ExxonMobil’s Secret Weapon Against Low Oil Prices

March 2016, Vol. 243, No. 3

Everyone is familiar with oil giant ExxonMobil, so it should be no surprise that investors have kept XOM shares under pressure as oil prices hover near lows that would have been unthinkable a few years ago. What many investors do not realize though is that Exxon is more than just an oil company – the firm also owns the fourth-largest chemical company in the world, ExxonMobil Chemical.

ExxonMobil Chemical gets a lot less attention that the oil and gas operations of the parent company, which is unfortunate because those chemical assets have significant value as well and should help to ensure that XOM’s profits remain positive (excluding write-offs) regardless of what happens to oil prices.

The chemical company’s principle products include olefins used in carpeting, ropes and vehicle interiors, polyethene used in packaging and plastics, polypropene used in textiles and stationary, and adhesive resins. ExxonMobil Chemical is also the largest producer in the world of butyl rubber.

A new report from consultancy IHS indicates that ExxonMobil is ramping up investment in its chemicals division to help ensure it can thrive in a low oil price environment. Part of that effort is the expansion of the firm’s Mont Belvieu  and Baytown, TX export facilities. That expansion will let Exxon distribute ethylene, used in a variety of intermediate chemicals applications, through out Asia.

The ExxonMobil name commands a lot of weight throughout the world which should bring in potential business partners and customers as Exxon ramps up its export capacity. ExxonMobil Chemical’s earnings already contribute 24% of the overall XOM profits and its feedstock supply chain is a critical factor in driving those earnings.

U.S. feedstock costs are among the lowest in the world and that is a critical competitive advantage for XOM along with various proprietary technologies in the chemical space that the company has.

The cost advantage of ExxonMobil Chemical could be at risk though. IHS consultant David Witt cited several challenges to ExxonMobil Chemical going forward. In addition to the threat of lower oil prices which hurts feedstock competitiveness, he said “I think ExxonMobil Chemical’s biggest threat to growth may hinge on China’s economic slowdown, the potential implementation of protectionist measures and the risks associated with geopolitical uncertainty in the Middle East. These macro-risks are not only applicable to ExxonMobil itself, but ExxonMobil’s large, but fairly narrow portfolio, could be more substantively impacted as a result.”

Interestingly, ExxonMobil Chemical keeps such a low profile within the broader overall company that much of the benefits and risks to the parent company related to its chemicals group are not mentioned in the investment media. Yet the roughly one-quarter of XOM’s profits from the chemicals group is an important driver of Exxon’s overall value.

One interesting possibility for Exxon to better highlight the Chemical group, potentially improving performance and enhancing overall value, is a partial spin-off. Much as EMC owns most of VM Ware, but VM Ware trades under its ticker symbol, Exxon could hold onto 80% of the chemical business while listing the remaining 20% through a public offering. Price/earning (P/E) ratios on stand-alone chemical companies such as Dow, DuPont and Eastman range from about  10X to as much as 30X, suggesting Exxon might be able to command an attractive multiple for a 20% stake in the chemicals group.

More importantly, the parent firm could highlight the diversity of its businesses, which in turn might help to enhance its own multiple as shareholders perceive a more stable set of cash flows going forward.

By Michael McDonald, Oilprice.com

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