Sizing-up this Energy Goliath

Nikita is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Energy behemoth ExxonMobil (NYSE: XOM) always seems to be making the right moves at the right time. Its decision to go-ahead with the offshore Hebron Oil Project in Canada is a fine example of the company’s far-sightedness. With an expected daily production capacity of 150,000 barrels of oil, this will definitely prove to be a game changing deal for the company in the not-so-distant future.  With such smart deals, the gas giant is clearly strengthening its foothold to secure its dominance in the energy arena. But it isn’t all that rosy when you’re pitted against rivals such as Chevron (NYSE: CVX) and Shell (NYSE: RDS-A) (NYSE: RDS-B). To understand Exxon’s position in the competitive landscape a SWOT analysis, through which strengths, weaknesses, opportunities and threats can be evaluated, is essential.

Strengths:

  • Market Leader: Exxon has already positioned itself as the largest refiner and marketer of petroleum products in the world, with substantial oil and gas reserves and a high reserve replacement ratio. That allows it to tap the less traversed terrains almost anywhere on the globe and lock up reserves.
  • Integrated Business Operations: Around 75% of the company’s refining capacity is integrated with its lubricants and/or chemical businesses. Such integrations increase the productivity of all streams and lead to cost reduction due to economies of scale.
  • Geographically Diverse Business: Exxon has upstream and downstream operations worldwide, covering the US, Canada, Europe, Asia Pacific and Latin America. It has around 25,000 retail service stations in 100 countries. It should be noted that Exxon has a significant presence in North America and Europe, which are the leading consumers of oil and natural gas. But rivals like Shell, too, have a widespread presence in North America and Europe, which can hamper the market share of Exxon in the future. In fact, more than 60% of Shell's revenue is generated from the US and Europe.

Weakness:

  • Pending Legal Cases: Exxon has been involved in several lawsuits that increase costs and adversely affects profitability. Moreover, legal proceedings also tarnish the goodwill of a company to some extent. Some of the recent lawsuits were related to the violation of air emission rules and a gas leak at an Exxon service station.

Opportunities:

  • Launch of Products and Capacity Expansion: With the ongoing launch of products and capacity expansion, Exxon has a very good chance to capture a major portion of the Asia-Pacific region, which is a huge energy market. In fact, it is also expanding its Singapore chemical facilities, which will add about 2.6 million tons per year of capacity.
  • Expanding Natural Gas demand: The ‘green properties’ of natural gas has made it immensely popular. Therefore, Exxon, being one of the largest suppliers of natural gas, has tremendous opportunity to tap the growing natural gas market.
  • Opportunities from Unconventional Sources of Energy: Unconventional sources such as deepwater, oil sands, acid/sour gas and tight gas assets have tremendous expansion opportunities. Exxon can definitely benefit from these sources. In fact the company has started implementing aggressive strategies for extracting them. The Hebron project is expected to capture over 700 million barrels of underwater crude.

Threats:

  • Decline in US Oil Consumption:  According to IEA’s World Energy Outlook 2012, global energy demand for oil is likely to grow by more than one-third to 2035. However, there will be around a 5 million barrels/day drop in US oil consumption by 2035, with respect to current levels. This might impact Exxon, as more than one-third of its revenue is generated from the US.
  • Intense Competition in Natural Gas Sector: Chevron can pose a great threat to Exxon in the natural gas sector. It has seven new projects lined up in this sector that are expected to come online during 2012-2013, and is projected to produce 115 million barrels of oil equivalent in 2013.
  • Government Regulations: The US Gulf of Mexico oil spill is likely to lead to stricter environmental rules and standards for deep water offshore drilling. This will ultimately increase the cost of projects in Gulf of Mexico, which is one of the regions were Exxon has projects.

Final Thought:

With a diversified business and plentiful resources to fuel its growth plans, Exxon’s long-term outlook is pretty bright. Although competitors and law-makers are breathing down its neck all the time, Exxon’s groundbreaking initiatives and aggressive expansion strategies keep it way ahead of the competition.


nikitadugar has no position in any stocks mentioned. The Motley Fool recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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