Growth rate in net income5Reinvestment rate3Return on equity.
Reinvestment rate5Adjusted net capital expenditure1Change in noncash working capital Net debt issued/Net income.
Net capital expenditure (Net Capex)5Capital expenditure2Depreciation.
Adjusted net capital expenditure5Net capital expenditure1Acquisitions.
Net debt issued5Debt issued2Debt repaid.
Noncash working capital5Noncash current assets2Noncash current liabilities (see Table 5.25).
Table 5.25 Estimation of change in working capital in millions of dollars
Year 2009 2010 2011 2012 2013 2014
Current assets 23,670 58,984 72,963 64,460 59,308 52,910 Cash and marketable securities 4660 7827 12,664 9582 4644 4616 Noncash current assets 19,010 51,157 60,299 54,878 54,664 48,294 Current liabilities 22,310 62,633 77,505 64,139 71,724 64,633 Interest bearing current liabilities 1060 2787 7711 3653 15,808 17,468 Noninterest bearing current
liabilities
21,250 59,846 69,794 60,486 55,916 47,165
Noncash working capital 2240 8689 9495 5608 1252 1129
Change in working capital 6449 806 3887 4356 2381
Noncash current assets5Current assets2Cash and marketable securities.
Noncash current liabilities5Current liabilities2Interest bearing current liabilities.
Reinvestment5Adjusted net Capex1 Change in noncash working Capital2Net debt issued.
Reinvestment rate5Reinvestment/Net income (seeTable 5.26).
The average reinvestment rate based on geometric mean was 62% during the 5-year period 2010 14.
Estimation of growth rate from fundamentals.
Growth rate of earnings5Reinvestment rate3Return on equity of Exxon Mobil (seeTable 5.27).
The average growth rate of net income based on geometric mean during the period 2010 14 was 14.6%.
FCFE5Net income Adjusted net Capex2Change in noncash working capital 1Debt issued Debt repaid (seeTable 5.28).
5.14.1 Two stage FCFE model
In this section, Exxon Mobil is valued using two stage FCFE model in which it is assumed that Exxon Mobil’s net income will grow at a growth rate of 14.6% during the high growth period of 10 years and thereafter at the steady growth rate equal to growth rate of US economy.
High growth period inputs.
Net income in 20145$32520 million.
Table 5.26 Estimation of reinvestment rate
Year 2010 2011 2012 2013 2014
Capex 26,871 30,975 34,271 33,669 32,952
Depreciations 14,760 15,583 15,888 17,182 17,297
Acquisitions 3261 11,133 7655 2707 4035
Adjusted Net Capex 15,372 26,525 26,038 19,194 19,690
Change in noncash working Capital 26449 2806 3887 4356 2381
Net debt issued 26919 396 22682 2408 4917
Reinvestment 15,842 25,323 32,607 23,958 17,154
Net Income 30,460 41,060 44,880 32,580 32,520
Reinvestment Rate 0.52 0.62 0.73 0.74 0.53
Table 5.27 Estimation of growth rate from fundamentals
Year 2010 2011 2012 2013 2014
Reinvestment rate 0.52 0.62 0.73 0.74 0.53
ROE 0.24 0.27 0.28 0.19 0.19
Growth rate 0.12 0.17 0.20 0.14 0.10
Growth rate in high growth period514.6% (average value estimated from fundamentals) High growth period510 years.
Reinvestment rate562% (average reinvestment rate during the period 2010 14).
Present value of FCFE in high growth period5$127,396.05 million (seeTable 5.29).
Stable growth period inputs.
Stable period growth rate5US GDP growth rate52.13% (based during period 2011 14).
Return on equity of industry sector55.4%.
Reinvestment rate52.13%/5.4%539%.
The average reinvestment rate during the stable period is estimated as 39%.
Net income at end of high growth period 127,056.45 Net income in stable period (127,056.4531.0213) 129,762.75
Reinvestment 50,607.47
FCFE in stable period 79,155.28
Terminal value of FCFE FCFE in stable period/(cost of equity- growth rate in stable period) 668,541.2018
PV of terminal value $180,810.10
Value of Exxon Mobil5Present value of Exxon Mobil in high growth phase1 Present value of terminal value of Exxon Mobil in stable phase.
5$127,396.051$180,810.105$308,206.15 million.
Number of shares54282 million.
Value per share5$71.98.
Exxon Mobil was trading at $78.42 on December 3 2015. On the basis of two stage FCFE model, Exxon Mobil was slightly overvalued in the market. The market value of equity was $328.3 billion on December 4 2015.
5.14.2 Free Cash Flow to Firm (FCFF) valuation model
Exxon Mobil is valued using two stage FCFF Valuation model. In two stage FCFF model, the present value of Exxon Mobil is estimated on the basis of assumption that Table 5.28 Estimation of Free Cash Flow to Equity (FCFE) in million dollars
Year 2010 2011 2012 2013 2014
Net income 30,460 41,060 44,880 32,580 32,520
Adjusted net Capex 15,372 26,525 26,038 19,194 19,690
Change in noncash working capital 26449 2806 3887 4356 2381
Debt issued 1741 1765 1953 361 5731
Debt repaid 8660 1369 4635 769 814
FCFE 14,618 15,737 12,273 8622 15,366
Year 1 2 3 4 5 6 7 8 9 10 Net income 37,267.92 42,709.036 48,944.56 56,090.4607 64,279.67 73,664.4995 84,419.516 96,744.766 110,869.5 127,056.45 Reinvestment
rate
0.62 0.62 0.62 0.62 0.62 0.62 0.62 0.62 0.62 0.62
Reinvestment 23,106.11 26,479.60 30,345.62 34,776.09 39,853.39 45,671.99 52,340.10 59,981.75 68,739.09 78,775.00 FCFE 14,161.81 16,229.43 18,598.93 21,314.38 24,426.27 27,992.51 32,079.42 36,763.01 42,130.41 48,281.45 PV of FCFE $12,425.91 $12,494.60 $12,563.66 $12,633.11 $12,702.95 $12,773.17 $12,843.8 $12,914.8 $12,986.2 $13,057.9
Sum $127,396.05
the earnings (EBIT(12T)) grows at a high growth rate for a period of 10 years and thereafter at the stable growth rate which was equal to the growth rate of US economy.
Reinvestment5Adjusted net Capex1Change in noncash working capital Reinvestment rate5Reinvestment/EBIT(12T).
The average reinvestment rate during the period 2010 14 was 34.4% (see Table 5.30).
FCFF5EBIT(12T) 2Adjusted net Capex2Change in working capital (seeTable 5.31).
The average growth rate of earnings during the 5-year period 2010 14 was 7%
(seeTable 5.32).
High growth period inputs.
High growth period510 years.
Growth rate in high growth period57% (based on growth rate estimation from fundamentals).
Reinvestment rate534.4% (based on average reinvestment rate during 2010 14).
Table 5.30 Estimation of reinvestment rate
Year 2010 2011 2012 2013 2014
EBIT(12T) 52,959 73,257 78,726 57,711 51,630
Adjusted net Capex 15,372 26,525 26,038 19,194 19,690
Change in noncash working capital 6449 806 3887 4356 2381
Reinvestment 8923 25,719 29,925 23,550 22,071
Reinvestment rate 0.17 0.35 0.38 0.41 0.43
Table 5.31 Estimation of FCFF during 2010 14 in million dollars
Year 2010 2011 2012 2013 2014
EBIT(12T) 52,959 73,257 78,726 57,711 51,630
Adjusted net Capex 15,372 26,525 26,038 19,194 19,690
Change in noncash working capital
26449 2806 3887 4356 2381
FCFF 44,036 47,538 48,801 34,161 29,559
Table 5.32 Estimation of growth rate from fundamentals
Year 2010 2011 2012 2013 2014
Return on invested capital 0.22 0.25 0.26 0.17 0.16
Reinvestment rate 0.17 0.35 0.38 0.41 0.43
Growth rate 0.04 0.09 0.10 0.07 0.07
Average growth rate 0.07
Current EBIT(12T)5$51,630 million.
WACC513.21%.
The present value of FCFF in the growth period5$251,615.24 million (seeTable 5.33).
Stable period inputs.
The growth rate in stable period is assumed to the growth rate of the US economy.
Growth rate of Exxon Mobil earnings in stable period52.13%.
Return on capital employed for oil and gas sector56.03%.7 Reinvestment rate52.13/6.03535%
EBIT(12T) at the end of high growth period5$101,564.02 million
EBIT(12T) at beginning of stable period5101,564.0231.02135$103,727.34 million Reinvestment5103,727.3430.355$36,304.57 million.
FCFF in stable period5103,727.34236,304.575$67,422.77 million.
Terminal value of FCFF in stable period5FCFF in stable period/(WACC Growth rate in stable period).
567,422.77/(0.1321 0.0213)5$608,508.75 million.
Present value of terminal value5$175,962.01 million.
Value of operating assets of Exxon Mobil5Present value of operating assets of Exxon Mobil in high growth phase1Present value of Exxon Mobil‘s operating assets in stable phase period.
Value of operating assets of Exxon Mobil5251,615.241175,962.015$427,577.25 million.
Value of Exxon Mobil5Value of operating assets1Cash and cash equivalents in current year.
Value of Exxon Mobil5427,577.25146165$432,193.25 million.
Less value of interest bearing debt in current year5$29,121 million.
Less value of minority interests5$6665 million.
Less value of pension obligations5$25,802 million.
Value of Equity5$370,605.25 million.
Number of shares in 201454282 million.
Value per share5$86.55.
Summary of Discounted Cash Flow Valuation Two stage dividend discount model
Value of Exxon Mobil per share5$66.12.
Two stage FCFE
Value of Exxon Mobil per share5$71.98 Value of equity5$308.21 billion Two stage FCFF
Value of Exxon Mobil’s operating assets5$432193.25 million Value of equity5$370.61 billion
Value per share5$86.55
The 52 week range for Exxon Mobil in year 2015 was $66.55 $95.33.
Exxon Mobil was trading at $78.42 on December 3 2015. The market capitali- zation of Exxon Mobil was $328.3 billion on December 3 2015.
7http://csimarket.com/Industry/industry_ManagementEffectiveness.php?ind5603. Estimation based on average of last five quarters.
Year 1 2 3 4 5 6 7 8 9 10 EBIT(12T) 55,244.1 59,111.2 63,249.0 67,676.4 72,413.7 77,482.7 82,906.5 88,710.0 94,919.6 101,564.0 Reinvestment 19,004.0 20,334.2 21,757.6 23,280.7 24,910.3 26,654.1 28,519.8 30,516.2 32,652.4 34,938.0 FCFF 36,240.1 38,776.9 41,491.3 44,395.7 47,503.4 50,828.7 54,386.7 58,193.7 62,267.3 66,626.0 PV of FCFF 32,011.4 30,255.5 28,595.8 27,027.3 25,544.7 24,143.5 22,819.1 21,567.4 20,384.3 19,266.2
SUM $251,615.24