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.

IN PICTURES: 20 Tools For Building Up Your Portfolio

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.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Markets

    PEG Ratio Nails Down Value Stocks

    Learn how this simple calculation can help you determine a stock's earnings potential.
  4. Stock Analysis

    What Exactly Does Warren Buffett Own?

    Learn about large changes to Berkshire Hathaway's portfolio. See why Warren Buffett has invested in a commodity company even though he does not usually do so.
  5. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Investing

    What’s the Difference Between Duration & Maturity?

    We look at the meaning of two terms that often get confused, duration and maturity, to set the record straight.
  7. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  8. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  9. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  10. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  1. Which mutual funds made money in 2008?

    Out of the 2,800 mutual funds that Morningstar, Inc., the leading provider of independent investment research in North America, ... Read Full Answer >>
  2. Do hedge funds invest in commodities?

    There are several hedge funds that invest in commodities. Many hedge funds have broad macroeconomic strategies and invest ... Read Full Answer >>
  3. What does low working capital say about a company's financial prospects?

    When a company has low working capital, it can mean one of two things. In most cases, low working capital means the business ... Read Full Answer >>
  4. Do nonprofit organizations have working capital?

    Nonprofit organizations continuously face debate over how much money they bring in that is kept in reserve. These financial ... Read Full Answer >>
  5. Can a company's working capital turnover ratio be negative?

    A company's working capital turnover ratio can be negative when a company's current liabilities exceed its current assets. ... Read Full Answer >>
  6. Does working capital measure liquidity?

    Working capital is a commonly used metric, not only for a company’s liquidity but also for its operational efficiency and ... Read Full Answer >>

You May Also Like

Trading Center