Why Exxon Mobil needs to do a deal
The energy giant could use an acquisition to reduce its exposure to refining and chemicals.
Oil and gas giant Exxon Mobil Corp. (XOM) isn't having a good week.
On Tuesday, analysts at Tudor, Pickering, Holt & Co. Securities said they preferred the stocks of Royal Dutch Shell plc/BG Group plc and rival Chevron Corp. (CVX) over Exxon, saying Shell's 7% yield is sustainable for years even in a $50 per barrel world given its asset sale program and noting Chevron's low valuation, low leverage versus its peers, its free cash flow turnaround from Australian liquefied natural gas projects and its underappreciated business in West Texas' and New Mexico's Permian Basin.
On Wednesday, Raymond James analyst Pavel Molchanov went as far as to downgrade Exxon's stock to underperform, saying the company may be "too defensive" with its overexposure in refining and chemicals, which helped it through previous downturns but will prevent it from benefiting from any upside in oil prices next year. "On the cusp of 2016, a year when we expect at least a modest oil price recovery, Exxon is far from the best way to play that," he said.
Exxon Mobil's stock is down 17% to $80.74 from its 52-week high of $97.20 a year ago.
What could give the golden child of Rockefeller's Standard Oil a boost? An old-fashioned acquisition, preferably a company with a lot of oil in the ground that could increase its oil weighting. Exxon certainly has the wherewithal, with 3.8 billion shares of treasury stock worth more than $300 billion it could use for a purchase. And the slide in oil prices has created a plethora of low-priced prospects.
The company has done some cherry-picking. In September of last year it traded some of its properties for some of Linn Energy LLC's (LINE) in the Permian, the hottest basin in the country because of its profitability even at today's lower oil prices. And in October it revealed that it had picked up leases on 48,000 acres near its own in the area in August. It didn't reveal the sellers or the price, but the purchase boosted its position by a third to 135,000 acres, and observers say it's angling for more.
Anadarko Petroleum Corp.'s (APC) spurned deal to buy Apache Corp. (APA) last week got tongues wagging that Exxon may strike at either company, both of whom have positions in the Permian (Apache has the most with 3.2 million gross acres). "I don't think Apache will be here next year," Porter Trimble, president and founder of KKR & Co. LP (KKR) oil and gas partner Fleur de Lis Energy LLC, predicted at an Independent Petroleum Association of America luncheon in Houston on Wednesday.
Occidental Petroleum Corp. (OXY) has also been mentioned as a potential Exxon target, as it is the largest operator and producer in the Permian, accounting for 13% of the oil produced there and a position of 5 million gross acres. But the company also has a big chemicals division, which would mute any oil-adding benefits. It's also going through a management change, with CEO Stephen Chazen retiring and Oxy "lifer" Vicki Hollub taking over next year.
Pioneer Natural Resources Inc. (PXD) and Whiting Petroleum Corp. (WLL) have also been named as potential Exxon targets, Pioneer for its sizeable positions in the Permian and South Texas' Eagle Ford Shale and Whiting for its properties in the Bakken, where Exxon has expanded its position in recent years. Permian-only player Parsley Energy Inc. (PE) has also been cited as a possibility, even though it's trading near its 52-week high. Even BP plc's name has been floated around, which, despite being British, has more U.S. assets than Exxon. But BP still has lingering issues from its big oil spill in the Gulf of Mexico five years ago and a reluctant CEO in Bob Dudley, who said last spring when asked about the rumors: "Big is not necessarily beautiful."
Indeed, given its past reputation for being "acquisition phobic" (despite its successful purchase of Mobil), Exxon may prefer to do a series of asset deals rather than a big strategic one. Its purchase of XTO Energy Inc. five years ago for $41 billion has been disappointing, with natural gas prices nearly half of what they were then, and no meaningful recovery in sight. Besides, as Exxon's investor relations chief Jeffrey Woodbury reiterated several times on the company's third quarter conference call with analysts, any acquisitions the company would consider would have to compete for capital with projects it's working on or contemplating.
The company has more than a few of those in the works - 32 major upstream projects, at last count. We've got very high-value investment opportunities that will effectively compete for allocation of capital," Woodbury said.
Last week Uruguay government-owned oil company Administración Nacional de Combustibles, Alcoholes y Portland, or Ancap, confirmed that Exxon had bought a 35% stake in an oil block off the coast of Uruguay, joining with France's Total SA to drill the country's first offshore exploratory well in the first half of next year. It will be in ultra-deep waters and target an estimated 1.5 billion barrels of oil equivalent, but the investment is a mere $200 million. Projects like that aren't likely to boost the company's oil production as easily, or as quickly, as an acquisition would.
