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ExxonMobil: Go big or go home

Takeover opportunities abound for ExxonMobil if it chooses to pull the trigger

While the downturn has wounded many oil and gas companies, it is creating opportunities for others – none more so than ExxonMobil. Extended price declines have provided fertile ground for takeovers in the past. In 1999, Exxon, then the world’s largest traded oil company, took over its closest rival Mobil in a $75bn deal that gave it access to Qatar’s gas, among other prizes. In 2009, the company used a period of plunging US natural gas prices to snap up leading shale player XTO for $45bn. 

Thanks to its size and diversity, the company has weathered the oil and gas price decline over the past year better than anyone else. Its large refining and chemicals businesses, its efficiency and its generous dividends are all advantages in a downturn. Its share price is down about 20% from last July, compared to an average of around 30% for the other majors and much more for independent producers. Capital spending is down a modest 11.5% this year, from $32.9bn to $29.2bn. 

The conservative business model, though, has a flip side. For many, the company has come to be seen as a safe haven during difficult times, but one to avoid when times are good. “Our bias now is to look toward at least a modest recovery in 2016, and Exxon is not the best way to play that,” Raymond James analyst Pavel Molchanov says about the company.

It raises some fundamental questions for chief executive Rex Tillerson: is ExxonMobil content to remain a stable cash generator? Or is the worst downturn in a generation an opportunity to set the company up for a new era of growth? 

Even with its deep inventory of projects around the world, ExxonMobil’s size – its market value is around $330bn – has made sustained organic production growth difficult to come by. Production was 3.98m barrels of oil equivalent/d at the end of the second quarter this year, down from 4.5m barrels of oil equivalent (boe)/d at the end of 2011, though slightly higher than a year earlier. The company is producing less oil today than it was just after it bought Mobil. 

Total production

And natural gas production jumped after the XTO takeover, but has been sliding since 2011. Field declines and regulations capping output from the Dutch Groningen field are among the causes. 

These point to the difficulties the company has faced over the last decade in finding areas large enough to make a real difference to the bottom line. 

It is locked out of many of the world’s largest oil deposits, particularly in the Middle East. It has also eschewed some areas open to foreign investors but where governments have insisted on control for their national oil companies, such as Venezuela’s Orinoco Belt and Brazil’s pre-salt. The company gambled on Russia’s potentially huge Arctic offshore in a deal with state-controlled Rosneft, but sanctions on Moscow put paid to that.  

In the five years between 2010 and 2014, ExxonMobil returned around $124bn to shareholders through dividends and share buybacks, compared with earnings of $182bn over the same period. 

The strategy has helped buoy the share price as investors looking for steady predictable returns have piled in, but it raises a larger question about long-term growth prospects. ExxonMobil executives confidently predict an inexorable increase in fossil fuel demand in the coming decades as populations grow and prosperity rises around the world, but its own growth opportunities look more limited. Buying into growth seems the most obvious solution. 

“We are looking for quality assets in terms of people and resources, where we can add value,” Tillerson said in October at the Oil and Money conference in London. He added that it takes “a while to sort out the value of a business.” Disposals too are on the cards as the company does not need to own midstream assets where security in getting production to market is not a problem, he said.

At a crossroads

The company’s size means virtually no publically traded company is off limits, at least financially. The most widely mooted potential target is BP. The recent Macondo oil spill case settlement removes a huge risk, though the British government has warned off suitors. The US government could effectively scupper the deal as well. BP’s Macondo settlement includes a clause allowing federal and state officials to demand as much as $12.7bn in accelerated payments in the event of a takeover.

Alternatively, it could place a bet closer to home by buying one of the large US tight oil players, similar to the way it targeted shale gas in the XTO deal. There are number of companies too stretched to fully develop their acreage. 

It could home in on the Permian basin with promising economics that looks set to be the next major source of shale growth when the sector rebounds. Pioneer Natural Resources is a major operator in the Permian, as are Oxy, Apache and Concho Resources.

Or it could look at an upstream player with a more balanced international portfolio. Anadarko stands out with stakes in Mozambique, Brazil and US shale, including in the Permian. Opportunities abound for ExxonMobil if it decides to strike.  

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