Accounting Research Paper on ExxonMobil



The focus of this research paper is on ExxonMobil Corporation, a U.S.-based multinational oil and gas company that is involved in the upstream (exploration and production), midstream (transportation of gas and oil), and downstream (refining and marketing of oil and gas products) operations in the global oil and gas industry. It is thus an example of an integrated major in this industry, meaning that it is involved in virtually all the main operations in the industry. Accordingly, this research paper endeavors to determine how ExxonMobil prices its revenue and costs. Although the company is involved in multiple foreign operations, this essay will mainly concentrate on upstream and downstream operations and their contributions to the company’s profits. The research paper will also focus on the strategies sued by ExxonMobil to hedge against exchange rate risk. Based on this information, the paper will then examine the effect of decreases or increases in the exchange value of the dollar on the firm’s profitability.

ExxonMobil’s Revenue and Cost Pricing

            Revenue pricing for ExxonMobil is a fairly tricky affair because the firm is not reasonable for setting prices. However, the firm makes use of scenario in Excel to achieve revenue pricing. First, the firm creates a “low” scenario for the projected price of oil per barrel or gas per cubic foot. For example $ 60 per barrel. A “middle” scenario is also created where the price per barrel could be projected at say, $ 90. A “high” scenario is also forecasted where the price of oil per barrel could be projected at $   120. In this way, the company can see a host of probable outcomes on the basis of commodity pricing. However, the scenario is not as simple as it is made to look here, considering that a multinational company like ExxonMobil is associated with a lot of stakeholders, all of whom are interested in its revenue. As such, the firm is forced to consider hedging. At the same time, the firm may never realize the ultimate market price of its products owing to commissions paid out and the effect of middlemen.

On the other hand, costs incurred by ExxonMobil can be grouped into either production-related expenses or non-production related expenses. The former are estimated using per cubic units in the case of gas, or dollar per barrel in the case of oil. The rise in the dollar value of production-related expenses relative to a firms revenue over time is important as it enables us to estimate the amount of profit or loss that the firm has incurred in that duration.

Contributions of Upstream and Downstream Operations of ExxonMobil to Its Profits 

Upstream Operations

The strength of ExxonMobil as a global company enables it to explore and capture various natural resources distributed across diverse geographical and geological environments. To do so, the company relies on industry-leading capabilities and technology that is has adopted. In this case, ExxonMobil relies on its rich understanding of the world’s hydrocarbons endowment in addition to its unique geoscience abilities to prioritize on oil and gas resources that warrants further exploration.

In executing its upstream strategies, ExxonMobil makes use of a steadfast reliance on operational excellence, coupled with the desire to gain superior results and competitive advantages in the industry, as of 2013, ExxonMobil had the leading earnings in the global oil and gas industry from its upstream operations, at $ 26.8 billion (ExxonMobil Summary Annual Report, 2013). However, this represented a drop in upstream earnings for the second consecutive financial year, compared with the $ 34.4 billion and $ 29.8 billion earned in 2011 and 2012, respectively. At the same time, the production of both natural gas and oil reduced during this time. For example, in 2011, ExxonMobil produced 13.1 million cubic feet of natural gas per day. This was an increase in the daily production of natural gas, compared reduced to   the 12.3 million cubic feet of natural gas produced per day in 2012, a figure than reduced further in 2013 to 11.8 million cubic feet(ExxonMobil Summary Annual Report, 2013).

 At the same time, oil production stood at 4.17 million barrels per day in 2013, a drop from the 4.2 million and 4.5 million barrels per day realized in 2012 and 2011, respectively. This is despite the fact that the average capital employed by ExxonMobil in its upstream operations has been increasing year-on-year. In 2011, it stood at 129 million while in 2012, it was at 139 million. In 2013, the average capital employed stood at 152 million (ExxonMobil Summary Annual Report, 2013). 

The return on capital employed by the firm has also declined steadily these last 3 years largely due to a rise in exploration and capital expenditures. In 2011, the return on capital was 26.5%, before reducing to 21.4% in 2012. In 2013, it reduced one more to 17.5%. During the same period, exploration and capital expenditure increased steadily to stand at $ 33 million, $ 36 million and $ 38 million in 2011, 2012, and 2013, respectively (ExxonMobil Summary Annual Report, 2013). 

Downstream Operations

ExxonMobil’s key downstream operations entail refining and supply, specialties and lubricants marketing, as well as fuels. The key strategies of ExxonMobil in its downstream operations is to offer valued, quality services to its diverse customer base, to lead the industry in innovations, effectiveness and efficiency, and to maintain capital discipline. In terms of performance, the company’s leading lubricants such as Mobil Delvac 1, Mobil 1, and Mobil SHC have been posting record sales in the oil and gas industry year in, year out.

In 2013, ExxonMobil realized earnings of almost $ 3.5 billion from its downstream operations. This was largely contributed by increased efficiency and margin capture, as well as contributions form the company’s recent investments. The average return on capital employed stood at 14.1% in 2013. In 2012, it was at 54.9% while in 2011, it stood at 19.1% (ExxonMobil Summary Annual Report, 2013).  In 2013, ExxonMobil sold 5.8 million barrel per day worth of petroleum products, a drop from the 6.1 million and 6.4 million barrels per day recorded in 2012 and 2011, receptively  (ExxonMobil Summary Annual Report, 2013).  The average capital employed in ExxonMobil’s downstream operations has also increased steadily over the past 3 years from $ 23.3 million in 2011 to $ 24 million in 2012 while in 2013 it stood at $ 24.4 million. The same case has been with capital expenditure, at $ 2.1 million in 2011, $ 2.2 million in 2012, and $ 2.4 million in 2013.

Hedging against Exchange Rate Risk

Like all other corporations, ExxonMobil treats the issue of risk management with the seriousness it deserves. Adler (1992) argues that financial executives view risk management as one of their most significant objectives. Given the multiple foreign operations that ExxonMobil is involved in, it is only natural to consider hedging its exchange rate risk. Such a need arises from ExxonMobil’s huge investment in refining operations, oil fields, shipping, transportation, storage, and marketing. In all of these operations, ExxonMobil is exposed to a number of crucial market risks like gas and oil fluctuations, fluctuating interest rates, as well as fluctuating exchange rates. Froot, Scharfstein and Stein (1993) note that a company can hedge or offset exposures to risks by selling or buying a suitable package of options, futures, or other derivatives. However, according to the company’s 10K disclosure available from its 2009 financial statements, ExxonMobil makes limited use, if any, of derivatives:

“…. the Corporation makes limited use of derivative instruments to mitigate the impact of [changes in interest rates, currency rates and commodity process]. The Corporation does not engage in speculative derivatives activities or derivative trading activities nor does it use derivatives with leveraged features.” (ExxonMobil 2009).

The decision by ExxonMobil not to make use of derivative instruments is unique, seeing as both Shell and BP utilizes derivatives. How then can we explain the decision by ExxonMobil to shun the use of derivatives as a hedging tool against exchange rate risk? It is important to note that ExxonMobil is capable of exploring, producing, refining and shipping significant volumes of oil and gas profitably, as separate activities. This is a sign that the company has successfully managed to separate its operations from financial activities. In other words, ExxonMobil treats derivatives and other financial activities like prop trading and hedging as separate activities from its physical activities. Nonetheless, it is still remains a puzzle as to why ExxonMobil would decide to hedge against exchange rate risk using derivatives as a tool.

Like all the other oil companies, the hedging theories apply to ExxonMobil as well. These hedging theories entail the need to maximize shareholder value when the company is faced with mounting market risks that are likely to have an effect on its cash flow. Evidently, ExxonMobil does not have any immunity against such market risks and is thus exposed to them in the same way other oil companies are.

Effects of Decreases on Increases in the Exchange Value of the Dollar on the Firm’s Profitability

Commodity markets as well as most international organizations like the World Bank and the IMF (International Monetary Fund0 base prices on the dollar. Therefore fluctuations in the dollar exchange rate as a result of real developments or inflation will affect the profitability of firms in these industries. This is indicative of the very strong link between oil prices and the dollar value, an issue that has been the subject of numerous research studies. For example, Benassy-Quere et al. (2005) talk of a very clear relationship between US Dollar exchange rate and oil price. In their study, Benassy-Quere et al. (2005) have offered a long-term causality and real term relationship between the dollar value and oil prices between 1974 and 2004. According to their estimation, when the price of oil increases by 10%, there is a resultant appreciation in dollar value of 4.3%. However, this may not always be the case as evidenced between 202 and 2004 when the dollar value deprecated amid rising oil prices (Obadi, 2012). 

In contrast, many other studies have been done to assess how oil process are affected by US Dollar exchange rate (for example Alhajji, 2004; Cheng, 2008; Krichene, 2005; Yousefi & Wirjanto, 2004). According to Alhajji, when the US Dollar appreciates in value, it leads to reduced upstream activities via diverse channels such as increased costs, reduced return on investment, purchasing power and inflation (2004). The same factors are likely to affect ExxonMobil as well. Moreover, when the US Dollar depreciates in value, there is a resultant rise in demand for oil form nations whose currency has appreciated as a result of a higher purchasing power. Consequently, ExxonMobil is forced to export oil to these countries, meaning that the volume o exports increases, however, due to a weekend dollar, relative to the foreign currency, its revenue reduces. At the same time, a depreciation in the dollar value would lead to a decline in revenues from oil exported to countries whose currencies are pegged to the dollar.


            The focus of this paper has been on ExxonMobil, a U.S.-based multinational oil company with operations across the globe. We have established from the research paper that both the upstream and downstream operations of ExxonMobil are very important for its profitability. For example, in 2013, the company made  $ 3.5 billion from its downstream operations. In the same financial year, ExxonMobil’s upstream operations contributed $ 28.6 billion towards the company’s revenue. The oil and gas industry is very volatile and is subject to fluctuations in dollar value and inflation. For these reasons, hedging against the exchange risk becomes a priority. However, in the case of ExxonMobil, the company in its 2009 10K disclosure declares that it does not engage in hedging against exchange rate risk. It still remains a puzzle as to why the company would adopt such an approach but several critics have argued that ExxonMobil has successfully managed to separate its various operations upstream, midstream, and downstream from its financial activities, of which the exchange rate risk is part of, thereby minimizing the risks that are likely to emerge. However, a drop in the dollar value hurts the revenues of ExxonMobil because it has to export more oil and gas at reduced value and possibly incur additional operational costs due to inflation. 

Reference List

Adler, M. (1992). Exchange rate planning for the international trading firm. Working Paper,

Columbia University.

Alhajji, A. F. (2004): The Impact Of Dollar Devaluation On The World Oil Industry: Do

Exchange Rates Matter? Middle East Economic Survey, 47(33)

Cheng, K. C. (2008). Dollar depreciation and commodity prices. In: IMF, (Ed.),2008 World

Economic Outlook. International Monetary Fund, Washington D.C., pp. 72-75.

ExxonMobil (2009). Risk Factors. Retrieved from http://phx.corporate

ExxonMobil (2013). ExxonMobil Summary Annual Report 2013. Retrieved from


Froot, K.A., Scharfstein, D.S., & Stein, J.C. (1993). Risk Management: Coordinating Corporate

            Investment and Financing Policies. The Journal of Finance, 48(5), 1630-1660.

Krichene, N. ( 2005). A simultaneous equations model for world crude oil and natural gas

markets. IMF Working Paper.

Obadi, S.M. (2012). To what Extent Do Oil Prices Depend on the Value of US Dollar:

Theoretical Investigation and Empirical Evidence. Retrieved from  

Yousefi, A., Wirjanto, T. S.(2004). The empirical role of the exchange rate on the crude-oil

price formation. Energy Economics. 26, 783-99