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Exxon Mobil Preparing to Buy BP? (More Speculation)

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By: MICHEAL KAUFMAN

Published: Feb 13, 2015 at 8:00 am EST

According to the recent reports from several financial media outlets, Exxon Mobil Corporation (NYSE:XOM) is in the market to hunt.

The multinational oil giant is one of the strongest defensive companies in the energy sector. It performs fairly well in low-price environments. The American company has an exceptionally strong cash position, which allows it to beat competition by acquiring it.

Exxon has a history of acquiring energy companies when commodity prices are low. During 2009, natural gas price plummeted 70%. Exxon Mobil acquired XTO Energy Inc, an oil and gas company, in an all-stock deal, putting the Texas-based company’s valuation at $41 billion.

Exxon placed a multi-billion dollar bet on natural gas price to recover, and it might be planning to do the same with oil in the current oil price slump. Since last July, crude oil price have nearly halved. After trading over $100 per barrel last year, crude futures fell below $50 in January. West Texas Intermediate crude oil futures for March delivery stand at $51.21 per barrel, whereas Brent crude oil futures are trading at $57.05 per barrel.

The current low-price environment has wreaked havoc for energy producers, as their profit margins have been wringed dry. Financial instability has left them vulnerable to takeover attempts. Exxon with its vast financial muscle is looking to pounce on the opportunity.

The oil firm has a credit rating better than the US government, allowing it to borrow funds at a low cost. Analysts believe it can target any of its competitors for an acquisition. Estimates put Exxon’s cash flow for 2015 over $11 billion. Additionally, the company holds 3.8 billion shares in its treasury, valued at nearly $350 billion. With that kind of capital, Exxon can take over most of the energy companies.

As far as targets are concerned, Paul Sankey of Wolfe Research believes BP plc (ADR) (NYSE:BP) is the obvious fit for Exxon to acquire. The British oil giant currently faces severe environmental penalties which could amount to $13 billion, due to BP’s role in the 2010 Deepwater Horizon oil spill, the worst oil spill disaster in US history. A federal judge will announce his ruling toward the end of April, but from the proceedings so far, it has become evident that BP showed negligence.

BP’s merger with Royal Dutch Shell plc (ADR) (NYSE:RDS.A) has been discussed for a while now, but reports linking BP with Exxon have been doing the rounds. Exxon’s prior acquisition of XTO Energy did not pan out in favor of its shareholders but it may be able to acquire BP’s shares at a bargain as it faces billions of dollars in fines.

Exxon’s potential acquisition of BP would mitigate the impact on BP’s reputation from the impending fine, while boosting Exxon’s ability to locate new sources of oil and natural gas. Exxon is better positioned to deal with the long-term legal troubles and billion-dollar fines. It also has a market cap almost thrice that of BP.

Actual progress towards a potential takeover of BP by Exxon Mobil has not been witnessed but media reports have perhaps alerted the US regulators. They must be on their toes because a merger between Exxon and BP could reunite parts of the Standard Oil empire, which was declared an illegal monopoly by the US Supreme Court in 1911.

Exxon would also face cultural challenges if it takes over BP, while the cultural change would be good for the British oil company.

More XOM research by Bidness Etc

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