A January 5th report from Fadel Gheit of Oppenheimer Equity Research says that history suggests that Exxon Mobil will make a significant acquisition in the near future given the major pullback in oil prices over the last few months. The Oppenheimer report highlights that Exxon Mobil has plenty of cash and credit, which means that even other oil majors are potential targets.
History to repeat itself for Exxon Mobil?
Of note, Exxon Mobil used its treasury shares in its acquisitions of both Mobil and XTO. Not coincidentally, both transactions came following a sharp drop in oil and gas prices similar to the current environment.
The report highlights that share buybacks per XOM’s longstanding policy “improve per share metrics while storing value until used opportunistically in acquisitions.”
Moreover, given that spinning off downstream assets can be essentially ruled out and organic growth is harder and harder to come by in the current environment, the Oppenheimer analysts “think a large acquisition is more likely.” They note that: “Even rivals are potential targets.”
Assessing earlier acquisitions
The Oppenheimer report argues that Exxon Mobil needs a bargain basement acquisition to make up for the XTO fiasco. “While the Mobil merger added valuable assets and generated >$10B annual synergy benefits, the XTO acquisition was far less successful on plummeting gas prices and no meaningful recovery in sight.”
XOM share repurchase program likely to be suspended
It also seems likely that Exxon Mobil will suspend or reduce its share repurchase program unless oil prices rebound rapidly in the next few months.
The firm’s capital employed was $200 billion last year, and has averaged $155.7 billion annually over the last 10 years and more than $181.7 billion over the last five years. Return on capital employed (ROACE) topped out at 33% in 2008 and has averaged 24% over the last 10 years and 20% over the last five years. Unless there is a major bounce back in crude oil prices, 2015 ROACE could drop under 10% for the first time in more than decade, possibly leading to the share repurchase program being reduced or suspended.
