Exxon Mobil's Downstream Outlook

By Eric Fox | March 26, 2010 AAA

Exxon Mobil (NYSE:XOM) will attempt to navigate a difficult business environment in the downstream sector in 2010, through a combination of efficiency built on scale, capital discipline, technological superiority and cost cutting.

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2009 Downstream Recap
Exxon Mobil reported GAAP earnings of $1.8 billion, and a return on capital employed of 7% in 2009. The company's immense complex of refineries produced 5.4 million barrels per day, and Exxon Mobil invested $3.2 billion in its downstream operations during the year.

Macro View
Exxon Mobil believes that transportation energy demand will grow by 35% by 2030, driven by demand from the non-OECD or developing world. Despite this growth, Exxon Mobil recognizes the tough current business environment in the refining and marketing business. The company attributes this to increased capacity coming on line and new regulatory mandates expected in 2010.

Downstream Strategy
One way that Exxon Mobil will manage through this environment is through cost cutting. The company has cut its operating expenses by 10% since 2005 in fuels marketing, and plans to continue this in 2010 and beyond.

In refining, Exxon Mobil has increased its purchases of what it calls "challenged crude" or crude oil feedstock that is more difficult to refine due to its characteristics. Since this feedstock is more difficult to refine, it trades at a discount to other grades. Exxon Mobil believes the company can utilize its technology, efficiency and integrated downstream operations and earn an acceptable margin on this feedstock.

Return On Capital Employed
Exxon Mobil has historically maintained a higher return on capital employed than its competitors in the downstream, achieving an average return on capital employed of 23% over the 2002-2009 cycle.

Other companies focused on the down stream are also having problems with margins. Frontier Oil Corporation (NYSE:FTO) reported a loss for the fourth quarter of 2009 and full year, due to what the company called "weak demand for refined products, particularly distillates, and narrow crude differentials."

Tesoro Corp (NYSE:TSO) is considering closing its refinery in Hawaii, and turning it into a fuel terminal. The refinery is operating well under its capacity of 93,500 barrels per day, and averaged only 68,000 barrels per day in 2009.

Sunoco Inc. (NYSE:SUN) reported a loss from continuing operations of $135 million in the fourth quarter of 2009. The company blamed weak demand for fuel due to the economy.

Bottom Line
Exxon Mobil will attempt to continue making a profit in its downstream operations despite the poor environment that is plaguing the industry. If history is to be a guide, the company will do better than its competitors here. (Before jumping into this hot sector, learn how these companies make their money. To learn more, read Oil And Gas Industry Primer.)

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