OIL & GAS IN

DUSTRY

I NV E S T M E N T D

E C I SI O

N - 20 1 5

Abdulaziz AlshayaAlaa SulaimanAlmuthanna AlonaizanJose Alvarez

INTRODUCTION Purpose:a. The purpose of this presentation is to prepare a comparative analysis of 3

company’s financial health for the past 2 years in the oil and gas Industry .b. Based on the financial health of the companies, we will recommend which

company to invest $100,000 in. c. We will do our analysis on Exxon Mobil Corporation, Chevron Corporation,

and ConocoPhillips.Recommendations:1. Oil & Gas companies must have the ability to deal with any economic

changes that may occur in the future such as what happened in 2014, decreasing oil prices.

2. Companies should focus on liquidity in order to meet their short term obligations.

THIS PRESENTATION IS IN FIVE PARTS• Describing the industry overall.

• Business Strategy.

• Financial Ratios and analysis.

• Investment Decision.

• Conclusion.

INDUSTRY OVERALLThe five biggest Oil and Gas companies in the United States are:

1. Exxon Mobil Corporation.2. ConocoPhillips.3. Chevron Corporation.4. Occidental Petroleum Corporation.5. Apache Corporation.

ECONOMIC FACTORS • Decreasing oil prices will lower inflation.

• The drop in oil prices forces the companies to stop digging for oil, stop hiring, or even start firing .

• Usually, an increase in oil prices would lower the demand for it.

• Falling oil prices might be in consumers favor.

EXXON MOBIL CORPORATIONBrief History• Over the last 125 years Exxon Mobil has evolved from a regional

marketer of kerosene in the U.S. to the largest publicly traded petroleum and petrochemical enterprise in the world.

• In 2011, the Corporation announced two major oil discoveries and a gas discovery in the deep-water Gulf of Mexico after drilling the company's first post-moratorium deep-water exploration well, one of the largest discoveries in the Gulf of Mexico in the last decade.

• Exxon Mobil has seen its stock price slump since the oil crash in the second half of 2014. The company remains very committed to shareholders through share buybacks and an increasing dividend yield.

• Exxon’s financial performance seems in trouble, "We rate EXXON MOBIL CORP (XOM) a HOLD … we also find weaknesses including weak operating cash flow, poor profit margins and disappointing return on equity.” (Owusu, T, 2015).

Company’s StrategyExxonMobil Chemical focuses on sustainable solutions based on time-tested business practices. The core elements of the business strategy include:• Consistent focus on delivering operational excellence.• Build technology leadership.• Benefit from integration.• Invest with intelligence and discipline.Long Term Financial Outlook• Integrated business model resilient through the commodity price cycle.• Company on track to grow daily production to 4.3 million oil-equivalent

barrels by 2017.• Seven major Upstream project startups expected in 2015.• Earnings are expected to grow at an average annual rate of -1.05%. (Nasdaq,

2015).

CONOCOPHILLIPS Brief History• ConocoPhillips is the world’s largest independent exploration

and production (E&P) company, based on proved reserves and production of liquids and natural gas.

• In 2012, More than half a million net acres added in deep-water Gulf of Mexico.

• In 2012, Eagle Ford annual production grows 144%, achieving peak daily rate of 103 Thousand Barrels Oil Equivalent per Day (MBOED).

• At December 31, 2014, ConocoPhillips employed approximately 19,100 people worldwide.

• In 2014, ConocoPhillips’ net hydrocarbon production from continuing operations increased slightly more than 4% over 2013.

• In 2014, the company’s earnings per share adjusted for non-operating items declined by more than 57% to just $0.60.

Company’s Strategy• ConocoPhillips global businesses follow specific, well-defined processes

that help manage sustainability issues as they begin a new venture, from the initial phases of identifying a potential opportunity through project development and operations.

• Corporate strategies and action plans have been developed for key issues and are updated periodically. The planning process is designed to prompt appropriate action for adapting to a range of possible future scenarios.

• The updated plans have four main focus areas:1- Understanding Footprint. 2- Managing Operations and Projects.3- Managing Risk and Opportunity Exposure. 4- Engaging Externally.Long Term Financial Outlook• The company revealed that it plans to cut capital spending by around 20%

this year to $13.5 billion due to the recent decline in oil prices.• The company expect 3% to 5% compound annual margin growth over the

next 5 years at flat prices, as they divest lower-margin assets and shift their production mix to higher-value products.

CHEVRON CORPORATIONBrief History• Chevron is one of the largest hydrocarbon producers in the United

States.• In 2013, Chevron again ranked No. 1 in net oil-equivalent

production in California.• They are a leading developer, manufacturer and marketer of

lubricant and fuel oil additives.• Chevron Shipping Co. managed approximately 2,100 deep-sea

tanker voyages in 2013.• Through their 50% ownership of Chevron Phillips Chemical

Company LLC and its affiliates, They are one of the world’s leading producers of chemicals and plastics.

• The company estimates its average worldwide oil-equivalent production in 2015 to be flat to 3 percent growth compared to 2014.

Company’s Strategy• Their Strategic Plan sets direction, aligns their organization and

differentiates it from the competition. It guides their actions to successfully manage risk and deliver shareholder value and achieve sustained financial returns from its operations.

• In the upstream, the company’s strategies are to grow profitably in core areas and build new legacy positions.

• In the downstream, the strategies are to deliver competitive returns and grow earnings across the value chain.

• The company also continues to apply commercial excellence in supply, trading and transportation to enable the success of the upstream and downstream strategies, and to utilize technology across all its businesses to differentiate performance.

Long Term Financial Outlook• Long-term market fundamentals remain attractive.• Positioned for peer-leading 20% production growth to 2017.• Signals lower capital spending, aggressive cost management.

FINANCIAL RATIOS Ratio Purpose

I. LiquidityCurrent Ratio Measures a company's ability to pay short-term obligationsQuick Ratio Measures a company's ability to pay immediate short-term obligationsCurrent Cash Debt Coverage

Measures a company's ability to pay off its current liabilities in a given year from its operations

II. ActivityAccounts Receivable Turnover

Measures how efficiently a firm uses its assets

Inventory Turnover Showing how many times a company's inventory is sold and replaced over a period

Asset Turnover Measures how efficiently assets are used to generate salesIII. Profitability

Profit Margin on Sales Measures net income generated by each dollar of sales

Return on Assets Measures overall profitability of assets

FINANCIAL RATIOSRatio PurposeIII. ProfitabilityReturn on Equity

Measures profitability of owner's investmentEarnings Per Share Measures net income earned on each share of common stockPrice-Earnings Ratio Measures the ratio of the market price per share to earnings per sharePayout Ratio Measures percentage of earnings distributed in the form of cash dividends

IV. CoverageDebt to Assets Measures the percentage of total assets provided by creditors

Times Interest Earned Measures ability to meet interest payments as they come dueCash Debt Coverage Measures a company's ability to repay its total liabilities in a given year from its

operationsBook value Per Share Measures the amount each share would receive if the company were liquidated

at the amounts reported on the Balance sheetFree Cash Flow Measures the cash that a company is able to generate after laying out the

money required to maintain its asset base

EXXON MOBILRatio 201

42013

Interpretation

Current Ratio 0.82 0.83 Exxon had $0.82(2014) $0.83(2013) in current assets for every dollar of current liabilities

Quick Ratio 0.56 0.60 Exxon is not currently paying back its all current liabilities

Current Cash Debt Coverage

0.66 0.66 Exxon has a low ability to satisfy its short-term obligations

Accounts Receivable Turnover

12.89 12.35 Exxon takes approximately 28 days to turn over it’s A/R (365/12.89)

Inventory Turnover 16.26 18.56 The inventory stays approximately 21 days on hand. 16.26 times(2014) 18.56 times( 2013)Asset Turnover 1.13 1.24 For every dollar in assets, Exxon generates 1.13 (2014) 1.24 (2013) from sales

Profit Margin on Sales

8.25% 7.74% Exxon has a net income of $0.08 for each dollar of sales

Return on Assets 9.34% 9.57% 9.34 % of Exxon's net income comes from assets

Return on Equity 18.67% 19.17% 18.67% of Exxon's net income comes from owner's investments (stockholder equity)

Earnings Per Share 7.59 7.37 $7.59 EPS for Exxon's shareholders

Price-Earnings Ratio 12.08 13.25 Investors are willing to pay $12.08 for one dollar of current earnings

EXXON MOBILRatio 201

42013 Interpretation

Payout Ratio 36.33% 34.31% 36% of Exxon's earnings paid out to investors as cash dividends

Debt to Assets 50.10% 49.83% 50% of Exxon's assets are provided by creditors

Times Interest Earned

181.52 6413.33 Exxon has great ability to repay its interest and debt

Cash Debt Coverage

26% 26% Exxon has a low ability to satisfy its long-term obligations

Book value Per Share

45.68 47.23 $45.68 per each share of common stock

Free Cash Flow 348,000 66,000 Its an amount rather that a ratio that shows the company's ability to pay its debt

CONOCOPHILLIPSRatio 201

42013 Interpretation

Current Ratio 1.31 1.26 Conoco had $1.31(2014) $1.26(2013) in current assets for every dollar of current liabilities

Quick Ratio 1.19 1.18 Conoco was paying back all its current liabilities in 2013 and 2014

Current Cash Debt Coverage

1.26 0.99 Conoco is able to cover cash debt

Accounts Receivable Turnover

6.87 6.16 Conoco takes approximately 53 days to turn over it’s A/R (365/6.87)

Inventory Turnover 24.56 27.68 The inventory stays approximately 15 days on hand. 24.56 times(2014) 27.68 times( 2013)

Asset Turnover 0.45 0.46 Conoco generates 0.45 (2014) 0.46 (2013) from sales

Profit Margin on Sales

13.08%

16.83% About $0.13 for each dollar of sales

Return on Assets 5.86% 7.79% 5.86 % of net income comes from assets

Return on Equity 13.21%

18.30% 13.21% of Chevron net income comes from owner's investments (stockholder equity)

Earnings Per Share 5.55 7.44 $5.55 EPS for shareholders

Price-Earnings Ratio

12.31 9.05 Investors are willing to pay $12.31 for one dollar of current earnings

CONOCOPHILLIPSRatio 2014 2013 Interpretation

Payout Ratio 51.32% 36.41% 51.32% of Conoco earnings were paid out as dividends

Debt to Assets 55.46% 55.88% 55.46% of Conoco's assets are provided by creditors

Times Interest Earned

15.49 24.60 Conoco has the ability to repay its interest and debt

Cash Debt Coverage

26% 24% Conoco has a low debt coverage

Book value Per Share

0.03 0.03 $0.03 per each share of common stock

Free Cash Flow (3,875,000)

(2,784,000) Amount the company has to be able to use to pay its debt

CHEVRONRatio 2014 2013 Interpretation

Current Ratio 1.32 1.52 Chevron had $1.32(2014) $1.52(2013) in current assets for every dollar of current liabilities

Quick Ratio 1.12 1.33 Chevron was paying back all its current liabilities in 2013 and 2014.

Current Cash Debt Coverage

0.97 1.04 Chevron is able to cover most of cash debt

Accounts Receivable Turnover

10.45 10.33 Chevron takes approximately 35 days to turn over it’s A/R (365/10.45)

Inventory Turnover 22.50 25.44 The inventory stays approximately 16 days on hand. 22.50 times (2014) 25.44 times( 2013)

Asset Turnover 0.77 0.90 Chevron generates 0.77 (2014) 0.90 (2013) from sales

Profit Margin on Sales 9.84% 12.36% About $0.10 for each dollar of sales

Return on Assets 7.40% 8.80% 7.40 % net income comes from assets

Return on Equity 12.65% 15% 12.65% of Chevron net income comes from owner's investments (stockholder equity)

Earnings Per Share 10.22 11.18 $10.22 EPS for shareholders

Price-Earnings Ratio 10.87 10.68 Investors are willing to pay $10.87 for one dollar of current earnings

CHEVRONRatio 2014 2013 InterpretationPayout Ratio 41.45% 35.35% 41% of Chevron earnings were paid out

Debt to Assets 41.72% 41.24% 42% of assets are due to debt

Times Interest Earned

- - Chevron has no interest expense during 2014 and 2013

Cash Debt Coverage

29% 35% Chevron has a low debt coverage

Book value Per Share

0.06 0.06 $0.06 per each share of common stock

Free Cash Flow (11,907,000)

(10,556,000)

Amount the company has to be able to use to pay its debt

INDUSTRY COMPARISON 2014Ratio Average

IndustryExxon Chevron ConocoPhillips

ROE 11.50% 18.67% 12.65% 13.21%

P/E 12.30 12.08 10.87 12.31

Price to Book Value

1.49 45.86 0.06 0.03

Net Profit Margin 4.90% 8.25% 9.84% 13.08%

INVESTMENT DECISION • According to the ratio analysis, we recommend investing in ConocoPhillips because :

• The company expects 5% annual growth over the next 5 years.

• The company has a high ability to pay its short-term obligations.

• The company has a high turnover especially in A/R & Inventory.

• The company has high profitability ratios compared to the industry (highest profit margin).

• The company pays more than 50% of its net income as dividends which is good for investors.

CONCLUSION After calculating financial ratios of EXXON MOBIL, ConocoPhillips, and Chevron, we decided to

invest $100,000 in ConocoPhillips capital because it has the best liquidity and coverage ratios, while maintaining high profitability and activity ratios compared to the industry as a whole; which means that the company is able to cover its short-term and long-term liabilities and pay dividends to investors with 51% of the income.

On the other hand, even though EXXON has high profitability ratios, it does not have the ability to pay its debts (low liquidity), also it has high inventory turnover, and its payout ratio is very low compared to the other companies.

Meanwhile, Chevron is maintaining good liquidity and profitability ratios, yet its stock book value per share is very low, and the company is built on conservatism, which does not favor the investors. Therefore, it seems that investing in stably growing company that plans to reduce its capital spending like ConocoPhillips is the best decision.

REFERENCESChevron Corporation 10-Khttp://www.chevron.comSilverstein, K. (2015). How Falling Oil Prices Will Impact Economy—And The Keystone Pipeline Debate. Retrieved

from:http://www.forbes.com/sites/kensilverstein/2015/01/09/falling-oil-prices-impact-economy-and-the-keystone-pipeline/

Biggest US oils and Gas companies ,(2014). Retrieved from:http://www.petrostrategies.org/Links/biggest_us_oil_and_gas_companies.htm

Mufson, S. (2014). As oil prices plunge, wide-ranging effects for consumers and the global economy. Retrieved from:http://www.washingtonpost.com/business/economy/as-oil-prices-plunge-wide-ranging-effects-for-consumers-and-the-global-economy/2014/12/01/904984b2-7971-11e4-9a27-6fdbc612bff8_story.html

Helman, C. (2013). Chevron: The World's Biggest Gusher. Retrieved from: http://www.forbes.com/sites/christopherhelman/2013/02/13/chevron-the-worlds-biggest-gusher/

Exxon Mobil corporation 10_KNEW YORK--(BUSINESS WIRE), (2015). ExxonMobil Adds New Production; Continues Long-Term Capital Focus and

Investment Discipline. Retrieved from: http://finance.yahoo.com/news/exxonmobil-adds-production-continues-long-132800511.html

Owusu, T., (2015). Exxon Mobil (XOM) Stock Declines Today as Oil Price Take a Sharp Downturn. Retrieved from: http://www.thestreet.com/story/13100812/1/exxon-mobil-xom-stock-declines-today-as-oil-price-take-a-sharp-downturn.html

ConocoPhillips 10-Khttp://www.conocophillips.comTrefis Team, (2015). ConocoPhillips Price Revised To $68.50 On Lower Capital Expenditures, Slower

Production Growth. Retrieved from: http://www.forbes.com/sites/greatspeculations/2015/02/03/conocophillips-price-revised-to-68-50-on-lower-capital-expenditures-slower-production-growth/