EXXON MOBIL: ENERGY GIANT
CASE STUDY: EXXON MOBIL
Amie Bratcher
Columbia College
Business 510
Professor Manzoor Chowdhury, Ph.D
December 2013

Executive Summary
ExxonMobil is an American multinational oil and gas corporation that is headquartered in Irving, Texas. On November 30, 1999, Exxon and Mobil merged to become ExxonMobil. ExxonMobil is the largest publicly traded petroleum and petrochemical enterprise in the world (www.exxonmobil.com). The main activities of ExxonMobil are exploration, production, transportation and sale of crude oil and natural gas as well as the manufacture, transportation and sale of petroleum products (www.corporatewatch.org).
This analysis will discuss the history of ExxonMobil. The analysis will identify the market structure and production decisions of the company. It will attempt to determine consumer demand. Through the findings of consumer demand the analysis will also attempt to determine the behavior and pricing strategies of ExxonMobil. It will also provide an explanation of management decisions. And, an explanation of management approaches to opportunities along with threats from macroeconomic expectations and implications. The analysis will also identify ExxonMobil’s competitors. Some common examples of competition are; Royal Dutch Shell, BP, and Chevron. The analysis will further discuss how the decisions of each individual company may affect similar companies in the industry. HISTORY
ExxonMobil is the biggest and most profitable of the Western “supermajor” oil companies (ExxonMobil: Oozing Success). In 1999, when Exxon and Mobil merged to form Exxon Mobil Corporation, it brought together a shared history of over 120 years with being a part of the Standard Oil Company family (A Guide to the ExxonMobil Historical Collection, 1790-2004: Part1). This merger made Exxon Mobil the world’s largest energy corporation. Exxon and Mobil were offspring of Standard Oil which was founded by John D. Rockefeller in 1870 (The History of Corporate). Standard Oil Company quickly started partnering with or purchasing other companies responsible for refining, transporting and marketing petroleum products (A Guide to the ExxonMobil Historical Collection, 1790-2004: Part1). In 1882, Standard Oil Trust was formed to merge the companies it had purchased which numbered about 40 companies. By 1889, the Trust accumulated companies that were involved in exploration, production, refining, transportation and marketing. Unfortunately, in 1890 Congress passed the Sherman Anti-Trust Act that aimed to ensured fair competition in interstate commerce and to eliminate monopolies. This Act eventually led to the dissolution of the Trust in 1892 (A Guide to the ExxonMobil Historical Collection, 1790-2004: Part1).
In 1911, the Supreme Court of the United States ruled that the Standard Oil Company of New Jersey was an “unreasonable” monopoly and ordered it to dissolve which resulted in 34 distinct and separate companies (A Guide to the ExxonMobil Historical Collection, 1790-2004: Part1). Jersey Standard, a predecessor of Exxon, and Socony, a predecessor of Mobil, were two of those companies involved in that split. Jersey Standard became the leading oil producer in the world. In 1919, it acquired a 50% share in Humble Oil & Refining Co. (The History of Corporate). By 1958, Standard Oil owned almost 98% of Humble. In 1925, Socony acquired a 45% interest in Magnolia Petroleum Co. Socony also merged with Vacuum Oil Co. in 1931to become Socony-Vacuum Oil Company, Inc. (The History of Corporate).
In 1955, Socony-Vacuum merged with Mobil Oil Company to become Socony Mobil Oil Company, Inc. In the 1960s, Socony changed its name again to the Mobil Oil Corporation because Mobil’s products were receiving increased brand recognition (A Guide to the ExxonMobil Historical Collection, 1790-2004: Part1). In 1959, Jersey Standard discovered oil in Libya and thus began a decade of major oil discoveries in the Middle East. These discoveries established Standard Oil as a global chemical producer in 1965 (A Guide to the ExxonMobil Historical Collection, 1790-2004: Part1). Mobil Chemical Company was created in 1960.
During the 1970s, Standard Oil contemplated its corporate identity. Throughout the years, Standard Oil marketed products under various brand names. With discussion indicating the need for harmonizing its products, in 1972 Standard Oil decided that it will now market its products under the brand name Exxon thus the company would become Exxon Corporation (A Guide to the ExxonMobil Historical Collection, 1790-2004: Part1).
In 1973, the oil industry faced a challenge with the Arab oil embargo. Countries were disrupting production, causing oil supplies to diminish and prices to soar (A Guide to the ExxonMobil Historical Collection, 1790-2004: Part1). This challenge forced Exxon and Mobil to increase exploration and productions in other parts of the world. The 1980s and 1990s was a prosperous period for Exxon and Mobil. This period showed increases in oil supplies and reductions in prices and new marketing techniques (A Guide to the ExxonMobil Historical Collection, 1790-2004: Part1).
Prior to merging with Mobil, Exxon had businesses in every phase of the petroleum industry. Exxon transported oil through pipelines and operated one of the largest fleets of oil tankers in the world. Other interests of Exxon were natural gas, coal, nuclear fuels, chemicals and mineral ores such as copper, lead, and zinc (Exxon Corporation). Mobil’s core business concentration was in petroleum extraction, processing, and distribution (Mobil Corporation).
MARKET STRUCTURE
ExxonMobil has a market structure that is an oligopoly. Oligopoly businesses usually have market power derived from barriers to entry. The key characteristic of oligopoly is that there are a small number of businesses competing with each other, so behavior is mutually interdependent (Farnham, 230). The strategies and decisions of one business affect other businesses, whose decisions then affect the other business. The concept of game theory has been applied to an oligopoly market structure because of the outcomes in relation to prices, quantities, and profits are a function of strategic behaviors adopted by businesses of this market structure (Farnham, 239). Other characteristics of an oligopoly market structure are that the company’s product information is likely to be protected by patents, copyrights, and trade secrets, and the company has limited control over price.
ExxonMobil is part of an industry in which there are relatively few, but large suppliers that are large enough to impact price of the products. ExxonMobil is a major manufacturer and marketer of basic petrochemicals, including olefins, aromatics, polyethylene and polypropylene, and a variety of specialty products (ExxonMobil – Company Structure Information from ICIS).
ExxonMobil has an organizational structure based on 12 separate global businesses designed to allow the company to compete more effectively in a changing worldwide energy industry (ExxonMobil – Company Structure Information from ICIS):
1. Upstream – allows for exploration, development, production, gas and power marketing, and US coal businesses;
2. Downstream – refining and supply, fuels marketing, lubricants and petroleum specialties, research and engineering; and
3. Chemicals.
ExxonMobil claims to be the one of the top three global petrochemical companies based on earnings. It has locations in more than 20 countries and markets its products in more than 150 countries. ExxonMobil has a business portfolio that includes a new line of polyolefins for automotive applications. It has products that range from soft and flexible compounds to reinforced composites that depend on the polypropylene, polyethylene, and elastomer base polymers that ExxonMobil can produce globally and tailor for specialty compounds (ExxonMobil – Company Structure Information from ICIS).
PRODUCTION & COST ANALYSIS IN THE SHORT RUN AND THE LONG RUN
In July 2012, CNNMoney reported that ExxonMobil beat its previous quarterly record of $14.83 billion that was set in the third quarter of 2008. The second quarter profit for ExxonMobil in 2012 was $16 billion, the highest ever for a U.S. corporation (CNNMoney: Exxon reports record profit of nearly $16 billion). This number includes $7.5 billion from “divestments and tax-related items.” Partly from the sale of refining and chemical operations in Japan (CNNMoney: Exxon reports record profit of nearly $16 billion). Not including the divestments and tax-related items, ExxonMobil made $8.4 billion, which is less than the $10.7 billion it made during the same period in 2011 (CNNMoney: Exxon reports record profit of nearly $16 billion). ExxonMobil’s combined production of oil and gas decreased by 5.6%.
Historically, ExxonMobil has delivered returns on capital well above its competitors' (Good, 2013). However, due to competitive pressures on the integrated oil and gas companies increasing over the past ten years, returns are sliding (Good, 2013). The gap between Exxon’s and its competitors’ returns have narrowed in the upstream segment. Exxon earns its wide economic moat by integrating its low-cost upstream segment and its downstream business to capture economic rents along the oil and gas value chain (Good, 2013). Exxon’s returns generated from the low-cost assets combined with a low cost of capital produce an excess return greater than its competitors.
Reserves represent having cash flow that a company can use to fund growth. Exxon’s reserve life has increased in the last 10 years for both liquids and natural gas reserves. The portion of Exxon’s developed reserves have also increased proving the certainty of being able to capture future capital requirements despite potential cost inflation (Good, 2013). Finding and development costs for Exxon Mobil have remained relatively stable during the last decade despite increasing in absolute terms. With finding and development costs and operating costs, relative costs are usually better than absolute levels for measuring efficiency. A company that has a cost structure well below the marginal cost of production will benefit from a pricing umbrella, which will ensure long-run viability (Good, 2013). Cash operating costs indicate how efficiently an explorer and producer can pull gas out of the ground and bring it to market once a well is drilled and completed. Throughout the last ten years, Exxon Mobil’s cash costs have increased but measuring them against revenue, costs remain constant with its historical values (Good, 2013). With Exxon Mobil having an average operating- costs of 30% over the past four years, it had a cash margin of 70%. Because of Exxon Mobil’s size, it has the power to negotiate better terms with service companies and countermand the leverage that a service company might have with the smaller explorers and producers when the capacity is tight (Good, 2013). The scale of Exxon’s project queue and its financial strength allows it to capitalize during oversupplies when prices are lower.
Exxon Mobil’s downstream segment earns excess returns thanks to its low-cost position due to economies of scale and unique assets, as well as integration among operating segments (Good, 2013). During 2009 after the global recession, Exxon Mobil’s downstream segment earned its cost of capital when its competitors did not (Good, 2013). From 2002 to 2012, Exxon Mobil’s downstream segment averaged 24% returns on average capital employed compared with the upstream segment’s 34% (Good, 2013). The economies of scale are derived from Exxon Mobil’s global footprint. Exxon Mobil is the world’s largest refiner with interest in 32 refineries worldwide with net distillation capacity of 5.4 million barrels per day and it is the sixth-largest chemical manufacturer in the world with annual sales volume of more than 24 metric tons (Good, 2013). Since the refineries and chemical facilities are on the same site, Exxon Mobil is able to take advantage of the reduced overhead and administrative costs from shared site management and utilities and infrastructure.
CONSUMER DEMAND AND BEHAVIOR
Recent research suggests that changes in the prices of gasoline do not affect consumer behavior much in the short run. Recent research estimates the short run effect of gas prices on the demand for gasoline is about -0.06 at the end of the 1990s and between -0.03 and -0.08 during 2001 and 2006 (Puentes & Istrate, 2010). A gallon of gas takes a vehicle much farther than it did in the past because of improved fuel economy standards. Consumers might adjust to higher gasoline prices by changing jobs or move closer to their current job to reduce their commute. Since 2003, the gasoline prices have been steadily increasing but it has not slowed the rate of growth in consumption of gasoline (CBO, 14). Increase in gasoline prices and consumer response those higher prices have important implications for government policies that would reduce gasoline consumption (CBO, 14). Higher gasoline prices have influenced consumers to make changes in how they operate their vehicles. With the higher prices, consumers have started using the lower octane grades of fuel that are sold at lower prices. Higher prices might also influence what kind of vehicle consumer’s purchase. Higher gasoline prices increase the demand for smaller, more fuel-efficient vehicles and reduce the demand for the larger, less –efficient vehicles.

COMPETITION
Exxon Mobil has outperformed all of its competitors. In 2008, Exxon Mobil earned $45 billion, gave back $40 billion to its shareholder, invested $26 billion around the world, and managed to find more oil than it produced (Yarow, 2009). The CEO of Exxon Mobil, Rex W. Tillerson, stated that the company simply made better decisions than its competitors. It did not acquire and invest a lot when the price of oil was too high. Exxon Mobil’s top competitors are Royal Dutch Shell, BP and Chevron Corporation.
Royal Dutch Shell is based in the United Kingdom. Shell has three segments of operations: upstream, downstream and corporate. Upstream operations are engaged in searching for and recovering crude oil and natural gas, the liquefaction and transportation of gas, the extraction of bitumen from oil sands ad converting it into synthetic crude oil, and wind energy (The New York Times, 2013). Downstream operations are engaged in manufacturing, distribution, and marketing activities for oil products and chemicals, alternative energy, and carbon dioxide management (The New York Times, 2013). Corporate operations represent the key support functions of Shell’s holdings, treasury, and self-insurance organization (The New York Times, 2013).
BP has two segments of operations: upstream and downstream. Upstream operations consist of exploration, field development and production (www.bp.com). Downstream operations consist of the products and service-led arm of BP, focused on fuels, lubricants and petrochemicals (www.bp.com). Chevron Corporation has three segments of operations: upstream, downstream and other businesses. Upstream operations consist of exploration and production. Downstream operations consist of manufacturing, products, and transportation. Other businesses consist of developing chemicals, mining, power, and technology. STRENGTHS AND WEAKNESSES
ExxonMobil’s strengths include (ExxonMobil Corporation – Financial Strategic Analysis Review, 2013):
• Integrated refining and chemical operations – ExxonMobil optimizes operations and production by producing higher-value products with lower feedstock and operating costs because it has its refining operations and chemical operation with its chemical business.
• Geographical diversification – ExxonMobil has operational facilities and markets in the majority of the world and does exploration activities on six continents.
• Extensive research and development activities – ExxonMobil conducts its own research and development activities related to alternative energy and collaborates through sponsorship of the Global Climate and Energy Project at Stanford University.
• Operating Performance – Operating income for ExxonMobil at the end of 2012 was $78,726 million which was a 7.47% over the previous year.
ExxonMobil’s weaknesses include (ExxonMobil Corporation – Financial Strategic Analysis Review, 2013):
• Legal Proceedings – ExxonMobil has been involved in several lawsuits and legal proceedings in the process of its normal business operations. Any adverse outcome would have a significant effect on ExxonMobil’s financial performance and results of operations.

CONCLUSION
ExxonMobil is an American multinational oil and gas corporation that is headquartered in Irving, Texas. On November 30, 1999, Exxon and Mobil merged to become ExxonMobil. ExxonMobil is the largest publicly traded petroleum and petrochemical enterprise in the world (www.exxonmobil.com). The main activities of ExxonMobil are exploration, production, transportation and sale of crude oil and natural gas as well as the manufacture, transportation and sale of petroleum products (www.corporatewatch.org).
This report discussed the history of ExxonMobil, identified the market structure and production decisions of the company, attempted to determine consumer demand and the behavior and pricing strategies of ExxonMobil. It also provided an explanation of management decisions. And, an explanation of management approaches to opportunities along with threats from macroeconomic expectations and implications. This analysis also identified ExxonMobil’s competitors - Royal Dutch Shell, BP, and Chevron. This analysis further discussed how the decisions of each individual company may affect similar companies in the industry. References
Corporate Watch. ExxonMobil & Esso UK. Industry Area Oil and gas exploration, development and Production. http://www.corporatewatch.org/?lid=292

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Briscoe Center for American History, The University of Texas at Austin. A Guide to the ExxonMobil Historical Collection, 1790-2004: Part 1. http://www.lib.utexas.edu/taro/utcah/00352/cah-00352.html

The Economist. 2012. Exxon Mobil: Oozing Success. http://www.economist.com/node/21560226

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Exxon Mobil. 2013. Corporate Website. www.exxonmobil.com

Puentes, R. and Istrate, Emilia. 2010. The Avenue: Gas prices and Consumer Behavior. http://www.newrepublic.com/blog/the-avenue/gas-prices-and-consumer-behavior

Yarow, J. 2009. Exxon is Embarrassing the Competition. http://www.businessinsider.com/exxon-making-is-embarassing-the-competition-2009-3

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