Financial Statement Analysis is the Decrease in Revenue

Identifying Red Flags from 2020 Financial Statements for ExxonMobil
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The first red flag that is observed from the financial statement analysis is the decrease in revenue, as seen in the below table.
Table 1: Revenue trends
As observed in the above table, there is a continuous decrease in the revenue, and therefore, there is a need to understand the cause behind it. As mentioned in the 2020 Annual report (ExxonMobil, 2020), the oil & gas business is a commodity business, and therefore its performance is dependent extensively on global economic conditions. The industry is closely linked with economic activities and prosperity levels. In case of a recession or negative economic growth, there is an adverse impact on the business. There are several other factors that influence the business, including a restructuring of fiscal, monetary, or political systems (like Brexit), currency fluctuations, trade tariffs, and political environment. These factors impact the demand and supply of the products. In the case of increased demand, the revenue increases and vice versa. Similarly, in the case of reduced supply, the revenue increases and vice versa. However, the business model allows the organization to hedge against any adverse impact of demand and supply naturally: A decline in oil or gas prices has an adverse impact on the upstream segment and proved reserves, and an increase in oil or gas prices has an adverse impact on the downstream and chemical segments (ExxonMobil, 2020).
Due to reduced demand in 2019, the company earned lesser revenue. However, the fall in revenue (8.5%) was not shocking considering that it is a commodity business: In 2019, different verticals performed differently: while there was a marginal increase in revenue from upstream (2.5%), there was a significant fall in downstream (61.3%) and chemical (83.5%) segments. The fall in revenue for these verticals could be attributed to several factors: For downstream as well as chemical segments, due to crude differentials, the margins decreased, and as a result, the production was reduced. Also, the organization focused on undertaking new projects that did not generate revenue yet (ExxonMobil, 2019).
However, a 30.13% fall in revenue in 2020 is a significant development. This fall is attributed to the demand reduction due to the Covid-19 pandemic. In the first two quarters of 2020, the demand-supply balance faced two disruptions: The pandemic spread globally at a rapid pace and resulted in substantial reductions in business and consumer activities. This led to reduced demand for oil & gas products, and the announcements made by several key producing nations to increase production resulted in oversupply. Even in the third and fourth quarters of 2020, there was considerable uncertainty in the market as the recovery from the pandemic varied globally. Therefore, while many businesses showed some signs of recovery, however, the demand remained much lower in comparison to the period before the pandemic (Fridson & Alvarez, 2011; ExxonMobil, 2020).
The second red flag that is observed from the financial statement analysis is the reduced income from affiliates. The company has invested in several subsidiaries as a minority shareholder; however, it possesses various rights to participate in significant management decisions. These subsidiaries are engaged in different aspects of oil & gas: exploration, production, marketing, and distribution in North America, Europe, Africa, and Asia (Fridson & Alvarez, 2011; ExxonMobil, 2020). The income from the affiliate entities has also reduced, as seen in the below table.
Table 2: Income from Affiliates
As discussed earlier, the business is extensively dependent on demand and supply, and as a result, the affiliate companies have been impacted too due to the pandemic. As observed in table 1 and table 2, the decrease in income over the period 2019-2020 is much higher than that in the period 2019-2020. This could be attributed to reduced demand due to reduced business activities due to the pandemic and increased production that led to over-supply. While it is natural that an oil & gas company will invest in other oil & gas businesses, however too much exposure to one sector resulted in a sharp fall in revenue from affiliates. Instead, if the company would have invested in some other sectors, it is a possibility that the revenue from affiliates would not have been severely impacted (Fridson & Alvarez, 2011; ExxonMobil, 2020).
The third red flag that is observed from the financial statement analysis is that the unusually high depreciation and depletion (including impairment), as shown in the below table.
Table 3: Depreciation Trends
In 2020, primarily due to a decline in prices for crude oil, natural gas, and petroleum products, the company had to face a significant decline in its market capitalization in the first quarter. As a result, the company had to recognize an impairment of before-tax goodwill of 0.6 billion. This impairment was done based on goodwill reporting as per the market-based estim...