Exxon’s Boatload of Cash: Who is the Target?
Posted on: February 18, 2009 - Email Article - Printable Version
Analysts have been buzzing about Exxon’s position for a while, speculating as to whether or when the world’s largest publicly traded corporation will make a bid to acquire a competitor. You could make an argument that Exxon [XOM: 67.22, 0.00 (0.00%)] is currently in the best shape of any financial company in the history of the world. The company’s net income for the third quarter of 2008 alone was over $14B dollars, and it currently has $38.43B dollars in cash ready to be deployed. On top of this mountain of greenbacks, it also has roughly $165B in repurchased stock. Exxon has been fairly quiet on the M&A front since it bought Mobil last decade, but many feel things could change with the recent collapse of crude oil prices. I would like to take a look at a few potential targets for Exxon as well as some other options that I see very feasible.
Apache Corp.
Apache Corp. [APA: 106.94, +0.35 (+0.33%)] is one of the largest exploration and production companies in the world, with excellent geographical resource exposure, something that Exxon dearly covets. Apache also has a stronghold on the Southeast Asian and Australian natural gas markets, two areas that Exxon would be very wise to enter. Apache has the scale that would lead to a meaningful acquisition for Exxon. Even though Apache looks like a perfect target for Exxon’s management, it is very unlikely that a deal like this would occur, because Apache is extremely sound financially. Apache has seen positive free cash flow for the past 22 years. This trend is likely to continue even in this financial crisis. The premium that Exxon would have to pay to acquire Apache would make the relative value of such a deal extremely unfair.
Chance of occurring: <5%
Anadarko Petroleum
Anadarko Petroleum [APC: 72.32, +1.03 (+1.44%)] is a company similar to Apache but with less of a natural gas bias. Anadarko has excellent exposure to Africa, another area that could be lucrative for Exxon to enter. Anadarko had built up a sizable amount of debt in 2006 and 2007, and it seemed like it could have possibly been a takeover target; however, the CEO, Jim Hackett, has done an excellent job of paying down this debt and managing the company over the last few years. This is another situation where an acquisition would be unlikely, although slightly more likely than an acquisition of Apache.
Chance of occurring: <10%
Chesapeake Energy Corp.
Chesapeake Energy [CHK: 25.79, +0.13 (+0.51%)] has been all over the news during the course of the last year due to their stock’s roller coaster ride. Nobody was hotter than Chesapeake during the energy boom, and no one has been in worse shape (until recently) since energy commodity prices came crashing down. Exxon’s natural gas exposure is not nearly high enough when considering the likely shift in the world’s infrastructure under the new environmentally conscious hydrocarbon man, and Chesapeake is the leading natural gas producer in the United States. Chesapeake also has massive leaseholds in the Haynesville Shale, the United States’ foremost natural gas play. It has superb management with CEO, Aubrey McClendon, and I doubt he would let the company go down without a fight or a great offer. This acquisition of Chesapeake has a higher probability of getting done, as it makes a lot of sense for Exxon going forward.
Chance of occurring: 35%
EnCana Corp.
EnCana [ECA: 33.86, -0.18 (-0.53%)] is a company that has run into some problems recently with liquidity. The company has over $12B in debt and less than $400M in cash on hand as of the end of the last quarter. On top of the abnormally high debt levels for a large energy company, it also had negative un-levered free cash flow for the last quarter, totaling approximately $1.9B. This burn rate of cash is not sustainable, and management will have to significantly cut back the capital expenditure program in order to accommodate their new financial situation. Management had been quoted saying that there was a potential for the company to break into two “separate parts to unlock value,” but this seems unlikely given their current situation. The reserves are mostly spread throughout the United States and Canada, so Exxon wouldn’t really gain any geographical exposure by acquiring EnCana. Still, it would help boost Exxon’s footprint in the natural gas markets and potentially unlock value if they could manage the company better than current management. This size of an acquisition could also be at risk of anti-trust regulation.
Chance of occurring: 15%
Suncor Energy
Suncor [SU: 30.90, +0.15 (+0.49%)] is the type of company I would consider buying if I was in charge of Exxon. The resources are located in Canada, and these resources are oil sands, which are not conventional crude oil resources. Obviously, oil sands are extremely out of favor right now, but it would make all the sense in the world to buy near the “low” of the market. Exxon could easily finance a takeover of Suncor with an all cash offer, even with a substantial premium over the current stock price. Exxon has shown that it is really not concerned with environmental issues, and acquiring a company as environmentally unfriendly as Suncor wouldn’t be a problem for Exxon’s management or shareholders.
Chance of occurring: 20%
Royal Dutch Shell plc?!?
Before you delete this web address from your browser, please hear me out. As ridiculous as it may sound, Royal Dutch is a possible (not extremely likely) target for Exxon. [RDS: 0.00, N/A (N/A)] has a large amount of international exposure that Exxon envies as well as a fairly impressive reserve replacement ratio that well outpaces Exxon’s own. The key here is the regulators and anti-trust laws, the two main reasons why I don’t see this happening. Without these two factors in the way, I think Exxon wouldn’t hesitate to buy RDS and put to rest a rivalry that has lasted over 100 years between the spin-out of Standard Oil and the European oil giant. All things equal, Exxon could even buy RDS in a stock only deal (if the shares of Exxon didn’t lose any value).
Chance of occurring: 5%
Foreign Government Joint Venture
This is the option that most of the analysts and writers are buzzing about. Unfortunately for their speculatively racing minds, I think that this is extremely unlikely. Exxon, along with most of the other oil majors, is already having enough problems with nationalized oil producers, Venezuela being a great example. The Venezuelan state controlled oil producing company is refusing to pay Schlumberger [SLB: 63.90, -0.30 (-0.47%)] and Halliburton [HAL: 30.74, +0.10 (+0.33%)] a combined $1B, and it seems as if the companies will never see a penny of this money. Operating in these types of environments is not worth the risk of losing all your assets to nationalization; just ask ConocoPhillips [COP: 51.30, -0.17 (-0.33%)] and B.P. plc [BP: 56.60, +0.41 (+0.73%)]. In case you missed it, ConocoPhillip just wrote down over $10B in Russian exposure in their last earnings report, and the BP-TNK venture has had a world of trouble since the day it was started.
Chance of occurring: 1%.
Resource Acquisition and More Share Buybacks
Here is an option that not only makes sense, but is very likely. Some form of this will take place with Exxon’s cash load. This method presents a few benefits for Exxon that I believe are not as easy to see. Firstly, resource acquisition in many cases will dodge the regulation barrier that would come with any Exxon acquisition. This way, the oil giant can basically sidestep Obama. Don’t forget that Obama isn’t Exxon’s biggest fan, he had commercials that attacked their profit margins running throughout his campaign. With the public outrage over “big oil profits,” I doubt the U.S. department of justice lets anything of this nature slide through easily. Seeing the types of deals that are made around the industry almost daily as companies are scrambling for liquidity, it seems as if Exxon could easily outbid rivals for leaseholds that are up for sale from either other struggling smaller competitors or governments.
Share buybacks present not only an effective, but also an interesting scenario for Exxon. The market may not be able to price in the full value of an acquisition by Exxon, but whenever a firm announces share buybacks, it is much easier to calculate what this will mean for the share price. Often times in our markets, irrational exuberance takes over and equity prices can run up higher than they should as share buybacks are announced. Exxon could use this to its advantage to acquire a company in an all stock deal when its stock price is inflated beyond levels the company feels are fair. This approach could potentially kill two birds with one stone. With roughly $40B in cash, Exxon could potentially set more than half of this aside to buy back shares. It could keep the rest on hand in case of any emergency or a sustained drop in energy prices, something that actually would not be a bad thing for Exxon in the long run.
Chance of occurring: 100%
Final Thoughts
Exxon will most likely choose one of these options; it is just a matter of time. Exxon’s management hinted that something was in the works during the fourth quarter earnings call. With Exxon holding that much cash it would be in the best interest of shareholders if the company put it to work. Regulators will be the big question, and the option of not having to deal with regulators through the last scenario I listed is very attractive for Exxon. In the mean time, do not expect Exxon to act quickly. Exxon has waited as crude has dropped from $147 to $39, and it will not be afraid to wait longer in order to get the exact deal that it wants. Exxon would rather miss calling the bottom and buy in somewhat into the upside than attempt to catch a falling knife with its cash reserves. While I have full faith in Exxon’s management to make the right decision, I would warn long investors to be aware of this pending acquisition before taking a large long bet on the world’s largest company.
- Charles W. Petredis
Disclosure: The author’s family as well as the mutal fund the author manages are long APA, CHK, and XOM. The mutual fund the author manages is long SLB.
The Following Stocks Were Mentioned In This Article: APA, APC, BP, CHK, COP, ECA, HAL, RDS.A, SLB, SU, XOM
Comments
you have forgot, lyondellbasell, the houston refining sour crude refinery.
it seems they have a taste for it…. also it seems petrobras has a want for it too…. whats your thoughts?
also its only a matter of weeks before this huge company goes chap 7,
hell circuit city did it in 90 days… lyondellbasell cant make payments on old loans let alone new ones… lol
To be completely honest, I don’t know overly much about them. They are a private company so information is tough to come buy. Some of their business segments don’t exactly match Exxon’s and being held by private investors even with the risk of bankruptcy it could be difficult to buy. The sour crude refining is extremely attractive to Exxon, but anti-trust may be brought up on an acquisition of that type considering Exxon is such a large refiner already. Interesting suggestions though, thanks for the input.
Well done aticle and interesting perspectives. Agree that the select resource acquisitions and continued major share buybacks are the easiest productive courses for deployying XOM’s huge cash reserves and growing cash flows.
XOM’s discipline in deployingcapital and their extraordinary csh generation power has rewarded its long-term shareholders with growing dividends and capital for decades.
This challenging energy market plays right into XOM management’s disciplined acquisition approach. Thanks for the fine summary of interesting qulity energy candidates.
Charles:
You said: “Anadarko has excellent exposure to Africa, another area that could be lucrative for Exxon to enter.”
Exxon doesn’t need to “enter” Africa. They have a nice presents there already. Check your facts, like for Angola and Nigeria. About 11% of their product comes from Africa.
When I read a sentence like that it doesn’t want to make the reader go any further.
Do your homework please.
After reading further:
Your an idiot.
Your comments about regulation, RDS, the Obama Administration, EnCana, etc., are ignorant.
Go do some more research.
TO: small time player
>Why would Exxon buy LyondellBasell? If you were Best Buy you wouldn’t have tried to buy Circuit City, you just wait for them to go under then go after their customer base, let the customer’s come to you because they can’t go to CC any longer.
You people need to use your heads here. Next, does XOM even want to expand their chemical business? They have stated that they want to expand the core competencies. These means finding like assets and merging them into a more focused output. This means that they would only want certain parts of LyondellBasell, which they can buy piece meal if they so desire. They have no interest in buying the entire company.
XOM main strategy to expand is find hard core crude and natural gas in hard to find places (like Western Africa, Sakhalin, Qatar, Azerbaijan, North Sea, and Alaska). You will see limited expansion in both the chemical business and the retail station business (these are not high priority areas). Look for XOM to get the gas pipeline from the North Slope to Alberta going, or take their Sakhalin technology to Greenland. Look for more expansion in Malaysia, New Guinea, and Western Australia (offshore), and more more Western Africa expansion (think offshore Cameroon, Gabon and Namibia).
No, about the only idea that you two clucks have put out that make much sense is the Petrobras (after just buying back their own stock). The problem with Petrobras is 1) the valuation, and 2) the way the company is structured.
You two go to your room and come back when you have a better idea.