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ExxonMobil

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2404 1225 Words (6 Pages)
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This report is an analysis of a project of Exxon Mobile, one of the world’s largest oil company in Argentina. The project requires an investment of $130 million in 100 oil wells in Argentina. The factors of consideration in financial analysis are the country risk profile as well as the ROI of the project. The method that has been used is the NPV value calculation along with sensitivity analysis on fluctuating oil prices as oil prices affects the cash flows of the project significantly. Exxon is an unlevered company so financing will be done mainly with equity. The Lessard method is used for measuring the cost of equity in the analysis. The oil industry beta and Argentina’s beta have been accommodated in the analysis. The investment is considered as risky because of the longer time payback period and the high country risk of Argentina as an emerging market.

Following questions are answered in this case study solution:

  1. Overview

  2. Discussion

  3. 3 Financial Analysis

  4. Recommendations

  5. Summary & Conclusion

Case Study Questions Answers

2. Discussion

Exxon Mobile is a successful company earning billions of dollars in revenue. Since the company is not reliant on the debt it is considered as a cash rich company with sufficient free cash to invest in new opportunities. The investment opportunity in Argentina requires $70 million on drilling wells and another $60 million for establishing production facilities. If the investment generates high returns in the future it would add strategic value to the company. The operating cost of 100 wells was estimated to be of $7 per barrel while the revenue estimates at the current market prices of 2005 were $58 per barrel. At this stage, the investments seems like a lucrative opportunity. The oil prices had been on an upward trajectory since the last decade and the trend was likely to be continued in the future. However, there are huge uncertainties in the oil market that cause great fluctuations in oil prices. Although the investment is estimated to generate free cash flows of $37 million for six years (Table 1) it will be significantly dependent o the oil prices in the global market.

In addition to future oil prices, another important factor of consideration is the country's risk and its impact on the discount rate of the project. In the case of emerging markets, the discount rates are arbitrarily increased as an industry wide practices. On one hand, this practice keeps the companies safe from risky investments while on another it by ignoring the investment opportunities. The right and appropriate practice therefore to look for all deciding factors that can affect the financial decision including the monetary aspects and financial returns. The project is also more risky as Exxon will mainly use its equity for investments and will have to solely bear the losses in case of a wrong decision. Furthermore, the country’s beta in this case is for above the oil industry indicating high risk and market volatility (Table 2). The decision is of utmost importance due to the high stakes and large investment of capital.

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