Research Paper on "Analysis of Two Oil Companies"

Research Paper 4 pages (1046 words) Sources: 3

[EXCERPT] . . . .

Sales are also more stable than earnings and never negative (Stock Analysis on Net, N.d.).

Exxon -- PSR

Dec 31, 2013 0.98

Dec 31, 2012 0.89

Chevron - PSR

Dec 31, 2013 1.0

Dec 31, 2012 0.9

Financial Statement Review

A review of both companies SEC filings for the year 2012 were analyzed and the notes to the reports reviewed. One interesting aspect to Exxon's accounting policies that was revealed in the notes was the way that they account for their inventory (Exxon Mobil Corporation, 2013). The notes reveal that:

"Crude oil, products and merchandise inventories are carried at the lower of current market value or cost (generally determined under the last-in, first-out method -- LIFO). Inventory costs include expenditures and other charges (including depreciation) directly and indirectly incurred in bringing the inventory to its existing condition and location. Selling expenses and general and administrative expenses are reported as period costs and excluded from inventory cost. Inventories of materials and supplies are valued at cost or less."

Using the last-in, first-out (LIFO) would mean that the company sells the oil that it recently extracted first while the inventory that is in reserve is held in reserve and not sold. Exxon also states that it shies away from any use of derivatives and the speculation associated with these instruments (Exxon Mobil Corporation, 2013).

By contrast, Chevron states in its notes that the company is more open to use derivatives to "manage risk posed by physical transactions" (Chevron Corporation, 2013). However, the company also states that it typically uses these instruments for non-reoccurring or infrequent transactions. Derivatives and other financial instruments such as interest rate swaps can help a company hedge risks that might be associated with volatility in the market. Chevron also uses the last inventory method as Exxon to value its inventory holdings (LIFO). Using this method typically shows that the inventories are valued "below" the market average on the aggregate. It is likely that most oil companies use this method because it will reduce their risks to holding inventories since the inventory is valued under market value. For example, if the inventory was valued at market value, then if the market value reduced then so would their asset holdings.

References

Chevron Corporation. (2013, January 31). Form 10-K. Retrieved from Securities and Exchange Commission: http://www.sec.gov/Archives/edgar/data/93410/000009341013000003/cvx-123112x10kdoc.htm#s6075D5B9D3D0038BFD5C342F03CB712A

Exxon Mobil Corporation. (2013, January 31). Form 10-K. Retrieved from Securities and Exchange Commision: http://www.sec.gov/Archives/edgar/data/34088/000003408813000011/xom10k2012.htm

Google Finance. (N.d.). Chevron Corporation. Retrieved from Google Finance: https://www.google.com/finance?q=NYSE%3ACVX&fstype=ii&ei=paDPVrnyNYG3e939gcgH

Google Finance. (N.d.). Exxon Mobil Corporation. Retrieved from Google Finance: https://www.google.com/finance?fstype=ii&q=NYSE:XOM

Investopedia. (N.d.). What are the main differences between single step and multiple step income statements? Retrieved from Investopedia: http://www.investopedia.com/ask/answers/102714/what-are-main-differences-between-single-step-and-multiple-step-income-statements.asp

Stock Analysis on Net. (N.d.). Exxon Mobil Corp. (XOM). Retrieved from Stock Analysis on Net: https://www.stock-analysis-on.net/NYSE/Company/Exxon-Mobil-Corp/Valuation/Ratios

Tracz, S. (2013, August 1). Ouch! Exxon posts big miss; Shell takes massive shale charge. Retrieved from CNBC: http://www.cnbc.com/id/100928297 READ MORE

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