Speaking to analysts in New York last month, Rex Tillerson, chief executive of ExxonMobil, stressed how the company’s great financial strength gave it options that were not available to most of its competitors.
“We maintain flexibility so if something really interesting is in front of you, you don’t have to pass because you didn’t have the financial capacity to do it,” he said.
Royal Dutch Shell’s agreed £47bn deal to buy BG Group might count as the sort of “really interesting” prospect he had in mind.
A move by Exxon to break up the deal by outbidding Shell for BG is not impossible. However, more likely might be a move to acquire another company similar to BG’s size, on the grounds that Exxon should not be the last single person at the dance looking for a partner.
Exxon has long been rumoured as a potential bidder for BG, and now has both the motive and the opportunity.
Like Shell, it is struggling to grow and will find it easier to raise production by dealmaking than by drilling. Exxon’s output was about 4.3m barrels of oil equivalent per day in 2001, and 4m boe/d last year.
BG has attractive positions in some of the industry’s most interesting long-term prospects, including oil in the deep water off Brazil and gas off the coast of Tanzania. Both of those positions are large and complex projects to develop that would benefit from Exxon’s financial strength and technical capabilities.
Buying BG would also be a way for Exxon to build its position in exports of liquefied natural gas from the US, helping it to catch up in a race where it has been lagging behind.
BG said in February that, along with its partner the Energy Transfer group, it would be deferring until 2016 an investment decision on the proposed Lake Charles LNG export terminal in Louisiana. Oil-linked gas prices in Asia and Europe have slumped along with the price of crude, and BG wanted to be sure both that it could sell the LNG and that the cost of the development had been brought down as much as possible.
In spite of the delay, the companies are still pushing ahead with an application for the permits they need from the Federal Energy Regulatory Commission, which they expect to receive by the end of the year.
Exxon, which prides itself on cost-effective and punctual delivery of large and complex projects, would stand a better chance than most companies of completing the Lake Charles plant on time and on budget. Its large US gas reserves might also make the economics of LNG exports look more favourable.
If it does decide to fight for BG, Exxon certainly has the firepower. With its greater size, low debt and triple-A credit rating, it could probably muster a larger cash component in any offer than Shell’s 28 per cent of its total offer of ₤13.50 a share.
However, there are also some good arguments against Exxon attempting to butt in. For a start, hostile deals are very rare in the oil and gas industry. Exxon would have to persuade BG’s board to back its bid, which will not be easy given that Shell has a substantial head start.
Second, it would be hard to prevent an acquisition for shares diluting earnings for some time. Shell’s agreed purchase price implies a multiple of about 26 times consensus estimates of BG’s 2016 earnings, while Exxon’s shares trade at about 16 times. Paying a higher premium to see off Shell would make that problem even greater.
Third, Exxon is not under the same pressure to do a deal as Shell. Exxon has replaced 101 per cent of its oil and gas production in its proved reserves over the past three years, excluding the effects of acquisitions and disposals, according to Martijn Rats at Morgan Stanley. For Shell, the equivalent figure is 76 per cent, meaning that it has been running down its reserves.
Finally, Exxon’s executives will be alert to the risk of overpaying during a downturn, following the deal to buy XTO Energy, a US shale company, for $41bn including debt that they agreed at the end of 2009.
Exxon insists that was a good deal that will be vindicated over time, and XTO, retained as a separate unit within the group, has reported some impressive performances in increasing its US shale oil production. Even so, Exxon’s critics argue that the collapse in the gas price in 2011-12 probably meant that the company moved too soon, and it could have secured a better deal later.
While BG might not be the perfect fit for Exxon, however, there are others in the category of midsized exploration and production specialists that could be tempting. Paul Sankey of Wolfe Research last month suggested Hess, Continental Resources, Devon Energy, Apache and Anadarko as possible targets.
There is a good chance that the Shell-BG deal will prompt others. When the crude price is moving fast, it is hard to bring buyers’ and sellers’ expectations into alignment, but a deal of this size provides a benchmark that other boards and investors will take into account.
Once deals start being agreed, as in the big oil merger wave at the end of the 1990s, companies tend to start making a rush to reach agreements to avoid being left behind.
Bankers have been suggesting that the oil merger and acquisition market after the crude price crash was waiting for the first big domino to fall to tip over many others. Shell and BG have just given that first domino a push.
Source: Financial Times