Big Oil Could Be About to Embark on an Acquisition Spree

With cash flows under pressure from rapidly rising capital spending, ExxonMobil and Chevron could start to look for growth elsewhere; smaller peers EOG Resources and Cabot Oil & Gas could become targets.

Jan 20, 2014 at 9:51AM

Declining returns on investment and rising capital spending are two factors that have been haunting international oil and gas players ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) throughout much of 2013. However, their domestic counterparts, the likes of EOG Resources (NYSE:EOG) and Cabot Oil & Gas (NYSE:COG), have not been forced to grapple with similar pressures.

Indeed, looking at the cash flow statement of Exxon for the first nine months of this year, we can see that the company spent nearly $28 billion on investing activities while only receiving around $35 billion in cash from operating activities. You may say, "well, that's still a $7 billion profit," however, when we consider the fact that Exxon spent an additional $21 billion buying back stock and paying dividends during this quarter, things look different. Meanwhile, Chevron spent $26 billion while only taking in $25 billion in cash.

On the other hand, EOG made a cash profit of nearly $500 million for the first nine months of 2013, and Cabot broke even. Also bear in mind that these smaller exploration and production companies don't offer much in the area of dividends and share repurchase commitments, so there is less pressure on cash flows. 

Robust balance sheets
With cash flows under pressure, the market has started to speculate that international oil players may start buying up smaller peers, effectively skipping out on the speculative exploration stages, which can be costly.

Indeed, Exxon is no stranger to buying up smaller peers. The company is already the largest natural gas producer in the U.S. after the $25 billion acquisition of XTO Energy in 2010. Exxon also spent $1.6 billion acquiring Denbury Resources' Bakken assets last year. But even these multi-billion dollar acquisitions are nothing but peanuts for the world's largest oil company. For example, at the end of the third quarter, Exxon had net debt of around $16 billion, a debt-to-asset ratio of only 4.6%. Chevron, on the other hand, had a net cash balance of approximately zero, so both companies have plenty of room to borrow and buy up smaller peers -- some could argue that Chevron needs to borrow more to make use of low interest rates and gear-up while the going is good.

Prey
But which companies would provide suitable targets? EOG, mentioned above and the second-largest independent U.S. oil and gas producer by market value, would make a good candidate. EOG's production is accelerating rapidly, with year-on-year third quarter production up 9.6% to around 526,000 barrels per day in the third quarter. EOG is special as the company is somewhat vertically integrated. The company has rail infrastructure, three sand mines, and two sand processing plants, which it brought up to fulfill the company's annual demand for 3 million tons of sand per year, required for the company's fracking operations. According to EOG chairman Mark Papa, sourcing its own sand saves EOG $500,000 per well on average, around 7% of total well costs .

EOG has an enterprise value of $50 billion, so a buyout would cost Exxon or Chevron significantly more than this, as they would be expected to buy EOG out for a premium. However, a deal of this size could prove too much for both oil majors as this acquisition would require a large amount of debt and significant regulatory hurdles to clear.

Elsewhere, Cabot looks like an interesting opportunity. According to the company's president and CEO Dan O. Dinges, Cabot has the most economic natural gas production in North America, with a breakeven cost of below $1.20/Mcf. In addition, the company aims to increase production by 44%-54% for full-year fiscal 2013 and then increase production again by 30% to 50% during full-year fiscal 2014.

With an enterprise value of around $17 billion, half that of EOG, Cabot looks like an attractive prospect for the oil giants looking to absorb smaller competitors. That said, Cabot does look expensive when compared to peer EOG, as Cabot trades at an enterprise value-to-revenue figure of 10.4, triple EOG's ratio of 3.5 .

Foolish summary
All in all, falling investment returns, rising capital spending, and declining production are all factors hurting international oil and gas producers such as Exxon and Chevron. On the other hand, smaller U.S. producers are still growing rapidly. With clean balance sheets and plenty of appetite for borrowing in the financial world, the world's largest oil and gas players could be about to embark on an acquisition spree, and there are plenty of targets that could become prey.

The American energy boom is just getting started
Record oil and natural gas production is revolutionizing the United States' energy position. Finding the right plays while historic amounts of capital expenditures are flooding the industry will pad your investment nest egg. For this reason, the Motley Fool is offering a comprehensive look at three energy companies set to soar during this transformation in the energy industry. To find out which three companies are spreading their wings, check out the special free report, "3 Stocks for the American Energy Bonanza." Don't miss out on this timely opportunity; click here to access your report -- it's absolutely free. 

Fool contributor Rupert Hargreaves owns shares of Chevron. The Motley Fool recommends Chevron. The Motley Fool owns shares of EOG Resources. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers