Monday, January 27, 2014

Berkshire Adds Exxon Stake in Biggest Stock Bet Since IBM- 11/19/2013


  1. Company overview:
    Period Ending Dec 31, 2012 Dec 31, 2011 Dec 31, 2010
    Total Revenue 482,295,000 486,429,000 383,221,000
    Revenue breakdown: 83% Downstream (refining marketing final products), 9% upstream (crude oil production), 8% chemical.
    Cost of Revenue 303,670,000 306,802,000 233,751,000

    Net Income44,880,000 41,060,000 30,460,000
    Capital Expenditures (34,271,000) (30,975,000) (26,871,000)
    EBITDA ratio: 15%-16%, NI margin from 8.9% to 9.5% to 10.7%

    Trends: NI margin improved, CapEx gradually increases, Depreciation same, FCF is likely to remain the same in the future.
    P/E: 12.8 comparing with 12.0 industry average, dividend yield 2.52% comparing with 3.5% average
    Energy efficient: $19.27 to find the equivalent of a barrel of crude oil, compared with $21.48 for Chevron Corp, and $22.66 for London-based BP Plc.
    Bought at $86.04, 1 year average $89.55, last $95.42

    1. Disrupting technology: e.g, shale oil technology is much more economically viable nowadays, development costs are close to oils. ExxonMobil Electrofrac
    2. Increasing oil prices- WTI (oil benchmark for US), 2012 $94.1/barrel, 2013 $98.2

    1. Disastrous events:BP has lost almost $100 B of its pre-crisis (2007) market cap due to the accident of Macondo oil leak at Mexico Gult,
    2. Higher costs associated with extracting oil from harder areas.
    3. Political risks: oil price fluctuations

    1. Great credit rating: AAA, stable historical cash flow, strong industry growth: Refining from 19 billion in 2010 to 33 billion in 2012, Retail/marketing from 5.5 billion in 2010 to 7.2 billion in 2012
    2. High payback: Dividends yield 2.3%- fit for Berkshire, Share repurchase 3%- Indication for fundamental strength and undervaluation

    Haohan XuAbout Berkshire Hathaway:
    Warren Buffet, value investor, focus on blue chip stocks with stable dividend payout. 27 out of 33 stocking holdings pay cash dividends.( XOM also seems to be a nice match for diversification risks.

  2. Company Overview -

    Insurance and Other: $123,337 million; 76%
    Railroad, utilities, and energy: $ 32,582 mil; 20%
    Finance and financial products: $6,544 mil; 4%

    Profit Margins Q3, 2013:
    Berkshire Hathaway: 10.86%
    Wells Fargo: 27.24%
    Bank of America Corp: 11.60%

    ROA Q3, 2013:
    Berkshire Hathaway: 4.33%
    Wells Fargo: 1.49%
    Bank of America Corp: 0.40%

    ROE Q3, 2013:
    Berkshire Hathaway: 9.71%
    Wells Fargo: 14.53%
    Bank of America Corp: 3.99%

    1, Berkshire Hathaway owns a vast and diversified portfolio of cash flow efficient companies

    Managers of business units; Warrant Buffet; Charlie Munger
    To understand who’s Charlie Munger, here is the link of related article:

    2, Berkshire Hathaway’s acquisition strategy allows the company to stay competitive

    - Large Purchases
    - Demonstrated consistent earning power
    - Businesses earning good returns on equity
    - Good management in place
    - Simple businesses

    3, Berkshire Hathaway’s management team has an investing strategy that has proven successful

    - Productive Assets- business; firms; farms
    - Nonproductive assets, ex. “Gold” – never recommended!
    - Money-market funds, bonds, mortgages, bank deposits, and other instruments.

    4, Berkshire Hathaway’s most profitable business segment

    - Well known: Berkshire Hathaway actively invests in the equities market
    - Most profitable: insurance business. GEICO, General Re, Berkshire Hathaway Reinsurance Group, Berkshire Hathaway Primary Group

  3. Exxon Mobil Corp., or ExxonMobil, is an American multinational oil and gas corporation headquartered in Irving, Texas

    Business Segment: (earnings after income taxes)
    Upstream 29895 67%
    Downstream 13190 29%
    Chemical 3898 9%
    Corporate and Finance -2103 -5%

    Historical sales:
    In Financial Crisis, there is around 35% drop in sales from 2008 to 2009. From 2009 to 2011, there is a steady increase in sales 25%. In 2012, there is a decrease of 3.0% versus 2011.


    Exxon Mobil
    China Petroleum & Chemical Corporation
    BP Plc
    Chevron Corporation

    1.2012 Exxon has 420billion, 3% drop from 2011
    2. derives most of its sales outside of its home market: sales in the United States were $151.30 billion which was only 36.0% of 2012's sales

    1. This gross profit margin is lower than the company achieved in 2011, when cost of goods sold totalled 71.2% of sales. The gross margin in 2012 was the lowest of the previous five years (in 2008, the gross margin had been as high as 32.1%).

    2. Earnings before extraordinary items have grown for each of the past 3 years

    3. The company's return on equity in 2012 was 29.1%

    4. Exxon refineries provide a top-tier cost structure, offsetting some refining volatility. Exxon believes its per unit refining costs are 10% below peers


    1. The long term debt to equity ratio of the company is very low, at only 0.05.
    2. The accounts receivable for the company were $34.99 billion, which is equivalent to 30 days of sales.


    XOM has enjoyed superior earnings and dividend growth and stability
    1. Upstream growth opportunities in the deep water, Arctic and Black Sea, LNG, onshore unconventional
    2. Exxon advanced technology permits project development in a timely and cost-efficient manner
    3. Strong pipeline of long-lived upstream assets with improving decline rates, and the downstream unit should benefit large refineries
    4. Further expansion of activities in global LNG and frontier regions and targeted divestments

  4. Exxon Mobil Corp.
    Total earnings (44.9 billion) from segments
    -Upstream: industry leading earning 29.9 billion, 67%
    -Downstream: 30%
    -Chemical: 9%
    -Corporate and financing: loss 5%.

    Upstream business is exploration business. Has an active exploration or production presence in 40 countries.
    Downstream is about refining. Portfolio includes refining facilities in 17 countries.
    Chemical company manufactures high-quality chemical products in
15 countries.

    -Cash flow:
    Stable cash inflow from 2009 to 2012, the growth rate between 2009 and 2011 is 10% higher, the growth rate decrease in 2012.
    Stable dividends growth rate especially from 2005 to 2012. 14% CAGR.
    -Profits margin: 8.6%
    -ROA: 8.3%
    -ROE: 20.19%
    -P/E: 12.46

    BP: ROA: 2,92%, ROE: 19.82% P/E: 6.12
    Chevron: ROA: 7.61% ROE: 17.08% P/E: 9.98
    TOTAL SA: ROA:7.23% ROE:12.75% P/E: 11.29

    Risks: No growth production but higher capital expenditure.
    -Productions amount from 2009 to 2012,
    Liquids production: 2387, 2422, 2312,2185,
    Natural gas production: 9273, 12148, 13162,12322,
    Oil equivalent productions: 3932, 4447, 4506, 4239,

    -The cap-ex spend from 2009 to 2012 ($billion)
    22.5, 26.9, 31.0, 34.3
    Decreasing production threatens future cash flows.

  5. Exxon Mobil Corp.

    Business Structure in 2012 according to Net Income
    • Total Net income $46,983m (44,880+2,103)
    • Upstream $29,895m 63.6% net profit margin 30.95%
    • Downstream $13,190m 28% net profit margin 2.88%
    • Chemical $3,898m 8.3% net profit margin 6.4%

    Financial Performance in Q3 2013
    • Total net income $8,330 m (7,870+460)
    • Upstream earnings 80.5%. Higher liquids and natural gas realizations
    • Downstream earnings 7.1%. Weaker margins, mainly in refining, decreased earnings by $2.4 billion.
    • Chemical earnings 12.3%. Higher commodity margins

    Comparison With Peers
    • BP upstream EBIT margin 31.1% (2012)
    • BP downstream EBIT margin 0.68% (2012)

    • Shell upstream Net profit margin 23.37% (2010)
    • Shell downstream Net profit margin 0.88% (2010)

    • ConocoPhillips Refining and Marketing Net profit margin 0.08% (2009)

    • The stock's drastic underperformance over the last 5 years.
    • The lowest dividend yield in the peer group. Shell 4.7%, Chevron 3.4% and XOM 2.8% (Dividend yield over the last 5 years)
    • The failure to take an active role in exploring shale gas.

  6. Berkshire Hathaway is a holding company that owns subsidiaries in a variety of business sectors. The insurance group is contributing 24% of the revenue, manufacturing, service, and retailing contributes another 24%, the logistic and wholesale distribution company McLane also contributes 23%. Other smaller units include Burlington Northern Sante Fe, the railway company; MidAmerican, an energy and utility company; and Marmon Group, an electrical components manufacturer.
    Berkshire buys companies that are undervalued, but generate a steady, robust cash flow. The increase in the holding in Exxon reflects Berkshire’s belief that Exxon is undervalued. So let’s take a look at Exxon.
    Exxon is an integrated oil and gas company. Roughly 80% of the revenue comes from downstream business, which includes refining, marketing, and distribution. 10% of the revenue comes from upstream business, including exploration and production, and another 10% comes from the chemical business.
    Look at net income, downstream has only 28%, upstream contributes 64%, and the Chemical contributes 8%. Combining these, the figures suggest that the downstream has much more expenses than the upstream.
    It is interesting that Mr. Buffett decides to invest in an energy company at this point, as the crude oil futures have predicted as much as 15% decrease going down the road next five years. Bloomberg’s article mentioned that Berkshire had record high quarterly loss in 2009 when the company invested in ConocoPhillips with oil prices near their peak.
    As OPEC acting effectively as an oil cartel and a nearly competitive gasoline market in North America, Exxon has little pricing power over either crude oil it produces or the prices in the gas stations. On the downstream, Exxon is investing significantly in refining infrastructure and technology, funded by the company’s robust free cash flow. On the upstream, in 2012, the company has done significant exploration and development into shale gas in the central to east United States, this information is extracted from the Exxon’s latest 10-K filing, which I have posted on our Discussion board. It’s also consistent with Sally’s findings. But I do agree with Stone in that the company has yet to materialize any potential reserves found in Shale.
    On the downstream, Exxon’s major refineries are spread in Gulf of Mexico, upper Illinois, Montana, and Southern California. Bloomberg Industries reported that the growth of inland U.S. crude oil supply has provided refiners with a cost advantage. This is probably one of the reasons that help keep Exxon’s exploration cost low, compared to foreign counterparts such as BP.

  7. Business Overview:
    - Revenues of USD 482,295.00 million , a decrease of 0.85% from 2011.
    - The operating profit USD 78,726.00 million , an increase of 7.47% over 2011.
    - The net profit USD 44,880.00 million , an increase of 9.30% over 2011.

    Upstream - Oil exploration, extraction, shipping, and wholesale operations
    - Earnings of $29.9 billion (2012) 64%, $34 billion (2011) 80%
    - Lower liquids realizations, offset by improved natural gas realizations, decreased earnings by about $100 m
    - Q3 2013, earning $6.6 million

    Downstream - Marketing, refining, and retail operations
    - Earnings of $13.2 billion (2012) 28% and $4 billion (2011) 10%
    - Higher crude oil and natural gas realizations increased earnings by $10.6 billion
    - Q3 2013, earning 0.5 million

    Chemical - High-volume commodity chemical
    - Earnings of $3.9 billion 8%, 4 billion 10%
    - Margins decreased earnings by $440 million, while volume lowered earnings by $100 m
    - Q3 2013, earning 1.2 million

    Industry Overview and Competitive Positioning
    -The global integrated oil and gas industry's outlook has been stable since September 2011.
    -Leading players have (Market Cap) Royal Dutch Shell, (26T) BP (9T) Chevron (2T) ExxonMobil (5T)

    Financial Analysis:
    - Return on average capital employed – corporate total 25.4% 24.2% 21.7% (2012,2011,2010)
    - EPS 28.0% 27.3% 23.7%
    - D/E (percent) 6.3 9.6 9.0
    - Cash equivalents were $13.1 billion at the end of 2012

    Competitive Analysis
    1. Integrated Refining and Chemical Operations
    2. Geographical Diversification
    3. New LNG Projects
    4. New Products and Capacity Expansion and Expansion in Unconventional Assets
    5. Cost efficient
    1.The company business could be significantly affected by the changes in the oil and gas prices
    2.Government regulations and weather conditions, as well as renewable fuel prices
    3.Water Contamination Concerns

  8. Business Overview:
    - Four business segment: upstream; downstream; chemical; corporate & financing
    - Three main business segments:
    • Upstream segment generated 8.9% of its total revenue in 2012 & 30b income, 67% of annual income, 74.13% profit margin in 2012;
    • Downstream segment 82.6% of total revenue, 13b income,29% of annual income,3.5% profit margin in 2012;
    • Chemical segment 8.6% of total revenue, 10b income, 9% annual income,10% profit margin in 2012

    Financial Overview:
    - Earnings of $45 billion. 2013 Q3: Upstream earnings rose by 12%; Downstream dropped by over 81%; Chemical earnings rose by nearly 30%
    - An industry-leading return on average capital employed of 25 percent in 2012
    - Total shareholder distributions of $30 billion in 2012. Repurchasing $5 B every quarter in the last 4 years; remain a minimum 3% buyback rate
    - Dividends per share $2.52 per share, a 3% dividend reward rate
    - Capital expenditure $33 b so far this year
    - Free Cash Flow ended Q3 with $5.7 billion
    - D/E remains at 0.04; low amount of net debt
    - AAA credit rating

    Other Positives:
    - Financially healthy
    - Industry outlook: increasing demand: worldwide energy demand is projected to increase by about 35 percent 2040. Price increase in the long run.
    - Solid pipeline: 28 major Upstream project start-ups between 2013 and 2017
    - Cost efficient $19.27 in per-barrel costs, $21.48 in per-barrel costs for Chevron Corp., and $22.66 for BP Plc.; 10 percent improvement in refinery energy efficiency since 2002
    - Potential increase in oil production due to shale oil boom

    - Achieving growth in oil and natural gas production has been a challenge
    - Regulatory issues, Climate change will also affect production and demand of natural oil and gas
    - Continued weak natural gas prices
    - Low-rate and higher cost in shale oil exploration didn’t bring expected profitability