chesapeake

Energy, Anadarko, Devon, BP, EnCana, ConocoPhillips, Chevron and Shell.

Complements:

Any integration that Upstream can achieve in its value chain is a good complement in terms

of having a market ready to process the supplies when oil prices are high.12

Downstream Oil

Petroleum refiners manufacture a number of products from crude oil, the two most important

of which are gasoline and diesel.6

Supplier Power:

The suppliers in Downstream are the Oil and Gas drilling companies, who explore and

produce crude oil. Their biggest cost is the cost of obtaining crude oil, and they tend to keep their

production at the same level to utilize maximum capacity. Suppliers have high-moderate power

since they can control their production to some extent.6

Cyclical supplier power: If the price is high to the extent that demand goes down, then price

goes down. The supplier’s power moves with demand and price, increasing as demand and price

go up.

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Buyer Power:

Key buying industries are households, commercial transportation, international and domestic

airlines in the U.S., and Marine.6

Cyclical Demand: Buyers have no bargaining power in an up cycle and will have to pay the

price that refiners demand. In a down cycle, buyers have power and can bargain on price since

demand is low; refiners have to reduce output which will make inefficient use of their plants,

causing losses.

Threat of New Entrant:

The refining industry is capital intensive due to the costs to meet environmental regulations

and to construct and maintain refineries. The low returns and government regulation act as

deterrents to new entrants.6


There really is no substitute for refineries. Although large refiners have operations overseas,

domestic production is processed in local refineries.6

Competition:

There is intense competition in the refining industry. The Nelson Complexity Iindex, a

broad-based tool to measure the value-added nature of a refinery, assigns higher values to

refineries that can process undesirable fuels into high-quality end products. There are five major

competitors (Chevron, Marathon Oil, Valero, ExxonMobil and ConocoPhillips). They have

nearly equal market share and dominate the industry.6

Complements:

For Integrated Oil companies, vertical integration lets them sell their Upstream product

directly Downstream without involving distributors. This reduces cost and increases profit

margin. Thus, having a vertically integrated Downstream sub-segment ensures a steady supply of

oil.

Chemical

Supplier Power:

Petrochemical manufacturers use crude oil, refined oil and natural gas to produce

petrochemicals, and are affected by high prices in general.

Cyclical: Petrochemical manufacturers form a very small percentage of the output of the

refiners, crude oil producers and natural gas producers. However, when the business cycle is

high, the supplier has power and when the cycle is low, the supplier does not have power in

controlling price.

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Buyer Power:

Buyers of petrochemicals are plastic, rubber, and resin manufacturers, as well as other

petrochemical manufacturers who use the intermediate products. Petrochemical manufacturers

pass on their oil costs to buyers. Since demand goes down considerably during a downturn,

Petrochemical manufacturers suffer with excess capacity.13

Cyclical: During an up cycle, plastic and rubber manufacturers cannot bargain for price since

demand is high. However, during a down cycle, buyers get bargaining power.

Threat of New Entrants:

The chemical business is capital intensive. For example, a world-class ethylene plant can cost

more than $1 billion to construct.13 The thin profits margins discourage new entrants. However,

internationally, China, Korea and Saudi Arabia are trying to enter the market13 since they can

have higher margins due to lower labor costs.


Environmental awareness amongst consumers to use environmentally friendly products

instead of plastic may also influence the level of demand.13

Competition:

There are two major U.S. chemical manufacturers: Dow Chemicals and ExxonMobil. The

highest threat is the movement of production facilities overseas out of the U.S.13 Dow Chemicals

has 2.7 percent market share and ExxonMobil has 3.2 percent market share; BASF, DuPont, and

SBAIC are other chemical players in the international arena.13

Complements:

Many of the established players are part of integrated oil companies operating in integrated

oil refining and petrochemical complexes, a position that gives them a significant competitive

edge over potential stand-alone newcomers.13

Level 1 Analysis

A detailed Level 1 analysis can be found in Exhibit 2.

Macro Environmental Forces Analysis, Economic Trends and Ethical Concerns

Upstream and Downstream Oil and Natural Gas

Economic:

Historically the profitability of the oil and gas companies is tied to the strength of the

economy. The demand for petroleum products (and, by extension, for crude oil) is linked to the

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overall level of activity in the economy. A regression analysis spanning the past twenty years

indicates that the level of real gross domestic product (GDP) can explain about 95 percent of the

demand for crude oil in the United States6.

The natural gas price has historically moved very little. From 1984 to 2010, the price of

natural gas has gone from $3.95 to $6.16.14

Global:

Oil can be analyzed in terms of demand, supply and geopolitical factors. Oil is an

internationally traded commodity. Historically, OECD countries drive the demand for oil. North

America has historically had the largest demand for oil; in 2010 North America consumed 23.9

million barrel of oil per day. The second largest consumer is Europe with 14.4 million barrels

per day, and China and other Asian countries accounted for 9.4 and 10.4 million barrels per day,

respectively.15

On the supply side, OPEC is the highest supplier of crude oil with 40 percent of the world’s

daily supply coming from OPEC countries. Although the demand for oil is expected to increase,

the supply from non-OPEC countries is expected to remain constant16.

In 2005, domestic conventional supplies of natural gas made up for 80 percent of demand. It

is expected to change to 30 percent in 2030. In the future, unconventional gas extraction is

expected to grow to meet the growing demand in gas for electricity generation across the globe

and in North America and China16.

As the U.S. has been the major consumer of energy, a downturn in the U.S. economy sould

result in an oil price decrease. However, in future, non-OECD countries are going to drive the

demand for energy.11 By 2030, energy demand in non-OECD countries will be about 75 percent

higher than OECD demand. This will result in the U.S. no longer being able to put downward

pressure on oil in case they have an economic meltdown like the one in 2008. Therefore, the

drivers of oil price are going to change in the future.

Social/ Environmental:

Due to diminishing U.S. domestic supplies, oil companies resorted to deep water drilling.

Following the B.P. oil spill in the Gulf of Mexico, the U.S. Government put a ban on deep sea

drilling in the Gulf of Mexico.16 Since local oil companies rely heavily on local oil production,

this affects their ability to produce oil. Industry participants are subject to extensive federal, state

and local regulations and environmental laws that govern discharge of materials into the

environment including the emission of air pollutants and the discharge of water pollutants.

12

Industry participants are also subject to regulations governing the manufacture, storage, handling

and disposal of hazardous substances and waste and other toxic materials.6

Regulation in Oil and Gas Drilling: The Oil Drilling and Gas Extraction Industry is highly

regulated, with the federal and state governments being involved in all stages of production.

State governments determine which areas are open to oil exploration and extraction, issue

exploration and production leases, and enforce environmental legislation. The federal

government also maintains the Strategic Petroleum Reserve (SPR). This was established in 1977

in response to upheaval in the Middle East. The purpose of the reserve is to provide a stock of oil

that can be drawn down in the event of a major upheaval in the market.

In 2007, Congress passed the Energy Independence and Security Act, which contains

standards relating to producing a certain amount of renewable fuel (the renewable fuel standard

or RFS) and automotive standards to increase fleet gas mileage to 35 mpg by the year 2020.6

Political:

The geopolitical turmoil around the world affects the U.S. because although the U.S. is the

third largest crude oil producer, about half of the petroleum the U.S. uses is imported.11 (Canada

23.3 percent, Venezuela 10.7 percent, Saudi Arabia 10.4 percent, Mexico 9.2 percent, Nigeria

8.3 percent)6. Tensions sparked by perceived successful government transitions in Tunisia and

Egypt have caused a ripple effect throughout the Middle East. Oil prices rose substantially as

these tensions spread to other countries including Libya, Bahrain and Yemen. Speculation has

largely been behind the sharp crude oil price increase as traders believe that unrest in countries

near major oil producers may lead to actual supply disruptions. For instance, if Saudi Arabia

experiences significant unrest and its oil supply is threatened, prices may rise quickly as the

country is a major producer and exporter of crude oil.6

In the U.S. the major oil companies are vertically integrated and they control the oil prices.

The high profits are due to the mergers in the oil industry, which also has reduced competition17.

Technological:

New shale gas extraction technology enables oil and gas drilling companies to get new

regions to extract gas from. This has resulted in a U.S. shale gas production increase 14-fold over

the last decade, with reserves tripling over the last few years. Thirty percent domestic gas

production growth has outpaced the sixteen percent consumption growth, leading to declining

imports and declining prices of natural gas in the short term. China has obtained a stake in

Chesapeake in Texas, U.S. in order to gain access to explore shale gas drilling technology.18

Natural gas price projections are significantly lower than past years due to an expanded shale gas

13

resource base. Technology will continue to evolve and play a key role in increasing efficiency,

expanding supplies and mitigating emissions16

Since oil from conventional sources is diminishing, oil companies need to look at

unconventional and hard-to-extract locations to get oil. This has triggered technology innovation

in the Arctic regions, as well as deep-water drilling technology. There has been progress in

safety measures taken as well to prevent oil spills and corresponding environmental damage.16

Demographic:

The world population is growing and has grown from about 1 billion people in 1800 to

approximately 7 billion today. By 2030, world population is likely to grow to 8 billion. A

century ago, wood and coal were the most prominent sources of energy. Today, access to

modern technology contributes to growth in demand and supply of oil and natural gas. Another

factor that contributes to the growth in demand for energy is the standard of living of people

across the globe. As standard of living improves, the demand for energy per capita increases.

Since global population growth is greater in non-OECD countries, the growth in standard of

living is an important factor in determining the growth of demand for energy. 16

Ethical:

Various theories hold that burning fossil fuels like oil and gas have large environmental

impacts due to resulting emissions. Emissions from burning fossil fuel can also cause air

pollution, which may have harmful effects on people’s health through breathing impure air.19

Although natural gas burns cleaner, the technology used to extract natural gas can cause more

greenhouse-gas emissions than the use of coal or oil.20

Forecasted Oil demand:

The U.S. Energy Information Administration (EIA) projects that net imports of U.S. crude oil

and petroleum products will only slightly increase in 2035 in spite of the growth in demand.

U.S. petroleum import dependence falls from 51 percent in 2009 to 45 percent by 2035 in EIA's

reference case projection.11

Non-OECD demand for oil is expected to raise above the OECD countries. 11

Total global energy use in 2010 has been 500 quadrillion BTUs with oil being the major source

of energy. Forecasted U.S. energy consumption in 2030 is 650 quadrillion BTUs, with oil still

dominating as a source of energy. Energy efficiency gains reduce consumption by 13 percent

from where it would otherwise be.11 Please see Table 1 for a summary of the forecasts of energy

demand by energy source.

14

Table 1: Energy Demand in past and forecast11

Source Percentage demand in 2010 Percentage demand in 2030Petroleum 32% 30%

Natural gas 22% 25%

Coal 25% 22%

Nuclear 8% 10%

Hydro 2% 2%

Other Renewable 1% 2%

Biomass Waste 10% 9%

Forecasted Natural Gas Demand:

Natural gas consumption is driven by Industrial use (35 percent) and central electric power

(29 percent).11 Hence, any increase in demand for electricity will result in increase in demand

for natural gas. Currently, coal dominates as the major supplier of electricity. By 2030, natural

gas is expected to outstrip the use of coal.16

Petrochemical Industry

Petrochemicals play an important role in the U.S. economy since many of the goods

produced by petrochemical manufacturers are fundamental building blocks used in the

production of a variety of consumer and industrial products. Therefore, petrochemicals are

affected by their production volatility, as well as the prices of oil and gas, which are used as raw

materials to produce the intermediary.13

Economic:

The same factors that affect oil and gas are those that affect petrochemical.

Global:

U.S. producers are being adversely affected by the development of large-scale, low-cost

export-oriented plants located in the Middle East; Saudi Arabia’s ethylene capacity alone more

than doubled between 1990 and 2001 to 5.4 million metric tons, and by 2005 had increased again

to reach 7.7 million metric tons. South Korea and China have also invested considerable

resources in growing their petrochemical industries to become significant petrochemical

exporters.13

Social/Environmental:


Political/ Regulatory:


15

Technological:

The technology used in this industry has been fairly static over the past ten years. Most of the

technological development has been aimed towards increasing the efficiency of the production

process and the manufacturing assets of the participant.13

Ethical:


Demographic:


Forecasted demand:

In the five years from 2011 to 2016, the Petrochemical Manufacturing industry demand is

expected to grow by an estimated 4 percent per year.21

Competitor Analysis

ExxonMobil operates in three major industries: oil, natural gas, and chemicals. Since the

dynamics, opportunities, and challenges in each are very different, the competitors in each

industry are analyzed separately.

Firms Competitors

Oil Industry

The world oil market is dominated by government-controlled companies that actually control

the majority of both current production (more than 52 percent in 2007) and proven reserves (88

percent in 2007).22 The companies operating in the world oil market can be broadly classified

into three categories:

National oil companies that function as corporate entities but have strategic and

operational autonomy and support of national governments. Examples are: Petrobras

(Brazil), Statoil (Norway), PetroChina (China), and ONGC (India).

National oil companies that operate as an extension of the government – Saudi Aramco

(Saudi Arabia), Pemex (Mexico), and PDVSA (Venezuela). They support their respective

government’s programs like subsidizing fuels to domestic consumers.

Investor-owned oil companies (ExxonMobil, Shell, and BP) form a relatively smaller

segment of the world oil market and sell their output in competitive markets.

ExxonMobil is the largest among the six big non-state owned, vertically integrated oil

companies, popularly known as “Big Oil” (or “supermajors”) companies; the others in this

16

category are Royal Dutch Shell, BP, ConocoPhillips, Chevron, and Total S.A. In addition, there

is increasing competition from national oil companies like Saudi Aramco, Gazprom and China

National Petroleum Corporation (CNPC). Though the big oil companies have the technological

know-how and large assets at their disposal, they are at a disadvantage when it comes to access

to oil reserves, as OPEC controls the majority. Access to high growth markets in non-OECD

countries is difficult as these markets are already served by incumbent, local, state-owned

companies like Petrobras in Brazil, Oil and Natural Gas Corporation (ONGC) in India, and

PetroChina in China.

Natural Gas Industry

Though the oil business has been dominated by the Big Oil companies, the natural gas

business in the U.S. was, until recently, managed by small, independent, non-integrated

companies.23 With replacement ratios for oil dropping and the oil-rich regions becoming more

politically unstable, Western oil companies are scrambling to find new ways to address growing

energy demand. Big Oil companies started foraying into natural gas, an adjacent market.

Globally, there are big state-owned companies. Gazprom, of Russia, has 17 percent of the

world’s natural gas reserves.24 ONGC is an Indian state-owned oil and gas company that

contributes 81 percent of India's natural gas production.25 The Chinese market is dominated by

three local companies: China National Offshore Oil Corporation (CNOOC), CNPC (parent of

PetroChina), and China Petrochemical Corporation (parent of Sinopec). The natural gas market

is highly fragmented, with dominant players in each region and no single company having

control over multiple geographies.

Chemical Industry

ExxonMobil also manufactures and sells commodity petrochemicals and a wide variety of

specialty products. The competitors for ExxonMobil in this market are: BASF (Germany), Dow

Chemical, Ineos (UK), Saudi Basic Industries Corporation, DuPont and Chevron Phillips

Chemical Company LLC (CPChem).26

Primary Competitors

Oil

The primary competitors for ExxonMobil in the oil industry are the other Big Oil companies:

Shell, BP, ConocoPhillips, Chevron, and Total S.A. See Exhibit 3 for a detailed comparison of

competitors. The common trend across all competitors is the rise in production of natural gas.

17

This indicates that the Big Oil companies are now adjusting their energy portfolio to account for

the depleting oil reserves. ExxonMobil’s jump in production of natural gas in 2010 is attributed

to the acquisition of XTO. ConocoPhillips, in particular, is seeing its overall replacement ratios

falling and a drop is seen both in oil and natural gas.

Natural Gas

The primary competitors for ExxonMobil are Chesapeake Energy, Anadarko, Devon, BP,

EnCana, ConocoPhillips, Chevron and Shell (see Exhibit 4). Rapid consolidation in the natural

gas industry is occurring of late, with large oil companies snapping up companies or resources

from smaller and mid-sized companies. More details can be found in Exhibit 5.

Chemicals

BASF is the world’s largest chemical company. In addition to a wide variety of chemical

products, BASF also has interests in oil and gas through its subsidiary Wintershall AG and joint

ventures with Gazprom.27 Dow Chemical is the second largest chemical company worldwide.28

ExxonMobil Chemical ranks first or second in the production of many petrochemicals. It is

active in all aspects of hydrocarbon industry, has integrated plants with its refineries and has

high-level joint ventures making it highly competitive.29 Ineos, the U.K.’s largest chemicals

company, is formed from divested assets from BP, Dow Chemical, BASF, and Unilever.

Privately held, it is also known to have a lean management team.30 Saudi Basic Industries

Corporation (SABIC) is owned 70 percent by the Saudi government and processes the huge

amount of Saudi Arabian oil byproducts into chemicals.31 DuPont was one of the most

diversified chemicals company and is now slimming down to focus on biotech, safety and

protection products. Chevron Phillips Chemical Company LLC (CPChem) is owned 50/50 by

ConocoPhillips and Chevron and is one of the world’s top producers of specialty chemicals.32

Primary Competitors’ Business Level and Corporate Level Strategy

Since oil and gas are commodities, companies have focused on an “overall low-cost” strategy

and are leveraging their size to achieve larger economies of scale. Here are more specific

strategies that are more likely to be seen applied across all companies:

Vertical integration from production to refining to distribution

Grow in size to accumulate huge assets, as the oil and gas business needs substantial

capital investment

Relationships with players in oil-rich regions (e.g., Saudi Arabia and Kuwait)

18

Joint ventures with other oil & gas companies like the joint oil exploration in Arctic33

The business dynamics vary remarkably between oil and natural gas industries. Success in

the gas industry depends more on how quickly a company can seize an opportunity and buy into

a new concept or technology. Also, gas wells last for a much shorter period of time than oil

wells, forcing companies to keep chasing new reserves. This will require the companies to

optimally leverage their economies of scale for natural gas compared to oil.34 Mid-sized

companies no longer see a “high barrier” to enter the gas market because of the abundance of

natural gas deposits.

How Competitors Achieve Their Strategic Position

Since success in the oil and gas industry depends largely on access to reserves and the

technology to harness it, it is very important to have access to a huge capital base, to build strong

relationships with organizations and countries where the reserves are located, and to efficiently

transport crude fuel to refineries. For example, ExxonMobil has joined with Qatar Petroleum and

other partners to further develop the world’s largest non-associated natural gas field.35

Chevron has landed a massive multi-billion dollar deal in the Wafra oil field of Saudi Arabia

where it is experimenting ways to extract heavy oil economically amidst challenges unique to the

Arabian desert.36 This means competitors leverage their technical expertise, strong relationships

and huge capital investments to take big risks. In return, they reap huge rewards if things work

out.

Shell is the second largest oil and gas company and its strategy has been to enhance their

worldwide Upstream portfolio for profitable growth, through exploration and focused

acquisitions, and through divestment of non-core positions. Shell agreed to buy most of East

Resources for $4.7 billion to expand its holdings of the promising U.S. shale gas deposits. Shell

has also been following a joint acquisition strategy – it jointly acquired Australia’s Arrow

Energy Ltd. for $3 billion along with PetroChina. Shell expects its share of natural gas to be

more than half of its total energy production in 2012.37

BP is the third largest energy company in the world, having a very diverse portfolio including

oil, natural gas, wind, solar, and bio-fuels.38

ConocoPhillips is the fourth largest oil and gas company, and the sixth-largest reserves

holder among non-state controlled companies. ConocoPhillips is known worldwide for its

technological expertise in reservoir management and exploration, 3-D Seismic technology, high-

grade petroleum coke upgrading and sulfur removal.39

19

Total S.A. is the fifth largest and highly diversified energy company in the world. Total

engages in all aspects of the petroleum industry (Upstream and Downstream), petrochemicals,

coal mining, solar, biomass, and nuclear.40

Value – Cost Profile

While running its business, a firm invests capital (called cost drivers) and creates value for its

shareholders through value drivers. The common value drivers in the oil and gas industry are

proven reserves (oil and gas), production of oil and gas to meet the demand, financial health,

geographical diversification, diversification beyond oil and gas and its brand image. The cost

drivers are refinery utilization, marketing and distribution costs, operational excellence, safety,

and economies of scale. The value and cost drivers are weighted based on their relative

contribution towards a company’s performance.

The ‘Value – Cost’ analysis was done for ExxonMobil and its competitors (See Exhibit

24A). The analysis shows that ExxonMobil’s value drivers are significant compared to its

competitors, while there is scope for improvement in the areas of refinery utilization and

marketing and distribution. It should be noted that our financial analysis shows that

ExxonMobil’s Downstream business has lower profit margin that its other two segments

(Upstream and Chemical). The effect of cost drivers is more than the value drivers in the case of

ConocoPhillips, making its ‘Value – Cost’ profile negative.

IntraIndustry Analysis

The oil and gas industry is a mature and declining industry.41 Most of the major producing

conventional oil fields were discovered decades ago and are in decline42, the world conventional

oil reserves are depleting,43 and the relative finding of newer fields and deposits is slow.44 As a

result, the industry is consolidating, primarily through asset acquisition and through mergers. In

2010, there were 947 deals announced with the value of $270 billion, a 35 percent increase over

2009.45 The mobility barriers to entry remain the same as identified previously. Although there

were few innovative technologies recently discovered or invented,46 none of these were

significantly disruptive other than the “fracking” process and horizontal drilling that XTO

brought to ExxonMobil for increased production from shale rocks47.

20

Strategic Group Overview

ExxonMobil’s peers for the strategic group analysis are Royal Dutch Shell (RDS), British

Petroleum (BP), Conoco Phillips (COP) and Chevron Corp (CVX). These five major integrated

O&G are public-owned companies. See Exhibit 31 for detailed strategic group maps.

Strategic Group Analysis

In this section, all the five companies are evaluated and their performance is identified. The

data used for analyzing the strategic group analysis is provided in Exhibit 30.

ExxonMobil (XOM): ExxonMobil is the leader in the strategic group. All of its core lines of

business are doing well. ExxonMobil is able to generate high revenue in both the product lines of

oil and gas. In Downstream, ExxonMobil’s refineries are performing well to their production

and capacity. ExxonMobil’s resources are well deployed.

The company has the largest natural gas reserves, but is second to BP for oil reserves. Due to

the nature and state of the industry, ExxonMobil has to consider ways to increase its oil reserves

in order to maintain its leadership position. In the Downstream, ExxonMobil is doing well with

its refining business. In Downstream marketing, ExxonMobil is transitioning out of the retail

network (i.e., dealer or company-operated) in the U.S. and moving to a branded distributor

model.48 ExxonMobil’s accidents (seventy-five in 2011) are rated medium in the strategy group

compared to the company’s production. These incidents can significantly impact business and

brand value. (For example, BP paid up to $10 billion for environmental damages49 and fines,

excluding a loss of $101 billion in its market capitalization within the span of two weeks (See

Exhibit 29)). The company’s days of inventory is medium compared to its peer group.

ExxonMobil is also financially stable with the second lowest total debt among the peer group.

Royal Dutch Shell (RDS): Royal Dutch Shell is one of the largest competitors in the

strategic group for natural gas reserves. However, it has low oil reserves compared to the group.

It is able to generate considerable amount of revenue. In Downstream activities, RDS has good

production capacity and refineries to handle the capacity, but refineries are under utilized for oil

production. RDS has more than 25,000 retail outlets worldwide and, like the rest of the peer

group, RDS is trying to exit direct retailing business to focus on profitable Upstream activities.

In operations, RDS has significant human capital and is aligned with strategic group leaders.

Although RDS does not have significant oil production in the strategic group, the number of

accidents is higher than its peers. RDS’ Days of Inventory is high compared to its peer group and

has the highest total debt.

21

British Petroleum (BP): BP is one of the largest competitors of ExxonMobil from the

strategic group, with high oil reserves. Despite high oil reserves, BP is unable to generate a

considerable amount of revenue. This is attributable to the major oil spill in April 2010 that was

caused at BP’s oil well, one of the largest marine oil spills in the history of the petroleum

industry.50 This event has significantly impacted BP’s ability to generate revenue. In the

Downstream, BP is limited in its production due to its refining capacity constraints. In future,

BP will need a considerable amount of refining capacity to be able to handle the reserves. BP has

more than 22,400 retail outlets worldwide. In operations, BP has significant human capital but is

not performing as well compared to the strategic leaders XOM and RDS. BP, apart from its 2010

oil spill, has similar safety accident records compared to its peer group. The days of inventory for

BP is the highest among the peer group, and its total debt is the second highest in the peer group.

Chevron (CVX): Chevron, although low, has sizable oil reserves. Chevron is the oil

production leader in the strategic group. Its production is about 30 percent of the entire peer

group put together. In the Downstream, Chevron is low on capacity and refining capability. It

also has more than 20,000 retail outlets worldwide. From operations, Chevron’s human capital

of 62,000 is not performing as well compared to XOM and RDS. Chevron is the worst performer

within the group based on safety accident records, with 129 accident or safety issues in 2011.

Chevron’s large production output is well supported by its low days of inventory. Chevron also

has the lowest debt in the peer group.

ConocoPhillips (COP): COP is the laggard in the strategic group. It does not report its oil

and gas reserves. In order to perform the analysis, its reserves were computed using “barrels-of-

oil-equivalent” (BOE), an industry term to describe combined oil and gas reserves. It was in the

poorest quadrant for all the strategic map analysis, with the exception of lower debt and

accidents compared to the group. It has the smallest reserves to revenue. In Downstream, COP

has limited capacity and less refining power compared to the group leaders. In 2011, COP had

the lowest number of accidents compared to the group, which could be due to its low production

levels. It has higher total debt than XOM and CVX, and its low production is supported well

with its low days of inventory.

Technology & Innovation

In the oil and gas industry it takes about five to seven years to extract oil from a viable oil

well to get into the supply chain. (See Exhibit 13.) The technological innovations in the oil and

gas industry are primarily around discovering, exploring, refining, transportation and storing.

These new technological innovations expedite discovering oil and gas and exploring in very

22

difficult conditions, dramatically bringing down costs of production and bringing products to

markets quicker to meet the growing energy demand. A sample of recent technological

innovations include:

“High-End Geological Exploration” – An application51,52 that can explore large geologic

formations, identify blocks of rock 20 kilometers on a side, and then pan or zoom in to

see if it holds oil. The ability to explore on another corner of the world without leaving

the office and directly playing it on a large computer screen with an array of high-end

computers significantly reduces the costs of exploration. This technology has

dramatically reduced the exploration costs, while increasing the success rate of finding

new wells.

“Horizontal Drilling”53 – This innovation is typically used for natural gas exploration,

and is a method to drill thousands of feet vertically and then drill a thousand feet

horizontally along targeted reservoir, which allows well bore to contact a larger cross

section to increase productivity rates. ExxonMobil acquired XTO, which had a

significant expertise level with this complex technology needed. XTO’s technology and

assets helped ExxonMobil drive a 24 percent increase gas output during first-quarter of

2011.54

“Deepwater Exploration” – Technology like deepwater spar55 and Floating LNG56

provide a stable floating platform to support drilling operations in deepwater oil and gas

fields. This helps the discovery and capture of oil and natural gas in high seas where

common on-shore infrastructure cannot be deployed.

Other notable innovations include: “Hydro processing Catalysts,”57 a refining technology that

improves refinery operations; “Cryogenic Liquid Energy Transfer,” a technology58 that can

transfer and off-load liquefied natural gas from tankers at an offshore terminal facility in isolated

coastlines with no natural harbors; and “Gas Storage” technology,59 that helps store massive

amounts of gas by improving operating performance and reduced maintenance.

The typical industry Research and Development spending on these types of innovations is $1

billion annually60.

Industry Key Success Factors (KSFs)

For the oil and gas industry, the five main Key Success Factors (KSFs) are: Exploration and

Oil discovery, Manufacturing, Financial, Technology and Marketing & Distribution. See Exhibit

32 for additional details on key success factors.

23

Exploration & Oil discovery: This is a critical KSF for the oil and gas industry (30 percent).

The critical nature of oil and gas production companies should be able to continuously and

consistently discover and explore to increase its reserves. ExxonMobil has ample projects

planned in the short-term61 to successfully execute this KSF. In the longer term, ExxonMobil

has to find ways to increase oil reserves.

Manufacturing & refining is an equally critical KSF for the oil and gas industry (30 percent).

The ability to get proven oil and gas resources into the supply chain for production and

manufacturing by refining and processing will enable the companies to monetize its reserves. If

the manufacturing is unable to create the required output, customers can easily switch to other

suppliers due to the commodity nature of the products. ExxonMobil with its refinery capacity61

and production efficiency has the ability to successfully execute this KSF. However, the

company must also ensure the safety of its workers and its assets. This can otherwise lead to

significant legal and state fines as seen in connection to BP’s 2010 oil spill in the Gulf of

Mexico.

Financial and Manufacturing are the next leading KSFs for the oil and gas industry, both with

a weight of 20 percent. The oil & gas industry is a very capital-intensive business. These fixed

assets, like refineries, are expected to scale to significant levels from one specific location. Apart

from these fixed assets, newer fields’ exploration and the ability to bring a well to production

take considerable amount of time, as stated previously. (See Exhibit 13.) This delay in the

ability to bring products to market, along with heavy capital expenditure, requires a significant

amount of financial backing. Apart from capital intensive manufacturing and assets, the

industry’s accident prone nature requires companies to be prepared for the worst (BP was fined

$10B for the Gulf oil spill62). ExxonMobil has significant financial stability to execute this KSF

successfully.

Technology is the immediate second KSF for the industry (10 percent). As the oil and gas

wells deplete, the industry is increasingly trying to find new hydrocarbon sources in

unconventional areas like tar sands and deep water in a way that is safe and economically

profitable. Disruptive technological innovations and applications help companies gain advantage

in the industry. ExxonMobil with its current resources compared to industry and financial

backing should address this KSF.

Marketing & Distribution plays a critical role for oil & gas companies (10 percent). The

commodity products need to be brought to the right markets at the right prices, need to increase

customer loyalty and retention and finally need to increase brand awareness to attract new

24

customers. This critical KSF is a significant contributor to oil & gas companies. While

ExxonMobil is ahead of its competitors, this KSF should focus on more profitable segment

customers like states and commercial airlines.

The other KSFs that were considered and placed lower were Skills and Capability; although

critical since the oil and gas industry employs more than 50,000 employees and many more

contractors, this received a lower rating than the other KSFs. The supply chain KSF was rolled

into manufacturing and manufacturing operations, and inventory and storage was rolled into the

financial KSF.

SWOT Analysis

Oil Industry

Strength: ExxonMobil is a well-established company and a market leader in the oil and gas

industry and it has been in existence for over a century. It has a strong brand name and industry

presence that gives its customers a sense of security. The company has diversified into many

different areas of the energy industry and is performing consistently in revenue generation.

ExxonMobil is vertically integrated and operationally very efficient, which is evident from its

industry leading profit margins. ExxonMobil has 40.6 million acreage combined in: North

America with ten year leases, in Africa with twenty-five to fifty year leases, and in Asia with

twenty to thirty year leases.60 It has highest number of refineries compared to its peer group (See

Exhibit 30). Exxon’s 27 percent of production from North America is expected to grow to 35

percent in 2015, with contributions from both established operations and new projects.60 It has

the largest natural gas reserves and the lowest debt in its strategic group (See Exhibit 31).

Weakness: The key weakness confronting ExxonMobil is the decline in its oil reserves and

its low replacement rate for oil reserves. In Downstream, ExxonMobil generates about 12

percent revenues (See Exhibit 5). This is partly due to its 26,000 retail outlets and declining

inflation-adjusted margins. This weakness might be mitigated by a branded distributor model.60

ExxonMobil has not been able to handle environmental and social group issues effectively.63

Threats: There are several threats to ExxonMobil in the oil industry. ExxonMobil, along with

other Western oil companies, are at the mercy of OPEC since OPEC controls most of the oil

reserves in the world. The reserves are concentrated in politically unstable regions making oil

business tricky and unpredictable. Most companies are seeing the replacement ratios declining

for oil. In contrast, large natural gas reserves are being discovered in easier to access regions like

the U.S. and newer technologies (like hydraulic fracturing) have made extracting natural gas

25

more feasible now. Substitute power from natural gas is getting stronger, which will increasingly

grab energy market share from oil. The oil industry, in general, will see more competition from

natural gas, as the barrier to enter the natural gas industry is much lower than that for the oil

industry. Incumbent large oil companies will see their dominant position threatened if they don’t

diversify soon as natural gas will gain in prominence going forward.

Opportunities: The oil industry will continue to offer opportunities even in the long term. Oil

business is more profitable than natural gas due to the low price of natural gas. As per

ExxonMobil’s energy outlook, oil is projected to remain the number one source of energy

through 2030. Incumbent large companies are favored in the oil industry owing to inherent

advantages of economies of scale and access to huge capital. They can leverage their existing

contracts and relationships to block new entrants. The number of vehicles is projected to grow

(especially in non-OECD countries) and this is good news for the oil industry because oil-based

products will continue to be the primary fuel (gasoline & diesel).

See Exhibit 33 for additional details on the SWOT analysis for the oil business segment.

Natural Gas Industry

Strength: The acquisition of XTO, the technology leader in efficient natural gas exploration,

has helped ExxonMobil fortify its position for natural gas exploration. As mentioned above,

ExxonMobil has strong financials, industry presence and brand name in the energy industry.

ExxonMobil has several large commercial contracts for both the short-term and the long-term

(20 years or above) for its natural gas supply.64, 65

Weakness: In the natural gas industry, profit margin is very low compared to the oil industry.

The capital investment for natural gas is less than oil, and this leads to a large number of small

players in the natural gas industry, keeping the price of natural gas low. ExxonMobil cannot

leverage its oil infrastructure for gas exploration and refining. Also, as mentioned in the

competitive analysis, natural gas wells get depleted faster than oil wells. Therefore, ExxonMobil

needs to ensure that it finds the right amount of reserves for natural gas at a faster rate than oil.

Threats: A lower price (as compared to oil) makes natural gas businesses less profitable.

Hydraulic fracturing is a promising technique to extract vast deposits of shale gas in the U.S. but

it is prone to environmental issues like water contamination, leading to many problems for

natural gas companies. The economies of scale desired by large companies is difficult to achieve

as gas wells have a relatively shorter life.

Opportunities: As per ExxonMobil’s energy outlook, global energy demand will grow by 1.2

percent per year through 2030 and natural gas is projected to become more relevant, largely

26

because it burns clean. Strategically, it is a good idea to have natural gas in addition to oil in a

company’s energy portfolio for the long-term. One estimate puts the reserves in North America

alone to last for the entire century. OPEC controls less than half of natural gas reserves, giving

more room for investor-owned companies like ExxonMobil to grow in this sector. Hydraulic

fracturing (also known as fracking), a breakthrough technology, is now viable and the production

costs for natural gas have fallen.

See Exhibit 33 for additional details on SWOT analysis.

Comparative Financial Analysis

Five companies were chosen as competitors to ExxonMobil66 for the competitive financial

analysis: Chevron67, ConocoPhillips68, Royal Dutch Shell Company69, British Petroleum70, and

Total S.A71. These five companies, like ExxonMobil, are all integrated and produce both oil and

natural gas.

Revenue Growth:

Financial Exhibits 2 and 3 detail the trends in revenue growth for 2003 through 2010;

Financial Exhibit 2 looks at Total Revenues, including revenues from equity affiliates and non-

controlling minority interests. Financial Exhibit 3 strips these additional revenues out, and

looks at just those sales and operating revenues directly attributable to each individual company.

Financial Exhibits 2A and 3A show how closely revenues follow the rise and fall of crude oil

prices72, with ExxonMobil the clear leader in sales throughout most of the time span. However,

what is also noticeable is how Shell has managed to close the gap in revenues with ExxonMobil

over the years, despite the uncertainty inherent in predicting oil prices; by 2010, Shell is neck-in-

neck with ExxonMobil and poised to take over as the leading company in revenues. With an

industry that is moving more towards consolidation, any potential loss of market share needs to

be defended.

Financial Exhibits 2B and 3B display the compounded annual growth rates for revenues for

the six companies, using 2004 as the base year. Of particular note is that despite rising oil prices

from 2004 to 2007, the compounded annual growth rate is steadily declining and at a substantial

rate; only record oil prices in 2008 kept the CAGR for that year from slipping, and held it close

to the 2006 rate. However, even with oil prices beginning to rise again in 2010, the CAGRs for

revenues remains at a much slower growth rate than was experienced at the beginning of the

decade. Also of note is ExxonMobil’s position against its competitors; ExxonMobil is just above

or equal to the average Revenue CAGR of the six companies, consistently growing slower than

27

half of its competitors. This trend continues in Exhibits 2C-D and 3C-D, suggesting that the

industry may be reaching a plateau in revenue growth, with ExxonMobil growing at an even

slower rate than the average of its competitors. Given this, ExxonMobil needs to implement a

growth strategy in order to survive the intense competition and increasing pressure of depleting

reserves.

Profitability:

Financial Exhibits 4 through 6 display the various profit margins for ExxonMobil and its

competitors, both as a percentage of sales and in terms of growth rates over the decade. In terms

of Gross Margin, ExxonMobil is the leader among the six companies analyzed, suggesting that

the company is more efficient at keeping its Cost of Goods Sold lower as oil prices fluctuate, and

is able to better absorb some of the volatility inherent in changing oil prices; Total S.A.

experiences the most volatility in Gross Margin. However, Financial Exhibit 5A shows that by

2010, ExxonMobil has lost its position as leader for Income Before Interest and Taxes as a

percentage of sales. This also holds true for Net Income as a percentage of sales, as shown in

Financial Exhibit 6A; ExxonMobil led the group of six companies in the early part of the

decade, but saw a decline in Net Income as a percentage of sales in 2006 through 2008, despite

rising oil prices, and by 2009 was no longer the leader. Of particular interest is the drop in Net

Income as a percentage of sales almost across the board in 2008, with the exception of Chevron,

despite the growth in revenues during this same period.

These three profit margins in general throughout the industry fluctuate as a percentage of

sales as oil prices rise and fall. In order to stabilize this effect, the rolling three year growth rates

were computed for the three, and the annual compounded growth rate was calculated for Net

Income, using 2004 as a base year. These can be found in Financial Exhibits 4B, 5B, 6B, and

6C. Based on a rolling three year growth rate, ExxonMobil’s gross margin as a percentage of

sales has been slowly declining over the last eight years. ConocoPhillips is also declining, but

the other four companies have shown an increase in their gross margins from 2003 to 2010, with

the European companies (Shell, British Petroleum, and Total S.A.) making the biggest increases.

As Financial Exhibit 6B shows, however, all companies in the industry are experiencing

significantly slower growth in net income, in some years despite rising oil prices. This evidence

supports the fact that the oil and natural gas industry is mature, and perhaps reaching saturation;

any company in this industry must be more operationally efficient and technologically innovative

to find ways to grow profitability. Chevron and ConocoPhillips are able to experience a greater

growth rate in income than ExxonMobil, steadily gaining ground over ExxonMobil over the last

28

couple of years. However we believe this is mainly due to the XTO acquisition and repayment of

assumed debt.

Operational Efficiency and Resource Management:

Financial Exhibit 7 compares each of the six companies to each other in their ability to

generate cash flow from their operations, therefore their ability to pay their debts and run their

business without outside financing. In this category, ExxonMobil is in a very strong cash

position relative to its closest competitors; at the peak of oil prices in 2008, ExxonMobil’s

closest competitor, Shell, still fell almost $20 billion short of ExxonMobil’s operating cash flow

position. One thing to note is that in those years where oil prices were below $60 a barrel,

ExxonMobil lost that strong edge in operating cash flow over its competitors. All six

companies’ cash positions were affected by the trend in oil prices, some more than others.

British Petroleum has been unable to recover its operating cash flow from the drop in 2009,

although this is likely due in large part to the Gulf Oil Spill in 2010.

Clearly, ExxonMobil is the leader in Return on Equity, which is mainly attributed to

excellent efficiency in operations, asset utilization, and high equity returns. The higher ROE

numbers in the DuPont analysis (Financial Exhibit 8) support ExxonMobil’s decision to expand

into new markets while focusing on its strength as a vertically integrated company.

Financial Exhibit 9 compares ExxonMobil with its competitors using various other key

financial metrics; current and quick ratio, debt-to-equity ratio, return on assets, inventory

turnover, and days of inventory. Chevron, Total S.A., and ConocoPhillips have the best ability

to cover their short term liabilities and demands according to the Current Ratio. When Inventory

is taken out of the equation, only Chevron and Total S.A. are able to keep their Quick Ratio

above 1.0 in the last couple of years. This suggests that the oil and gas industry rely heavily on a

quick turnaround of inventory in order to cover short term liabilities. ExxonMobil is especially

in a troubling position, as the company used to have very good current and quick ratios, but have

seen significant deterioration since 2008. The first year that ExxonMobil saw the drop in its

current and quick ratios was 2009, also a year that saw a drop in Operating Cash Flow for the

company, again highlighting ExxonMobil’s dependence on oil prices staying about $60 a barrel

in maintaining a competitive edge. In 2010, ExxonMobil had a large increase in its financing

activities, likely due to the assumption of debt from XTO. Interestingly, the U.S. companies

(ExxonMobil, Chevron, ConocoPhillips) experience significantly higher inventory turnover than

the European companies (Shell, British Petroleum, Total S.A.). Conversely, the European

companies have higher Days in Inventory; the European companies hold their inventory for three

29

to four times more days than their U.S. counterparts. ExxonMobil falls at the bottom of the

grouping of U.S. companies in terms of inventory turnover and days of inventory, but still

offloads its inventory twice as fast as the European companies. Lower inventory turnover could

also be indicative of a lower reserve replacement ratio, and could reflect the difficulty of finding

new reserves for a particular company. Given the consolidation and commodity nature of the oil

and gas industry, and ExxonMobil’s low current and quick ratios, this should be an area that

ExxonMobil should focus on.

ExxonMobil, along with Chevron, is the leader in generating a return on the company’s

assets. A possible link could exist between the inventory turnover and the return on assets; if a

company is already producing at full capacity in its refineries, or does not have many new

reserves in waiting, then the inventory turnover could be lower for that company. With the

exception of Chevron, the companies in this analysis are highly leveraged, as shown in the Debt-

to-Equity Ratios in Financial Exhibit 9. ExxonMobil is the most balanced of the six companies,

keeping just above and below 1.0.

Return on Capital Employed is a ratio highly used in the oil and gas industry as a benchmark.

The ratio looks at the return for a company by taking its income from continuing operations,

adjusted for after-tax expense and minority interests and dividing it by the yearly average of total

debt, stockholders’ equity, and minority interests. In terms of ROCE, ExxonMobil has

consistently been the leader, which is partly attributable to the company’s ability to consistently

maintain the life of its plants for a couple years longer than its competitors. Chevron, British

Petroleum, and Total S.A. are clumped together a few percentage points below ExxonMobil, and

ConocoPhillips and Shell comprise the third tier of ROCEs among the six competitors.

Overall, based on the ratios detailed in Financial Exhibit 9, Chevron appears to be in the

strongest financial position of the six companies, and the U.S. companies as a whole appear to be

in better financial health than their European counterparts.

Summary of External Analysis

The oil and gas industry is highly profitable, but is a mature industry, and is dominated by

large public and even larger state-owned corporations. The current economic growth in

developing nations has increased overall demand for oil and gas. The oil & gas industry is

heavily dependent on oil for short-term and long-term profitability, but natural gas is viewed as a

core component for long-term profitability. The value chains for oil and natural gas share many

common aspects, but are also somewhat dissimilar – for example, Downstream and Chemical are

30

excellent value chain complements for oil, but the same cannot be said for natural gas. Like any

mature industry, the industry is consolidating as described in the Intra-Industry section.

An industry player’s profitability is largely dependent on its reserves. The oil industry is very

difficult for new entrants to enter due to significant levels capital expenditure needed. On the

other hand, lower cost expenditure and disruptive technologies in natural gas are attracting

smaller entrants in the gas industry. Overall, the industry is under pressure with increasing

regulations and competitive pressure from state-owned oil companies, notably those belonging to

OPEC. The industry’s ability to find new sources economically has dramatically improved due to

newer technologies. Technological innovation is likely to continue to shape the future of the

industry.

In the short-term, the industry is focused on increasing oil reserves and production,

especially from conventional resources. In the long-term, the industry needs to increase both its

oil and natural gas reserves, considering the energy demands projected by energy agencies.22

ExxonMobil stands out as a highly efficient, financially sound, and strong energy portfolio

company. It has an edge over its U.S. rivals ConocoPhillips and Chevron in terms of capacity

and efficiency. However, ExxonMobil needs to address its diminishing oil reserves. The

acquisition of XTO has provided ExxonMobil with the technology to find and access more

natural gas that previously was not possible. BP and Shell are significant rivals to watch for;

with their vast reserves and their investments in natural gas, they can impact ExxonMobil in both

the oil and gas businesses.

3. Internal Analysis

Business Definition and Mission

ExxonMobil’s primary business is the exploration and production of oil and natural gas, the

refining and manufacturing of petroleum products, and the sale of crude oil, petroleum products

and natural gas. ExxonMobil also transports oil and has interests in electric power generation

facilities. ExxonMobil is the world’s largest publicly traded international oil and gas company,

and the world’s largest refiner and marketer of petroleum products. The company’s chemical

business ranks among the world’s largest.

“Meeting the rising demand for energy – safely and with minimal environmental impact” is

ExxonMobil’s mission.73 The company’s corporate slogan is “Taking on the world’s toughest

energy challenges."74 ExxonMobil’s guiding principle is “we must continuously achieve superior

financial and operating results while simultaneously adhering to high ethical standards.”75

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Organization Structure, Control and Values

Organization Structure

ExxonMobil was incorporated in New Jersey in 1882 and head quartered at Houston, Texas

with offices worldwide, employing over 83,000 employees globally.82 ExxonMobil distinguishes

itself through a unique, functionally based organizational structure, which consists of ten core

companies that oversee individual businesses worldwide. (See Exhibit 6 for Functional

Operating Companies of ExxonMobil). Rex Tillerson is ExxonMobil’s CEO and Chairman of

the board. Including the Chairman, the company’s board currently consists of eleven members,

all of whom are accomplished business leaders and visionaries.76

Each of ExxonMobil’s business-line companies stewards a focused portfolio of operations

globally, with a president at the helm with significant autonomy. The details of the corporate

officers who head these units can be found in Exhibit 7.

Controls

The ExxonMobil System of Management Control – Basic Standards, commonly referred to

as the “Red Book,” is a comprehensive manual that describes ExxonMobil’s formal system of

management control. It describes a series of management control including: Delegation of

Authority Guide and Review Procedures (“DOAG”), Planning and Performance Monitoring

Processes, Contracting Controls and Standards, Capital Budgets Procedures, Credit and

Collection Procedures, Banking Procedures, Cash Disbursements and Receipts Controls,

Financial Accounting Procedures and Reporting Guidelines, and Major Project Controls.77

ExxonMobil has a clearly written policy for all major areas of operation. For example, the

company has written policies covering ethics, gifts and entertainment, political activities,

international operations, and auditing, in order to guide employee behavior and measure actions.

ExxonMobil’s Anti-Corruption Legal Compliance Summary78 lays out policies that govern its

anti-corruption compliance program. ExxonMobil also has written Corporate Governance

Guidelines79 aimed at steering the conduct of the board, directors and employees of the company.

Values

ExxonMobil’s organizational values commitment includes conducting business in a manner

that is compatible with the environmental and economic needs of the communities in which

ExxonMobil operates, and that protects the safety, security, and health of its employees, those

involved with its operations, its customers, and the public.

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Culture: Exxon’s corporate culture focuses on long-term viability using a disciplined

approach that requires large investments in a diverse set of projects that take many years to

develop, but are expected to deliver sustainable competitive advantage for decades.

Safety: Having learned from the Valdez disaster, ExxonMobil’s safety record has improved

tremendously to become one of the safest energy producers. ExxonMobil has instituted

Operations Integrity Management System, the cornerstone of its commitment to managing risks

to safety, security, health, and the environment80. It guides the activities of each of its employees

and contractors around the world.

ExxonMobil’s commitment to safety is unparalleled in the industry. The company operates

with the view that the more you spend on safety, the more profitable operations tend to be. For

example, “ExxonMobil learned from its oil-field blow-out in Indonesia years ago – which was

due to employees using powerful machinery unsuitable for the type of oil-well that they were

drilling.” 4 The cost of a blow-out like this is orders-of-magnitude more than the cost of

operational safety measures. Employees are trained constantly on operational safety and the

company observes and incorporates best practices from various industry players.

Standards of Business Conduct Training programs: ExxonMobil provides regular and

detailed training on various standards of business conduct to ensure that its employees behave

ethically and comply within the legal and company-specific guidelines.

Business Conduct Audit and Violation Reporting: ExxonMobil conducts comprehensive

internal audits of one-third of corporate operating units and business activities each year. Also,

the company provides a number of mechanisms to employees for reporting suspected violations

of company policies, including a 24-hour hotline phone number and mailing address.

Ethical Standards and Practices

ExxonMobil is a conservatively operated firm and is tough on employees who violate the

code of conduct. ExxonMobil employees are required to annually confirm they have read the

policies set forth in its Standards of Business Conduct. ExxonMobil’s conduct in practice reflects

its stated values. “ExxonMobil is extremely serious about bribery and other such misconducts.

Its managers are ethical and enforce the operation guidelines rigorously. Even in countries where

side agreements – also referred as ‘squeeze agreements’ in China – are common, ExxonMobil

conducted itself extremely ethically and professionally.”4 Overall, ExxonMobil’s organizational

values and its actual behavior are in alignment.

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Strategic Position Definition

Business Portfolio

The business portfolio of ExxonMobil consists of geographically diverse, highly cyclical

Upstream and Downstream businesses, and a less-cyclical Chemical business. Additionally,

ExxonMobil operates a global services company and owns subsidiaries such as XTO.

ExxonMobil’s portfolio of assets provides advantages in scale, geographic diversity, and

business mix that mitigate risk arising from changes in commodity prices, product margins, and

business cycles. The combination of global scale and integration across its businesses gives

ExxonMobil a competitive advantage.

Both the Upstream and Downstream business are fundamentally commodity businesses,

affected significantly by changes in oil and gas prices. The Upstream business is a capital

intensive business dealing with exploration, development and production of crude oil and natural

gas. The Downstream business is large and diversified; it deals with refining and marketing

across the globe. Unlike the Upstream business, the Downstream business is a low margin

business where operational efficiency and cost reduction makes a difference. In order to obtain

the most economical feed stocks, the company’s major petrochemical plants are integrated

with its refineries. ExxonMobil’s chemical business has a number of less-cyclical business lines

that help reduce the volatility and deliver consistent results. For example, there is no real impact

to earnings from the chemical business between 2008 and 2009. However, in 2010 earnings

doubled due to improved margins.

Corporate Strategy

ExxonMobil is a narrowly diversified company with few lines of related business that

operate in global markets. At the core of ExxonMobil’s corporate strategy is related business

diversification. The Upstream business segment is the largest one with more than 70 percent of

earnings coming from that segment. The Chemical operation is a distant second in profit

generation at 16 percent, followed by the Downstream business segment at 12 percent. The

average capital employed by the Upstream business segment is four to six times that of other

segments. Clearly, the Upstream business is ExxonMobil’s center of gravity.

Business Portfolio Performance

ExxonMobil’s business is fundamentally a commodity business where performance is

affected significantly by changes in oil and gas prices. For example, in 2008 oil and gas prices

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soared and so did ExxonMobil’s Upstream and Downstream segment’s earnings –to $6.2 billion

and $1.65 billion, respectively. Whereas in 2009 when oil and gas prices dropped, the earnings

of the Upstream and Downstream segments plummeted to $2.9 billion and a loss of $153

million, respectively. The price sensitivity of business segments is depicted in Exhibit 21.

A key measure of performance that ExxonMobil and the oil & gas industry uses is Return on

Capital Employed (ROCE), as stated earlier in the External Analysis. In this regard, the

Chemical business is the leading segment with 26 percent ROCE, followed by the Upstream

business at 23 percent and the Downstream business at 14 percent. This is noteworthy

considering that the Capital and Exploration expenditure on Chemical is the lowest. Strong cash

flow from operations and asset sales is more than sufficient to fund a growing level of

investments in the business. (See Exhibit 8 for Business Segment Performance.) The overseas

(Non-U.S.) operations of the Upstream and Downstream businesses contribute to roughly 80

percent of the total earnings for these business segments, whereas the earnings impact for the

Chemical segment is well balanced. (See Exhibit 9 for a breakdown of earnings by U.S. and

Non U.S operations.)

Acquisitions

ExxonMobil acquired XTO Energy for $24.6 billion in June 2010, motivated by its energy

outlook that suggests a growing need for natural gas in the next several decades. Another key

factor is that most of the company’s Upstream assets are abroad, and the merger represents a

move toward the U.S. market. This strategic move enabled ExxonMobil to build its natural gas

reserves and assets, as XTO complemented ExxonMobil’s vast liquid reserves with substantial

gas reserves. Exhibit 12 shows how ExxonMobil’s natural gas reserves are boosted by the

acquisition of XTO, necessary for it to be a strong contender in natural gas and a leader in total

reserves.

Value Chain Synergies of XTO Acquisition: The acquisition enhanced shareholder value by

capturing cross-business synergies such as: (1) transferring competitively valuable expertise and

technological know-how from its oil exploration and production to the natural gas exploration

and production businesses of XTO, (2) sharing of exploration facilities and resources to reduce

the costs of finding, discovery and development, (3) leveraging ExxonMobil’s leading brand

name to deliver XTO products, and (4) Combining the value chain activities of XTO and

ExxonMobil to improve operational efficiencies in marketing, shipping and distribution.

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Divestiture

ExxonMobil has a long standing divestment program, wherein $40 billion of assets were

divested over the last few decades. ExxonMobil divestments are opportunistic and are consistent

with overall corporate strategy. For example, in the first quarter of 2011, the company divested

assets in Western Canada and the Gulf of Mexico. The company has been managing

Downstream assets carefully, as the refining industry is in a declining phase with low margins

and profitability is heavily dependent on the oil price. In 2010, ExxonMobil sold its interest in a

lube oil refinery in France and restructured its retail activities to convert to a more efficient

branded wholesaler model as in the United States.6

Joint Venture and Alliances

The oil and gas exploration and production activity is lengthy and capital intensive. It

typically it takes between seven to twelve years before a company realizes profit from new

exploration and production. See Exhibit 13 for details on the length of time it takes to explore

and how returns are valued. Producing oil from proven fields take three to five years4 to generate

profits. To mitigate the risks and the costs of exploration and production, oil companies normally

form alliances. For example, years ago, ExxonMobil and Chevron could have operated alone in

the North Sea oil fields, but chose to form a joint venture in order to reduce risk.4

ExxonMobil often seeks foreign partners to surmount tariff barriers and import quotas. The

foreign partner also provides local knowledge about customs and cultural factors and access to

distribution outlets. Governmental regulations and political pressures also very often force

companies to share their energy stakes. For example, BP was the only company in Iran for a

considerable length of time. However due to governmental intervention, BP was forced to share

their stake with other companies.4 Many of the rigs and plants that ExxonMobil and its

competitors operate in the Middle-East is part of a joint venture.

The Downstream business is highly competitive and risky with tight margins. Any unused

refining capacity would result in reduced margin. To deal with this problem, many oil companies

form alliances to optimize the plant utilization, thereby improving margins. ExxonMobil’s

Downstream alliances are characterized by the economics outlined above. A list of significant

alliances and equity stakes in those alliances are depicted in Exhibit 14.

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BCG Matrix

The exploration and production (E&P) business is a “star”. It is the leading business segment

and generates plenty of cash. (See Exhibit 8 and 9 on segment financials.) E&P also uses large

amounts of cash. More specifically, conventional oil E&P has been a “star,” though growth rate

has been declining compared to that of natural gas.

ExxonMobil’s Chemical operation has been generating a proportionally high profit with

relatively low investment, typical characteristics of a “cash cow”. Unlike a typical cash cow

business that tends to show low growth, the Chemical business has been growing at a healthy

pace. However, as it is a distant second to E&P in revenue contribution, it cannot be labeled a

star, and cash cow is the better fit.

Though the entire industry has recently seen a major uptick in refinery profits and margin, it

is mainly due to surging oil prices. The refinery and manufacturing business is fundamentally a

narrow margin business. Factoring in the low growth rate makes this segment a “dog.” The coal

operation and the oil transportation businesses are not as attractive as the rest of the businesses.

The unconventional E&P (e.g. shale oil and gas E&P) is capital intensive and time

consuming with technology risks abounding. The gas E&P is not as profitable as the oil E&P due

to lower natural gas prices. The innovations in E&P technology would make unconventional oil

and gas production more affordable in the next few decades, but for now it is not cost effective.

For these reasons, non-conventional E&P and gas E&P are classified as “question mark.” (See

Exhibit 15 for BCG matrix.)

Business Strategy Mix

Of the industries that ExxonMobil operates in, the Exploration & Production, and the

Chemical Industries are the most attractive ones where ExxonMobil has key strengths, making

these segments the most lucrative ones for future investments. See the nine-cell matrix in

Exhibit 16 that depicts the business strategy mix.

Though ExxonMobil is strong in the Downstream refinery business, the segment industry-

wide has a low margin, warranting a cautious approach and minimal capital investment.

The unconventional E&P business segment is interesting in that there are a number of

uncertainties at this time requiring a cautious approach, but it holds significant promise,

especially if technological innovation makes it cost effective. For now, ExxonMobil should

proceed carefully by maintaining its investments to be competitive.

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The transportation and coal businesses are not core strengths of ExxonMobil and these

businesses are growing at a very slow rate. ExxonMobil should consider a phased withdrawal

from these businesses.

Business Level Strategy

A diversified company like ExxonMobil operating in multiple industries generally employs a

multi-business strategy. See Exhibit 17 for details on ExxonMobil’s business strategy as stated

in its 2011 Financial and Operating Report.

ExxonMobil operates as a broad low-cost-provider in the Upstream and Downstream

businesses. This is an appropriate strategy given the company’s primary products are

commodities; as such, any differentiation among competing products is difficult, and there are

low switching cost for buyers. Therefore, the company must compete on the basis of cost and

efficiency. It achieves its cost leadership by competing through technological and operational

efficiencies in the areas of exploration, extraction, and refining.

ExxonMobil’s Chemical division employs a best-value strategy to leverage its leadership in

production, costs and proprietary chemical and polymer offerings. Its chemical products, like

“Esso.” is a leading brand in industrial and automotive sectors and is sufficiently differentiated

from competitors. The company achieves cost leadership through synergies gained by combining

refining and chemical production operations. See Exhibit 17 for details on ExxonMobil’s

business strategy as stated in its 2011 Financial and Operating Report.

Growth Strategy

ExxonMobil’s two largest divisions, Upstream and Downstream, both employ market

penetration growth strategies. This is due to the fact that the consumption of petroleum products

is ubiquitous, so there are essentially no new markets in which to employ a market development

strategy. Additionally, the products themselves are standardized, so a growth strategy centered

on product development is unfeasible. In contrast, the Chemical division employs a product

development strategy, focusing on creating new chemical products through the development of

proprietary technology.

Implications of Strategic move on Business and Growth Strategy

The integrated oil & gas industry is capital intensive and the players typically make long-

term investments. Nevertheless, the strategy chosen by different competitors in this commodity

business could not be more different. For example, ExxonMobil has focused on acquiring

38

resources (e.g. XTO acquisition), whereas Chevron is investing heavily in internal growth, and

ConocoPhillips has been divesting assets to improve its business mix and using the proceeds to

obtain faster production growth.

ExxonMobil’s recent tilt towards oil, despite acquiring the leading natural gas player XTO

for more than $25 billion in 2010, is a strategic move that is aligned with its long-term strategy.

The recent tilt towards oil will not materially alter the company’s strategy, and the move is

focused on the short-term. The corporate strategy still remains the same; related diversification

and becoming the broad low-cost provider for Upstream and Downstream.

Implications of Strategic Move on Business Investment

The strategic move of increasing investment in oil exploration and production could mean

the following in the near-term:

Capital projects related to oil exploration and production are likely to receive significant

funds, especially those related to conventional oil production from proven field reserves

XTO integration may take a backseat, given that XTO is rich with natural gas and

unconventional oil reserves

Technology investments in unconventional and shale oil exploration and production

might get increased attention, as the technology breakthrough is critical to produce oil

from unconventional sources efficiently

ExxonMobil’s focus on alternative energy research may take a backseat

ExxonMobil will likely form new alliances and joint ventures in oil exploration and

production

Assets with promising oil reserves might be purchased.

Resource and capabilities

ExxonMobil through its years of operation in the oOil and gas industry have accumulated a

number of resources and capabilities that enable it to be operationally and financially effective.

Following are the key resources and capabilities that feed into the company’s value and cost

drivers (See Exhibit 18 for additional details):

Skills, Expertise and Competence – Global integration, operational excellence,

technological innovation

Valuable physical asset – Oil and gas acreage, reserves (proven and unproven), balanced

mix of portfolio, long-term oil and gas field rights, diversity and geographic coverage

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Rock-solid financial base

Valuable human assets and intellectual capital – Proven managerial know-how,

experienced and capable work force

Valuable intangible assets – Great brand name, disciplined investment with long-term

focus

Alliances – Partnerships, joint ventures.

VRIO Analysis:

Please see Exhibit 23 for the VRIO analysis of the firm’s resources and capabilities.

Value Drivers:

The core set of value drivers that help ExxonMobil build a competitive advantage include the

magnitude of proven and unproven reserves, the net acreage available for future exploration, the

mix of energy reserves (e.g. conventional vs. unconventional; oil vs. gas), exploration rights and

alliances (e.g. partnerships and joint-ventures), oil and gas exploration expertise, technological

innovation, geographical reach, marketing power, disciplined investment and a leading brand.

Exhibit 24B discusses the strength of the various value drivers and Exhibit 24A gives the

competitive value-cost profile.

Operational know-how: Exploring for oil & gas is a long-term, capital intensive activity on

unforgiving terrains such as the Arctic, in deserts or in the deep waters of the Pacific Ocean.

Over the years, ExxonMobil has built an incredible base of operational know-how in the

exploration and production of conventional and unconventional oil & gas in a wide range of

terrains. This is a structural advantage that is difficult for competitors to easily replicate. For

example, if ExxonMobil chooses to do so, it has the know-how to take on even the most “tricky,

expensive and unproven” exploration projects, like the one in Wafra3.

Technological Innovation: Technological innovations is critical to production of oil and gas

resources located in challenging environments such as oil sands, deep water, and arctic regions.

ExxonMobil invests nearly $1 billion in research and development, and this has helped over the

years in ExxonMobil becoming the leader in the industry with its pioneering technology.

Leading Brand: The trusted brands, global reach and high quality products of ExxonMobil

help the company stand out as a reliable vendor to whole and retail customers. Exxon, Esso and

Mobil are well recognized global brands owned by ExxonMobil. For example, Mobil is a

coveted brand in Chemicals and a well known brand in the auto industry.

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Disciplined Management: ExxonMobil is known for its conservative and long-term

approach, as well as for its fiscal discipline. ExxonMobil operates conservatively and generally

does not take huge risks, unlike its competitors Chevron (e.g. engaged in a risky oil & gas play in

Russia) or BP (e.g. operational practices at the blown-out Mondo Well at the Gulf of Mexico.)

Also, ExxonMobil will not fund projects if the rate of return does not meet its high standards;

there are instances in the company’s history where assets failing to meet these standards have

been sold off to other industry players. In fact, the company has divested over $40 billion in the

last ten years.82

Cost Drivers

The structural cost drivers that enable ExxonMobil to distinguish itself from most of its

competitors include economies of scale, integrated operations and economies of scope, learning,

and technology. The cost drivers that ExxonMobil exploits to the fullest include refinery

utilization, operational safety, and operational expertise.

Global Integration and Economies of Scope: The level of integration by ExxonMobil is

unmatched. The global scale of such integration brings structurally competitive advantages that

are hard to replicate. While some of ExxonMobil’s competitors are moving away from an

integrated business model, ExxonMobil has been able to build a significant competitive

advantage through global integrated operations. For example, more than 75 percent of

ExxonMobil’s refining capacity is integrated with Chemicals, and over 90 percent of its

Chemical operation is integrated with oil refineries and gas processing plants, resulting in

significant cost reduction and margin improvements, especially in a competitive Downstream

business.90 By sharing the many aspects of manufacturing between oil refineries and chemical

production, ExxonMobil is able to achieve unparalleled economies of scope.

Operational Excellence: ExxonMobil is known in the industry for its high quality project

management processes and its ability to consistently derive industry leading returns from its

projects. ExxonMobil integrates its extensive drilling data results and production histories in

shale gas opportunities to identify and optimize further development opportunities. The

institutional know-how helps ExxonMobil take on complex projects that competitors could not

do many times, and also deliver profitable results faster. The company has a good program to

ensure that skills and experiences gained by senior staff in research and development is passed

on to next generation of scientists and engineers.

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Economies of Scale: ExxonMobil’s Downstream business can rely on high refinery

utilization and economies of scale as it is vertically integrated with its supplier, ExxonMobil

Upstream business for crude oil. Utilization of the company’s refineries is also boosted

consistently as it refines crude for a number of smaller oil companies who do not have their own

refineries.

Learning: The learning that ExxonMobil shares between oil and gas exploration and refinery

and chemical manufacturing has been a great source of competitive advantage for ExxonMobil

over non-integrated oil companies. For example, the natural gas exploration division of

ExxonMobil benefited through a number of technological innovation and know-how that XTO,

one of the leaders in natural gas, brought to the company upon acquisition.

Operational and Safety Issues: Operational issues, such as downtime in production or

refinery, will have a huge impact on the financial performance of the company. Any operational

safety issues, such as a refinery blowout, will have extended negative consequences on the

company. Therefore, a significant amount of resources are needed for the maintenance of plants

and equipments, and to ensure safe operational practices. ExxonMobil leads the industry in

operational safety.

Implications of Strategic Move on Value‐Cost Profile

Overall the strategic move is going to positively impact the value drivers in many areas

involving oil and technology. It may not improve the value drivers on the natural gas front

significantly. The strategic move will improve the cost drivers across the board. Exhibit 25

depicts the impact of the strategic move on the value-cost profile.

Value Chain Synergies

ExxonMobil’s Upstream focus is to sustain output of oil and natural gas via development and

exploration. ExxonMobil’s Downstream strategy is to maintain a diversified business that

includes marketing and refining complexes across the globe. ExxonMobil has successfully

integrated its businesses to take advantage of the economies of scale and economies of scope.

See Exhibit 11 for details on ExxonMobil’s Value Chain Synergy.

The strength from the vertical integration is further evident from the intersegment business

activities captured in the form of intersegment revenue. For example, the Upstream business

generates nearly $47 billion, the Downstream business generates $66 billion, and the Chemical

business generates $18 billion in intersegment revenues, as stated in the company’s 2010 Annual

Report.

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Customer retention

The products (oil, gas, chemical and other by-products) produced by ExxonMobil is used in

wide variety of industries by wholesale and retail customers. (See Exhibit 22 for Sales

segments.) In the oil & gas industry, companies retain the wholesale customers through a

guaranteed supply, contracts and reliable service, and a geographically diverse and well-

integrated sales and distribution network. In the retail business, the company retains the

customers through competitive pricing and an expansive network of retail gas stations. In the

chemical business, in which ExxonMobil is a leader, ExxonMobil retains the customer through

high quality products, superior service and brand name.

Segmentation, Targeting and Positioning

ExxonMobil’s energy outlook for 2030 predicts that power generation will continue to grow

to account for 40 percent of all energy demand. Though nuclear and renewable energy are

projected to fill in 40 percent of this demand, the recent earthquake in Japan, and the ensuing

cutback of nuclear power by governments across the world in response to it, will likely change

the energy mix considerably. For example, Germany, the fourth largest economy in the world,

announced that they will shut down all of their nuclear reactors by 2022 resulting in the share of

nuclear power in that country to go from 23 percent to 0 percent in eleven years. The other

components in German power production mix -- coal (42.4 percent), Natural gas (13.6 percent),

Renewable energy (16.9 percent) and Other (4.5 percent) – stand to benefit.81 Natural gas will

definitely grab a decent share of the pie. ExxonMobil should be aware of such opportunities

elsewhere in the world and target its attention accordingly. It should position itself as a reliable

and capable provider of clean energy.

Value to Customers

ExxonMobil’s oil and gas products are commodities, so it is difficult to differentiate its

products from competitors. Exhibit 19 highlights the value the company’s products bring to

retail and commercial customers.

The Chemical products, especially specialty chemical, provide an opportunity to differentiate

through quality and range of products. Exhibit 20 highlights that value to customers.

Marketing Mix

Product: Balance the portfolio between oil, natural gas and chemicals with a tilt towards

oil.

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Price: Since oil and natural gas are commodities and especially since oil price largely

depends on the supply-demand equilibrium in the market, a change in pricing for oil and

natural gas is not recommended. ExxonMobil’s brand recognition and its leadership in

specialty chemicals will offer a potential for a price premium for specialty chemical

products, especially in Asia Pacific and the Middle East where the demand is strong.

Promotion: In the wake of the recent Gulf oil spill and the earthquake in Japan, a shift to

cleaner energy is expected. ExxonMobil should position itself as the promise for a new

world whose growing energy needs are served more by clean-burning natural gas and oil

extracted by cleaner technologies.

Place: Place is very important of the marketing mix for both Upstream (partnerships) and

Downstream (retailing, messaging at retail outlets etc.) operations. ExxonMobil should

increasingly look for opportunities in the emerging economies of Asia and Africa.

Financial Analysis

Please refer to Section II.G, Comparative Financial Analysis, for the main analysis of

ExxonMobil’s financial performance and operating ratios against its closest competitors. This

section analyzes some of those aspects of financial performance in greater detail as it relates to

ExxonMobil, as seen throughout Financial Exhibit 10.

Approximately eighty percent of ExxonMobil’s sales and operating revenues come from its

Downstream operations; however, its Upstream operations are the most profitable (see Financial

Exhibit 10A). In 2010, ExxonMobil’s Upstream division accounted for only 9.4 percent of its

operating revenue, yet generated 79.1 percent of the company’s net income. Since 2003, the

Upstream division has averaged 8.8 percent of operating revenue and 73.3 percent of net income.

A year by year examination since 2003 shows that a mere 1 percent increase in operating

revenue for the Upstream division can generate almost a 13 percent increase in net income.

Much of this is due in large part to the unprecedented rise in oil prices in 2008, but even in 2009

with oil prices at a steep drop from their 2008 levels, the Upstream division was able to generate

88.7 percent of net income, even though it had dropped to 8.2 percent of sales from a 2008 level

of 8.5 percent. As the Upstream division is by far the most profitable for ExxonMobil, any

strategic moves from the company should take this into account.

Financial Exhibit 10B displays key financials and key expenses of ExxonMobil as a

percentage of sales. Please refer to Section II.G, Comparative Financial Analysis, for an analysis

of the Gross, Operating, and Net Incomes. As expected, crude oil and product purchases (a.k.a.

44

Cost of Goods Sold) follows the rise and fall of crude oil prices. The biggest take-away from

this graph is the inability of ExxonMobil to quickly adjust its expenses to match falling oil

prices. In 2009, when oil prices hit $40 a barrel, ExxonMobil’s Selling, General, and

Administrative Expenses, Production and Manufacturing Expenses, and Exploration Expenses

(including dry holes) jumped significantly as a percentage of sales. (This is also seen in 2003

and 2004, which saw very low oil prices). Rising oil prices in 2010, and especially in the first

quarter of 2011, have brought these two expenses down to more acceptable levels. This is

generally an industry-wide problem, due to the nature of oil prices to shift very quickly, but it

does highlight an area of potential concern for ExxonMobil, as this inability to quickly adapt its

costs to macroeconomic conditions impacts its profitability.

Financial Exhibit 10C focuses more narrowly on ExxonMobil’s financial performance in

the first quarter of Fiscal Year 2011. Compared to the first quarter of 2010, ExxonMobil has

experienced large growth in its revenues and profit margins, including a 56 percent increase in

operating income and a 69 percent increase in net income, throwing support behind

ExxonMobil’s decision to focus strategically on oil in the short term.

ExxonMobil has greatly increased its capital and exploration expenditures over the last three

years, and has stated that it will continue to spend between $33 and $37 billion in capital

expenditures for the next several years.82 Beginning with 2008, coinciding with the record oil

prices, ExxonMobil has decreased the level of capital expenditures for its Downstream and

Chemical divisions and has instead chosen to direct its resources to its Upstream division. The

majority of expenditures relate to development products, and the increase in expenditures to the

Upstream division relate primarily to projects in Canada, Australia, and Papua New Guinea,

while the decrease in the Downstream and Chemical divisions are driven by the completion of

various projects.84

Valuation of ExxonMobil

To determine the valuation of ExxonMobil, both prior to the company’s strategic move and

as a result of any recommendations, the Discounted Cash Flow (DCF) methodology was used.

Information needed to calculate the DCF valuation for ExxonMobil was pulled from the

company’s 10-K Annual Reports from 2008, 2009, and 2010, and the following assumptions

were made:

ExxonMobil is rated as an AAA company (Standard & Poor’s) in regards to its lease

obligations.83

45

Adjustments were made to ExxonMobil’s NOPAT and Change in Net Capital Expenditures

in order to establish a baseline year for projections, and to account for statements made by

ExxonMobil’s Management in its 2010 10-K and First Quarter 2011 Earnings Call.84

ExxonMobil’s growth is treated as a three stage growth process: 1) Growth in the first initial

years as projected by analyst reports and ExxonMobil’s management; 2) Convergence to

industry projected growth rate; 3) Convergence to Nominal GDP growth rate, as reported by

the Congressional Budget Office.85

ExxonMobil’s WACC is based off of the average of various analyst estimates. The

sensitivity analysis in the Baseline DCF (prior to any strategic moves) takes into account the

individual WACCs from these sources, including the industry average.

As the majority of ExxonMobil’s long-term debt and capital lease obligations are set to

mature within ten years, the corporate bond spread for an AAA bond with maturity of ten

years was used to calculate the cost of debt.86

A period of five years was used to amortize the Research and Development expenditures.87

The Change in Net Capital Expenditures for Stage 2 represents a slight decrease from Stage

1, as ExxonMobil slows down its growth to eventually mirror the Nominal GDP growth rate

Based on the above, ExxonMobil is valued at approximately $386,626 million; this

represents the “baseline” valuation for the company (the valuation prior to the strategic move, as

of 31 December 2010). A sensitivity analysis for the weighted average cost of capital (WACC)

and revenue growth rate was conducted, and indicates that the WACC is the more sensitive of

the two variables, and has a greater impact on the valuation. Please see Financial Exhibit 12A

for the DCF calculations and sensitivity analysis for the baseline valuation.

Forecasting Model for Scenario Analysis

A core element of the scenario analysis is modeling the risk factors inherent in the oil & gas

industry, especially with respect to exploration and production. A glimpse of risks, exploration

time and the likely valuation implication is outlined in Exhibit 13. The modeling is based on a

Monte Carlo simulation. Risks are categorized into three broad categories: dry hole risk,

production risk, and risk of fluctuating oil prices (See Financial Exhibit 11)88. Each risk is

analyzed based on the industry data and the probability of success rate was determined. For each

risk, information was put into the forecasting model to generate a predicted future cash flow at

different oil prices.

46

Scenario Analysis

The scenario analysis provides a framework to estimate the impact of different strategic

decisions on the financial positions of the firm. The possible scenarios analyzed are:

1. No strategic move and an increase in investments in natural gas

2. No strategic move and higher oil prices influence the status quo

3. No strategic move and the oversupply in the oil market leads to lower crude prices

4. Implement Strategic move and low oil prices negatively impact the strategic decision

5. Implement Strategic move with high oil prices and cost synergies due to technological

and other value chain advancements.

We analyzed the financial impact of these different scenarios using the DCF methodology,

using our baseline DCF as a starting point. Table 2 below summarizes the outcomes with

followed by a summary of the impacts each scenario would entail.

Table 2: Financial impact of different scenarios analyzed

Base line newscn1 newscn2 newscn3 newscn4 newscn5

Revenue Enhancement 0% -2% 2% -2% -4% 5%

Change in CAP EX 0% 2% 0% 0% 2% 2%

Cost Reductions 0% -1% 0% 0% 2% 2%

PV CF 145,731$ 135,162$ 156,087$ 143,776$ 137,182$ 164,882$

PV Terminal Value 240,895$ 224,145$ 256,900$ 237,231$ 226,846$ 271,103$

Enterprise Value 386,626$ 359,307$ 412,987$ 381,006$ 364,028$ 435,985$

Scenario Analysis Summary

Scenario Analysis Details

1. No strategic move and an increase in investments in natural gas - This scenario assumes

there is no increase in oil production and reserves, positioning the company poorly against

competitors like Chevron and ConocoPhillips, which are increasing spending on oil. This

also means that ExxonMobil is not capitalizing on the projected upward trend in oil prices.

An increase in natural gas exploration and production in an oversupplied market and subdued

natural gas prices further means increased capital expenditure spending and reduced cost

synergies. The increase in gas spending coming at the expense of oil spending which would

result in a fall in oil production, further reducing the revenue and earnings. Overall, this

contributes a $10 billion decrease in discounted free cash flow (FCF) and a $27 billion

decrease in enterprise value. See Financial Exhibit 12B for details.

47

2. No strategic move; Higher oil prices influence the status quo - Similar to the previous

scenario, this scenario assumes no increase in oil production and reserves, positioning the

company poorly against competitors increasing their oil exploration and production. Unlike

the previous scenario where the revenue decreases, in this case there will be an increase in

commodity prices which would help in revenue improvement but competitors would outpace

ExxonMobil in revenue growth. Overall, this contributes a $20 billion increase in discounted

FCF and a $53 billion increase in enterprise value.

3. No strategic move; Oversupply in the oil market leads to lower crude prices - This scenario

essentially means that there is no increase in oil production and reserves over already planned

levels of growth. Since the commodity prices are lower there will be a negative impact to the

revenue but the magnitude will be less compared to that of competitors who are increasing

their oil spending. Nevertheless, the company is not getting impacted adversely by low

commodity prices. Overall, this contributes a $12 billion decrease in discounted FCF and a

$32 billion decrease in enterprise value.

4. Implement strategic move; Low oil prices negatively impact the strategic decision - This

scenario reflects an increase in oil production and reserves. Such an increase in oil

exploration and production, with current oversupply and subdued oil prices would likely lead

to lower revenue and increased capital spending, and less opportunities to capitalize on the

synergies. Overall, this contributes a $6 billion decrease in discounted FCF and a $17 billion

decrease in enterprise value.

5. Implement Strategic move; High oil prices; Improved cost synergies due to technological and

value chain advancements - In this scenario, increased oil production and reserves help the

company capitalize on the increasing oil prices, and positions the company well against its

competitors. Cost synergies further improve the bottom-line. Overall, this contributes a $27

billion increase in discounted FCF and a $71 billion increase in enterprise value. See

Financial Exhibit 12C for details.

Sensitivity Analysis

A sensitivity analysis of each scenario was done by adjusting the various parameters (COGS,

WACC, GDP etc.) in the calculations to account for possible input variations. Clearly COGS and

operating revenue have the largest impact on the revenue of ExxonMobil for each scenario;

WACC and GDP have considerable impact as well (See Financial Exhibit 13).

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4. Analysis of the Effectiveness of Strategy

Goodness of Fit Test

Oil is the number one energy source and expected to remain that way for years to come. Oil

prices have been on the rise recently and projected to stay high due to increasing demand.

ExxonMobil increasing the investment in oil in the next five years is a sound choice.

ExxonMobil has a number of proven conventional basins with high-quality, low-risk oil and

a number of moderate-risk new plays and unconventional oil sources, such as oil sands. It also

has the resources and capabilities, such as the technological prowess and the years of exploration

and production experience and expertise in exploring for oil in demanding terrains, to

successfully execute on this strategy. The proven operational excellence and a well-integrated

value chain will further help ExxonMobil achieve the industry-leading cost efficiency needed to

generate profits.

Competitive Advantage Test

As a part of executing the strategic move, ExxonMobil will need to invest not just in

conventional oil but also in unconventional oil. There is an estimated three trillion barrels of

heavy oil in the world, equaling 100 years of global consumption at current levels. Only a

fraction of it (400 billion barrels) can efficiently be recovered using current technology.3

To capitalize on this vast source of energy, ExxonMobil will need to invest in infrastructure

and technology needed to explore and process unconventional oil. The technological

development, learning and the exploration rights that it would acquire in the process would

provide a sustainable competitive advantage to ExxonMobil for years to come.

ExxonMobil should seize this opportunity to increase its competitive edge against its nearest

competitors; BP, with large reserves, is still reeling under pressure due to the massive oil spill;

Chevron has been taking significant risks to increase its limited reserves; and Shell is staking out

a leadership position in natural gas, driven by its low oil reserves.

Performance Test

ExxonMobil spent $32 billion in exploration and production in 2010. (See Financial

Exhibit 10D.) The company has planned to spend $34 billion to $37 billion in capital spending

in the next five years, according to the company’s 2010 Annual Report. The scenario analysis

described above suggests that with a conservative one percent increase in capital expenditure and

49

a one percent additional revenue growth improvement projection, ExxonMobil would have an

additional cash flow of $14.2 billion discounted to present value.

Overall, the strategic move ExxonMobil has undertaken is well-aligned with its energy

outlook and long-term investments in the relatively high-growth area of natural gas.

5. Recommendations

To maintain its position as the leading energy producer, ExxonMobil must be willing to “take

on the world’s toughest energy challenges,” as its slogan suggests, beginning with growing its

diverse portfolio of high-quality resources of all types – conventional and unconventional oil,

natural gas liquid, natural gas, and shale gas. To do this profitably in a mature commodity

industry, ExxonMobil must focus on sharpening its operational excellence. Finally, to achieve

sustainable competitive advantage, ExxonMobil must invest in technological innovation and in

building distinctive competencies that will help the company distance itself from its competition.

The following paragraphs provide a description of short-term and long-term

recommendations. The impact of these recommendations on the value-cost profile is outlined in

Exhibits 27 and 28.

Shortterm recommendation

1. Increase investments in oil exploration, production and refining.

Rationale:

Oil is the number one energy source and expected to remain that way for years to come.16

In 2010, the revenue per unit of sale of oil is $71 versus $4 for natural gas.89 ExxonMobil spent

$32 billion in exploration and production in 2010. (See Financial Exhibit 10D.) By increasing

the capital expenditure by 3 to 5 percent to invest in oil, ExxonMobil stands to gain

competitively and financially, extending its leadership in the industry.

Execution Strategy:

To successfully execute this recommendation, ExxonMobil should step up its investment in

conventional oil from both proven fields and new oil plays. The production from low-risk proven

fields will help increase the near-term revenue. The exploration and production activities

associated with moderate-risk new plays would propel the growth subsequently.

On the domestic front, ExxonMobil should purse opportunities in conventional basins with

high quality prospects with low to moderate risk exposure. ExxonMobil has nearly 2.1 million

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net acres in the Gulf.90 The company also discovered a large oil reserve at the Hadrian complex.

These would be good opportunities to invest in oil near-term.

On the international front, ExxonMobil should expand activities on the basin where the

company was successful in the past – e.g. Indonesia, Gulf of Mexico, and Angola, Africa.

ExxonMobil recently discovered new basins in the Black Sea where it now holds nearly 6.3

million net acres.90 ExxonMobil should step up investments in these attractive opportunities that

have a moderate risk profile.

Implementation:

A key determinant of implementation is the technology and expertise to discover and develop

oil in unproven fields. Investing in developing the know-how and technology will reduce the

risks associated with these activities and can extend the company’s lead, as it can turn its core

competencies into distinctive competencies.

Industry Impact:

A stepped-up investment in this area, a “star” business segment based on the BCG matrix

profile (See Exhibit 15) would have a positive impact on the entire ecosystem surrounding oil

exploration and production, including oil rig operators, equipment suppliers, and oil service

companies. This may drive the cost of operation due to higher service costs, but the revenue

increase and other synergies will outweigh this concern.

Value-Cost Impact:

This recommendation is expected to improve both the value drivers and cost drivers. The

details of the value-cost profile impact are outlined in Exhibits 26, 27 and 28.

Organizational Impact:

This recommendation may prompt doubts among the XTO business team on ExxonMobil’s

plans and commitment towards the recently acquired natural gas player. This can be addressed

by articulating the need for and the alignment between the long-term strategic importance of

XTO and the short-term need for oil investment. In addition, integrating XTO, which is a

separate division now, into the existing Upstream division would help share a common goal of

“producing high quality energy reserves of all types,” and make the XTO team feel that it is an

integral part of the company.

Operational Impact:

Cost effectiveness is critical to profitably executing this recommendation. A formalized,

centralized and tighter operation is critical for success. To this end, ExxonMobil should create

operational and financial benchmarks to measure itself internally and against the industry.

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Financial Impact:

Please see the writeup on Scenario Five discussed in the previous financial analysis section

for the cost and benefit implications of executing this recommendation.

Shareholder Impact:

Investors would likely welcome this strategic move; however, some investors might be

concerned about the impact that it might have on dividends. ExxonMobil should continue to

maintain its current dividend payout ratio and should instead consider reducing the size of the

share buy-back and perhaps slightly increase the leverage (debt-equity ratio) to capitalize on a

low-interest environment and the company’s strong credit rating.

2. Expand chemical operations internationally. Target emerging markets.

The Chemical segment of ExxonMobil is the number two in earnings, and number one in

profit earned relative to capital invested. With few major players and many smaller players,

ExxonMobil with its best-value provider status has a very good opportunity to use its marketing

and geographical presence to introduce its product development strategy to emerging markets.

This recommendation would help the company improve both the cost drivers and value

drivers. See Exhibits 26, 27, and 28 for additional details. This would also increase the

intersegment revenue for Downstream, as Downstream business is the supplier to Chemical

businesses.

3. Focus on increasing supply (wholesale) sale and retrenching retail sale

Operational efficiency and cost reductions are key to improving the margins in Downstream.

With over 26,000 service stations and 600,000 commercial customers in the retail operation,82

the retail outlet is one of the big cost components in the Downstream business.

There is an opportunity to increase the commercial (wholesale) customer base through long-

term contracts that are indexed to crude oil prices. Exhibit 22 shows how fuel sales are

segmented between wholesale (38 percent), retail (47 percent) and others (15 percent),

suggesting a potential for improvement. ExxonMobil can attempt to leverage current commercial

customers as a reference to penetrate further into this segment.

By implementing this recommendation, the company can sell products quickly to increase

inventory turnover. This would in turn improve the liquidity ratios, which have been on the

decline until the last quarter, when it saw a slight uptick.

ExxonMobil can also save costs through reducing its retail stores through divesting retail

gasoline stations in strategically less significant locations, avoid renewing leases and transfer

52

leases on less profitable (e.g. bottom 10 percent) retail stations, and reduce opening new retail

gasoline stations.

These are value generating activities that would improve the value-cost profile of

ExxonMobil. See Exhibits 26, 27 and 28 for impact to the value-cost profile due to this

recommendation.

Longterm recommendations

1. Invest in natural gas exploration and production

Increasing awareness and focus on the environment would favor the use of natural gas as a

preferred source compared to coal or oil. The natural gas adoption across the globe, though

certain to happen, will take time to materialize as the technology, regulations and infrastructure

used in the manufacturing, power generation and transportation need to change significantly to

utilize natural gas compared to utilizing a current source of energy. Additionally, natural gas

prices are still too low for ExxonMobil to make an aggressive investment that could prove highly

profitable. For the price of natural gas to increase, the demand for and adoption of natural gas

needs to increase. The Wall Street Journal article titled, “Big Dogs of the Oil Patch Tangle Over

Gas Subsidies” 91 highlights the increased awareness and tenuous nature of the need to maintain

oil-gas equilibrium and the importance of regulations in promoting natural gas adoption.

Given how long it takes to explore and produce energy profitably and the valuation of long-

term exploration projects (See Exhibit 13), ExxonMobil should consider a persistent and a long-

term investment in natural gas exploration and production to sustain its leadership position and

reap the rewards in the decades to come.

2. Invest in unconventional oil and gas plays

Rationale:

As the conventional light crude supply shrinks, the oil industry needs to rely on abundantly

available but hard to process heavy crude oil to meet demand.3 The unconventional sources are

going to be the predominant source of energy reserves in the long-term. ExxonMobil should

make a long-term commitment towards unconventional plays. Chevron has been successful in

unconventional energy by taking necessary and calculated risks, as evident from its recent oil

finds in Wafra3. There is an opportunity for ExxonMobil to establish a commanding position by

acting early, but cannot wait so long to do so that Chevron is able to build a significant

advantage.

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Execution Strategy:

To successfully execute this recommendation and operate profitably, ExxonMobil must

secure an attractive position early through its technological prowess and then achieve economical

cost of production and yield through its operational excellence.

Investing in only exploration and production is not enough, as the infrastructure and

technology needed to transport and process heavy crude and unconventional gas is much

different. This might require the company to reshape certain value chain activities with newer

technology and efficiency processes. (See Exhibits 27 and 28 for details on value-cost profile

impacts due to this recommendation.) This may also require the company to locate or relocate

processing plants closer to production activities as heavy crude transportation has been a

contentious issue, as evident from a Wall Street Journal article titled “Oil-Sands Pipeline Fuels

Concerns.”92

Organizational Impact:

ExxonMobil is a company with long-term vision, and is much more conservative than its

competitors, as evident from the type of risks that Chevron assumes (e.g. early mover in Russian

oil fields and early mover to Wafra) versus the type for risk that ExxonMobil avoids. Executing

this recommendation would require the company to take calculated risks which in turn would

require leadership commitment and an organizational and cultural mind shift.

Implementation approach:

Since unconventional play is risky due to geological, operational and technological

unknowns, ExxonMobil should seek joint ventures where possible. This would help balance the

conservative internal culture and the need to take a measured risk to be competitively strong.

Financial Impact:

ExxonMobil has the financial strength (See Financial Exhibit 7 on operational cash flow)

and strong management discipline on its side to make this happen. By carrying out this

recommendation, ExxonMobil stands to improve its reserve replacement ratio, which would

influence the overall valuation of the company.

3. Invest in renewable energy sources

The growth in renewable energy is projected to be the fastest among various energy sources.

(See Exhibit 10). However, even with government subsidies, increasing investment on

renewable energy is not likely to be profitable. Keeping in mind the corporate social

responsibility and shareholder interest, ExxonMobil must make an incremental and meaningful

investment in entrepreneurial ventures and academic research. This will also help ExxonMobil

54

stay competitive and will ensure that it will not be left behind due to technological innovation or

blindsided by any disruptive innovation in renewable energy.

4. Improve ethical operating standards

ExxonMobil has a comprehensive set of ethical, anti-corruption and other operating

standards as discussed earlier. Continuing to invest in educating, monitoring and strictly

enforcing these standards would improve the company’s operational and financial strength.

6. Conclusion

Company Prospects

ExxonMobil has a long-standing reputation as the industry leader with a long-term

orientation. Disciplined management, a globally well-integrated value chain, and operational

excellence are the hallmarks of ExxonMobil.

As the industry leader, ExxonMobil is poised to take on the challenges of the world energy

needs for decades to come. The magnitude of its reserves, strong technology orientation, and its

financial strength gives it a commanding position in the industry.

For ExxonMobil to extend the competitive advantage, a well-balanced strategy that caters to

the short-term as well the long-term is critical. ExxonMobil’s recent move of focusing on oil for

next five years is well aligned with its energy outlook and long-term investments in relatively

high-growth area of energy (i.e. natural gas).

Investment Advice

The oil & gas industry is cyclical and its profits are highly correlated to global supply and

demand dynamics and political stability in major oil producing nations. Nevertheless, improving

global economic growth prospects and ever increasing energy demand bodes well for the

industry’s profit outlook. With an internationally diversified business portfolio, industry leading

oil & gas reserves, envious financial strength and solid dividend yields, ExxonMobil is one of

the best long-term investment plays in the energy sector and integrated oil & gas industry. We

rate ExxonMobil as a BUY for long-term investors.

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7. Main Appendix

Exhibit 1: Industry attractiveness

Upstream

External Factors Power Power Attractiveness business cycle high business cycle low Supplier Power high low moderate Buyer Power low moderate moderate Threat of new Entrants

low low High

Threat of Substitutes low low High Competition high high Low Compliments moderate moderate moderate Overall moderate-high

Downstream

External Factors Power Power Attractiveness Attractiveness

Business Cycle High Business Cycle Low Integrated Non-Integrated

Supplier Power high moderate High Low

Buyer Power low high moderate moderate

Threat of new Entrants

low low High High

Threat of Substitutes low low High High

Competition high high Low Low

Compliments High high High Low

overall moderate Low

Chemical

External Factors Power Power Attractiveness Attractiveness

Business Cycle High

Business Cycle Low

Integrated Non-Integrated

Supplier Power High moderate High low Buyer Power Low high moderate moderate Threat of new Entrants

Low low High high

Threat of Substitutes

moderate-high moderate-high Low low

Competition Moderate Moderate moderate moderate Compliments High high High low overall moderate low

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Exhibit 2: Six force analysis – Level One

Legend: A1 = Industry Attractiveness for Integrated Oil and Gas Companies. A2 = Industry Attractiveness for Non-Integrated Oil and Gas Companies Sc = Score = score gives the importance of the 6 forces for the business unit analyzed. Range being 1-5 with 5 being the highest score. Rank gives the strength of the force. The range is 1-10 with 10 being the most powerful force. R1 = Rank during up-cycle. R2 = Rank during down cycle. mod= moderate

57

Upstream6,8,7

Factors A1 A2 Sc R1 R2 Reasoning

Is the product Differentiated? low low 5 1 1

Neither Oil nor Gas is differentiated. These are commodity products which are heavily traded in global markets. The only differentiation is between grades of oil which is again industry defined and lot of producers is able to provide the same grades of oil.

Does the Buyer earn low profits

Buyers are oil refineries and natural gas distributors. They both have low profit margins and are highly price sensitive since crude oil/ natural gas forms the biggest portion of their cost component

refiners high high 1 2 8 13% profit margin

natural gas distributors high high 1 2 8 13.5% profit margin

Is the product significantly important to the buyer high high 5 5 5

Yes. Crude oil forms the input based on which the oil refineries can generate gasoline. Natural gas distributes are essentially pipelines which transfer gas to retail consumers. Hence product is significantly important to the buyer

Is the product a significant portion of the buyers' cost The single most cost component of both oil refineries and natural gas distributors is the cost of crude oil

refiners mod mod 1 8 8 81% of the total revenue goes in obtaining oil

natural gas distributors mod mod 1 8 8 67.5% of the total revenue goes in obtaining gas

Buyer concentration for each buyer group

buyers are just price sensitive and go with the company that gives them the best price and are geographically located close to them to save shipping costs

refiners high high 4 2 2 Marathon Oil-12.1%, Chevron - 13.2%, Valero Energy - 14.9%, Exxon Mobil-18%, ConocoPhilips - 19%

natural gas distributors mod mod 4 2 2 Sempra Energy - 4%, NiSource - 3.2%, PG&E - 3%

Is the buyer strategically important to the firm? high high 3 2 2 Crude oil and natural gas can be supplied to any refinery or natural gas distributor.

Are there buyer switching costs? low low 4 2 2

Pipelines are shared between different oil and gas suppliers. So there should be no switching costs in switching buyers

Does buyer have full information? low low 1 1 1 buyers have full information with regard to the grade of oil

Is there a threat of backward integration? high high 1 1 1

No exploration and production are very different businesses than refining and natural gas distribution. Also the threat of entry into the business is high due to capital requirements. So there is little threat of backward integration

% volume sold to the buyer low low 1 1 1

All of the output is sold to refineries to refine oil. Almost all of the natural gas is given to natural gas distributors. These distributors distribute natural gas amount electricity generators and to retail customers.

Overall mod mod 5 2 8 The Buyer power is moderate

Are the supplier product differentiated? high high 5 1 1 Non-differentiated products. They render services/equipment or pipes for transport of oil and gas.

Do the suppliers earn low profits?

Highly cyclical. Hence they have to make up for the down cycle in up cycle of business when the drilling activity increases.

mining and drilling equipment manufacturers low low 1 8 2 38% profit margin

pipe and tube suppliers high high 1 8 2 24% profit margins

pumping equipment high high 1 8 2 4.2% profit margins

Buyer Power

Supplier Power

58

Are there substitutes for Suppliers' products/services? low low 5 8 8

There are no substitutes for the suppliers' products. Since drilling equipment and pipes are must-haves for the entire value chain to function.

Is the supplier strategically important to the firm? mod mod 3 1 1

oil companies present request for quotation from various suppliers and choose the supplier with the most effective terms . Hence no particular supplier is important to the firm

Size and concentration of suppliers or supplier groups Competition is high with 3-4 major players in each supplier group.

mining and drilling equipment manufacturers high high 5 1 1

major players with market share are: Patterson-UTI Energy - 1.7%, Helmerich & Payne -1.8%, Nabors Industries - 2.5%, Halliburton Company - 9.7%

pipe and tube suppliers low low 3 5 5 major players with market share are: Northwest Pipe Company-4.3%, Evraz Inc 4.0%, Tenaris 39.2%

pumping equipment low low 3 5 5 major players with market share are: Flowserve Corp-5.8%, Atlas Copco-3.1%, ITT Corp - 8.9%

Are there switching costs for the supplier? high high 4 2 2 there are no switching costs to suppliers

What is the supplier industry growth rate?

mining and drilling equipment manufacturers mod mod 1 3 3 Annual growth rate (last 5 years)-14.3%. Project growth rate (next 5 years) - 3.8%

pipe and tube suppliers mod mod 1 3 3 Annual growth rate (last 5 years)-(0.1)%. Project growth rate (next 5 years) - 2.6%

pumping equipment mod mod 1 3 3 Annual growth rate (last 5 years)-(0.5)%. Project growth rate (next 5 years) - 4.2%

% volume sold to the industry

mining and drilling equipment manufacturers high high 3 3 3 94%

pipe and tube suppliers mod mod 3 3 3 48%

pumping equipment mod mod 3 3 3 20.20%

Is the firm strategically important to the supplier? mod mod 3 3 3 large oil drillers would be important to the suppliers to get long term contracts

Do the suppliers pose a forward integration threat? high high 1 3 3

The suppliers are small entities compared to big oil companies. However this may be threat for smaller oil companies.

Overall mod mod 3 8 2

Are there economies of scale? high high 5 2 2

Yes. There is certain amount of fixed cost involved in oil exploration which involves obtaining a site and permit to drill with government of various nations. The ability to obtain maximum output from one well is the best case scenario to obtain profitability

Are capital requirements high? high high 5 2 2 Capital requirements are high.

Is there product differentiation? high high 5 2 2 there is no product differentiation

Are there cost advantages independent of scale? Proprietary product technology high high 2 2 2 No. Efficiency can be obtained by operations.

Barriers to Entry

59

Is there access to distribution channels? high high 3 2 2

The value chain requires the access to distribution channel i.e. middle stream relationships to transport oil and gas

Is there a high chance of retaliation by competitors and contrived deference? high high 4 2 2

The major oil and gas companies called the 'seven majors' have strong political connections which would prevent the entry of any new entrant.

Are there government barriers to entry? high high 2 2 2

Government regulation in terms of environmental impact forms significant portion of the expenses born by the drilling companies.

Overall high high 5 2 2

Competitors are numerous or are roughly equal in size and power low low 5 8 8 competitors are numerous and equal in size

Industry growth rate is slow? low low 5 8 8

industry growth rate is slower than in the past due to energy efficient transport mechanism and government mandate

High fixed costs? low low 5 8 8 there are high fixed costs in finding a site and obtaining government approval to drill

the products/ services lacks differentiation or switching costs low low 5 8 8 products lack differentiation since both oil and gas are commodity products

Capacity is normally augmented in large increments? low low 3 5 5 oil drilling and extraction is a slow process and cannot be augmented rapidly

Competitors are diverse in strategies? low low 3 8 8

competitors aggressively pursue oil drilling activities as the price of oil goes up and previously unprofitable wells start becoming profitable

High Strategic Stakes? low low 3 8 8

No. pursuing oil is the safe bet when the prices of oil are rising. Diversification into natural gas definitely helps the oil companies during the times when oil prices are declining since volatility in natural gas is a lot less compared to volatility in oil prices.

Exit Barriers are high? low low 3 8 8 exit barriers are not too high

Overall low low 5 8 8

Do buyers have high propensity to substitute? high high 5 2 2 buyers would love to substitute oil with anything environmentally friendly

Is the price performance of substitutes high? high high 5 2 2

No. the price performance of substitutes is low. Solar power, wind power are not still commercially viable alternatives to oil. In transport too some buses use natural gas instead of oil. However the reach of replaceable has not grown and it is still in R&D phase awaiting commercialization.


Relative concentration of complement products/services mod mod 3 4 4 highly concentrated and tightly integrated positions

relative supplier or buyer switching costs mod mod 3 4 4 switching costs are low

Ease of bundling mod mod 3 4 4There is no bundling. However, vertical integration eases the sale of oil and gas for the upstream producers

differences in pull through mod mod 3 4 4

vertically integrated companies helps the upstream producers to reduce their marketing expense as well as reduced inventories and hence operational efficiencies

threat of vertical integration mod mod 3 4 4 vertical integration acts as a compliment instead of threat

rate of growth mod mod 3 4 4 Cyclical.


Power of Complements

Rivalry


60

Downstream6

Factors A1 A2 Sc R1 R2 Reason

Is the product Differentiated?

high high 5 1 1All oil refineries produce the same oil with standard grades.

Does the Buyer earn low profits

low low 3 8 2 The buyers are the households and commercial transportation. They are price sensitive.

is the product significantly important to the buyer

low low 3 2 2

Transportation is essential to households and commercial transportation industry. Hence product is significantly important to the buyer. Electricity and household use of natural gas too is important to households

Is the product a significant portion of the buyers' cost

low low 5 5 5 With the rising oil prices, households are increasingly paying out of their noses.

Buyer concentration for each buyer group

low low 3 5 5no such grouping exists

Is the buyer strategically important to the firm?

low low 3 2 2 Yes. Households form a major portion of their sales. They have over 1 million industrial and wholesale customers

Are there buyer switching costs?

high high 5 8 2there are no switching costs in going to competitor for the same oil

Does buyer have full information?

low low 2 2 2buyer has grade of oil information

Is there a threat of backward integration?

low low 1 2 2 No. since exploration is highly competitive industry with high cost of capital and high barriers to entry.

% volume sold to the buyer

high high 1 2 2 Households get 47% of the output of refineries. 24% of output goes for commercial transportation


Are the supplier product differentiated?

high high 5 2 2 Supplier products are not differentiated. Although high quality light crude demand higher cost than heavy crude

Do the suppliers earn low profits?

Mod low 5 8 2 Suppliers can control their supply and wait for the up-cycle to sell. So they don’t earn low profits. Profit margin for drilling companies is 48%

Are there substitutes for Suppliers' products/services?

low low 5 8 8there are no substitutes for crude oil

Is the supplier strategically important to the firm?

mod low 5 7 7 crude oil is same from all suppliers with a particular grade so suppliers are not strategically important to the firm

Size and concentration of suppliers or supplier groups

mod mod 4 2 2 major players with market share: ExxonMobil -2.7%, Shell - 5.6%, BP - 7%, ConocoPhilips - 7.7%, chevron - 10.3%

Are there switching costs for the supplier?

high high 4 2 2since there is little product differentiation, there are no supplier switching costs

What is the supplier industry growth rate?

mod mod 3 4 4Annual growth rate (last 5 years)-3.1%. Project growth rate (next 5 years) - 5.5%

% volume sold to the industry

mod mod 3 4 465% of the output goes to refineries

is the firms strategically important to the supplier?

mod mod 3 4 4Refiners can obtain crude oil from any players in the industry

do the suppliers pose a forward integration threat?

high low 1 4 4 There are lot of vertically integrated oil companies which see a good control in market by entering in refining business

Overall high low 5 8 5

Supplier Power

Buyer Power

61

Are there economies of scale?

high high 4 2 2There are economies of scale as in any manufacturing facilities

Are capital requirements high?

high high 5 2 2 Huge investments are required to set up a refinery and meet government regulation standards as well as environmental guidelines

Is there product differentiation?

high high 4 2 2there is no differentiation in products produced by different refineries

Are there cost advantages independent of scale? Proprietary

high high 4 2 2cost advantages can be achieved by use of technological breakthroughs

Is there access to distribution channels?

high high 4 2 2 Refined oil is sold to retailers using contracts. So the distribution channel is accessible to new entrant

Is there a high chance of retaliation by competitors and

high high 4 2 2

Competitors are not making fresh moves in refining industry except outsourcing to reduce their costs. So there would not be retaliation from industry.

Are there government barriers to entry?

high high 4 2 2 Government regulations in terms of environment safety act as deterrent to the new player.


Competitors are numerous or are roughly equal in size and power

low low 5 8 8Competitors are equal in size and numerous.

Industry growth rate is slow?

low low 5 8 8Annual growth rate (last 5 years)-4.6%. Project growth rate (next 5 years) - 3.1%

High fixed costs?low low 5 8 8 involves cost in setting up a plant, getting past environmental regulation, tie-

ups in obtaining crude oil and contracts with buyersthe products/ services lacks differentiation or switching costs

low low 5 8 8products lack differentiation and switching costs are low

Capacity is normally augmented in large increments?

low low 3 5 5 Capacity can be improved by operational efficiency, technology improvements or by setting up new refining capacity.

Competitors are diverse in strategies?

low low 3 8 8competitors are not diverse in its strategy

High Strategic Stakes?low low 3 8 8 Strategy direction can be in terms for technology improvements to refine oil so

stakes are not high.

Exit Barriers are high?low low 3 8 8

Exit barriers are not high.


Do buyers have high propensity to substitute?

high high 5 2 2 There is no substitute for oil whose major buyers are households and commercial transport.

is the price performance of substitutes high?

high high 5 2 2 Substitutes in transport industry act in the form of electric and gas driven vehicles. Their price performance is high compared to oil.


Barriers to Entry

Rivalry


62

Relative concentration of complement products/services

mod low 3 4 4highly concentrated and tightly integrated positions

relative supplier or buyer switching costs

mod low 3 4 4switching costs are low

Ease of bundlingmod low 3 4 4 There is no bundling. However, vertical integration eases the sale of oil and gas

for the upstream producers

differences in pull through

mod low 3 4 4


threat of vertical integration

mod low 3 4 4vertical integration acts as a compliment instead of threat

rate of growthmod low 3 4 4

Cyclical.

Overall mod low 3 4 4


Chemical 13,6

Factors A1 A2 Sc R1 R2 Reason

Is the product Differentiated? high high 5 1 1 Commodity product. So no differentiation

Does the Buyer earn low profits low low 3 2 8 Buyers are plastic and rubber manufacturers. They earn low profits.

is the product significantly important to the buyer low low 3 2 2

Plastic and rubber manufacturers cannot function without petrochemicals. Petrochemicals act as intermediaries for other petrochemical manufacturing as well.

Is the product a significant portion of the buyers' cost low low 5 5 5 Petrochemicals form a significant portion of the costs

Buyer concentration for each buyer group low low 3 5 5 no such grouping exists

Is the buyer strategically important to the firm? low low 3 2 2

Plastic, resin and synthetic rubber manufacturers and other domestic chemical manufacturing industries are key buyers

Are there buyer switching costs? high high 5 2 8

there are numerous plastic, rubber and other chemical manufactures so switching costs within industry are not high

Does buyer have full information? low low 2 2 2

Buyers are large manufacturing corporations so they have full information.

is there a threat of backward integration? low low 1 2 2

Petrochemicals succeed with tie-ups with further backward integration. So there is no threat of back-ward integration

% volume sold to the buyer high high 1 2 2

Plastic, resin and synthetic rubber manufacturers - 47%, other domestic chemical manufacturing industries - 43.4%, polystyrene foam manufacturers - 7%, exports -2.6%


Buyer Power

63

Are the supplier product differentiated? high high 5 2 2 oil and gas have no differentiation among different suppliers

Do the suppliers earn low profits? mod low 5 8 2

Suppliers can control their supply and wait for the up-cycle to sell. So they don’t earn low profits. Profit margin for drilling companies is 48%

Are there substitutes for Suppliers' products/services? low low 5 8 8 there are no substitutes for oil and gas

is the supplier strategically important to the firm? mod low 5 7 7

crude oil is same from all suppliers with a particular grade so suppliers are not strategically important to the firm

Size and concentration of suppliers or supplier groups mod mod 4 2 2

Major players with market share: ExxonMobil -2.7%, Shell - 5.6%, BP - 7%, ConocoPhillips - 7.7%, chevron - 10.3%.

Are there switching costs for the supplier? high high 4 2 2

since there is little product differentiation, there are no supplier switching costs

What is the supplier industry growth rate? mod mod 3 4 4

Annual growth rate (last 5 years)-3.1%. Project growth rate (next 5 years) - 5.5%

% volume sold to the industry mod mod 3 4 4 4% of the output goes to petrochemical manufacturing

is the firms strategically important to the supplier? mod mod 3 4 4 Refiners can obtain crude oil from any players in the industry

so the suppliers pose a forward integration threat? high low 1 4 4

There are lot of vertically integrated oil companies which see a good control in market by entering in refining business

Overall high low 5 8 5

Are there economies of scale? high high 4 2 2 there are economies of scale as in any manufacturing industry

Are capital requirements high? high high 5 2 2

a world-class ethylene plant is thought to cost more than $1 billion to construct

Is there product differentiation? high high 4 2 2 there is no product differentiationAre there cost advantages independent of scale? Proprietary product high high 4 2 2

cost advantages can be obtained by operational efficiency and technological breakthrough in manufacturing process

is there access to distribution channels? high high 4 2 2

access to distribution channel is not easy with need to have tie-ups with other petrochemical manufacturers

is there a high chance of retaliation by competitors and contrived deference? high high 4 2 2

the existing players in the industry are not making fresh moves to gain additional market share instead they are moving their operations overseas to save cost. So no retaliation is expected.

Are there government barriers to entry? high high 4 2 2

government regulation in terms of environmental issues act as deterrents for new entrants


Supplier Power

Barriers to Entry

64

Competitors are numerous or are roughly equal in size and power low low 5 8 8 There are just two major players - Dow Chemicals and ExxonMobil.

Industry growth rate is slow? low low 5 8 8

Annual growth rate (last 5 years)-1.8%. Project growth rate (next 5 years) - 3.8%

High fixed costs? low low 5 8 8involves cost in setting up a plant, getting past environmental regulation, tie-ups in obtaining crude oil and contracts with buyers

the products/ services lacks differentiation or switching costs low low 5 8 8 products lack differentiation and switching costs are low

Capacity is normally augmented in large increments? low low 3 5 5

Capacity can be improved by operational efficiency, technology improvements or by setting up new refining capacity.

Competitors are diverse in strategies? low low 3 8 8 competitors are not diverse in its strategy

High Strategic Stakes? low low 3 8 8Strategy direction can be in terms for technology improvements to refine oil so stakes are not high.

Exit Barriers are high? low low 3 8 8 Exit barriers are not high.


Do buyers have high propensity to substitute? high high 5 2 2

Environmentally friendly consumers would require that petrochemicals be substituted with more environmentally friendly chemicals. However this is a very small segment.

Is the price performance of substitutes high? high high 5 2 2

the environmentally friendly products do not have high price performance since they do not have wide acceptance


Relative concentration of complement products/services mod low 3 4 4 highly concentrated and tightly integrated positions

relative supplier or buyer switching costs mod low 3 4 4 switching costs are low

Ease of bundling mod low 3 4 4There is no bundling. However, vertical integration eases the sale of oil and gas for the upstream producers

differences in pull through mod low 3 4 4


threat of vertical integration mod low 3 4 4 vertical integration acts as a compliment instead of threat

rate of growth mod low 3 4 4 Cyclical.

Overall mod low 3 4 4

Rivalry



65

Exhibit 3: ExxonMobil’s Competitors – Reserves and Production*

2010 2009 2008

ExxonMobil93

Reserves – Oil 8,890 8,905 7,576

Reserves - Natural Gas 78,815 68,007 31,402

Production - Oil 2,240 2,202 2,219

Production - Natural Gas 12,148 9,273 9,095

Royal Dutch Shell94

Reserves – Oil 4,528 4,031

Reserves - Natural Gas 47,135 49,055

Production - Oil 1,174 1,144 1,259


BP95

Reserves - Oil 10,709 10,511 10,353


Production - Oil 2374 2535 2401


ConocoPhillips96

Reserves - Oil

Reserves - Natural Gas

Reserves - Combined (BOE) 8,310 10,326 9,975

Reserve replacement ratio, 5-year average 75% 145% 155%

Production - Oil 913 968 923


Chevron97

Reserves - Oil 6,503 6,973 7,350


Production - Oil 2,763 2,678

Production - Natural Gas 5,040 4,989

Total S.A.98

Reserves - Oil 4,014 4,041 4,410


Production - Oil 1,340 1,381 1,456


66

Exhibit 4: US Natural Gas Producers99

Company Production 1Q 2011

(million cubic feet per

day)

RP

Ratio*

2010 Reported US

Net Proved

Natural Gas

Reserves

US Gas Rigs

Drilling on

5/6/11

ExxonMobil 3904 18 26111 54

Chesapeake 2703 16 15455 91

Anadarko 2412 9 8117 20

Devon 1964 13 9065 49

BP 1905 20 13743 5

EnCana 1801 11 7477 28

ConocoPhillips 1589 18 10479 10

Southwestern 1277 11 4930 14

Chevron 1270 5 2472 4

Williams 1155 10 4272 17

*RP Ratio: Reserves-to-Production Ratio, indicates remaining amount of natural gas reserves

expressed in years

Exhibit 5: Consolidation in the US Natural Gas Industry100

Company Acquisition

ExxonMobil Acquired XTO Energy Inc. for $25B

Acquired Ellora Energy Inc. for $695 million

Deal with Petrohawk Energy Corp. for $575 million

Royal Dutch Shell Purchased East Resources Inc. for $4.7 billion

BP & Statoil Separate joint ventures with Chesapeake, purchasing gas assets

in two major shale plays, the Fayetteville and the Marcellus

Total S.A. Purchase of assets from Chesapeake for $2.25B

Chevron $4.3B deal to buy natural gas fields in the Northeast

CNOOC Invested $2.16B in oil and gas fields owned by Chesapeake

67

Exhibit 6: ExxonMobil’s Functional Operating Companies

Exhibit 7: ExxonMobil Corporate Officers

R. W. Tillerson — Chairman of the Board M. W. Albers — Senior Vice President M. J. Dolan — Senior Vice President D. D. Humphreys — Senior Vice President A. P. Swiger — Senior Vice President S. J. Balagia — Vice President and General Counsel L. J. Cavanaugh — Vice President-Human Resources K. P. Cohen — Vice President-Public and Government Affairs W. M. Colton — Vice President-Corporate Strategic Planning T. M. Fariello — Vice President-Washington Office P. T. Mulva — Vice President and Controller O. K. Owen — Vice President-Safety, Security, Health and Environment D. S. Rosenthal — Vice President-Investor Relations and Secretary R. N. Schleckser — Vice President and Treasurer J. M. Spellings, Jr. — Vice President and General Tax Counsel S. K. Stuewer — Vice President-Environmental Policy & Planning

Exploration CompanyS. M. Greenlee - President

Develoment CompanyN. W. Duffin - President

Production CompanyR. M. Kruger - President

Gas and Power MarketingT. R. Walters - President

Upstream Research CompanyS. N. Ortwein - President

Upstream VenturesR. S. Franklin - President

Upstream

Refining and Supply CompanyS. J. Glass, Jr. - President

Fuels Marketing CompanyH. R. Cramer - President

Lubricants & Specialties CompanyA. J. Kelly - President

Research & EngineeringT.J. Wojnar, Jr. - President

Intl. Marine Transportation

SeaRiver Maritime

Downstream

ExxonMobil Chemical CompanyS. D. Pryor - Presiden

Chemical

Information Technology

Real Estate and Facilities

Global Procurements

Business Support Services

Global ServicesB.W. Milton - President

XTOJ. P. Williams, Jr. - President

Imperial Oil

ExxonMobilRex Tillerson - CEO

68

Exhibit 8: Functional Business Unit Earnings and Performance

ExxonMobil’s 2010 business segment performance. All numbers are in dollar value reported here

is in million dollars

$24,097

$103,287

$27,319

$3,567

$24,130

$2,505 $4,913$18,680

$2,215

Earnings After Taxes Average Capital Employed Capital and Exploration Expenditure

Business Segment Expenditure and Earnings

Upstream Downstream Chemical

23.33%

113%

14.78%

70%

26.30%

45%

ROACE (Return on Average Capital Employed) Capital and Exploration Expenditure as a % of earnings

Expenditure and Return on Captial Employed

Upstream Downstream Chemical

Exhibit 9: Breakdown of earnings by U.S and Non U.S operations

Business SegmentsEarnings After

Taxes

% of earning

contributed by

the segment

Average

Capital

Employed

ROACE (Return

on Average

Capital

Employed)

Upstream $24,097 79% $103,287 23.33%

Downstream $3,567 12% $24,130 14.78%

Chemical $4,913 16% $18,680 26.30%

FY 2010 data in Millions of dollars

Upstream$4,27243%

Downstream$770

8%

Chemical$4,91349%

Earnings from U.S Business

Upstream$19,82572%

Downstream$2,79710%

Chemical$4,91318%

Earnings from non‐U.S business

69

Exhibit 10: ExxonMobil’s Energy Outlook – Global demand by fuel

The projected average growth rate per year between 2005 and 2030 for oil is 0.7%, for natural

gas is 2.0%, for Biomass/waste is 0.4%, for nuclear is 2.3%, for Hydro is 2.1% and Wind, Solar and

Biofuels is 9.9%.

Exhibit 11: ExxonMobil Value Chain Synergies

70

Exhibit 12: Gas Reserves by Leading companies as of 2009101

Data as of 2009 Liquid Reserves (Million Barrels)

Natural Gas Reserves (Billion Cubic Feet)

Total Reserves (In Oil Equivalent Barrels, Million Barrels)

ExxonMobil 9215 12502 15103 BP 5658 40388 12562 Shell 4031 49055 12416 Chevron 6973 26049 11426 Total 5689 26318 10188 ConocoPhillips 3859 18965 7101 XTO 388 3442 2525

In the following chart the ExxonMobil’s reserves include the XTO reserve as well.

0

10000

20000

30000

40000

50000

60000

Total Reserves of Major Integrated Oil & Gas Companies ‐2009

Liquid Reserves(Million Barrels)

Natural Gas Reserves(Billion Cubic Feet)

Total Reserves (In Oil Equivalent Barrels, Million Barrels)

Exhibit 13: Exploration Timeline and Valuation102

71

Exhibit 14: ExxonMobil’s Partnership Alliances82

A list of significant equity companies as of Dec 31, 2010 together with ExxonMobil's Ownership Interest

Business Segment Percentage Ownership Interest

Business Segment Percentage Ownership Interest

Upstream Downstream

Aera Energy LLC 48% Chalmette Refining, LLC 50%

BEB Erdgas und Erdoel GmBH 50% Fujian Refining & Petrochemical Co. Ltd. 20%

Cameroon Oil Transporation Company S.A

41% Saudi Aramco Mobil Refinery Company Ltd. 50%

Castle Peak Power Company Ltd 60%

Golden Pass LNG Terminal LLC 18% Chemical

Nederlandse Aardolie Mattschappij B.V 50% Al‐Jubail Petrochemical Company 50%

Qatar Liquefied Gas Company Ltd 10% Infineum Holdings B.V 50%

Qatar Liquefied Gas Company Ltd 2 24% Saudi Yanbu Petrochemical Co. 50%

Ras Laffan LNG Company Ltd 25% Toray Tonen Specialty Separator Godo Kaisha

50%

Ras Laffan LNG Company Ltd II 31%

Ras Laffan LNG Company Ltd III 30%

South Hook KNG Terminal Company Ltd 24%

Tengizchevroil, LLP 25%

Terminale GNL, Adriatico S.r.l 69%

Exhibit 15: BCG Matrix

72

Exhibit 16: 9cell Matrix

Exhibit 17: ExxonMobil Business Strategy82

Upstream

business

strategies

Identifying and selectively pursuing the highest quality exploration opportunities

Investing in projects that deliver superior returns, maximizing profitability of

existing oil and gas production

Capitalizing on growing natural gas and power markets, using Joint-venture to

mitigate exploration cost and risk, integrating the supply chain of Upstream and

Downstream businesses.89

Down

stream

business

strategies

Maintaining best-in-class operations in all aspects of the business

Maximizing value from leading-edge technologies

Capitalizing on integration across ExxonMobil businesses

Selectively investing for resilient, advantaged returns

leading the industry in efficiency and effectiveness

Providing quality, valued products and services to customers.89

Chemical

business

strategies

Capitalizing core competencies to build proprietary technology positions, Capture

full benefits of integration across ExxonMobil operations

Consistently deliver best-in-class performance

Selectively invest in advantageous projects.89

73

Exhibit 18 : Resources and capabilities

Resources and Capabilities Description

Skills, Expertise

Global Integration

Operational Excellence

Technological innovation

In the Upstream, ExxonMobil uses seismic and reservoir

modeling that it pioneered to explore oil and gas resource and

drill accurately to enhance recovery potential. For example,

ExxonMobil’s FastDrill technology and drill string vibration

management allowed it to increase the drilling speed and reach.

ExxonMobil has integrated a wide variety of technology with

XTO to improve shale gas exploration and production. For

example, 3D imaging of shale pore networks, seismic methods,

new fracturing methods etc., allow it enhance the efficiency and

effectiveness of oil and gas production

In the Downstream, ExxonMobil employed sophisticated

molecular technology to optimize refining of varying quality

crude oil.

Valuable physical Assets

Oil and gas Acreage

Reserves

Balanced mix of portfolio

Long-term Oil and gas

rights

Geographic coverage

The proved reserve base of ExxonMobil is 47% in liquids

and 53% in natural gas.

ExxonMobil in 2010, increased its reserves by 209% of its

production or 3.5 BOEB, taking the total reserves to 24.8

BOEB. The liquid additions were 102% replacement ratio and

gas additions were 328% reserve replacement ratio.

Financial base Because ExxonMobil's product is a pure commodity, it is very

difficult to find an energy company that earns consistent,

attractive returns on invested capital over time because of the

inherent capital intensity and unpredictability of the sector.

Upstream operations require excellent capital discipline and

exploration skill. On the Downstream side of the business, the

only hope of earning a decent returns on invested capital comes

from scale. ExxonMobil check both boxes in a unique way. The

AAA balance sheet gives credence to its financial strength.

Valuable human assets and

intellectual capital

ExxonMobil employs over 16,000 scientists and engineers and

many of them are distinguished scholars in their field of

74

Proven managerial

know-how

High safety rating

Experienced work force

expertise. Their expertise range from geology, physics,

chemistry, oceanography, high technology and environmental

sciences.

ExxonMobil invests more than $1B annually in R&D to safely

explore and produce energy to meet demands

Valuable Intangible Assets Great brand name

Disciplined investment with long-term focus

Alliances

Partnerships

Joint-ventures

See section Joint Venture and Alliances in the main write-up for

details. Also see Exhibit 14.

Exhibit 19: Oil & Gas – Value to Customers

Oil & Gas Oil & GasValue Drivers for

Retail usersImportance Weight

Normalized Weight (β)

Value drivers for commerical users

Importance WeightNormalized Weight (β)

Comments

Price 1 1.00 0.22 Supply guarantee 1 1.00 0.17Accessibility (being able to energy source from a given vendor)

2 1.00 0.22Competitive contract (price)

2 1.00 0.17

Quality 3 0.75 0.16 Range of products 3 0.90 0.15Quality of Service 4 0.75 0.16 Quality of Service 4 0.80 0.14

Range of products 5 0.65 0.14 Product Quality 5 0.80 0.14Important in the case of aviation and marine fuel

Brand name 6 0.50 0.11Accessibility (how easily the vendor can supply energy to a company)

6 0.70 0.12

Brand name 7 0.70 0.12Total Value to the customers

4.65 1.00Total Value to the customers

5.90 1.00

Exhibit 20: Chemical – Value to Customers

Chemical

Value to customers Importance Weight Normalized Weight (β)

Range of Products 1 1.00 0.20 Product Quality 2 1.00 0.20 Accessibility 3 0.80 0.16 Brand name 4 0.70 0.14 Quality of service 5 0.70 0.14 Price 6 0.70 0.14

Total Value to the customers 4.90 1.00

75

Exhibit 21: Price Sensitivity of ExxonMobil products

Exhibit 22: ExxonMobil Global Fuel Sale Segments

Exhibit 23: VRIO Analysis

Resource / Capabilities Value

Rare /

Scarce

Easy to

Imitate

Organized

to Exploit

OPERATIONAL EXCELLENCE 10 3 3 9

GEOGRAPHIC ACCESS TO MARKET 10 3 3 10

SELLING POWER MARKETING 9 8 10 7

PRODUCT PRICE 9 3 3 8

REFINIERIES 9 3 4 9

TECHNOLOGY TO FIND RESERVES 8 6 5 9

STORAGE TRANSPORTATION 8 4 3 3

OIL/WELL RESERVES 5 5 10 8

76

Exhibit 24A: ValueCost Profile for ExxonMobil and its Competitors

Exhibit 24B: ExxonMobil Value and Cost Driver Strength

77

ExxonMobil Profile(pre-strategic move)

Notes

Value DriversMagnitude of proven oil reserves HighMagnitude of proven gas reserves ModerateMagnitude of proven unconventional reserves Moderatenet acreage available for oil exploration Highnet acreage available for gas exploration Moderate High in US onlymix of energy reserves (oil vs. gas) BalancedExploration rights Moderate Chevron and BP has more rightsOil exploration expertise Very HighGas exploration expertise Moderately HighUnconventional oil & gas exploration expertise Moderately HighGeographical coverage/Global Reach Very HighMarketing Power Very HighTechnological Innovation Very GoodAlliances (parternship & Joint-venture) HighLeading Brand HighDisciplined Management Very GoodFinancial base Very Good

Cost DriversEconomies of Scale Very HighGlobal Integration (Economies of Scope) Very HighLearning HighOperational Excellence Very High

Operational Safety HighExcept for Valdez almost 20 years ago; Greatly improved recently

Exhibit 25: ExxonMobil Value Cost Driver Change due to Strategic Move ExxonMobil Profile

(pre-strategic move)Impact of Strategic

moveValue Drivers

Magnitude of proven oil reserves High IncreasesMagnitude of proven gas reserves Moderate No meaningful changeMagnitude of proven unconventional reserves Moderate Increasesnet acreage available for oil exploration High Might decreasenet acreage available for gas exploration Moderate No meaningful changemix of energy reserves (oil vs. gas) Balanced More oil in the short-termExploration rights Moderate No meaningful changeOil exploration expertise Very High IncreasesGas exploration expertise Moderately High No meaningful change

Unconventional oil & gas exploration expertise Moderately High Increases

Geographical coverage/Global Reach Very High Might improveMarketing Power Very High No meaningful changeTechnological Innovation Very Good IncreasesAlliances (parternship & Joint-venture) High IncreasesLeading Brand High Might improveDisciplined Management Very Good No meaningful changeFinancial Strength Very Good Increases

Cost DriversEconomies of Scale Very High IncreasesGlobal Integration (Economies of Scope) Very High IncreasesLearning High IncreasesOperational Excellence Very High Increases

Operational Safety High Might improve

Refinery and Plant utilization High Increases

Exhibit 26: Recommendation Summary

78

Recommendation Description Recommendation Type Recommendation Code1. Increase investments in oil exploration, production and refining short-term; Global ST-12. Maintain investment in natural gas proportional to growth rate short-term ST-2

3. Expand chemical operations internationally. Target emerging markets short-term; Global ST-3

A) Invest in natural gas exploration and production long-term; Global LT-1B) Invest in unconventional oil and gas plays long-term; Global LT-2C) Invest in renewable energy sources Social Responsibility SR-1D) Improve ethical and operational standards Ethical Responsibility ER-1

Exhibit 27: Qualitative impact of recommendations on overall value

Please refer to Exhibit 26 on recommendations and associated recommendation code used here.

Value of RecommendationST-1 ST-2 ST-3 LT-1 LT-2 SR-1 ER-1

Value Drivers Improves Improves No major change Improves Improves No major change No major changeCost Drivers Improves Improves No major change Improves Improves No major change No major changeCompetitive Stature Improves Improves No major change Improves Improves Improves No major changeFinancial Strength Improves Might improve Improves Might improve Might decrease Might decrease Might improveValue Chain Synergy Improves Might improve Improves No major change Improves No major change No major changeBrand value No major change Might improve Improves No major change No major change Improves Might improveMarket Capitalization Improves Might improve Improves Might improve Might improve Might improve Might improve

Exhibit 28: Impact of recommendation on valuecost profile

Please refer to Exhibit 26 on recommendations and associated recommendation code used here.

79

ST-1 ST-2 ST-3 LT-1 LT-2 SR-1 ER-1Value DriversMagnitude of proven oil reserves Increases No major change No major change No major change No major change No major change No major changeMagnitude of proven gas reserves No change No major change No major change Increases No major change No major change No major changeMagnitude of proven unconventional reserves Increases No major change No major change Increases Increases No major change No major changenet acreage available for oil exploration Might decrease No major change No major change No major change Might decrease No major change No major changenet acreage available for gas exploration No major change No major change No major change Might decrease Might decrease No major change No major changemix of energy reserves (oil vs. gas vs. other) More Oil More Chemical No major change More Gas More Oil More renewable No major changeExploration rights Might increase No major change No major change Might increase Might increase No major change No major changeOil exploration expertise Increases No major change No major change No major change No major change No major change No major changeGas exploration expertise No major change No major change No major change Increases No major change No major change No major changeUnconventional oil & gas exploration expertise No major change No major change No major change Might increase Increases Might increase No major changeGeographical coverage/Global Reach Might improve Increases Might improve Might improve Might improve Might improve No major changeMarketing Power No major change Might improve Increases No major change No major change Increases IncreasesTechnological Innovation Increases Might improve No major change Might increase Increases Increases No major changeAlliances (parternship & Joint-venture) Increases Might increase Increases Might increase Increases Might increase No major changeBrand value Might improve Might improve Increases No major change No major change Increases IncreasesCost DriversEconomies of Scale Increases Might improve No major change Might improve No major change No major change No major changeGlobal Integration (Economies of Scope) Increases Might improve No major change No major change No major change No major change No major changeLearning Increases No major change Might improve Might improve Might improve Increases Might improveOperational Excellence Increases No major change No major change Might improve No major change No major change Might improveOperational Safety Might improve No major change No major change Might improve No major change No major change No major changeRefinery and Plant utilization Increases No major change No major change No major change No major change No major change No major change

Exhibit: 29 – BP Market Cap lost by $100B103

Dates & information BP Stock Price April 16 2010 $59.88 June 25th 2010 $27.72 Outstanding shares 3.14 billion Market cap lost in 2 weeks $100.98 Billion = ($59.88 - $27.72)x3.14B

Exhibit 30: Strategic Group analysis data104,105,106,107,108,109,110,111,112,113,114

XOM RDS BP COP CVX

TOTAL

(100%) XOM RDS BP COP CVX

Crude Capacity (100s bbl/d) 5783.00 4509.00 3325.00 2778.00 2756.00 19151.00 30.20% 23.54% 17.36% 14.51% 14.39%

Revenue ($ billion) 383.00 368.00 308.90 198.66 205.00 1463.56 26.17% 25.14% 21.11% 13.57% 14.01%

Net Income ($ billion) 31.40 20.50 ‐3.70 11.36 19.10 78.66 39.92% 26.06% ‐4.70% 14.44% 24.28%

Full Time Employees (1000s) 83.60 93.00 79.70 35.60 62.00 353.90 23.62% 26.28% 22.52% 10.06% 17.52%

Accidents since Jan 2011 75.00 84.00 89.00 50.00 129.00 427.00 17.56% 19.67% 20.84% 11.71% 30.21%

Oil Reserves 8890.00 4528.00 10709.00 8310.00 6503.00 38940.00 22.83% 11.63% 27.50% 21.34% 16.70%

Natural Gas Reserves (1000s) 78.815 47.135 42.700 10.740 24.251 203.641 38.70% 23.15% 20.97% 5.27% 11.91%

Oil Production 2240.00 1174.00 2374.00 913.00 2763.00 9464.00 23.67% 12.40% 25.08% 9.65% 29.19%

Natural Gas Production 12148.00 6244.00 8401.00 4606.00 5040.00 36439.00 33.34% 17.14% 23.05% 12.64% 13.83%

Total Debt ($B) 12.227 34.381 30.710 22.66 11.003 110.977 11.02% 30.98% 27.67% 20.42% 9.91%

# of retail outlets (1000s) 26.00 25.00 22.40 2.94 20.00 96.34 26.99% 25.95% 23.25% 3.06% 20.76%

# refineries 36.00 30.00 7.00 11.00 16.00 100.00 36.00% 30.00% 7.00% 11.00% 16.00%

Outstanding shares (B) 4.93 3.10 3.13 1.41 2.01 14.58 33.81% 21.26% 21.47% 9.67% 13.79%

Days of Inventory 23.93 37.83 44.26 13.97 17.21 137.20 17.44% 27.57% 32.26% 10.18% 12.54%

NOTE: For Strategic group analysis information was collected across various lines of business (oil and gas), internal information (number of employees, number of recent report accidents), Upstream information (reserves, production), Downstream information (refineries, retail outlets) and financial information (revenue, net income, outstanding shares, Days of inventory).

80

Exhibit 31: Strategic Maps

81

Exhibit 32: Industry Key Success Factors

Key Success Factors (KSF)

KSF Overview Weight Industry Score (1-10)

Weighted Average

Exploration & Oil discovery

Exploration and discovery increases - oil and gas reserves - increases competitive and market advantage - the reserves provides stability for long-term contacts

30% 9 2.70

Manufacturing Smarter manufacturing enables for optimal output - achieve high degree of economies of scale - much better quality than competitors - optimal utilization of assets - safety and hazard prevention

30% 9 2.70

Financial In the capital intensive industry, ability to have financial resources is critical - strong financial fundamentals to secure and procure loans and guarantees - strong controls in different phases of the value chain to avoid fund leaks

20% 9 1.80

Technology Technology enables to beat the competitor - Enable to find more in depleting wells - Enable to find new sources quicker than competitors - Enable to success rate & estimate the reserves quicker - Enable to bring the products to shore and market quicker - Strong pipelines of patents to safeguard the leading edge

25% 8 2.00

Marketing & Distribution

Marketing will enable to - ability to fulfill and manage market demand - a strong retail network to bring goods to the market - Brand recognition and retaining customers through various programs

15% 6 0.90

Total 100% 10.10

82

Exhibit 33: SWOT Analysis – Oil & Natural Gas

SWOT for OIL Weight Rating W.Score Weight Rating W.Score

STRENGTH OPPORTUNITIES

Leading market position in Oil Indsutry 30% 4 1.2 Oil will #1 source of energy through 2030 35% 3 1.05

Diversified revenue stream & operational

Efficiency 30% 4 1.2Demand for Gasoline will contiue to grow (esp. in non OECD countries) 30% 4 1.2

Steady financial performance 20% 3 0.6Large companies favored owing to inherent economies of scale 20% 2 0.4

World wide presence for exploration and

retail 20% 3 0.6Can leverage existing contracts and relationships to block new entrants 15% 3 0.45

Total 100% 3.60 Total 100% 3.10

WEAKNESS THREATSNot able to replenish oil reserves 45% 4 1.8 OPEC controls most of the oil reserves 40% 4 1.6Handling Enviornmental and Social issues 35% 4 1.4

Reserves concentrated in politically unstable regions 35% 4 1.4

Weak Downstream performance 20% 3 0.6 Replacement ratios falling 25% 3 0.75Total 100% 3.80 Total 100% 3.75

SWOT for NATURAL GAS Weight Rating W.Score Weight Rating W.Score

STRENGTH OPPORTUNITIESLeading market position in Energy

Industry 30% 4 1.2Natural Gas will replace Coal to take #2 position

as energy provider by 2030 30% 1 0.3Diversified revenue stream & operational

Efficiency 25% 4 1Abundance of untapped reserves in North

America & across world 25% 3 0.75

World wide presence for exploration and

retail for LNG integration 25% 3 0.75 OPEC controls less than half of natural gas

reserves 20% 2 0.4Long term Contract with Asian energy

supplier 20% 3 0.6 Production costs have fallen 15% 4 0.64 0 Breakthrough in a viable technology (fracking) 10% 4 0.4

Total 100% 3.55 Total 100% 2.45

WEAKNESS 0 THREATS

Profit Margin ver low compared to Oil 45% 4 1.8Low price (as compared to oil) makes businesses

betting on natural gas vulnerable 45% 4 1.8Higly Competitive due to low entry of barrier 35% 3 1.05

Economy of scale desired by large companies is

difficult to achieve 35% 4 1.4

Depletion of LNG wells faster than Oil 20% 2 0.4 Environment issues like water contamination 20% 3 0.6Total 100% 3.25 Total 100% 3.8

83

8. Financial Background Appendix

Financial information for Shell prior to 2004 is unavailable, as 2005 is the first year financial statements were filed with the Securities and Exchange Commission (SEC); for those financial exhibits which require data from 2003, including growth rates, an “N/A” is entered for Shell.

Financials for all companies, except Total S.A., are reported in dollars. Financials for Total S.A. are reported in Euros; for comparisons in absolute amounts (non‐percentages), the historical euro‐to‐dollar conversion rate for December 31 of each year was applied to Total S.A.’s financial data115. See Financial Exhibit 1 for a table of the conversion rates used.

West Texas Intermediate (WTI – Cushing) – A crude stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing a number of other crude streams and which is traded in the domestic spot market at Cushing, Oklahoma. Used in the following financial exhibits to mark the monthly oil prices from January 2003 to March 2011.116

Europe Brent – A blended crude stream produced in the North Sea region which serves as a reference or "marker" for pricing a number of other crude streams.116

All dollars are in Millions, except for crude oil spot prices and earnings per share.

FINANCIAL EXHIBIT 1

Historical Euro‐to‐Dollar Exchange Rates

Date

Conversion

Rate*

31 Dec 2001 $0.8858

31 Dec 2002 $1.0481

31 Dec 2003 $1.2552

31 Dec 2004 $1.3599

31 Dec 2005 $1.1843

31 Dec 2006 $1.3193

31 Dec 2007 $1.4719

31 Dec 2008 $1.4095

31 Dec 2009 $1.4332

31 Dec 2010 $1.3252

31 Mar 2011 $1.4098

*Rate represents amount of U.S. Dollars for 1 Euro Source: http://www.oanda.com/currency/historical‐rates/

84

FINANCIAL EXHIBIT 2 TOTAL REVENUE TRENDS IN THE OIL INDUSTRY

(Includes equity affiliates and other)

2A: TOTAL REVENUES FOR 2003‐2010 PLOTTED AGAINST MONTHLY CRUDE OIL PRICES $M)

$0

$20

$40

$60

$80

$100

$120

$140

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

2003 2004 2005 2006 2007 2008 2009 2010

Total Revenues (incl. equity affiliates & other) ($M)

ExxonMobil

Chevron

ConocoPhillips

Shell

British Petroleum

Total SA

Cushing, OK WTI Spot Price FOB (Monthly Dollars per Barrel)

Europe Brent Spot Price FOB (Monthly Dollars per Barrel)

2003 2004 2005 2006 2007 2008 2009 2010

ExxonMobil $246,738.0 $298,035.0 $370,680.0 $377,635.0 $404,552.0 $477,359.0 $310,586.0 $383,221.0

Chevron 121,277.0 155,300.0 198,200.0 210,118.0 220,904.0 273,005.0 171,636.0 204,928.0

ConocoPhillips 105,097.0 136,916.0 183,364.0 188,523.0 194,495.0 246,931.0 152,390.0 198,655.0

Shell N/A 266,386.0 306,731.0 318,845.0 355,782.0 470,940.0 285,129.0 378,152.0

British Petroleum 232,571.0 285,059.0 245,486.0 274,316.0 291,438.0 367,053.0 246,138.0 308,928.0

Total SA 130,028.7 169,816.2 163,174.0 203,951.9 202,383.3 226,506.7 188,667.9 212,913.3

Total Revenues (incl. equity affiliates & other) ($M)

85

FINANCIAL EXHIBIT 2 CONT’D

2B: REVENUE COMPOUNDED ANNUAL GROWTH RATES PLOTTED AGAINST MONTHLY CRUDE OIL

PRICES (BASE YEAR 2004)

Total Revenues CAGRs (incl. equity affiliates & other)

‐20.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2004‐05 2004‐06 2004‐07 2004‐08 2004‐09 2004‐10

‐$60

‐$40

‐$20

$0

$20

$40

$60

$80

$100

$120

$140Average

ExxonMobil

Chevron

ConocoPhill ips

Shell

British Petroleum

Total SA

Cushing, OK WTI Spot Price FOB (MonthlyDollars per Barrel)

Europe Brent Spot Price FOB (MonthlyDollars per Barrel)

2004-05 2004-06 2004-07 2004-08 2004-09 2004-10

Average 16.3% 10.8% 8.3% 12.0% 0.8% 4.5%

ExxonMobil 24.4% 12.6% 10.7% 12.5% 0.8% 4.3%

Chevron 27.6% 16.3% 12.5% 15.1% 2.0% 4.7%

ConocoPhillips 33.9% 17.3% 12.4% 15.9% 2.2% 6.4%

Shell 15.1% 9.4% 10.1% 15.3% 1.4% 6.0%

British Petroleum ‐13.9% ‐1.9% 0.7% 6.5% ‐2.9% 1.3%

Total SA 10.3% 11.3% 3.3% 6.5% 1.1% 4.3%

Total Revenues CAGRs (incl. equity affiliates & other)

86


2C: REVENUE ANNUAL GROWTH RATE (YOY) PLOTTED AGAINST MONTHLY CRUDE OIL PRICES

‐$80

‐$60

‐$40

‐$20

$0

$20

$40

$60

$80

$100

$120

$140

‐60.0%

‐40.0%

‐20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2003 2004 2005 2006 2007 2008 2009 2010

Revenue Annual Growth Rate (YOY) (includes equity affiliates)

Average

ExxonMobil

Chevron

ConocoPhillips

Shell

British Petroleum

Total SA



2003 2004 2005 2006 2007 2008 2009 2010

Average 35.8% 24.4% 16.3% 6.4% 3.7% 24.0% ‐33.5% 25.6%

ExxonMobil 20.7% 20.8% 24.4% 1.9% 7.1% 18.0% ‐34.9% 23.4%

Chevron 23.1% 28.1% 27.6% 6.0% 5.1% 23.6% ‐37.1% 19.4%

ConocoPhillips 83.7% 30.3% 33.9% 2.8% 3.2% 27.0% ‐38.3% 30.4%

Shell N/A N/A 15.1% 3.9% 11.6% 32.4% ‐39.5% 32.6%

British Petroleum 50.8% 22.6% ‐13.9% 11.7% 6.2% 25.9% ‐32.9% 25.5%

Total SA 0.8% 20.5% 10.3% 12.2% ‐11.1% 16.9% ‐18.1% 22.0%

Total Revenues (incl. equity affiliates & other) Annual Growth Rate

2D: REVENUE GROWTH RATES – ROLLING THREE YEARS

‐50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

2003‐05 2004‐06 2005‐07 2006‐08 2007‐09 2008‐10

Revenue Growth Rates ‐ Rolling Three Years (includes equity affiliates)

Average

ExxonMobil

Chevron

ConocoPhillips

Shell

British Petroleum

Total SA

2003‐05 2004‐06 2005‐07 2006‐08 2007‐09 2008‐10

Average 99.2% 54.6% 27.7% 36.8% ‐15.2% 3.1%

ExxonMobil 81.3% 53.1% 35.7% 28.8% ‐17.8% ‐5.3%

Chevron 101.1% 73.3% 42.2% 37.7% ‐18.3% ‐7.2%

ConocoPhillips 220.6% 79.4% 42.1% 34.7% ‐19.2% 2.1%

Shell N/A N/A 33.6% 53.5% ‐10.6% 6.3%

British Petroleum 59.2% 17.9% 2.2% 49.5% ‐10.3% 6.0%

Total SA 34.1% 49.2% 10.1% 16.6% ‐14.8% 16.8%

Total Revenues (incl. equity affiliates & other) Rolling Growth Rate

87

FINANCIAL EXHIBIT 3 SALES & OTHER OPERATING REVENUE TRENDS IN THE OIL INDUSTRY

(Excludes equity affiliates and other – reflects only revenue directly attributable to each individual company)

3A: SALES & OTHER OPERATING REVENUE FOR 2003‐2010 PLOTTED AGAINST MONTHLY CRUDE OIL

PRICES ($M)

$0

$20

$40

$60

$80

$100

$120

$140

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

$450,000

$500,000

2003 2004 2005 2006 2007 2008 2009 2010

Sales & Other Operating Revenue ($M)

ExxonMobil

Chevron

ConocoPhillips

Shell

British Petroleum

Total SA



2003 2004 2005 2006 2007 2008 2009 2010

ExxonMobil $237,054.0 $291,252.0 $358,955.0 $365,467.0 $390,328.0 $459,579.0 $301,500.0 $370,125.0

Chevron 119,575.0 150,865.0 193,641.0 204,892.0 214,091.0 264,958.0 167,402.0 198,198.0

ConocoPhillips 104,246.0 135,076.0 179,442.0 183,650.0 187,437.0 240,842.0 149,341.0 189,441.0

Shell N/A 266,386.0 306,731.0 318,845.0 355,782.0 458,361.0 278,188.0 368,056.0

British Petroleum 232,571.0 285,059.0 239,792.0 265,906.0 284,365.0 361,143.0 239,272.0 297,107.0

Total SA 131,359.2 166,859.7 138,630.6 175,056.6 201,391.2 225,986.5 160,737.7 186,158.8

Sales & Other Operating Revenue ($M)

88


3B: SALES & OTHER OPERATING REVENUE COMPOUNDED ANNUAL GROWTH RATES PLOTTED

AGAINST MONTHLY CRUDE OIL PRICES (BASE YEAR 2004)

Sales & Other Operating Revenue CAGRs

‐20.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

2004‐05 2004‐06 2004‐07 2004‐08 2004‐09 2004‐10

‐$60

‐$40

‐$20

$0

$20

$40

$60

$80

$100

$120

$140

Average

ExxonMobil

Chevron

ConocoPhil l ips

Shell

British Petroleum

Total SA

Cushing, OK WTI Spot Price FOB (MonthlyDollars per Barrel)

Europe Brent Spot Price FOB (MonthlyDollars per Barrel)

2004-05 2004-06 2004-07 2004-08 2004-09 2004-10

Average 13.2% 9.2% 8.0% 11.7% 0.1% 3.8%

ExxonMobil 23.2% 12.0% 10.3% 12.1% 0.7% 4.1%

Chevron 28.4% 16.5% 12.4% 15.1% 2.1% 4.7%

ConocoPhillips 32.8% 16.6% 11.5% 15.6% 2.0% 5.8%

Shell 15.1% 9.4% 10.1% 14.5% 0.9% 5.5%

British Petroleum ‐15.9% ‐3.4% ‐0.1% 6.1% ‐3.4% 0.7%

Total SA ‐4.6% 4.0% 3.7% 6.9% ‐1.8% 2.3%

Sales & Other Operating Revenues CAGRs

89


3C: SALES & OTHER OPERATING REVENUE YOY GROWTH RATE PLOTTED AGAINST MONTHLY CRUDE

OIL PRICES

‐$80

‐$60

‐$40

‐$20

$0

$20

$40

$60

$80

$100

$120

$140

‐60.0%

‐40.0%

‐20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

2003 2004 2005 2006 2007 2008 2009 2010

Sales & Other Operating Revenue Annual Growth Rate (YOY) (excludes equity affiliates)

Average

ExxonMobil

Chevron

ConocoPhillips

Shell

British Petroleum

Total SA



2003 2004 2005 2006 2007 2008 2009 2010

Average 36.2% 26.2% 12.6% 6.1% 6.0% 24.1% ‐36.9% 23.6%

ExxonMobil 18.0% 22.9% 23.2% 1.8% 6.8% 17.7% ‐34.4% 22.8%

Chevron 21.6% 26.2% 28.4% 5.8% 4.5% 23.8% ‐36.8% 18.4%

ConocoPhillips 83.7% 29.6% 32.8% 2.3% 2.1% 28.5% ‐38.0% 26.9%

Shell N/A N/A 15.1% 3.9% 11.6% 28.8% ‐39.3% 32.3%

British Petroleum 55.8% 35.1% ‐19.5% 9.2% 7.7% 28.9% ‐42.9% 16.0%

Total SA 2.1% 17.2% ‐4.6% 13.4% 3.1% 17.2% ‐30.0% 25.3%

Sales & Other Operating Revenue Annual Growth Rate

90


3D: SALES & OTHER OPERATING REVENUE GROWTH RATES – ROLLING THREE YEARS

‐50.0%

0.0%

50.0%

100.0%

150.0%

200.0%

250.0%

2003‐05 2004‐06 2005‐07 2006‐08 2007‐09 2008‐10

Sales & Other Operating Revenue Growth Rates ‐ Rolling Three Years (excludes equity affiliates)

Average

ExxonMobil

Chevron

ConocoPhillips

Shell

British Petroleum

Total SA

2003‐05 2004‐06 2005‐07 2006‐08 2007‐09 2008‐10

Average 93.2% 48.6% 26.6% 39.3% ‐15.5% ‐0.2%

ExxonMobil 78.6% 54.2% 34.0% 28.0% ‐17.5% ‐5.2%

Chevron 96.9% 71.4% 41.9% 36.8% ‐18.3% ‐7.4%

ConocoPhillips 216.2% 76.2% 38.8% 34.2% ‐18.7% 1.1%

Shell N/A N/A 33.6% 49.4% ‐12.8% 3.4%

British Petroleum 60.2% 14.3% ‐0.2% 50.6% ‐10.0% 4.5%

Total SA 14.2% 26.8% 11.5% 37.0% ‐15.5% 2.7%

Sales & Other Operating Revenue Rolling Growth Rate

91

FINANCIAL EXHIBIT 4 GROSS MARGIN TRENDS IN THE OIL INDUSTRY

4A: GROSS MARGIN AS A PERCENTAGE OF SALES PLOTTED AGAINST MONTHLY OIL PRICES

$0

$20

$40

$60

$80

$100

$120

$140

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2003 2004 2005 2006 2007 2008 2009 2010

Gross Margin as % of Sales

Average

ExxonMobil

Chevron

ConocoPhillips

Shell

British Petroleum

Total SA



2003 2004 2005 2006 2007 2008 2009 2010

Average 32.6% 29.1% 36.3% 37.2% 35.1% 33.1% 39.0% 36.7%

ExxonMobil 56.4% 53.3% 50.0% 51.7% 50.7% 47.7% 50.8% 48.3%

Chevron 41.2% 39.2% 35.4% 39.0% 39.7% 37.2% 41.9% 43.2%

ConocoPhillips 35.8% 34.1% 31.9% 36.9% 36.5% 31.7% 32.8% 31.7%

Shell* N/A 16.2% 17.6% 17.5% 16.6% 23.6% 28.8% 25.1%

British Petroleum 13.4% 12.7% 33.6% 31.8% 31.1% 27.3% 33.5% 30.0%

Total SA 16.1% 19.0% 49.0% 46.1% 36.1% 30.9% 46.0% 42.0%


4B: GROSS MARGIN AS A PERCENTAGE OF SALES

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2003‐05 2004‐06 2005‐07 2006‐08 2007‐09 2008‐10

Gross Margin as a % of Sales ‐ Rolling Three Years

Average

ExxonMobil

Chevron

ConocoPhillips

Shell*

British Petroleum

Total SA

2003‐05 2004‐06 2005‐07 2006‐08 2007‐09 2008‐10

Average 31.8% 34.2% 36.2% 35.1% 35.4% 35.9%

ExxonMobil 52.8% 51.5% 50.8% 49.9% 49.5% 48.8%

Chevron 38.1% 37.8% 38.1% 38.5% 39.2% 40.3%

ConocoPhillips 33.6% 34.4% 35.2% 34.8% 33.6% 32.0%

Shell* 17.0% 17.2% 17.2% 19.8% 22.7% 25.4%

British Petroleum 19.7% 25.6% 32.1% 29.8% 30.2% 29.8%

Total SA 29.5% 38.9% 43.8% 37.7% 37.2% 39.2%


92

FINANCIAL EXHIBIT 5 EBIT TRENDS IN THE OIL INDUSTRY ‐ Excludes minority and non‐controlling interests

5A: INCOME BEFORE INTEREST AND TAXES AS A PERCENTAGE OF SALES

$0

$20

$40

$60

$80

$100

$120

$140

‐5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2003 2004 2005 2006 2007 2008 2009 2010

Income Before Interest & Taxes as % of Sales(not including minority interests)

Average

ExxonMobil

Chevron

ConocoPhillips

Shell

British Petroleum

Total SA



2003 2004 2005 2006 2007 2008 2009 2010

Average 10.5% 11.9% 15.4% 16.0% 15.1% 11.5% 10.1% 10.5%

ExxonMobil 13.6% 14.4% 16.7% 18.6% 18.2% 17.9% 11.7% 14.4%

Chevron 11.0% 13.9% 13.3% 15.8% 15.1% 16.3% 11.1% 16.2%

ConocoPhillips 8.8% 11.0% 13.4% 16.0% 13.1% ‐0.8% 7.3% 11.1%

Shell N/A 12.3% 14.9% 14.4% 14.5% 11.3% 7.7% 9.8%

British Petroleum 6.7% 6.8% 13.6% 13.2% 11.4% 9.8% 9.4% ‐1.8%

Total SA 12.2% 13.1% 20.6% 18.2% 18.5% 14.8% 13.5% 13.4%

Income Before Interest & Taxes as % of Sales (not incl minority interests)

5B: INCOME BEFORE INTEREST AND TAXES AS A PERCENTAGE OF SALES – ROLLING THREE YEARS

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

20.0%

2003‐05 2004‐06 2005‐07 2006‐08 2007‐09 2008‐10

Income Before Interest & Taxes as % of Sales ‐ Rolling Three Years(not including minority interests)

Average

ExxonMobil

Chevron

ConocoPhillips

Shell*

British Petroleum

Total SA

2003‐05 2004‐06 2005‐07 2006‐08 2007‐09 2008‐10

Average 12.9% 14.5% 15.5% 14.0% 12.3% 10.8%

ExxonMobil 15.1% 16.7% 17.8% 18.2% 16.4% 15.1%

Chevron 12.9% 14.4% 14.8% 15.8% 14.5% 14.9%

ConocoPhillips 11.5% 13.7% 14.2% 8.5% 5.8% 5.2%

Shell* 13.7% 13.9% 14.6% 13.2% 11.4% 9.9%


Total SA 15.4% 17.3% 19.0% 17.0% 15.7% 14.0%

Income Before Interest & Taxes as % of Sales (not incl minority interests)

93

FINANCIAL EXHIBIT 6 NET INCOME TRENDS IN THE OIL INDUSTRY

6A: NET INCOME AS A PERCENTAGE OF SALES PLOTTED AGAINST MONTHLY CRUDE OIL PRICES

‐$60

‐$40

‐$20

$0

$20

$40

$60

$80

$100

$120

$140

‐8.0%

‐6.0%

‐4.0%

‐2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2003 2004 2005 2006 2007 2008 2009 2010

Net Income as % of Sales

Average

ExxonMobil

Chevron

ConocoPhillips

Shell

British Petroleum

Total SA



2003 2004 2005 2006 2007 2008 2009 2010

Average 6.2% 7.3% 8.8% 8.8% 8.5% 5.0% 5.7% 5.9%

ExxonMobil 9.1% 8.7% 10.1% 10.8% 10.4% 9.8% 6.4% 8.2%

Chevron 6.0% 8.6% 7.1% 8.2% 8.5% 8.8% 6.1% 9.3%

ConocoPhillips 4.5% 6.0% 7.5% 8.5% 6.3% ‐6.8% 3.0% 6.0%

Shell* N/A 7.0% 8.3% 8.0% 8.8% 5.7% 4.5% 5.5%

British Petroleum 4.5% 5.5% 9.3% 8.3% 7.3% 5.9% 6.9% ‐1.3%

Total SA 6.7% 7.8% 10.5% 8.9% 9.6% 6.6% 7.5% 7.5%


94


6B: NET INCOME COMPOUNDED ANNUAL GROWTH RATE AGAINST MONTHLY CRUDE OIL PRICES

Net Income CAGRs

‐20.0%

‐10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

2004‐05 2004‐06 2004‐07 2004‐08 2004‐09 2004‐10

‐$40

‐$20

$0

$20

$40

$60

$80

$100

$120

$140Average

ExxonMobil

Chevron

ConocoPhil lips

Shell

British Petroleum

Total SA

Cushing, OK WTI Spot Price FOB(Monthly Dollars per Barrel)

Europe Brent Spot Price FOB(Monthly Dollars per Barrel)

2004‐05 2004‐06 2004‐07 2004‐08 2004‐09 2004‐10

Average 36.8% 20.4% 13.8% 10.1% ‐5.1% 3.6%

ExxonMobil 42.6% 24.9% 17.0% 15.6% ‐5.3% 3.1%

Chevron 5.8% 13.4% 11.9% 15.8% ‐4.7% 6.1%

ConocoPhillips 66.4% 38.3% 13.5% Net Loss ‐11.5% 5.7%

Shell 36.5% 17.1% 19.1% 9.1% ‐7.6% 1.4%

British Petroleum 42.0% 18.3% 9.8% 7.7% 1.1% Net Loss

Total SA 27.7% 10.6% 11.1% 2.5% ‐2.6% 1.6%

Net Income CAGR

6C: NET INCOME AS A PERCENTAGE OF SALES – ROLLING THREE YEARS

‐2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2003‐05 2004‐06 2005‐07 2006‐08 2007‐09 2008‐10

Net Income as % of Sales ‐ Rolling Three Years

Average

ExxonMobil

Chevron

ConocoPhillips

Shell*

British Petroleum

Total SA

2003‐05 2004‐06 2005‐07 2006‐08 2007‐09 2008‐10

Average 7.6% 8.3% 8.7% 7.2% 6.4% 5.5%

ExxonMobil 9.4% 9.9% 10.4% 10.3% 9.1% 8.4%

Chevron 7.5% 8.1% 8.1% 8.7% 8.2% 8.5%

ConocoPhillips 6.3% 7.5% 7.4% 1.8% 0.0% ‐0.1%

Shell* 7.7% 7.8% 8.4% 7.3% 6.4% 5.3%


Total SA 8.4% 9.0% 9.6% 8.3% 7.9% 7.2%


95

FINANCIAL EXHIBIT 7 CASH FLOW FROM OPERATIONS ($M)

$0

$20

$40

$60

$80

$100

$120

$140

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

2003 2004 2005 2006 2007 2008 2009 2010 1Q11

Cash Flow From Operations

ExxonMobil

Chevron

ConocoPhillips

Shell

British Petroleum

Total SA



2003 2004 2005 2006 2007 2008 2009 2010 1Q11

ExxonMobil $4,797.0 $21,515.0 $48,138.0 $49,286.0 $52,002.0 $59,725.0 $28,438.0 $48,413.0 $16,856.0

Chevron 12,315.0 14,690.0 20,105.0 24,323.0 24,977.0 29,632.0 19,373.0 31,359.0 9,814.0

ConocoPhillips 9,356.0 11,959.0 17,628.0 21,516.0 24,550.0 22,658.0 12,479.0 17,045.0 1,947.0

Shell N/A 26,537.0 30,113.0 31,696.0 34,461.0 43,918.0 21,488.0 27,350.0 8,621.0

British Petroleum 16,303.0 23,378.0 26,721.0 28,172.0 24,709.0 38,095.0 27,716.0 13,616.0 2,404.0

Total SA 12,487.0 14,429.0 14,669.0 16,061.0 17,686.0 18,669.0 12,360.0 18,493.0 5,714.0

Cash Flow From Operations

96

FINANCIAL EXHIBIT 8 DUPONT ANALYSIS

XOM BP

ROE = PM x TA Turnover x Equity Multiplier ROE = PM x TA Turnover x Equity Multiplier2005 32.50% 11.01% 1.58 1.87 2005 27.66% 8.96% 1.21 2.562006 34.70% 11.79% 1.53 1.92 2006 26.11% 8.39% 1.22 2.552007 33.35% 11.32% 1.48 1.99 2007 22.25% 7.33% 1.20 2.522008 40.03% 10.64% 1.86 2.02 2008 23.17% 5.86% 1.58 2.502009 17.44% 7.00% 1.18 2.11 2009 16.31% 6.93% 1.01 2.322010 20.74% 7.95% 1.27 2.06 2010 -3.50% -1.10% 1.11 2.87

COP ShellROE = PM x TA Turnover x Equity Multiplier ROE = PM x TA Turnover x Equity Multiplier

2005 25.66% 8.33% 1.52 2.03 2005 27.84% 8.25% 1.40 2.412006 18.82% 9.28% 1.02 1.99 2006 24.06% 7.98% 1.36 2.232007 13.36% 6.93% 0.96 2.00 2007 25.28% 8.81% 1.32 2.172008 -30.81% -7.54% 1.58 2.59 2008 20.64% 5.73% 1.62 2.222009 7.78% 3.57% 0.89 2.44 2009 9.18% 4.50% 0.95 2.142010 16.57% 5.72% 1.27 2.28 2010 14.57% 5.47% 1.14 2.34

Total SA CVXROE = PM x TA Turnover x Equity Multiplier ROE = PM x TA Turnover x Equity Multiplier

2005 30.20% 10.01% 1.16 2.61 2005 22.50% 7.62% 1.47 2.012006 29.19% 8.87% 1.26 2.61 2006 24.86% 8.77% 1.47 1.922007 29.38% 9.63% 1.21 2.53 2007 24.24% 9.16% 1.37 1.932008 21.62% 6.61% 1.36 2.41 2008 27.62% 9.38% 1.58 1.862009 16.07% 7.53% 0.88 2.43 2009 11.41% 6.58% 0.97 1.792010 19.34% 8.32% 0.98 2.38 2010 18.10% 9.55% 1.08 1.76

97

FINANCIAL EXHIBIT 9

Key Industry Financial Ratios

1Q11 2010 2009 2008 2007 2006 1Q11 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006

ExxonMobil 0.98 0.94 1.06 1.47 1.47 1.55 0.76 0.73 0.84 1.23 1.28 1.33 3.8% 4.7% 3.3% 3.7% 3.8%

Chevron 1.53 1.68 1.42 1.14 1.17 1.28 1.34 1.49 1.21 0.92 1.01 1.11 2.3% 2.6% 2.1% 2.7% 2.4%

ConocoPhillips 1.22 1.26 0.89 0.96 0.92 0.95 0.95 1.07 0.68 0.72 0.76 0.75 1.0% 1.2% 0.9% 1.2% 1.3%

Shell 1.15 1.12 1.14 1.10 1.22 1.20 0.85 0.83 0.81 0.92 0.89 0.89 4.1% 6.1% 3.6% 4.7% 5.2%

British Petroleum 1.15 1.08 1.14 0.95 1.02 0.99 0.82 0.77 0.76 0.71 0.68 0.74 4.1% 5.7% 4.2% 5.3% 5.3%

Total SA 1.40 1.41 1.45 1.37 1.35 1.28 1.06 1.03 1.04 1.09 0.96 0.93

1Q11 2010 2009 2008 2007 2006 1Q11 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006

ExxonMobil 1.03 0.98 1.02 0.94 0.99 0.92 13.4% 10.2% 8.5% 20.1% 16.9% 18.3% 21.7% 16.3% 34.2% 31.8% 32.2%

Chevron 0.76 0.75 0.78 0.86 0.93 0.92 12.8% 10.3% 6.4% 14.8% 12.7% 13.3% 17.4% 10.6% 26.6% 23.1% 22.6%

ConocoPhillips 1.26 1.26 1.43 1.57 0.98 0.98 8.2% 8.0% 3.7% ‐10.8% 7.4% 10.1% 10.0% 7.0% 18.0% 17.5% 18.0%

Shell 1.15 1.15 1.12 1.19 1.14 1.05 8.5% 6.5% 4.5% 9.7% 12.0% 11.3% 11.5% 8.0% 18.3% 21.7% 19.5%

British Petroleum 1.78 1.84 1.31 1.48 1.49 1.55 9.9% ‐1.0% 7.6% 9.7% 8.8% 10.1% 16.4% 12.9% 24.0% 18.5% 23.3%

Total SA 1.36 1.35 1.39 1.37 1.48 1.56 10.9% 7.7% 7.0% 9.8% 13.2% 12.8% 16.0% 13.0% 26.0% 24.0% 23.0%

1Q11 2010 2009 2008 2007 2006 1Q11 2010 2009 2008 2007 2006 2010 2009 2008 2007 2006

ExxonMobil 14.88 15.26 13.23 21.42 17.99 17.04 24.53 23.93 27.60 17.04 20.29 21.42 25.7 21.9 22.9 22.7 23.4

Chevron 22.59 21.20 18.02 25.01 25.11 27.52 16.15 17.21 20.25 14.60 14.54 13.26 15.5 18.2 18.2 18.4 21.6

ConocoPhillips 21.34 26.12 20.74 33.10 29.23 23.07 17.11 13.97 17.60 11.03 12.49 15.82 13.8 11.4 13.8 13.7 17.8

Shell 10.09 9.65 7.41 18.59 9.42 11.33 36.19 37.83 49.27 19.63 38.76 32.22 18.8 17.1 17.9 17.4 15.9

British Petroleum 8.62 8.25 7.24 15.87 7.56 9.90 42.37 44.26 50.38 23.00 48.28 36.88 19.1 19.8 19.4 20.0 19.8

Total SA 7.03 5.97 5.12 11.54 6.34 7.09 51.95 61.11 71.23 31.63 57.58 51.45 17.1 17.7 17.8 20.2 18.8

Inventory Turnover Days of Inventory

Current Ratio Quick Ratio

Debt‐to‐Equity Ratio Return on Assets Return on Capital Employed

Life of Gross Plant (years)

SG&A to Sales

SG&A not broken out from Other Operating Expenses

*Values for Return on Assets and Inventory Turnover for 1Q11 were annualized in order to better compare with the previous year values.

98

FINANCIAL EXHIBIT 10 EXXONMOBIL KEY FINANCIALS

10A: COMPOSITION OF EXXONMOBIL’S SALES AND EARNINGS

0%10%20%30%40%50%60%70%80%90%100%

Operating Revenue by Segment

Other

Chemical

Downstream

Upstream

‐20%

0%

20%

40%

60%

80%

100%

Net Income by Segment

Other

Chemical

Downstream

Upstream

2003 2004 2005 2006 2007 2003 2004 2005 2006 2007

Upstream 9.0% 7.9% 8.4% 9.0% 7.3% Upstream 67.4% 65.8% 67.4% 66.4% 65.2%

Downstream 82.5% 82.5% 82.9% 81.7% 83.2% Downstream 16.3% 22.5% 22.1% 21.4% 23.6%

Chemical 8.5% 9.5% 8.7% 9.3% 9.4% Chemical 6.7% 13.5% 10.9% 11.1% 11.2%

Other 0.0% 0.0% 0.0% 0.0% 0.0% Other 9.6% ‐1.9% ‐0.4% 1.1% ‐0.1%

2008 2009 2010 1Q11 Average 2008 2009 2010 1Q11 Average

Upstream 8.5% 8.2% 9.4% 11.1% 8.8% Upstream 78.3% 88.7% 79.1% 81.5% 73.3%

Downstream 83.1% 82.9% 81.0% 79.4% 82.1% Downstream 18.0% 9.2% 11.7% 10.3% 17.3%

Chemical 8.4% 8.9% 9.6% 9.5% 9.1% Chemical 6.5% 12.0% 16.1% 14.2% 11.4%

Other 0.0% 0.0% 0.0% 0.0% 0.0% Other ‐2.9% ‐9.9% ‐7.0% ‐6.0% ‐1.9%

ExxonMobil Composition of Net IncomeExxonMobil Composition of Sales & Other Operating Revenues

ExxonMobil Composition of Net IncomeExxonMobil Composition of Sales & Other Operating Revenues

99


10B: EXXONMOBIL KEY FINANCIALS AS A PERCENTAGE OF SALES PLOTTED AGAINST MONTHLY CRUDE

OIL PRICES

XOM Key Financials as % of Sales

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2003 2004 2005 2006 2007 2008 2009 2010 1Q11

$0

$20

$40

$60

$80

$100

$120

$140Crude Oil & Product Purchases

Production & Manufacturing

SG&A

Exploration Expenses

Gross Income

Operating Income

Net Income

Cushing, OK WTI Spot Price FOB(Monthly Dollars per Barrel)

Europe Brent Spot Price FOB(Monthly Dollars per Barrel)

2003 2004 2005 2006 2007 2008 2009 2010 1Q10 1Q11

Crude Oil & Product Purchases 43.6% 46.7% 50.0% 48.3% 49.3% 52.3% 49.2% 51.7% 51.8% 53.1%

Production & Manufacturing 8.6% 7.8% 7.2% 7.8% 7.9% 7.9% 10.6% 9.3% 9.3% 8.4%

SG&A 5.4% 4.6% 3.9% 3.8% 3.7% 3.3% 4.7% 3.8% 3.9% 3.2%

Exploration Expenses 0.4% 0.4% 0.3% 0.3% 0.4% 0.3% 0.7% 0.6% 0.8% 0.3%

Gross Income 56.4% 53.3% 50.0% 51.7% 50.7% 47.7% 50.8% 48.3% 48.2% 46.9%

Operating Income 13.0% 14.1% 16.2% 18.0% 17.5% 17.3% 11.4% 13.9% 13.4% 16.6%

Net Income 8.7% 8.5% 9.7% 10.5% 10.0% 9.5% 6.2% 7.9% 7.0% 9.3%

Basic Earnings per Share $3.24 $3.91 $5.76 $6.68 $7.36 $8.70 $3.99 $6.24

Diluted Earnings per Share $3.23 $3.89 $5.71 $6.62 $7.28 $8.66 $3.98 $6.22

ExxonMobil Key Financials as a Percentage of Total Sales

100


10C: EXXONMOBIL FY11 FIRST QUARTER FINANCIAL PERFORMANCE

1Q11 4Q10 1Q10 1Q11 4Q10 1Q10 Over 4Q10 Over 1Q10

Total Revenues 114,004.0$ 105,186.0$ 90,251.0$ 100.0% 100.0% 100.0% 8% 26%

Crude Oil & Product Purchases 60,497.0 53,830.0 46,785.0 53.1% 51.2% 51.8% 12% 29%

Gross Income 53,507.0 51,356.0 43,466.0 46.9% 48.8% 48.2% 4% 23%

Production & Manufacturing 9,520.0 9,999.0 8,435.0 8.4% 9.5% 9.3% ‐5% 13%

SG&A 3,627.0 3,855.0 3,514.0 3.2% 3.7% 3.9% ‐6% 3%

Exploration Expenses 334.0 551.0 686.0 0.3% 0.5% 0.8% ‐39% ‐51%

Operating Income 18,946.0 15,437.0 12,123.0 16.6% 14.7% 13.4% 23% 56%

Net Income 10,650.0 9,250.0 6,300.0 9.3% 8.8% 7.0% 15% 69%

As % of Sales 1Q11 Growth

ExxonMobil FY11 First Quarter Performance ($M)

10D: EXXONMOBIL CAPITAL AND EXPLORATION EXPENDITURES ($M)

U.S. Non U.S. U.S. Non U.S. U.S. Non U.S. U.S. Non U.S. U.S. Non U.S. U.S. Non U.S.

Upstream 6,349 20,970 3,585 17,119 3,334 16,400 2,212 13,512 2,486 13,745 2,142 12,328

Downstream 982 1,523 1,511 1,685 1,636 1,893 1,128 2,175 824 1,905 753 1,742

Chemical 279 1,936 319 2,829 441 2,378 360 1,422 280 476 243 411

Other 187 0 44 0 61 0 44 0 130 9 80 0

Total 7,797 24,429 5,459 21,633 5,472 20,671 3,744 17,109 3,720 16,135 3,218 14,481

2010 2009 2008 2007 2006 2005

101

FINANCIAL EXHIBIT 11 Forecasting Model

Dry Hole ‐ Risk Oil Price ‐ Risk Production Risk

Scenario Input

Forecasting Model

FCF ‐2 FCF‐3FCF ‐1

Hydrocarbon Structure Reservoir Seal

Demand & SupplyGrowth RateGDP

Decline rateDrilling CostProduction Cost

Dry ‐ Hole Risk Factor1 Hydrocarbon must be present

2 A reservoir must be developed in the rock formation to hold the hydrocarbon

3 An impermeable seal must be available to trap the hydrocarbon in the reservoir and prevent them from migrating somewhere else.

4 A structure closure must be present that will cause the hydrocarbons to pool in a field where the drill bit penetrate

102

Prob. Of Success Mean Stdev Min Max

Hydrocarbon 0.945162708 99% 5% 0% 100%

structure 1.000555944 99% 2% 0% 100%

Reservoir 1.040051753 90% 10% 0% 100%

Seal 0.955840839 100% 2% 0% 100%

Net Producing well Prob. 0.940131245 PRODUCTION RISK

1 IP: The initial production rate tested from the drilled well.

2 An exponentially declining production rate that describes the annual decrease in production from the beginning of the

year to the end of the same year. Production rates in BOPD for our model are calculated by:

Decline

rate:

Mean Stdev

Price/BBI $51.06 53.75 24.67

Decline Rate 21.50% Mean Stdev Min Max

Drilling Cost 1,345,142$ 1350000 200000 0 100 Lognormal distribution

Completion Cost 290,097$ 35000 0 100 Normal Distribution

Professional Overhead 219,791$ 30000 0 100 Normal Distribution

Lease Costs/Well 550,000$

Seismic Costs/Well 90,000$

Total 2,495,029$

Distribution

0 1 2 3 4 5 6 7 8 9 10

BOPD 442 347 272 214 168 132 103 81 64 50 39

Net BBLS/yr 143,987 113,030 88,728 69,652 54,677 42,921 33,693 26,449 20,763 16,299

Price/BBI $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00 $100.00

Net Revenue Interest 77.4% 77.4% 77.4% 77.4% 77.4% 77.4% 77.4% 77.4% 77.4% 77.4% 77.4%

REVENUE 11,144,596 8,748,508 6,867,579 5,391,049 4,231,974 3,322,099 2,607,848 2,047,161 1,607,021 1,261,512

Operating Costs ($/Barre $7.20 (1,036,707) (813,815) (638,845) (501,493) (393,672) (309,032) (242,591) (190,434) (149,490) (117,350)

Severance taxes ($) 6.00% (668,676) (524,910) (412,055) (323,463) (253,918) (199,326) (156,471) (122,830) (96,421) (75,691)

Net Sales 9,439,213$ 7,409,783$ 5,816,679$ 4,566,093$ 3,584,383$ 2,813,741$ 2,208,787$ 1,733,897$ 1,361,109$ 1,068,471$

End Of Year

Year Cash flow

0 (2,495,029)$

1 4,312,298$

2 3,385,154$

3 2,657,346$

4 2,086,017$

5 1,637,523$

6 1,285,456$

7 1,009,083$

8 792,130$

9 621,822$

10 488,130$

NPV $10,195,379.40

103

FINANCIAL EXHIBIT 12 EXXONMOBIL DISCOUNTED CASH FLOW VALUATION

Financial Exhibit 12A: Discounted Cash Flow Valuation for ExxonMobil Prior to Strategic Move (As Of 31 Dec 2010)

Discounted Cash Flows Model (Prior to Strategic Move)

($ in millions)

Base TV

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 - Inf

Revenue $383,221 $490,906 $519,870 $549,444 $579,542 $610,064 $639,957 $668,883 $696,575 $722,766 $747,196

Adj. Op Income 29,250 $37,469 $39,680 $41,937 $44,234 $46,564 $48,845 $51,053 $53,167 $55,166 $57,031

Less: Net CAP EX 18,695 $19,817 $21,006 $22,056 $23,159 $24,317 $25,290 $26,302 $27,354 $28,174 $28,738

FCF 10,554 $17,652 $18,673 $19,880 $21,075 $22,247 $23,556 $24,752 $25,813 $26,992 $28,293 $539,660

Timing of CF 1 2 3 4 5 6 7 8 9 10 10

Discount Factor 0.92 0.85 0.79 0.72 0.67 0.62 0.57 0.52 0.48 0.45 0.45

Discounted FCF $16,284 $15,892 $15,608 $15,263 $14,863 $14,518 $14,073 $13,540 $13,061 $12,629 $240,895

PV of Cash Flows $145,731

PV of Terminal Valu $240,895

Enterprise Value $386,626

Free Cash Flow

$ (in Millions)Free Cash Flow

Component Current Year Stage 1 (XOM) 5.90%NOPAT 29,250 Op. Exp. Net Capex Stage 2 (Indstry) 5.90%Net CAPEX 18,695 7.6% 4.9% TV (GDP) 3.00%Free Cash Flow 10,554

WACC 8.40%

Revenue Growth Projections

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 202128.10% 5.90% 5.69% 5.48% 5.27% 4.90% 4.52% 4.14% 3.76% 3.38% 3.00%

Sensitivity Analysis of ExxonMobil's Enterprise Value

$386,626 7.75% 7.90% 8.40% 8.67% 8.90%2.00% 441,283 427,377 386,626 367,624 352,815 3.00% 441,283 427,377 386,626 367,624 352,815 5.90% 441,283 427,377 386,626 367,624 352,815

15.00% 441,283 427,377 386,626 367,624 352,815 28.00% 441,283 427,377 386,626 367,624 352,815

Growth by Stage

Stage 1 Stage 2

WACC

Stage 1 Growth Rate

Percentages

Stage 1 Growth Stage 2 Growth Terminal Value

104

Financial Exhibit 12B: Discounted Cash Flow Valuation – Scenario 1 Value Enhancing Synergies Revenue Enhancement -2%

Add Inc/Dec in CAP EX 2% Cost Reductions -1%

($ in thousands)

Base TV

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 - Inf

Revenue

ExxonMobil $383,221 $490,906 $519,870 $549,444 $579,542 $610,064 $639,957 $668,883 $696,575 $722,766 $747,196

Rec. Enhancement $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Revenue Enhancement Synergy

Add'l from Recomm. ($9,818) ($10,397) ($10,989) ($11,591) ($12,201) ($12,799) ($13,378) ($13,932) ($14,455) ($14,944)

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Cost Reduction Synergy ($2,168) ($2,296) ($2,427) ($2,560) ($2,695) ($2,827) ($2,954) ($3,077) ($3,192) ($3,300)

Total Operating Expenses $169,271 $216,836 $229,629 $242,692 $255,986 $269,468 $282,672 $295,449 $307,681 $319,249 $330,040

OpEx as % of Revenue 44% 44% 44% 44% 44% 44% 44% 44% 44% 44% 44%

New Revenue $383,221 $478,920 $507,176 $536,029 $565,391 $595,168 $624,332 $652,551 $679,567 $705,119 $728,952

Adj. Op Income 29,250 36,554 38,711 40,913 43,154 45,427 47,653 49,807 51,869 53,819 55,638

Less: Net CAP EX 18,695 20,213 21,426 22,498 23,622 24,804 25,796 26,828 27,901 28,738 29,312

Baseline Net CAP EX 18,695 19,817 21,006 22,056 23,159 24,317 25,290 26,302 27,354 28,174 28,738

Add. Inc/Dec in CAP EX - 396 420 441 463 486 506 526 547 563 575

FCF 10,554 16,341 17,284 18,415 19,532 20,623 21,857 22,979 23,968 25,081 26,326 $502,136

Timing of CF 1 2 3 4 5 6 7 8 9 10 10

Discount Factor 0.92 0.85 0.79 0.72 0.67 0.62 0.57 0.52 0.48 0.45 0.45

Discounted FCF $15,074 $14,709 $14,457 $14,146 $13,779 $13,471 $13,066 $12,572 $12,136 $11,751 $224,145


PV of Terminal Value $224,145


Free Cash Flow

$ (in Millions)Free Cash Flow Component Current Year Stage 1 (XOM) 5.90%

NOPAT 29,250 Op. Exp. Net Capex Stage 2 (Indstry) 4.90%Net CAPEX 18,695 7.6% 4.9% TV (GDP) 3.00%Free Cash Flow 10,554

WACC 8.40%


2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 202128.10% 5.90% 5.69% 5.48% 5.27% 4.90% 4.52% 4.14% 3.76% 3.38% 3.00%

Terminal Value

Stage 1 Stage 2

Growth by StagePercentages

Stage 1 Growth Stage 2 Growth

105

Financial Exhibit 12C: Discounted Cash Flow Valuation – Scenario 5

Revenue Enhancement Synergies Revenue Enhancement 5%

Add Inc/Dec in CAP EX 2% Cost Reductions 2%

($ in thousands)

Base TV

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 - Inf

Revenue

ExxonMobil $383,221 $490,906 $530,179 $562,519 $590,083 $617,817 $648,090 $677,384 $705,427 $731,951 $756,691

Rec. Enhancement $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Revenue Enhancement Synergy

Add'l from Recomm. $24,545 $26,509 $28,126 $29,504 $30,891 $32,404 $33,869 $35,271 $36,598 $37,835

$0 $0 $0 $0 $0 $0 $0 $0 $0 $0 $0

Cost Reduction Synergy $4,337 $4,684 $4,969 $5,213 $5,458 $5,725 $5,984 $6,232 $6,466 $6,685

Total Operating Expenses $169,271 $216,836 $234,182 $248,468 $260,643 $272,893 $286,264 $299,204 $311,591 $323,306 $334,234

OpEx as % of Revenue 44% 44% 44% 44% 44% 44% 44% 44% 44% 44% 44%

New Revenue $383,221 $519,788 $561,371 $595,615 $624,800 $654,166 $686,220 $717,237 $746,930 $775,015 $801,210

Adj. Op Income 29,250 39,673 42,847 45,461 47,689 49,930 52,376 54,744 57,010 59,154 61,153

Less: Net CAP EX 18,695 20,213 21,426 22,498 23,622 24,804 25,796 26,828 27,901 28,738 29,312

Baseline Net CAP EX 18,695 19,817 21,006 22,056 23,159 24,317 25,290 26,302 27,354 28,174 28,738

Add. Inc/Dec in CAP EX - 396 420 441 463 486 506 526 547 563 575

FCF 10,554 19,460 21,421 22,963 24,066 25,126 26,581 27,916 29,110 30,416 31,841 $607,334

Timing of CF 1 2 3 4 5 6 7 8 9 10 10

Discount Factor 0.92 0.85 0.79 0.72 0.67 0.62 0.57 0.52 0.48 0.45 0.45

Discounted FCF $17,952 $18,230 $18,028 $17,430 $16,787 $16,383 $15,873 $15,269 $14,718 $14,213 $271,103


PV of Terminal Value $271,103


Free Cash Flow

$ (in Millions)Free Cash Flow Component Current Year Stage 1 (XOM) 5.90%

NOPAT 29,250 Op. Exp. Net Capex Stage 2 (Indstry) 4.90%Net CAPEX 18,695 7.6% 4.9% TV (GDP) 3.00%Free Cash Flow 10,554

WACC 8.40%


2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 202128.10% 8.00% 6.10% 4.90% 4.70% 4.90% 4.52% 4.14% 3.76% 3.38% 3.00%

Terminal Value

Stage 1 Stage 2

Growth by StagePercentages

Stage 1 Growth Stage 2 Growth

106

Financial Exhibit 13: Sensitivity Analysis

LOW HIGH LOW HIGH LOW HIGH

331,843$ 338,547$ 299,049$ 314,625$ 354,469$ 372,371$

179,746$ 183,377$ 163,671$ 170,420$ 192,002$ 199,759$

32,499$ 33,156$ 28,677$ 31,423$ 34,014$ 37,169$

32,152$ 32,801$ 29,880$ 31,691$ 33,997$ 35,385$

23,348$ 23,820$ 21,699$ 23,233$ 24,940$ 25,444$

13,332$ 13,601$ 12,015$ 12,640$ 14,097$ 14,529$

11,483$ 11,715$ 10,564$ 10,887$ 12,266$ 12,514$

PERCENTAGE OF REVENUE

WACC

Net Capex

SG&A

GDP

Manufacturing Expenses

SCENARIO # 2

CATEGORYVALUATION (in million)

Operating Revenue

COGS


SCENARIO: BASE LINE


COGS

Operating Revenue

WACC

SG&A

GDP

Net Capex

PERCENTAGE OF REVENUE PERCENTAGE OF REVENUE

Operating Revenue

SCENARIO # 1


COGS

WACC

SG&A

GDP

Net Capex


107

LOW HIGH LOW HIGH LOW HIGH

317,110$ 333,626$ 299,823$ 318,759$ 374,208$ 408,227$

173,555$ 180,712$ 162,402$ 172,659$ 202,694$ 221,120$

30,409$ 33,321$ 28,127$ 32,145$ 35,908$ 41,090$

31,364$ 32,645$ 30,273$ 31,802$ 36,257$ 38,088$

23,009$ 23,474$ 21,984$ 23,094$ 26,329$ 27,659$

13,006$ 13,404$ 12,426$ 12,933$ 15,034$ 15,945$

11,316$ 11,544$ 10,812$ 11,030$ 12,949$ 13,472$

PERCENTAGE OF REVENUE


WACC

Net Capex

SG&A

GDP

SCENARIO # 5


Operating Revenue

COGS

SCENARIO # 4


Operating Revenue

COGS


WACC

Net Capex

SG&A

GDP

PERCENTAGE OF REVENUE PERCENTAGE OF REVENUE

Operating Revenue

COGS


SCENARIO # 3


WACC

Net Capex

SG&A

GDP

108

9. Glossary of Terms

BOE: Barrel of Oil Equivalent. It is a unit on energy based on the approximate energy released

by burning one barrel (42 US gallons or 158.987 liters) of crude oil.

BOEB: Barrels of Oil Equivalent in Billions

BTU: British Thermal Unit. This is the amount of heat required to increase the temperature

of one pound of water by one degree Fahrenheit.

Downstream: Refers to oil and gas operations after the production phase and through to the

point of sale, whether at the gas pump or the home heating oil truck.

Dry hole: A well that is drilled but does not produce oil or gas in commercially worthwhile

amounts

EIA: US Energy Information Administration. It collects, analyzes, and disseminates independent

and impartial energy information to promote sound policymaking, efficient markets, and public

understanding of energy and its interaction with the economy and the environment.

Fracking: It is the process of initiating, and subsequently propagating a fracture in a rock layer,

employing the pressure of a fluid as the source of energy.

Heavy crude: It is any type of crude oil which does not flow easily.

Light crude: is liquid petroleum that has a low density and flows freely at room temperature

Light Sweet Crude: Petroleum is considered "sweet" if it contains less than

0.5% sulfur compared to a higher level of sulfur in sour crude oil.

OECD: The OECD (Organization for Economic Co-operation and Development) is an

international organization of countries with highly developed economies and democratic

governments.

Oil sands: They are a type of unconventional petroleum deposit. The sands contain naturally

occurring mixtures of sand, clay, water, and a dense and extremely viscous form of petroleum

technically referred to as bitumen.

OPEC: The Organization of Petroleum Exporting Countries is an intergovernmental

organization dedicated to the stability and prosperity of the petroleum market. OPEC

membership is open to any country that is a substantial exporter of oil and that shares the ideals

of the organization. OPEC has 11 member countries.

109

Proven Reserves: Quantity of energy sources estimated with reasonable certainty, from the

analysis of geologic and engineering data, to be recoverable from well established or known

reservoirs with the existing equipment and under the existing operating conditions.

Reserve: Reserves are those quantities of petroleum claimed to be commercially recoverable by

application of development projects to known accumulations under defined conditions

Reserve Replacement Ratio: The reserve-replacement ratio measures the amount of proved

reserves added to a company's reserve base during the year relative to the amount of oil and gas

produced.

Seven Sisters: The "Seven Sisters" was a term coined in the 1950s by Italian businessman

Enrico Mattei to describe the seven oil companies which formed the "Consortium for Iran" and

dominated the global petroleum industry from the mid-1940s to the 1970s. The group comprised

Standard Oil of New Jersey and Standard Oil Company of New York (now ExxonMobil);

Standard Oil of California, Gulf Oil and Texaco (now Chevron); Royal Dutch Shell; and Anglo-

Persian Oil Company (now BP).

In 1973 the members of the Seven Sisters controlled 85% of the world's petroleum reserves but

in recent decades the dominance of them and their successor companies has been challenged by

the increasing influence of the OPEC cartel and of state-owned oil companies in emerging-

market economies.

Shale rocks: Oil Shale. It is an organic-rich fine-grained sedimentary rock, contains significant

amounts of kerogen (a solid mixture of organic chemical compounds) from which liquid

hydrocarbons called shale oil can be produced. Shale oil is a substitute for conventional crude oil

Supermajor: This name commonly is used to describe the world's five (and sometimes six)

largest publicly owned oil and gas companies

Upstream: The grass root of the oil business, Upstream refers to the exploration and production

of oil and gas.

110

10. ENDNOTES

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111

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MTEtMDUwMTM0L3htbA%3d%3d 61 ExxonMobil. “Investors.” 2011. ExxonMobil. http://ir.exxonmobil.com/phoenix.zhtml?c=115024&p=irol-irhome

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http://money.cnn.com/galleries/2010/fortune/1005/gallery.expensive_oil_spills.fortune/index.html 63 Exxon Mobil CEO defends hydraulic fracturing. May. 25, 2011 Star-Telegram http://www.star-

telegram.com/2011/05/25/3104314/exxon-mobil-ceo-defends-hydraulic.html 64 “China's Sinopec secures gas from Exxon Mobil in PNG”, BBC News, December 9, 2009,

<http://news.bbc.co.uk/2/hi/8394486.stm> 65 “Tokyo Electric, Chubu Lobby Exxon to Link With Shell”, Bloomberg Businessweek, July 3, 2006,

<http://www.bloomberg.com/apps/news?pid=newsarchive&sid=av3g7_kUeZGw&refer=uk> 66 Financial data for Chevron Corp. were obtained from the company’s 10-K Annual Reports, which were pulled from the

company’s Investor Relations website, “SEC Filings”: http://investor.chevron.com/phoenix.zhtml?c=130102&p=irol-sec.

Accessed frequently April through May 2011. 67 Financial data for ConocoPhillips were obtained from the company’s 10-K Annual Reports, which were pulled from the

company’s Investor Relations website, “SEC Filings”:

http://www.conocophillips.com/EN/investor/financial_reports/sec_filings/Pages/index.aspx. Accessed frequently April through

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