Sample Report On Financial Analysis- Exxon Mobil V/S Chevron
About the report
In this report, we will analyze the financial standing of two giant oil companies in the United States, Exxon Mobil and Chevron Corporation for the fiscal year, 2013 and 2014. During the times, when crude oil prices are tumbling down, we believe that carrying out the financial analysis in this industry will be an interesting subject and will also provide a deep insight into the historical trends in these companies.
While we plan to conduct the analysis using the tool of ratio analysis, however, in order to arrive at a comprehensive conclusion, we will be using multiple ratio sections, namely, Liquidity Ratios, Profitability Ratios, Efficiency Ratios, Solvency Ratios and Markey Ratios.
While the report is all about the financial standing of two American Oil Companies, Exxon Mobil Corporation and Chevron Corporation, however, at present, whole of the oil and gas industry is under stressful business environment with oil prices plunging down day by day. While many economies are benefitting out of it, but the major concern is for the oil companies that are finding it hard to survive now. Below discussed is the trend in the oil and gas industry:
During January, 2015, the oil prices reached its lowest level of $48/barrel since March, 2009. In fact, January was the seventh consecutive month for the consistent downward trend in the oil prices. Important to note, the negative price fluctuations is the result of growing oil supply in the world. United States of America, which was once a very lean producer of oil is showing continued growth in its production levels now. On the other hand, producing countries like Russia and Saudi Arabia are refraining from cutting down their production. Thus, amid record supply levels and weak global demand, the inventory levels are rising, thus contributing to fall in prices of crude oil. It is noteworthy to comment here that in January, estimated Organization for Economic Cooperation and Development (OECD) total commercial oil inventories reached their highest level since August 2010.
According to a forecast, the oil prices are expected to be at the average level of $58 per barrel during 2015 and $75 per barrel during 2016. These forecasts are unchanged since a month now; however, the oil futures indicate a high uncertainty in the future price outlook. The 95% confidence interval for market expectations widens over time, with lower and upper limits of $32/bbl and $108/bbl for prices in December 2015.
-Ongoing trends in US
During January, the total US crude oil production average at 9.2 million barrels per day while the average forecast for 2015 has surged to 9.3 million barrels per day. Interestingly, the forecasts for 2016 are 9.5 million barrels per day, with production level close to highest oil production in the history of the country.
The effect of falling oil prices is also visible on the retail gasoline prices that tumbled to $2.04 per gallon during last week of January, the lowest since April, 2009. Market analysts expect the price to average $2.33 per gallon during 2015 and $2.73 per gallon in 2016. An average American consumer has benefited from the ongoing trend in the oil prices and is expected to spend $750 less for gasoline in 2015.
About the company
-Exxon Mobil Corporation
Founded in the year 1999 out of a merger activity between Exxon and Mobil, the company is an American multinational oil and gas corporation with headquarters in Texas, United States. The company is also the second largest company in terms of market capitalization and fifth largest company in terms of revenue figures. In terms of oil and gas reserves, the company holds 25.2 Billion Barrels and ranks 14th in world in terms of oil reserves held. By the end of 2013, it had 37 oil refineries sprawling in 21 countries, thus making it largest refiner in the world.
Founded in the year 1879, Chevron is an American Multinational corporation and deals in products like fuels, lubricants and petrochemicals. The company is headquartered in California and currently operates in more than 180 countries around the world. Chevron is one of the largest oil companies in the world and is involved in each aspect of oil and gas industry.
As discussed before, under this section, we will analyze the trend in the financial position of both the companies using the past two year financial statements. While each ratio will be presented in a table and graph, the trend will be followed with a discussion also.
Also known as Working Capital Ratios, these ratios indicate the ability of the entity to honor their short-term obligations. Below discussed are two popular liquidity ratios for both the companies:
a)Current Ratio: Current Assets/ Current Liabilities
Referring to the data and graph above, we can witness that both the companies are losing on their liquidity standing since a year now. As for Exxon, the current ratio of the company declined from 1.01 to 0.83 courtesy 7.99% decline in the current asset base while current liabilities increased by 11.82%. The same trend was witnessed in Chevron’s current ratio that declined from 1.63 to 1.52.
ii)Acid Ratio: Cash+ Receivables/ Current Liabilities
We even tested the liquidity position of both the companies using the stringent measure of Acid Ratio and found the similar trend just as in the current ratio. As for Exxon Mobil, during 2013, the acid ratio of the company declined from 0.69 to 0.53 while that of Chevron Corporation declined from 1.25 to 1.16.
Overall, it was clear that Chevron was having a higher liquidity than Exxon Mobil, however, liquidity roots of both the companies are not strong and the management should take note of this concern.
Another important ratio section that indicates the profit margin being earned by the company from its business activities. All the stakeholders of the company keeps a close eye on the profitability margins of the company. Below discussed are few popular profitability ratios:
i)Gross Margin Percentage: Gross Margin/ Revenue
Beginning the profitability analysis with gross profit percentage, it was surprising to witness that Exxon Mobil Corporation, also lost on their gross margins during 2013 as the multiple declined from 37% to 35% as the revenue figures declined significantly by 5.40% thus eroding the gross margins of the company. Chevron, on the other side, maintained almost constant gross margin at 41.5%. It is important to notify that just like Exxon, even Chevron faced a steep decline in the revenue figures that declined by 5.40%, however, and control over cost of sales allowed the gross margin to be constant during the year.
ii)Net Margin percentage: Net profit/ Revenue
The effect of decline in revenue figures was very much visible in the bottom line profit margins of both the companies. As for Exxon Mobil, the net margins of the company declined from 9.31% to 7.43%. Although the major contributor in this decline was fall in the revenue figures, however, inability to control the operating expenses was yet another factor for decline in the net margins of the company.
The similar trend was visible in the profitability of Chevron Corporation also as the net margins of the company declined from 10.82% to 9.36%.
iii)Return on Equity: Net Income/ Total Equity
This profitability measure is of utmost importance for the shareholders of the company as it indicates the returns earned for them by the organization. Once again, a depressing trend was witnessed in the ROE multiples of both the companies. As for Exxon, because of significant decline in the net income of the company, the multiple decreased from 28.03% to 19.17%. This negative trend conveys negative vibes amongst the shareholders of the company and if the trend continues, shareholders might also lose confidence in the company.
Now, as for Chevron Corporation, the ROE of the company is relatively poor than Exxon Mobil with multiple falling from 20.30% to 15% in 2013. Here also, the downfall was courtesy of the decreased net income of the company.
Although, Chevron Corporation has higher profit margins than Exxon Mobil, but the latter company scores over the former with higher ROE multiple. However, as indicated by the ratios above, both the companies are losing on their profitability margins because of decreased revenue figures and uncontrollable costs and each of them should introspect their respective position before it gets too late.
Also known as Leverage Ratios, these ratio multiples indicate the proportion of the capital structure of the company and how much risk is involved in it. Analysts and long-term lenders, take an in-depth view of these ratios ratio to access the ability of the company to honor their long-term debt obligations:
i)Debt-Equity Ratio: Total Debt/ Equity
Now, this was an interesting observation. While both the companies were suffering from loss in the revenue figures, Chevron chose to increase the amount of debt in their capital structure with debt-equity ratio soaring from 0.09 to 0.13. However, Exxon, on the other side, preferred to adopt a conservative approach as indicated by it debt-equity ratio that declined marginally from 0.05 to 0.04.
Thus, on the inter-company basis, Chevron Corporation with higher debt proportion in the capital structure has higher risk embedded in it.
ii) Interest Coverage Ratio: Operating Income/ Interest Expenses
Combining the impact of interest coverage ratio with the previously discussed Debt-Equity Ratio, we have found that while Exxon Mobil adopted low-debt capital structure, it justifies its decrease in the interest coverage ratio from 25.84 to 17.42. This indicates that the company accepts that in the environment of low revenue figures, it is difficult to meet interest obligations; hence, the move to reduce the reliance on debt financing is more logical.
However, the trend in Chevron was completely different. Just as Exxon Mobil, even this company lost its revenue figures and profit margins, however, it still went for higher debt financing during 2013 without any interest expenses made. This endows a serious concern as the company is taking more debt but with no interest payments made, we have a big doubt over its solvency.
On comparing the solvency position of both the firms, we found that the proportion of debt financing in Exxon Mobil has reduced over the year and the decision seems logical considering weak financial position during 2013. However, Chevron Corporation, on the other side has increased the proportion of debt financing during 2013 but was unable to even honor its interest obligations.
Thus, it was clear that Exxon Mobil is much more solvent company that knows how to take decision relating to capital structure and not just involve itself into financial risk.
Also known as Asset Management Ratios, these ratios indicate the efficiency of the management of the company for the use of the asset base of the company. Below discussed are few of the efficiency ratios for both the companies:
i)Inventory Turnover Ratio: COGS/ Inventory
The concern for both the companies does not seem to end as it extends to the efficiency ratios too. As for the Exxon Mobil, the inventory turnover ratio of the company declined from 20.54 times to 18.56 times, indicating that it took more time for the company to sell their inventory and hence, capital was tied up for more time period in the inventory levels. The similar trend was visible in Chevron’s Inventory Turnover Ratio also which declined from 24.09 to 21.51.
ii)Receivables Period: 365* Accounts Receivables/ Revenue
As for Days of Receivables, finally we witnessed something optimistic for Exxon Mobil as during 2013, the debtors of the company turned early to pay their bills thus reducing the multiple from 25 days to 22 days. This is really encouraging for the company and can be a great assistance to the deteriorating liquidity condition of the company.
However, the results were opposite for Chevron Corporation as the debtors of the company took 2 additional days to pay back their bills with days of receivables surging from 32 days to 34 days. During the situation when the revenue figures are decreasing, liquidity is declining, slow payments from the debtors can further worse the situation for the company leading to some undesirable results.
Chevron or Exxon Mobil: How the year 2015 will be a different one for them?
The year 2015 is surely a tough one for the companies in oil and gas industry and both, Chevron and Exxon does not seem to be unaffected by the recessionary trend in the oil prices and sluggish demand globally. As per the market analysts, the companies will be cutting down their plans on capital expenditure and may also halt the existing projects. According to analysts at Wood Mackenzie, oil companies would have to cut their capital spending by at least 37% if crude oil price remains at $60 per barrel. Their expectations are based on the current price movements in the market that have dropped by 50% since June and the global excess has reached to 1.4 million barrels per day. With no real expectations of cut in the global supply, the lower oil prices and slugging demand will contribute towards falling profitability of both the companies, thus subsequently affecting their dividends and share repurchase program. Moreover, in order to maintain the confidence of the shareholders, both Chevron and Exxon Mobil will be making more dividend distribution and will be saving cash by delaying capital expenditure plans. This is really important for these companies because if dividend payments are compromised, each of the company will see significant decline in their share price as the past year performance of each of the company has been extremely with revenue figures declining compared to the previous year.
At the end of this report, we can conclude that both the companies are having tough run presently amid the depression in the oil prices globally. Moreover, with weak consumer demand, the revenue figures are plunging down and thus eroding profit margins of the company. We analyzed the financial standings of each of the organization for the period 2012 and 2013 and found similar trend where not only they are losing on liquidity standing but also on their profitability margins.
In short, both, Exxon Mobil and Chevron are having hard financial times and with oil prices expecting to be in the range of $48-$50 per barrel and with supply growing around the world, each of them should re-plan their strategy for pre-planned capital expenditure projects during 2015 to avoid any further pressure on cash flows and profitability.
Chevron Corporation. (2013). Annual Report 2013.
Exxon Mobil Corporation. (2013). Annual Report 2013.
Exxon Mobil Or Chevron Corporation: Who Will Perform Better In 2015? (n.d.). Retrieved February 12, 2015, from Bindness ETC: http://www.bidnessetc.com/32108-exxon-xom-or-chevron-cvx-who-will-perform-better-in-2015/
SHORT-TERM ENERGY OUTLOOK. (n.d.). Retrieved February 12, 2015, from http://www.eia.gov/forecasts/steo/
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