The world’s largest publicly traded oil company, Exxon Mobil Corporation (XOM), is in discussions with top Indian technology firms for outsourcing several IT contracts worth up to $1 billion. This comes just a day after BP (BP) awarded over $1.5 billion worth of outsourcing contracts to India.

Like other oil majors, Exxon also runs on an SAP platform across the company’s chemical and oil businesses in over 200 countries. In the midst of economic turbulence, outsourcing and offshoring of Enterprise Resource Planning (ERP) maintenance and support are gaining momentum to save the company’s operational costs. For instance, BP expects to save around $500 million over five years by reducing the number of its suppliers to 5 from around 40.

Low cost is one of the Exxon’s competitive advantages. Total operating cost in the first half of 2009 were down 13% from the same period last year, primarily reflecting the company’s ongoing cost reduction efforts.

Exxon remains better positioned on the back of its integrated business models. Its cost control, operating efficiency and capital discipline are legendary, to say the least. Besides, instead of making expensive acquisitions or investing in uncertain projects, as many of its peers did through the cycle, it returned the excess cash it generated to shareholders through a growing dividend and share buybacks, while continuing to invest increasing amounts in exploration and production activities.

However, we believe, that these positives are already reflected in current valuation, leaving limited room for above-market gains. Consequently, we recommend a Neutral rating.
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