Exxon Case

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					       EXXON CASE STUDY: CORPORATE RISK ASSESSMENT

Aims & Objectives
This case illustrates a structured approach to analysing risk in any public or company. It may
also be applied to private companies though the data sources and amount available may be
different or even absent (e.g. share prices). Supporting lecture notes, reading materials and
data are referenced below.

Case Study
You are a corporate loan officer in a major international investment bank and have been
asked to carry out a preliminary assessment of the risk profile of the Exxon Corporation, one
of the largest integrated energy companies in the world. The bank has just been asked to
participate in a commercial paper programme on the best possible terms but wishes to carry
out a thorough risk assessment first. The bank is already a major investor in Exxon bonds, has
outstanding commercial paper, derivative transactions and is a significant investor in Exxon
bonds and stock through its own pension fund and equity trading business. It is also one of
several banks which may be asked to provide corporate finance advice in issuing new equity
in the near future.

The importance of the banking relationship means you are you are heavily constrained in that
the only data available to you is from public sources and you are strictly forbidden to see
Exxon Corporation management accounts or to contact the company. You only have this
afternoon to carry out the analysis and your manager wants to see a preliminary report at 9.00
tomorrow morning.

Assessment
Please work in pairs to carry out the following analysis and report writing. This work counts
for up to 10% of your final course grade. You may pair with anyone but please ensure that if
you are intending to have the course assessed you are paired with someone who is also
having the course assessed, not with someone who is auditing. Write up your results and
analysis as a short management report of no more than 3 pages including charts (12point
Times New Roman, A4 paper, 2.5 cm margins). Send as Microsoft Word document and copy
of Excel spreadsheet model attached to e-mail jbower@london.edu. Please ensure report,
spreadsheet, and e-mail is clearly marked with your names and arrives by deadline 9.00 a.m.
Tuesday 11 April 2000.

1. Using the ten years of Total Return Data in Integrated Risk (Exxon Data).xls for Exxon
   stock, estimate the total Capital at Risk for the bank to 95% C.I. on its $100 million
   holding of Exxon stock.
2. Using 1998 Exxon Annual Report, 1998 Financial and Operational Review, identify five
   Financial, Operational, and Event risks (15 in total) faced by Exxon during 1998.
3. Using the ten years of total return data in Integrated Risk (Exxon Data).xls for Exxon
   stock, and total return data for other financial and commodity markets build a regression
   model to identify and quantify the major Economic risks (both transaction and strategic)
   faced by Exxon over the period 1 January 1988 – 31 December 1998.
4. Using information from news archives identify and quantify the major Event Risks faced
   by Exxon from the residuals of the regression in 3 above.
5. From the ten years of Accounting Raw Data in Integrated Risk (Exxon Data).xls calculate
   EaR and CFaR
6. In common with many other companies Exxon may soon announce that it wishes to buy
   back its own stock, in order to change its capital structure. Estimate the probability of
   Exxon failing to generate sufficient cash to cover its interest payments during 1999 if the
   expected level of interest payments was i) 10% higher and ii) 25% higher. Assume the
   expected Turnover (inc. Excise Duty) remains the same as in 1998 and comment on your
   results and whether you agree with Exxon [Hint: Use Excel NORMDIST function].

Reading
All the following can be found in the course pack and must be read to be able to do the case

“Corporate Risk Assessment” lecture presentation by John Bower
“Reading between the lines" from Corporate Risk Management
"Reading between the lines (II)" from Corporate Risk Management
"Reading between the lines (III)" from Corporate Risk Management
1998 Exxon Annual Report
1998 Financial and Operational Review

Software
This case study can be completed on an Excel spreadsheet using the standard built in
statistical and mathematical functions along with the Data Analysis tool on the Tools menu.
Ensure the Analysis Toolpak Add-in is installed if you cannot find Data Analysis.

Data file
The case data is on the LBS forum at http://www.london.edu/faculty/kvlahos/prm/ just click
on Course datafiles. It is also on Q: drive in a subdirectory called CBFM\PRM.

Web pages
Data useful to solving this case can be accessed via the internet and the LBS intranet. For
ease of use key readings and datafiles have already been copied for you and are referred to in
the Readings and Computer file listed above.

Link                                   Description
http://www.Exxon.com                   ExxonMobil corporate web pages provides investor and internal
                                       publications, limited news archive and description of corporate
                                       activities

http://www.sec.gov/Archives/edgar/     Securities & Exchange Commission database of corporate filings
                                       (10K, 10Q, etc)
http://forum.london.edu/forum.nsf/H    Many on-line data sources can be accessed via the LBS forum
ome/Library?OpenDocument               under the Resources-Library-Services:
                                        Company Analysis (Accounts Data for Intl Listed Firms)
                                        CDD (International Company Accounts & Annual Reports)
                                        Datastream (Share price and financial market data)
                                        Dow Jones Interactive (International news archive)
Disclaimer

This case study, and supporting materials has been prepared for teaching purposes only. It
uses only publicly available data. Neither the Exxon Corporation, nor any other corporate,
governmental, or private entity has been involved in the preparation of the case materials
other than the author. The case has been considerably simplified and is not intended to
illustrate actual decisions or events made by Exxon Corporation or its bankers. No inference
should therefore be drawn about the level of risk or risk management capabilities of Exxon
Corporation or its successor Exxon Mobil Corporation.

Author
John Bower, Decision Sciences Department London Business School, Sussex Place, Regent’s
Park, London. NW1 4SA. Contact jbower@london.edu. Case date: April 2000.

				
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