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How Will Exxon Mobil Fare After The Shell-BG Deal?

Screen Shot 2015-03-02 at 19.27.29SeekingAlpha.com article published 13 April 2015

How Will Exxon Mobil Fare After The Shell-BG Deal?

Summary

  • It seems as though Exxon Mobil could be the next integrated oil company in line to announce a merger.
  • According to Credit Suisse, it is possible that Shell, post-merger, could surpass Exxon Mobil as the largest publicly traded producer three years from now.
  • Exxon’s better position in terms of reserve replacement might be able to placate some investor concerns relating to future growth of the company.
  • PetroChina was able to marginally leave behind Exxon’s $352.6 billion capitalization, as the former’s capitalization stood at $0.2 billion higher.
  • I believe that deal or no deal, Exxon is one of the best picks for your portfolio for the long run, mainly because of its project portfolio and bright prospects.

Following the announcement of the Shell (RDS.A, RDS.B)-BG Group (OTCPK:BRGXF, OTCQX:BRGYY) merger, it seems as though Exxon Mobil (NYSE:XOM) could be the next integrated oil company in line to announce a merger. And why shouldn’t it? The company seems to be in a position of financial strength that most of its competitors lack. Moreover, in the current volatile environment, a merger seems to be a better option to expand the company’s production base as opposed to undertaking drilling activities to fuel growth in production, going forward.

Impact of the Shell-BG deal on Exxon

Prior to the deal between Shell-BG being agreed upon, the rumor mill continued to churn about Exxon bidding for a merger with BG in the future. BG was a potential candidate for a takeover by Exxon, mainly due to its asset mix in different regions, including its strong presence in the Brazilian market, and because Exxon had the technical expertise and financial muscle to make the most of out of the merger, if it were to materialize. In addition to this, the merger would allow Exxon to develop a position in LNG and take advantage of the opportunities to export LNG in the US.

However, now that the company is no longer in the running to add BG to its own business, it seems to have lost out on these advantages that could have allowed it to excel in the future. But that’s not all. Apart from the first-mover advantage that Shell has managed to attain, it also stands a chance of competing with Exxon Mobil in terms of market capitalization. According to Credit Suisse, it is possible that Shell, post-merger, could surpass Exxon Mobil as the largest publicly traded producer three years from now. That being said, Exxon Mobil seems to have some tough competition coming up; something that it strategically needs to plan for and compete with in a timely manner.

The only comfort some might seem to gain from Exxon Mobil not striking a deal with BG is when they look at how well the former did in terms of reserve replacement. Martijn Rats from Morgan Stanley shed light on how Exxon had been able to replace a total of 101% of its reserves in the past three years, surpassing Shell’s 76% reserve replacement in the same period. Given that reserve replacement is one of the key metrics of gauging future growth potential, Exxon’s better position in this regard might be able to placate some investor concerns relating to future growth of the company.

While the threat of Shell’s market capitalization growth outpacing that of Exxon seems to be a matter that might have to be dealt with a few years down the line, Exxon has some things it needs to pay attention to right away. For example, PetroChina (NYSE:PTR) exceeding Exxon as the most valuable energy company last week. PetroChina was able to marginally leave behind Exxon’s $352.6 billion capitalization, as the former’s capitalization stood at $0.2 billion higher. This last happened some five years ago, which an indication of the tides turning for Exxon sooner or later. It has been noted that the Shanghai Composite Index has been performing well over the past year, despite oil price volatility, and much of this good performance can be attributed to higher leverage opportunities for investors and the possibility of lower borrowing costs in the near future. While that may serve as an explanation for this news update, the news itself could be taken as a sign of Exxon being forced to give up its once-glorious title of being the largest in the market, if it doesn’t act quickly.

My thoughts on Exxon Mobil

Analysts at Morgan Stanley are of the opinion that Exxon Mobil could be announcing a major takeover sometime soon. Analysts have also highlighted that Exxon has the financial strength to facilitate a large purchase, and it is possible that the giant could go after a company with offshore operations. What’s my view on this? I honestly don’t think that Exxon needs to go after an acquisition to stay on top. For me, it has done pretty well on the reserve replacement front, and that could go a long way for the company in the next few years, especially if it maintains the pace.

As far as Shell is concerned, it definitely has a value proposition at the moment, but that doesn’t stop Exxon from leading a league of its own. Exxon has a wide array of projects in its portfolio, and its prospects seem bright to me. The company already holds a considerable position in LNG and natural gas too.

Even in this volatile oil market, the fact that Exxon has been able to maintain its position of strength is an accomplishment within itself. Also, the latest move to cut capital expenditure to preserve liquidity is undoubtedly a wise one in this current scenario, even as it has now become a norm among E&P companies. The company’s integrated business model is undoubtedly a plus point which will definitely get it through the oil supply gut that the market is trapped in at the moment. From the point of view of investors, I believe that Exxon’s dividends are safe and the company has the financial resources to make it through the storm. As for the stock itself, I think that it could be susceptible to volatility this year, just like the whole industry is. Despite that, I’m not ignoring that upside that the company’s strong business could have on the long-term prospects of the stock.

That said, I believe that deal or no deal, Exxon is one of the best picks for your portfolio for the long run. Even in the current scenario, when stock prices could see a general bearish trend, I believe that optimistic-led buying could keep prices afloat to some extent, especially with the ongoing talk of a merger deal. I’d recommend buying on dips and holding on to the position because of the immense upside that the stock holds.

SOURCE

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