ExxonMobil Strategic Analysis

Group 4: Brendan Wise, Chujun Tan, Erik Jansa,

Gabrielle Herman & Randy Bialcik

May 5, 2017 MGMT 3004 - Sec 002

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Introduction

In 1870, John D. Rockefeller founded the Standard Oil Company Inc., headquartered in

Cleveland, Ohio. The Standard Oil Company Inc. was a major success in the late 19th century

implementing horizontal and vertical integration into its business and strategic plan. However, due to its

large success and large market share, in 1890 Congress passed the Sherman Antitrust Act forcing Mr.

Rockefeller’s Standard Oil Company to be divided into 34 separate entities. After the Sherman Antitrust

Act, many of Rockefeller’s unique entities preferred to develop into individual brand names. The

Standard Oil Company of New Jersey later became Exxon and the Standard Oil Company of New York

became Mobil. With the continued success of the oil and gas industry and post separation of the Standard

Oil Company, competitors started to emerge. One decade later, Exxon and Mobil merged in 1999, thus

creating ExxonMobil. In essence, the merger of ExxonMobil is a small revert to the once incredibly

dominant original Standard Oil Company.

Internal Analysis

As a leader in the oil and gas industry, ExxonMobil Corporation has garnered tremendous success

as a company due to its size, long-term investments, and competency in research and development across

its four business divisions: Upstream, Downstream, Chemical, and Natural Gas and Power Marketing.

ExxonMobil’s Upstream division participates in the exploration of resources and land across the globe,

while continuously innovating groundbreaking technologies through research and development.

ExxonMobil’s Upstream Research Company has leveraged technical knowledge and expertise in

developing and innovating their drilling, completions, and operations technologies.1 In addition, the

company’s presence across a variety of geographical environments through an extensive network of fuel

terminals, refineries, and pipeline operations in over 200 countries are crucial key resources for the

company’s success. Their global operations combined with their research and development and size

makes ExxonMobil an industry leader of land acreage through trades, farm-ins, and acquisitions; this

allows ExxonMobil to extend their product portfolio into next-generation energies while building upon

their Upstream division through natural gas, shale gas, and tight oil projects. These strengths have enabled

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ExxonMobil to reduce development costs, improve recovery, increase profitability, and increase

shareholder value, as well as put them at an advantage for increasing energy usage.2

ExxonMobil’s Downstream division focuses on strengthening and diversifying their product

portfolio. Along with a highly developed learning curve incorporating their past and present products,

ExxonMobil is working with approximately 80 university research facilities around the world to explore

next-generation technologies. This includes their commitment to contribute $5 million to the Princeton E-

ffiliates Partnership from 2015 – 2020 to sponsor the research of energies that are more environmentally

friendly such as their algae biofuels.3 Having such a prominent history of research and development has

allowed ExxonMobil to embrace the development of energy products that deliver environmental

excellence and energy efficiency as an effort to build the company’s sustainability presence and to move

with the global trend towards cleaner energy. Participating in the innovation of alternative energies would

not only grow ExxonMobil’s already diversified product portfolio, but it would also benefit

ExxonMobil’s entire value chain by reducing energy consumption, transportation and shipping costs,

emissions and waste, and energy costs in general.4

To address these innovations, ExxonMobil must capitalize on the resources and capabilities that

the company has built over the years, specifically incorporating the progress they have achieved through

their Chemical and Natural Gas and Power Marketing divisions, through economies of scope (Exhibit 1).

Their most important resources include their extensive research and development technologies and the

corresponding tangible and intangible assets that have resulted. For example, throughout the year of 2013,

ExxonMobil was issued 383 patent grants by the USPTO, placing 97th worldwide in terms of patents

issued.5 Along with this, their intellectual capital and 82,000+ human assets, 19,000 of which are

qualified scientists and engineers, continually add to the company’s overall growth, building skills and

expertise further through global integration and technological innovation.6 Furthermore, in ExxonMobil’s

existing Chemical and Natural Gas and Power Marketing divisions, they have utilized their pre-existing

capabilities to expand into the wind turbine lubricant market as a key supplier. Though a small sector of

ExxonMobil, Mobil lubricants are used in more than 40,000 wind turbines worldwide.7

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ExxonMobil’s internal history has consisted of many leveraged core competencies that continue

to add value to the company through their integration. As a result of continuously innovated technologies,

research and development projects, and a growing global presence, ExxonMobil has built an empire of

rare capabilities and strengths with a very low risk of being imitated by competitors due to the time and

money investments that ExxonMobil has put into its development to become the largest publicly traded

petroleum and petrochemical enterprise in the world. Refer to the Appendix (Exhibit 2) to review an

analysis of ExxonMobil’s strengths, weaknesses, opportunities, and threats in the industry.

External Analysis

After a shortage in supplies and a downward plunge in prices over the past few years, the oil and

gas industry is facing a period of recovery. However, the industry confronts great opportunities and

challenges during this period, such as the unstableness in the Middle East region, the spiking demand for

energy across the globe, and decisions made by OPEC that directly influence the price and production

quantity of fuel worldwide. Considering ExxonMobil’s large presence in the oil and gas industry, it is

important to analyze the external environment of the industry in order to form our recommendations for

the future.

Considering the oil and gas industry profitable and the technology used for offshore drilling is

constantly improving, many companies are trying to enter the industry due to its attractiveness, but face

challenges in doing so.8 One of these challenges includes the incredible amount of sunk costs that new

entrants must incur to first enter the industry, such as investments in land, technology, and infrastructure.

In addition, rivalry in the industry is considerably high since OPEC controls the majority of the world’s

oil production. According to the OPEC homepage, more than 80% of the world’s proven crude oil

reserves are located in OPEC member countries, giving OPEC significant power as a competitor and a

major influence on the worldwide price of oil.9 Also, internationally, Gazprom is a major competitor

located in Russia that accounts for 11% of the world’s natural gas global output.10 Furthermore, there are

many competitors located domestically that directly compete with ExxonMobil in the energy market,

including Chevron, BP, and Royal Dutch Shell. Overall, competition is steep both internationally and

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domestically for the oil and natural gas industries. However, there are many more facets and substitutes in

the energy market, such as the increasing production of solar, wind, hydro, geothermal, and other

initiatives. Socially, there has been increasing demand and a positive public sentiment around renewable

energy and sustainability movements. Finally, buyer power is relatively low in this industry because most

buyers are everyday consumers of energy. Buyers do not have the ability to negotiate with the decision

makers regarding the price of energy.

Despite all the competition in the energy market, the overall consumption and demand of energy

are increasing globally, creating new opportunities for current players. According to ExxonMobil News,

energy usage is expected to grow 35% over the next 25 years due to a growing world population and an

uprising of the middle class in both developed and developing countries.11 According to the US Energy

Information Administration, the United States used 35.4 quadrillion British Thermal Units (BTUs) of

petroleum and 28.3 quadrillion BTUs of natural gas in 2015. Renewable energy only took up 10% of the

whole consumption, which was 9.7 quadrillion BTUs.12 In 2016, natural gas accounted for 33.8% of the

United States energy consumption by source while coal, nuclear, and renewable accounted for 30.4%,

19.7%, and 14.9% respectively. However, by 2040, the global demand for natural gas specifically is

estimated to rise by 45%, which will account for 25% of the world’s electricity, 10% of marine

transportation, and 5% of total transportation.13

Furthermore, the social environment of the energy industry is pursuing more efficient ways of

energy consumption. On one hand, customers use energy more efficiently because the advanced

technologies in their home and workplace. On the other hand, resource producers are increasingly able to

deploy a range of technologies in their operations. This includes putting mines and wells that were once

inaccessible within reach, raising the efficiency of extraction techniques, shifting to proactive

maintenance, and using sophisticated data analysis to identify, extract, and manage resources.14

In conclusion, the energy market will continue to grow globally and domestically. Along with

this, there is an increasing demand for cleaner and more efficient forms of energy. Moving forward,

natural gas and renewable energy will account for the majority of the growth in this industry.

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Historical Performance

Our process for examining ExxonMobil’s historical performance followed two key parts.

Primarily, analyzing the company's financial performance over the last few years and secondly, looking at

the company's performance in their internal divisions.

To analyze ExxonMobil’s financial performance, we looked at their operating profit margin and

net profit margin versus the industry and versus their key competitors. In general, the oil and gas industry

has been decreasing over the past five years, dropping 15% in operating profit margin and 10% in net

profit margin.15 We can conclude that the reason for this drop in the industry can be attributed to lower

demand, decreasing oil prices, and the sustained cost of production relative to other forms of energy,

therefore creating slimmer margins for the oil industry. In addition, the increase in demand for alternative

energy sources outside of oil has damaged the margins in the oil industry. Despite ExxonMobil’s

operating and net profit margins being continuously above average over the past three years, the oil

industry is in the late maturity stage of its life (Exhibit 3 & 4). Hence, potential implications and risks

include slowing of total industry sales, less profitability, fierce price competition, and stronger effects of

external forces.

The innovation of ExxonMobil’s research and development department has driven the company

over the last few years as well. Compared to BP and Royal Dutch Shell, ExxonMobil has spent $1,024.6

million on research and development on average over the last five years, while their competitors have

spent $572.4 and $1,190.8 million respectively.16 However, a trend to note is that ExxonMobil has been

increasing its research and development spending, while the competitors have been cutting the expenses.

In respect to our key recommendations, we examined the development in ExxonMobil’s Chemical

division and Natural Gas and Power Marketing division. ExxonMobil’s Chemical division is one of the

company’s greatest performers, boasting an 18% return on capital employed and accounting for 58.9% of

ExxonMobil’s earnings after income tax in 2016 (Exhibit 5).17 Within ExxonMobil’s Chemical division,

it’s lubrication products are very high quality products that their competitors have yet to imitate. For

example, ExxonMobil provides a lubricant for wind turbines that lasts about seven years. This lubricant

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has given ExxonMobil a competitive advantage, as well as a foot-in-the-door with the wind energy sector.

ExxonMobil is also diversifying into natural gas and power marketing, which we see as a strategic move

for the company. At year end in 2016, ExxonMobil had produced 3,078 million cubic feet of natural gas

per day in the United States, making it the number one natural gas producer in the nation. The next closest

competitor in the United States, Chesapeake Energy, was producing only 2,866 million cubic feet per day

(Exhibit 6).18

Key Issues

ExxonMobil’s Natural Gas and Power Marketing division faces fierce competition within the

natural gas industry. The top ten natural gas producers in the world account for 30% of the natural gas

mining market.19 The main competitor within this industry is Gazprom, a Russian gas-producing

“champion” that was incorporated in 1989 when the Soviet Ministry of Gas Industry became a public

corporation.20 Because of Russian gas fields, Gazprom accounts for 17% of global natural gas

production.21 The output of Gazprom is forty-three billion cubic feet of natural gas a day, whereas

ExxonMobil’s global output is about eleven billion cubic feet of natural gas a day.22

ExxonMobil’s Natural Gas and Power Marketing division also competes with companies in

industries outside of the natural gas market because of how power markets and grids function. Power

plants within each market forecast the amount of energy they can produce and create bids for the cost, as

well as forecast the demand needed for periods throughout the day.23 Because of this, power plants

produce fuels that can be produced and consumed at the lowest cost, in comparison to more costly forms

of energy. Natural gas particularly is an expensive option as a fuel for a power plant, considering 85% of

the cost to run a natural gas power plant is incurred from the fuel.24 Natural gas power plants consistently

have a higher cost than wind, hydroelectric, and nuclear power plants according to the Energy

Information Administration (eia). Together, nuclear and renewable sources of energy account for about

35% of the United States energy production, and these power plants produce the cheapest bids for

electricity. When combined with coal power plants, this number reaches 65%.25 This leaves a small

margin for the use of natural gas.

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The last key issue we identified for ExxonMobil's Natural Gas and Power Market division was

government regulations. With the concerns of global climate change, countries around the world have

been passing regulations on the emission of carbon dioxide and other greenhouse gasses. Since natural

gas is a greenhouse gas, it releases carbon dioxide when burned.26 Because of this release of carbon

dioxide, natural gas is not considered a clean form of energy, even though natural gas power plants

release about 30% less carbon dioxide than coal power plants. This classifies natural gas as a reduced-

carbon form of energy.27 Government regulations, like the Clean Power Plan, stressed the importance of

using reduced-carbon methods for energy production. This plan was put into place by President Obama

and paved the way for additional research and investments into natural gas power plants.28 This plan was

later put under review by President Trump with the Executive Order on Promoting Energy Independence

and Economic Growth.29 This executive order puts the future of natural gas research into question

because it is cheaper for the government to continue the operation of coal power plants rather than

funding natural gas research. Another form of regulation that puts the future of natural gas into question is

the Paris Agreement, which calls for investment into carbon free energy sources like renewable and

nuclear energies.30 This is a threat to ExxonMobil’s Natural Gas and Power Marketing division,

specifically, because natural gas does not fit the “carbon free” description. To conclude, ExxonMobil is

caught in between the worldwide trend of net zero energy and the United States’ trend of cheaper energy

options.

Recommendations

From our analyses on the natural gas and power production industries, along with ExxonMobil’s

core competencies, we have decided on three main recommendations for ExxonMobil’s Natural Gas and

Power Marketing Division. These recommendations were made on the premise that governments around

the world are starting to aim for renewable and reduced-carbon forms of energy production and that the

United States will eventually follow suit. Our recommendations include (1) further developing company

strategy into cleaner forms of natural gas power plants, (2) lobbying for regulations supporting cleaner

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energy, and (3) expanding company research and development scope towards more sustainable forms of

energy.

ExxonMobil should further develop company strategy into the cleaner forms of natural gas power

plants because of the growing demand for cleaner energy throughout the world. By investing funds into

the research and development of natural gas power plants, ExxonMobil can strive to more efficiently

produce reduced-carbon energy. Discovering more efficient ways to convert natural gas into power will

reduce the price associated with natural gas power plants. This reduced price will make natural gas power

plants more competitive with current low-cost sources, such as nuclear energy. Being able to compete

with the lowest cost forms of energy will allow natural gas power plants to produce energy throughout

full days as opposed to only being able to run the factory during peak electricity use periods.

Lobbying for regulations and supporting cleaner energy would seem counterintuitive, but it

would ultimately benefit ExxonMobil while debilitating its competitors. If regulations were implemented

that raised the standard of energy from carbon-free to reduced-carbon, ExxonMobil would be able to

compete in the market at a higher advantage because of their dominant domestic presence in the natural

gas sector and looser regulations on natural gas. However, their competitors, such as Royal Dutch Shell

and Chevron, would be negatively affected. Additionally, lobbying for these regulations may lead

ExxonMobil to receiving government grants or funds purposed for research and development into the

efficiencies of the reduced-carbon natural gas power plants. To accomplish this, ExxonMobil would have

to contact and persuade government officials to favor cleaner energy. This would be a strategic move as

the current global social climate is favoring reduced-carbon energy production.

Expanding company research and development scope towards more sustainable forms of energy

would benefit ExxonMobil because of their pre-existing lubricant technologies in the wind turbine

industry. By allocating ExxonMobil’s highly extensive research and development capabilities into wind

energy, the company would have the opportunity to backwardly integrate as a supplier of both wind

turbines and their existing lubricants. This is critical in considering the social and political movement

towards clean energies, while also taking into account that ExxonMobil already has some experience with

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wind turbines. In addition to this, when wind turbine energies are not steadily available from mother

nature, ExxonMobil can utilize their developed natural gas sector to provide reliable power.

There are a few potential repercussions to note with the implementation of our recommendations,

however. First, the current political state in the United States is not in step with the rest of the world in

terms of forward-thinking environmentally-friendly initiatives. Under President Trump, there have been

movements to revert to oil and coal as the main energy sources due to their cheaper production costs.

Thus, if ExxonMobil were to focus on natural gas and sustainability exclusively, they could miss out on

the short-term benefits to produce at a cheaper cost. Furthermore, there are less governmental pressures to

pursue sustainability efforts like wind, solar, hydro, or geothermal, which, again, could cause

ExxonMobil to spend money researching cleaner forms of energy at a higher cost.

Conclusion

In conclusion, ExxonMobil is a phenomenal company that has stood the test of time since 1870

when it was founded by John D. Rockefeller. Today, considering domestic and global pressures, we

believe that there are two choices for ExxonMobil; these being to capitalize on the short-term benefits of

the US government’s regression back into coal and oil, or to focus on the global trend of carbon-reduced

and sustainable energy efforts. We suggest to go with the latter, to focus on longevity of the company in

the changing energy and political climate, to utilize technologies to create cost-effective ways to produce

and use energy, and to uphold our corporate responsibility in the eyes of our consumers by being an

innovative and ethical industry leader.

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Appendix

Exhibit 1

Exhibit 2

Strengths

• Brand reputation as a leader in the

industry

• Strong research and development

• Geographical and product portfolio

diversification

• Extensive network of fuel

terminals, refineries, and pipelines

• Intellectual and human capital

Weaknesses

• Weak revenue growth compared to

competition

• Not viewed as environmentally friendly

by stakeholders and environmental

interest groups

• Relies a lot on oil rather than using its

capabilities to develop alternative

energies

Opportunities

• Rising demand for shale gas

• Global energy usage is expected to

grow

• Increasing energy demands in

many developing economies

• Improving its environmental image

by focusing more on efficient

energies

Threats

• Declining oil prices

• Environmental government regulations

• Competitors are developing alternative

energy sources faster

• Economic recessions decrease energy

demand

• Natural disasters

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Exhibit 3

Exhibit 4

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Exhibit 5

Exhibit 6

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Endnotes

1 http://cdn.exxonmobil.com/~/media/global/files/financial-

review/2016_financial_and_operating_review.pdf

We used this website for information about ExxonMobil’s Upstream Research Company and their

technology uses.

2 http://cdn.exxonmobil.com/~/media/global/files/financial-

review/2016_financial_and_operating_review.pdf

We used this website for information on ExxonMobil’s land acreage ownership and the resulting

profitability and costs that have occurred.

3 http://web.b.ebscohost.com.ezp1.lib.umn.edu/ehost/detail/detail?vid=16&sid=25f20b46-d57d-4715-

89f2-

39aed62c8594%40sessionmgr104&hid=101&bdata=JkF1dGhUeXBlPWlwLHVpZCZzaXRlPWVob3N0

LWxpdmU%3d#AN=bizwire.c71129887&db=keh

We used this website for information about ExxonMobil’s investment into research and development

through universities across the country.

4 http://corporate.exxonmobil.com/en/company/news-and-updates/speeches/moving-down-the-value-

chain

We used this website for information about ExxonMobil’s diversifying product portfolio and how it has

affected their value chain.

5 http://www.ipwatchdog.com/2015/01/28/exxonmobil-flexes-patent-muscle-in-offshore-drilling-

monetizing-remote-gas/id=54189/

We used this website for information regarding patents and patent ranks that ExxonMobil has acquired.

6 http://web.b.ebscohost.com.ezp1.lib.umn.edu/ehost/detail/detail?vid=16&sid=25f20b46-d57d-4715-

89f2-

39aed62c8594%40sessionmgr104&hid=101&bdata=JkF1dGhUeXBlPWlwLHVpZCZzaXRlPWVob3N0

LWxpdmU%3d#AN=bizwire.c71129887&db=keh

We used this website for information assessing the tangible and intangible assets within ExxonMobil and

their contribution to the company.

7 http://corporate.exxonmobil.com/en/community/corporate-citizenship-report/managing-climate-change-

risks/developing-solutions-reducing-ghg-emissions-for-customers

We used this website for information on ExxonMobil’s presence in the wind turbine and lubricant

industry.

8 http://smallbusiness.chron.com/competitive-forces-offshore-oil-gas-industry-76822.html

We used this website for information regarding offshore drilling and new entrants of the industry.

9 http://www.opec.org/opec_web/en/data_graphs/330.htm

We used this website for information on OPEC and the pressure that it puts on ExxonMobil as a large

competitor and force in the oil industry.

10 http://www.gazprom.com/about/

We used this website for information regarding Gazprom, another major competitor for ExxonMobil.

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11 http://news.exxonmobil.com/press-release/exxonmobils-outlook-energy-sees-global-increase-future-

demand We used this website for information on future projections of energy usage due to the increase in the

global population and how this affects ExxonMobil’s future.

12 https://www.eia.gov/energyexplained/?page=us_energy_home

We used this website for information from the US Energy Information Administration on the number of

BTUs emitted by different energy sources in the United States.

13 http://corporate.exxonmobil.com/en/energy/energy-outlook/natural-gas

We used this website for information from ExxonMobil’s prediction of the future global demand growth

for natural gas energy.

14 http://www.mckinsey.com/business-functions/sustainability-and-resource-productivity/our-

insights/how-technology-is-reshaping-supply-and-demand-for-natural-resources

We used this website for information on the social environment of the energy industry and its pursuit of

energy-efficient technologies.

15 https://www.stock-analysis-on.net/NYSE/Company/Exxon-Mobil-Corp/Ratios/Profitability#Operating-

Profit-Margin

We used this website for financial information on ExxonMobil, including their operating profit margin

and net profit margin within the industry and to compare with their competitors.

16 https://www.statista.com/topics/1109/exxonmobil/

We used this website for information in comparing ExxonMobil’s investment in research and

development to their competitors’ investments.

17 http://cdn.exxonmobil.com/~/media/global/files/summary-annual-

report/2016_summary_annual_report.pdf

We used this website for information about ExxonMobil’s Chemical division and its financial

performance in the past year.

18 http://www.ngsa.org/wp-content/uploads/2017/03/Top-40-2016-4th-quarter.pdf

We used this website for information about natural gas production statistics in the United States to

compare ExxonMobil with their competitors in year 2016.

19 http://www.investopedia.com/articles/markets/030116/worlds-top-10-natural-gas-companies-xom-

ogzpy.asp

We used this website for information about the key competitors in the natural gas industry, along with

facts about natural gas production.

20 https://www.oxfordenergy.org/wpcms/wp-content/uploads/2015/09/NG-102.pdf

We used this website for information about the history of Russia’s natural gas industry, which led to the

creation of Gazprom, one of ExxonMobil’s strongest competitors.

21 http://www.gazprom.com/about/

We used this website for information about Gazprom’s historical background and their amount of global

natural gas production.

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22 http://www.investopedia.com/articles/markets/030116/worlds-top-10-natural-gas-companies-xom-

ogzpy.asp

We used this website for information about Gazprom’s production of natural gas per day versus

ExxonMobil’s production of natural gas per day.

23 https://www.energymanagertoday.com/wholesale-electricity-markets-explained-0109432/

We used this website for information about how power markets and grids function and how they forecast

energy costs from demand and production.

24 https://www.eia.gov/electricity/annual/html/epa_08_04.html

We used this website for information about the major components to the price of energy per type of

power plant, specifically natural gas and the expensive costs that natural gas power plants incur.

25 https://www.eia.gov/tools/faqs/faq.php?id=427&t=3

We used this website from the United States Energy Information Administration for information on the

percent of U.S. energy produced by each type of power plant.

26https://ay16.moodle.umn.edu/pluginfile.php/1138998/mod_resource/content/0/04_Energy_Balance_%2

B_Circulation.pdf

We used this slide deck from Daniel Griffin, PhD, a biology professor, for information about greenhouse

gases and the solar cycle.

27 https://www.eia.gov/tools/faqs/faq.php?id=73&t=11

We used this website for information on how much carbon dioxide is released by different types of fossil

fuels, specifically natural gas.

28 https://www.federalregister.gov/documents/2015/10/23/2015-22842/carbon-pollution-emission-

guidelines-for-existing-stationary-sources-electric-utility-generating

We used this website for information about the Clean Power Plan, which allowed for reduced-carbon

methods for energy production, and the advantage this regulation gave ExxonMobil.

29 https://www.whitehouse.gov/the-press-office/2017/03/28/presidential-executive-order-promoting-

energy-independence-and-economi-1

We used this website for information on the White House’s executive order for removal of the Clean

Power Plan in the recent year and how this has affected ExxonMobil’s Natural Gas and Power Marketing

division.

30 http://unfccc.int/files/meetings/paris_nov_2015/application/pdf/paris_agreement_english_.pdf

We used this website for information on the Paris Agreement and how this regulation for carbon-free

energy affects ExxonMobil.