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Feeling Flush, Exxon Fuels Speculation Deal Is on Tap: Shell spokesman declined to comment

THE WALL STREET JOURNAL

By RUSSELL GOLD

Exxon Mobil Corp. is riding high above its peers, its coffers filled by years of high oil prices. Now, energy investors are wondering if Exxon is ready to make a move.

Already the world’s largest publicly traded company, measured by both profit and market capitalization, Exxon is poised to grow even bigger by acquiring a rival energy company or entering a partnership with an oil-rich nation in need of capital, an array of industry experts believe.

The last time oil prices plunged, in the late 1990s, Exxon used a large clutch of its own shares to purchase rival Mobil Corp. in a $75 billion deal that was then the largest takeover in corporate history. Since that deal closed in 1999, Exxon has made no sizable acquisitions.

Now, despite the current deterioration of financial markets, the plunge in oil prices and a global credit freeze, Exxon is one of a very few companies with enough financial firepower to pull off a major deal.

“In our opinion, 2009 could be Exxon Mobil’s year,” notes Neil McMahon, a long-time oil analyst with Sanford C. Bernstein & Co. The company “might be able to change the industry structure forever and gap away from competitors.”

The Texas oil behemoth finds itself in such an enviable place because it never chased oil’s recent bull run, though it earned heavy criticism for its restraint. In the past two years, as oil climbed near $150 a barrel, politicians called for Exxon to spend some of its riches ramping up production to drive down prices. Other oil companies grabbed expensive new assets that now will be a drain on operating income with oil selling below $50 a barrel.

Exxon Chief Executive Rex Tillerson chose to sit on the sidelines, saying he thought oil prices were unrealistically high and would inevitably fall. As a result, he remained fiscally disciplined, giving the company ample room to weather the plunge in oil prices as rivals flounder.

Mr. Tillerson made that point to reporters after a speech in Chicago in December. In the past year or two, he said, there were “some pretty high prices paid for some resources. [These companies] had to be operating with a very different view of future prices than we do.”

Since the beginning of 2000, Exxon has increased its cash on hand to $36.7 billion at the end of September from $3 billion. It also began a share buyback program. So far, it has purchased 2.2 billion of its shares, which are now worth $170 billion, about the market capitalization of Microsoft Corp. or General Electric Co.

Exxon is “sitting pretty,” says Philip Verleger, an oil consultant and professor at the University of Calgary. “They have money and [now] there are a lot of companies that are desperate.”

The oil giant has remained mum about future deals. “We monitor opportunities all the time: companies, their performance, their own situation. We continue to do that,” Mr. Tillerson said last week when asked about plans for its repurchased shares. “If we think the value is good, we certainly have the capability and the wherewithal to do something. But if we’re not convinced the value is good, then we don’t have to do anything.”

Exxon’s strength comes not just from its balance sheet, but from a deep management bench with the experience and talent to pull off a major acquisition or investment, observers say.

Few in the industry expect Mr. Tillerson to keep his powder dry much longer. “Having maintained discipline during the boom years, just sitting there during the down cycle will frustrate his shareholders. He’ll be considering action,” says Deutsche Bank analyst Paul Sankey.

One of the many scenarios suggested by observers is Exxon buying Royal Dutch Shell, a move that would give the Texas company access to more oil reserves in West Africa and would turn Exxon into an uncontested giant in the fast-growing global gas trade. A Shell spokesman declined to comment.

Such a deal, however, would face intense regulatory scrutiny around the world. There’s also a potential financial hurdle that even Exxon’s balance sheet can’t cure: The company would likely have to issue tens of billions of dollars worth of new stock to foreign shareholders to complete the transaction. Many foreign institutional shareholders operate funds that either limit or have no U.S. equity exposure, and would likely unload the shares. That could send Exxon’s own share price into a tailspin.

Another popular scenario is an Exxon merger with BG Group PLC, which has valuable acreage off Brazil’s coast as well as substantial natural-gas assets. A BG spokesman declined to comment.

Since Exxon’s core strength is its expertise in giant oil and gas production projects, it might also seek to arrange a partnership with a foreign country with undeveloped resources that would welcome Exxon’s deep pockets to help pay for projects. The drop in oil revenue could create new opportunities for Western oil companies from Iraq to Mexico.

In particular, analysts see a partnership with Brazil as a possibility. Petroleo Brasileiro SA, a publicly traded oil company in which the government owns a majority of shares, has found several giant oil fields in the past year off the coast near Rio de Janeiro. Estimates to develop the resource reach as high as $400 billion. Exxon, which is drilling a high-profile well in the area, could join with Petrobras to develop the resource.

Mr. Tillerson recently talked up Exxon’s ability to help finance multibillion dollar oil investments. Because Exxon can provide its own financing for projects, he said, it’s easier for host governments and national oil companies to “secure financing because we’re not out competing for that same financing dollar.”

Exxon has numerous exploratory projects ongoing — in Madagascar, New Zealand, Greenland and the Black Sea. If any turn into major new finds, the company could use its financial resources to buy drilling platforms, tankers and terminals.

If Exxon makes a deal, Mr. Tillerson won’t have to look far to find it.

Says Fadel Gheit, an oil analyst at Oppenheimer & Co. who used to work for Mobil: “It is very nice to have a AAA credit rating and $40 billion in cash. Deals come to you.”

—Neil King Jr. contributed to this article.Write to Russell Gold at [email protected]

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