EXXONOMIES of SCALE: ASSESSING EXXONMOBIL ECONOMIC MOAT and WHAT FINANCIAL STATEMENT REVEALS Part I
THE FATE of PRICE TAKER
Unlike Disney or Apple who are capable of casting premium for their product, one of the most disadvantages of being a commodity company — and also why value investors are reluctant to invest in — is they can’t control the price of their product however excellent the management or however superior their facility. The price of their products rise along with net rising of demand and falling as the demand fades. Being an oil producer at admirably scale (1st rank in US and 7th in worldwide) and one of the most vertically integrated oil companies — Exxonmobil (NYSE:XOM), like any other oil company faces the threat due to the declining oil price and shine when the price is rising. This article will focus on assessing Exxonmobil economic moat. Our main question is, does Exxonmobil have economic moat or advantages which keep or protect their business from competitors for a prolonged duration?
DIVINE GIFT MOAT
When businesses can not control their own price of products, the only choice left to protect their market is to deliver their product with lowest possible cost within the longest possible duration. But once again, it is a painfully uncontrollable factor, it is given. By nature. Production costs and its continuity depend heavily on where the oil reserves are located. Production cost ranges greatly from sub $10 per barrel oil in Saudi Dessert to over $40 in the deep stormy seas in the United Kingdom. Exxonmobil’s commitment to capture and obtain a wide array of reserve locations with premium characteristics allows the company to operate with low cost — around $22 per barrel oil. Moreover, by acquiring strategic reserves, Exxonmobil at the same time eliminates competitors to gain cost advantages since once location is obtained, it is impossible for any entity in this planet to create such geological characteristics. Yes, this is a race to possess finite assets and Exxonmobil is one of the top leaders.
GOING THROUGH MARKET CYCLE
Like any other commodities, Oil price fluctuates along with rise and collapse of supply demand. In the peak of the cycle, oil companies enjoy a meaty margin and many are wiped out when price comes to the bottom cycle. Having operating at low cost in the long duration enables Exxonmobil to adapt through every phase of the cycle. Moreover, Exxonmobil is one of companies which consistently pay dividends for their shareholders, an admirable commitment and capability of a company who faces volatility of their product’s price.
IN THE SEARCH OF ANOTHER DIVINE MOAT
Though Exxonmobil is able to possess blessed areas with a premium cost, their supply is not unlimited — meaning that once natural resources are depleted, the company has to explore another potential (unproven) reserve somewhere else, and once again — it can be done — but not easy. In 2019 alone, ExxonMobil added 4.5 billion barrels to their reserves due to multiple new discoveries in Guyana offshore — one of the largest discoveries in decades — continued growth in the Permian Basin and a strategic acquisition in Brazil. Even with that outstanding milestone, Exxonmobil recorded 579 millions barrels aggregate loss of its reserve.
MORTAL MADE MOAT: MAXIMIZE THE GIFT
In 1998 Exxon and Mobil, two largest separate American oil companies, agreed to be merged with $76.2 billion (bn) in stock as a deal. This acquisition was recorded as the biggest deal in oil history and gave birth to the largest oil company in the world. Executives of both entities stated that horizontal merger of these two giants will lead to:
- reduction of redundancy segments (cost reduction to $3.8 billion next year) — and at the same time -
- More production at scale level
In 2019, ExxonMobil produced 2.39 barrels of liquids on a daily basis — (rank 7th in the world), this behemoth size — along with acquisition of blessed premium reserves that cater around the globe — helps the company a lot to bow the cost down by spreading its costs over such a big operation, making the company remain cost competitive with almost anywhere in the world.
Besides cost cutting, operation at massive scale leads to other financial advantages which help companies to spend capex at a high level, eyeing potential reserves, capturing it, and reinforcing moat even more.
Next article we will cover how having an integrated business model brings advantages (and disadvantages) for a company