Would ExxonMobil Corporation (XOM) Buying Chevron Corporation (CVX) Be A Good Move?
Most of the industry stalwarts prefer to consolidate when the going is tough. That is by being tough enough to get things to turn around by M&A or restructuring. The current situation may well suit ExxonMobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX). Both are in the same industry and are big enough to indulge in M&A individually. However, if both the companies merge, what would be the gain for the investors or the company? Currently, the combined market valuation of the two companies is slightly above Google Inc (NASDAQ:GOOGL)’s $445 billion. However, it is significantly lower than the approximately $660 billion market cap of Apple Inc. (NASDAQ:AAPL). At a time when the oil price is facing downside pressure, the two biggest oil companies merging provides them a number of gains.
Expenditures To Drop Steeply
The oil price witnessed more than 50% drop in the last one year period with the threat of further drop. Goldman Sachs Group Inc (NYSE:GS) predicted that it would not be surprised if oil plummets to the $20 a barrel level. That suggested the kind of uncertainty the industry is undergoing because of excessive supply. While different countries might be prompted to encourage alternate energy in the wake of global climate change, the fact is that it will not be sufficient to offset the dependence on oil or make a significant impact. The current weakness in price has got enough to do with the conditions in China, which is the biggest market for automobiles, and struggling for growth pace.
None-the-less, the impact from the alternate energy sources cannot be ignored by ExxonMobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) altogether over a long-term period. Therefore, this might be the right time to plan ahead for the likely situation down the line in a decade or so. Both might have the individual capability to do so and could still succeed. However, if they join, the benefits are going to be much stronger than one would have imagined. Oil and gas sector is one of the few industries that always required big money or constant capital expenditures, without which it will be tough to survive. That is one big factor that can not only change the conditions for both the firms but also provide immense synergies. For instance, ExxonMobil Corporation (NYSE:XOM) spent capital expenditures of $8.3 billion, whereas Chevron Corporation (NYSE:CVX)’s capital expenditures were $8.7 billion in the second quarter.
Effects Of Drop In Oil Price
One of the biggest effects of the steep drop in global oil price is that both spent 16% and 14.3% less capital expenditure respectively than the year-ago quarter. For the first half, the year-over-year drop in capex was 12% and 11.8% respectively. While Exxon earnings dropped 52.3%, Chevron’s earnings plummeted 90% due to some charges, apart from the weakness in global price.
ExxonMobil Corporation (NYSE:XOM)’s cash flow from operations and asset sales dipped 26.6% to $9.4 billion in the second quarter while the drop for the first half was 38.3% to $17.9 billion. Chevron Corporation (NYSE:CVX)’s cash flow from operations plummeted 41.7% to $9.5 billion in the first half of the current year. There are several other factors that impacted the results of both the companies in the second quarter, as well as the first quarter. The current situation is somewhat weaker than the second quarter, which showed some improvements from the first quarter.
At least two big acquisitions have taken place in the past year in the oil and gas industry. While Halliburton Company (NYSE:HAL) has agreed to buy Baker Hughes Incorporated (NYSE:BHI) last year for $34.6 billion, there was another acquisition that happened in April of the current year. Royal Dutch Shell plc (ADR) (NYSE:RDS.A) and BG Group plc (ADR) (OTCMKTS:BRGYY) have agreed to be merged with a total value of $70 billion. Both are waiting for regulatory approvals. However, their action suggested that the industry is in a consolidation mode.
When Royal Dutch and BG agree for a merger, there is a strong perception that ExxonMobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) can also engage in a similar exercise. While the market cap of Exxon is slightly above $300 billion, Chevron’s market cap is about $145 billion. Therefore, it is the big brother Exxon which should make the move to explore the possibilities of a merger. If the merger happens subject to government approval, then there is going to be immense benefits to the shareholders.
According to Oppenheimer analysts, Luis Amadeo and Fadel Gheit, Exxon should go on a shopping spree and can aspire for Chevron theoretically. The analysts argue that weak oil and gas prices should accelerate consolidation in the industry, benefiting financially big companies such as ExxonMobil Corporation (NYSE:XOM). For all theoretical purposes, if the government agrees, Exxon can offer a maximum of 40% premium to Chevron Corporation (NYSE:CVX). The brokerage said that the merger would enable a reduction of over 20% in CAPEX and over 40% of operational costs. Similarly, it will reduce the net debt ratio sharply.
For the shareholders, more free cash flow would result in more buyback of shares and increased dividend. That will result in higher yield. Individually, both the oil companies are paying dividend regularly and that itself merited buying of both the company’s shares. That should boot the shareholders value significantly.
There is no doubt that ExxonMobil Corporation (NYSE:XOM) and Chevron Corporation (NYSE:CVX) are well-managed companies individually and performing well despite the difficult market environment. However, if they merge, then everything changes to a more favorable climate to face any situation arising out of the alternate energy initiatives. Since the oil price is dictated by the OPEC, the regulator should not see the combination to be a monopoly. It can be a good move if both agree for a merger.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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