Exxon Seen Bidding for Anadarko to EOG to Boost Growth

Chairman and Chief Executive Officer Rex Tillerson
Exxon Mobil Corp. Chairman and Chief Executive Officer Rex Tillerson has been struggling with production declines as fields discovered decades ago peter out and national governments in the Middle East and Latin America prohibit exploration by foreign businesses or make it too expensive. Photographer: Aaron M. Sprecher/Bloomberg

With Exxon Mobil Corp. poised to lose its lead as the largest publicly traded oil producer by output, acquiring Anadarko Petroleum Corp. or EOG Resources Inc. would accelerate growth and help the company regain its lead.

OAO Rosneft’s plan this week to buy BP Plc’s Russian venture TNK-BP for $55 billion would vault the Moscow-based company past Exxon in terms of production. Irving, Texas-based Exxon also is lagging behind on growth, with analysts estimating only a 3 percent increase in sales through 2014, according to data compiled by Bloomberg. That compares with 28 percent at Rosneft and more than 26 percent at Anadarko and EOG, which have market values exceeding $30 billion.

As Exxon falls behind in discovering untapped oil fields, it may be forced to buy what it cannot find, Brown Advisory Inc. said. For Macquarie Group Ltd., Anadarko is a candidate for Exxon because utilities from Singapore to Seoul would pay a premium to import gas it finds off Mozambique’s coast. EOG would rejuvenate Exxon with its oil-rich reservoirs in the Eagle Ford Shale in Texas, U.S. Capital Advisors LLC said.

“Exxon is grasping for investment opportunities that carry scale,” Eric Gordon, a Baltimore-based analyst at Brown Advisory, which oversees $32 billion, said in a telephone interview. “The places where oil is domiciled are becoming more challenging to get access to,” he said. Exxon is “being forced to gain access through acquisitions.”

BP, Billionaires

Alan Jeffers, an Exxon spokesman, declined to comment on whether the company is considering an acquisition in response to Rosneft’s expansion. John Christiansen, a spokesman at The Woodlands, Texas-based Anadarko, and K Leonard, a spokeswoman at EOG in Houston, said the companies don’t comment on speculation, when asked whether Exxon has approached them.

Rosneft, a state-owned energy producer, said Oct. 22 that it agreed to buy TNK-BP, a 50-50 venture between BP and a group of billionaires. It will pay $26.8 billion in cash and shares for BP’s stake and has an initial deal to acquire the billionaires’ half for $28 billion.

The deal will give Rosneft control of more than 40 percent of Russia’s crude output and boost its production to the equivalent of 4.573 million barrels a day, surpassing Exxon’s 2011 average of 4.506 million. Rosneft’s output will also exceed that of every Middle Eastern country except Saudi Arabia.

Upon completion, Rosneft’s deal will rank as the third-biggest oil acquisition on record, trailing only Exxon’s $87.7 billion merger with Mobil Corp. in 1999 and BP’s $61.9 billion purchase of Amoco Corp. the same year, data compiled by Bloomberg show.

Exxon’s Acquisitions

In the past five weeks, Exxon agreed to spend about $5 billion on oil and gas fields in Canada and the U.S. Great Plains, bringing the total allocated to acquisitions since June 2010 to more than $40 billion, data compiled by Bloomberg show. Chairman and Chief Executive Officer Rex Tillerson has been struggling with production declines as fields discovered decades ago peter out and national governments in the Middle East and Latin America prohibit exploration by foreign businesses or make it too expensive.

Global output probably dropped at Exxon for a fifth straight quarter during the July-to-September period, according to Argus Research Corp. That would be the longest streak of declines in 13 years, data compiled by Bloomberg show. Exxon is scheduled to release third-quarter results on Nov. 1. Its reserve growth slowed to 0.5 percent last year after jumping 7.9 percent and 8.9 percent in 2010 and 2009, respectively.

Less Discovery

Exxon is lagging behind rivals in finding new energy sources. It discovered enough oil and natural gas last year to replace 107 percent of what it pumped from wells, a so-called reserve-replacement ratio that was less than one-third that of Rosneft, data compiled by Bloomberg show. It also lagged behind the 148 percent ratio at Anadarko and 167 percent at EOG.

Exxon is focused on acquiring companies with vast tracts of unexplored acreage, rather than firms that churn out large volumes of crude or gas every day, said Duane Grubert, an analyst at Susquehanna International Group LLP. in Stamford, Connecticut. That’s a shift from the 1990s and early 2000s, when some of the largest oil-industry deals targeted producers such as Texaco Inc. and Unocal Corp., he said.

Anadarko’s wealth of potential future output means Exxon would need to offer at least $102 a share for the company, said Joseph Magner, an analyst at Macquarie in Denver. That’s 53 percent more than yesterday’s closing level of $66.55 and values its equity at $51 billion.

Today, Anadarko shares slipped 0.1 percent to $66.49.

Prosperidade, Golfinho

The company is still trying to determine how much gas is locked in its trio of offshore Mozambique discoveries known as Prosperidade, Golfinho and Atum.

“These are big fields that just keep getting bigger” as drilling proceeds, Ernest Leyendecker, the company’s exploration chief, told analysts at a Johnson Rice & Co. conference in New Orleans on Oct. 2.

Anadarko’s other attractive qualities include a stake in the Jubilee oilfield on the other side of the African continent, in the waters off Ghana, and exploratory prospects off the coasts of Sierra Leone and Ivory Coast. Exxon has been interested in Jubilee since at least 2009, when it made an unsuccessful $4 billion bid for some assets of Kosmos Energy Ltd., which discovered the field and is now developing the project in partnership with Anadarko.

EOG might also satisfy Exxon’s needs, according to Cameron Horwitz, head of exploration and production research at U.S. Capital Advisors in Houston.

‘Most Coveted’

It has “one of the most coveted asset bases” among U.S. onshore exploration companies, Horwitz said. The company’s “prime asset” is an almost 650,000-acre tract in Texas’s Eagle Ford Shale formation, where wells are yielding crude and so-called gas liquids such as propane, which command higher prices than gas alone, he said.

In the past 18 months, EOG has discovered it can drill twice as many wells on a given area without draining gas liquids from neighboring wells, an indication the formation holds far more reserves than previously thought, Horwitz said. He said EOG is worth at least $149 a share, a 33 percent premium to yesterday’s close of $112.42. That would value the company at $40.2 billion, compared with Exxon’s market capitalization of $417.4 billion.

EOG gained 1.5 percent to $114.09 today.

“EOG isn’t just going to give the company away,” Horwitz said of the premium. “It’s a big pill to swallow. Obviously, only a very select group of buyers could do that.”

Apache’s Allure

Apache Corp., the Houston-based energy producer that replaced 113 percent of the reserves it pumped out of the ground last year, is another tempting target for Exxon, according to Capital One Southcoast Inc.’s Eliot Javanmardi. The company’s market capitalization was $32.4 billion yesterday.

Today, Apache shares fell 0.5 percent to $82.36.

Apache’s discoveries in places like Canada’s Liard Basin constitute “an embarrassment of riches,” the New Orleans-based analyst said. “It is a massive, massive find” that may hold as much as 40 trillion cubic feet of gas, he said.

John Roper, a spokesman at Apache, said the company’s policy is to not comment on market speculation.

Buying Anadarko, EOG or Apache would give Exxon a business that’s growing at least six times as fast as its own. Analysts project Anadarko will boost revenue 26.9 percent through 2014, while EOG’s sales may climb 37 percent and Apache’s could rise 20.7 percent, estimates compiled by Bloomberg show. Exxon may report sales of about $447 billion that year, just a 3 percent increase from 2011, the data show.

None Needed

Exxon doesn’t need to respond to Rosneft’s acquisition with its own large deal because it has enough opportunities to grow and increase production on its own, according to Anthony Walker of Exxon shareholder Ariel Investments LLC.

“I would be a little bit concerned if they felt that they needed to respond to what their competitors are doing because it probably signals that they would be going after lower-return opportunities,” Walker, an energy analyst for Chicago-based Ariel Investments, which oversees $4.7 billion, said in a phone interview. “They do have some avenues to production growth outside of acquisitions.”

Exxon’s biggest transaction in more than a decade, the 2010 purchase of XTO Energy Inc. for $34.9 billion, “turned out to be kind of a dud,” Susquehanna’s Grubert said in a phone interview.

Prices Plunge

XTO was targeted because of its North American gas fields and its expertise in drilling shale formations, he said. The deal proved poorly timed as a supply glut drove down prices. Natural-gas futures lost more than half their value between June 2010, when Exxon completed its deal for Fort Worth, Texas-based XTO, and April of this year, when prices sank to a 10-year low.

“They bought that company for a skill set and a different kind of gas market,” Grubert said.

While Exxon is still working to integrate the XTO acquisition, the company has a strong enough balance sheet to undertake another large transaction, such as buying EOG or Apache, said Todd Lowenstein, a Los Angeles-based fund manager at HighMark Capital Management Inc., which oversees about $17 billion. Exxon’s cash and near-cash items exceed total debt by $2.22 billion, data compiled by Bloomberg show.

“XTO was a very sizable deal for them, and they haven’t quite harvested the returns yet,” he said in a phone interview. “So they may be gun-shy.”

Still, “there are a lot of assets in play right now, and I wouldn’t be surprised if Exxon is looking,” he said.

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