Exxon-Mobil Has Mega Cash and Capital Ideas

While it’s true that integrated oil giants such as Exxon Mobil (XOM), Chevron (CVX), BP (BP), Royal Dutch Shell (RDSA) and ConocoPhillips (COP) face weaker fourth-quarter profits, energy demand is depressed and retail gasoline prices are below $1.80 a gallon, opportunities for a major merger or acquisition remain ripe, analysts say.

Shrunken stock prices, $40-a-barrel oil and a dire need for cash to develop hard-to-reach energy reserves could drive acquisitions with cash-rich firms like Exxon Mobil.

So while tough times afflict the stocks of major energy firms, the industry could be on the verge of the biggest round of deal-making since a fertile period 10 years ago when oil sold for less than $10 a barrel.

When the dust cleared, Exxon bought Mobil, BP bought Arco and Chevron purchased Texaco as the landscape changed.

“In our opinion, 2009 could be Exxon Mobil’s year,” Neil McMahon, analyst with Sanford Bernstein, said in a note to clients Friday. “The company is in a unique position to gap farther away from the competition by turning the industry structure on its head again, as it did in parallel with BP in 1998 by starting the merger trend.”

This time around, Exxon Mobil is in an arguably stronger position, with the potential to add future production growth to its financial performance through targeted mergers and acquisitions and joint-venture deals, he noted.

“With many exploration and production companies struggling to manage their finances, there is a ready pool of takeover targets, and those companies have been leading the exploration effort in several of the places where Exxon Mobil would like to grow, such as Brazil and West Africa,” McMahon said. “We believe there could be the potential for game-changing maneuvers, similar to those seen back in the late 1990s.”

A major alliance between Petrobras (PBR) could work well for Exxon, on the heels of a huge need for cash by the state-run Brazilian oil giant as it seeks to develop rich discoveries in the Atlantic Ocean off Rio de Janeiro.

Brian Youngberg of Edward Jones echoed the sentiment on Wall Street of likely deal-making in the energy sector if oil prices remain low and cash stays scarce, although he declined to speculate on any specific deals.

“The majors are growth-challenged but relatively cash rich, and there are companies out there with depressed share prices that can help with volume growth using the cash influx that the majors could offer,” Youngberg said. “I do not see further consolidation of the majors themselves.”

He said the oil giants may shy away from a major deal with a state-run oil company, given the difficulties BP faces with its TNK-BP venture in Russia.

“I see the acquisition of smaller U.S. or Canadian producers as more likely,” Youngberg said. “These also offer the potential for increased production in unconventional natural gas, a major growth area in natural gas supplies.”

With a market cap of about $400 billion, Irving, Texas-based Exxon Mobil remains about $200 billion richer than Wal-Mart Stores (WMT) as the largest company in the world — even after shedding about $100 billion in value from July of last year.

Flush with riches from $100-a-barrel oil during 2008, Exxon Mobil finished out its third quarter with $37 billion in cash. Each quarter, it has been spending $8 billion on stock buybacks alone — more than enough to buy a significant energy firm.

On its third-quarter conference call, Exxon Mobil officials said the company could be interested in an investment in biofuels because it already ranks as one of the largest purchasers of ethanol to satisfy blending mandates from the federal government.

Meanwhile, energy giants like Chesapeake Energy (CHK) have been selling off assets and cutting their capital spending in the face of a cash crunch.  

– Copyright 2009, Dow Jones Newswires. All rights reserved.

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