Exxon's Deal Clock Is Ticking

Some of the $12 billion it borrowed this week should go to M&A.

If you're standing in Cupertino, you probably can't see side-eye coming at you from Dallas. Unless, perhaps, you're Apple and your disgruntled fellow behemoth is Exxon Mobil.

Exxon sold $12 billion of debt on Monday, which is no mean feat for any company, especially amid such a sluggish start to the year for corporate bonds. It came barely two weeks after Apple also sold $12 billion worth of bonds.

The similarity ends there, however. Most of Apple's new debt will likely be plowed into stock buybacks. Carrying net cash of more than $140 billion already -- pro forma for that bond sale -- the company hardly needs the money. So this is just some old-fashioned financial engineering.

It wasn't so long ago that Exxon was also in the happy situation of letting its balance sheet take the strain of cutting its share count, which helped to recast otherwise lackluster growth in a more favorable light. No longer. With 2015's cash flow the lowest in many years and average oil prices so far this year portending even worse to come, Exxon really can use the money. That $12 billion is just about enough to cover its sacrosanct dividend payment for the year.

Chances are, though, Exxon has other uses in mind.

On Wednesday, when its executives hold their annual analyst day in New York, you can bet more than one member of the audience will ask when the oil giant is going to take advantage of the damage oil prices have done to exploration and production stocks and swoop in for an acquisition.

Hunting Ground

U.S. E&P stocks have fallen by more than two-thirds since the summer of 2014

Source: Bloomberg

Having already lost so much in value, E&P companies are also shedding the attributes that normally attract investors, chief of which is growth. Take Anadarko Petroleum, perennially spoken of as being on Exxon's hit list, which on Tuesday said it will cut this year's investment budget by half and sell $3 billion worth of assets, causing production growth to flatline. Having also dinged its credibility in November with news of a clumsy approach to rival Apache, Anadarko's market capitalization has fallen by about $22 billion since the end of 2014.

Yet, as Occidental Petroleum's chief executive pointed out in a conference speech recently, acquisitions don't just involve buying equity -- which also requires a takeover premium -- but also taking on the target's debt. On that basis, Anadarko, like many other E&P companies, isn't quite as cheap as its stock suggests.

Full Price

While Anadarko's market cap has fallen by more than half since the end of 2014, its enterprise value is down by just 28 percent

Source: Bloomberg

Note: Data for 2012 through 2015 are for year-end

Nevertheless, if Exxon is planning on making a move -- and its combination of low growth and poor reserves replacement suggests it should -- it may need to move fast, for two related reasons.

First, oil prices are proving reasonably resilient despite the weight of inventories pressing down on the market, weak Chinese economic data, and looming problems in the form of refineries shutting down for maintenance and rising Iranian exports. For now, at least, the oil market is spellbound instead by the theater of OPEC meetings and rumored meetings, as well as yet more stimulus efforts out of Beijing (both of which are expressions of weakness rather than fundamental strength, but hey).

This is supporting a second trend: E&P companies relieving their stress by doing a little money-raising of their own, but in the equity rather than debt markets. Late on Monday, Marathon Oil became the latest to join the party, announcing a stock offering -- upsized, no less -- that may raise almost $1.3 billion. Assuming it does, and the underwriters exercise their right to buy more shares, that would push the amount raised so far this quarter to $9.1 billion -- more than was sold in last year's record first quarter, and still with a month to go.

It's a Gusher!

U.S. E&P companies are raising record amounts of new equity this quarter

Source: Bloomberg

Note: Assumes Marathon Oil raises $1.28 billion with current offering. Data for 1Q2016 as of March 1.

At their current pace, which appears to be accelerating, E&P companies look set to raise more than $13 billion this quarter. If Exxon's own $12 billion really is earmarked for a war chest, it had best declare war soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Liam Denning in San Francisco at ldenning1@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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