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. Last Updated: 07/27/2016

Exxon, Mobil Iron Out Merger Kinks




NEW YORK -- If they can agree on terms, Exxon Corp. and Mobil Corp. are set to announce Tuesday what could be the world's biggest industrial takeover, a source familiar with the negotiations said.


The source said there were still "a lot of blanks" to be filled in and analysts say that the premium Exxon, already the world's largest publicly traded oil company in terms of market capitalization, would be prepared to pay for the second ranked U.S. oil company is now the key issue.


"That is the $64,000 question," said Deutsche Bank Securities analyst Michael Young.


Exxon and Mobil officials declined to comment.


At a closing price for Mobil stock of $85.50 on the New York Stock Exchange on Friday, the answer to that question would be $69.1 billion, based on 808.4 million Mobil shares outstanding on a diluted basis. The acquisition of Mobil would propel Exxon, with a market capitalization of $183 billion even further beyond its nearest rival, Royal Dutch/Shell Group, which has $170 billion in market capitalization.


More importantly, in terms of size it would also increase Exxon's reserve base to 20.74 billion barrels of oil and natural gas, giving it a bigger asset base to exploit.


Investment bankers say that oil industry deals, which use mostly or all stock, as is believed to be the case here, typically command a 20 percent to 40 percent premium over the stock price of the company being acquired.


At the close of trade on the New York Stock Exchange on Nov. 20, before the rumors of a deal started circulating, Mobil shares were priced at $75.25, and using a 20 percent premium, the transaction would value Mobil shares at $90.30, for a total of almost $73 billion.


Analysts say Exxon would probably try to use as much of its highly rated stock in any transaction, although there has been speculation that the company may offer a partial cash sweetener.


Analysts add that with oil prices at their lowest level in real terms in 25 years and little, if any demand growth seen in 1999, any deal would enable the companies to cut costs.


The $54 billion acquisition of Amoco Corp. by British Petroleum Co. PLC, will achieve annual savings of $2 billion and, based on that, analysts expect that a merged Exxon and Mobil could expect savings of $3 billion to $4 billion.


Mobil would also bring big positions in assets that Exxon would like, namely oil and gas exploration. It has a huge stake in the North Sea, a 25 percent share of the 6 billion to 8 billion barrel Tengiz oil field in the Caspian Sea as well as production off the shore of Nigeria, big heavy oil projects in California, Canada and Venezuela and the one of the world's biggest liquefied natural gas project in Indonesia. It would also bring strong refining operations.


BT Alex Brown analyst Adam Sieminski said a merged Exxon-Mobil would have 18 percent of the U.S. retail gasoline market and 12 percent of U.S. refining capacity.


He said the deal would increase Exxon's exposure to European refining and marketing, which already accounts for 40 percent of its product sales and 16 percent of Mobil's refining capacity.


It would also be a company with a strong chemicals presence at a time when that industry is in depression.


What it does not bring, Sieminski and other analysts say, is a really compelling logic. Exxon has always said it does not need to get bigger through acquisitions and has consistently enjoyed the best returns in the industry.


Just to show how well-managed Exxon is in comparison with the rest of the industry, a 33 percent fall in oil prices caused Exxon's third-quarter earnings to slip just 10 percent to $1.4 billion. At the same time, Mobil's earnings dropped 45 percent to $509 million.


"Exxon could benefit from finding a partner with strong, undeveloped upstream potential, or a company with an undermanaged asset base. Mobil does not seem to fit either description," Sieminski said.


One move Sieminski believes is possible is something short of a full merger. "A downstream joint venture that would include U.S. and Asian assets would be quite believable," he said.


The statement issued by Exxon and Mobil on Friday in which they said they were having discussions on a "possible combination transaction" certainly makes that a possible outcome.


Stock investors appear to be betting on a full merger for the two companies.