Exxon Mobil Corporation
Why Exxon won't Buy Shell

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By madamebutterfly1
January 26, 2009

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Not sure if this means anything or not.

Smallfish: I know the speculation has been out there about Exxon buying Shell. It is all crapola. The suggestion is a desperate attempt from an analyst who first suggested it to grab headlines. The analyst gave no reason for his suggestion and to me he obviously demonstrate supine ignorance as to why in whole or in part Shell will be a crappy acquisition for Exxon.

The suggestion for the acquisition of Shell came about because someone calculated that with the cash on hand of about $38 billion, and the value of the shares Exxon has bought back and are in treasury --shares which are worth at current market value over $225 billion, Exxon could afford to pay a 60% premium to buy Shell at Shell's current valuation --this is just a statement of supposition based on arithmetic. It means that if Exxon management were to target Shell, they could buy it lock, stock and barrel. The article proceeded to suggested that if there were to be an acquisition, Exxon will likely pay no more than 30%.

The key question I would like to see an analyst answer is to provide us with some weighty reasons as to what strategic value Shell would bring in whole or in part if acquired by Exxon?

Of all the "majors," Shell has a much greater proportion of its capital invested in the downstream than the rest of its competitors. The downstream of the oil business has the lowest return on capital, and I don't know if you have noticed how Exxon's downstream has been shrinking since the Mobil acquisition?

I believe Exxon is not interested in acquiring more downstream assets that have low returns -- and Shell's downstream business is populated with a ton of low return assets, including refineries.

Shell's refining structure is weak, with some notable exceptions. Let's face it --the refining business has proven historically to be challenging unless integrated with Chemicals. And while Shell has some degree of integration with its Chemical business -- Shell's chemical business synergy with its refineries is not the best. So have already given you two strikes against Shell.

And of course there are all the legal complications of Equiva and Motiva. Some of these if I recall correctly used to be tripartite JV's between Texaco, the Saudis and Shell. After Chevron acquired Texaco, the Texaco piece was unwound, and Shell took control of it.

As an example of some of the low profitability problems Shell is facing in the refining sector, Shell is stuck today -- and I mean really stuck with a $12 billion refinery expansion it does not want to do (because with refineries margins having collapsed, it will take over 20 years to get a payback) -- yet, Shell is being forced by the Saudis --at least that is the rumor I hear, to go continue with its grandiose plans to expand one of Shell's Texas refineries from about 240 kbd to 600 kbd.

Why would Exxon want to acquire this project, then kill it, and piss off the Saudis. Let Shell stew in its own mess.

As for E&P -- I don't have to say much.

Shell has had a dismal record in the upstream. The only "bright" spot is their recent agreement with Gazprom that would give Shell a stake of 25% in a huge gas play in Russia that should allow Shell to expand its LNG business significantly. As for the other E&P plays --- Shell has been throwing monies at them to expand reserves to offset their dismal record of exploration, and as a consequence has acquired some mighty expensive production, particularly in Canadian Tar Sands. Unless oil climbs above $60/B, Shell earnings in this venture are going to go south.

In my book this is a third strike. Not to mention its terrible culture of loosed ethics that has been ingrained in that company from its inception -- it is European thing, despite all the propaganda of the European Union to their claim that they no longer allow for bribes and claim they have created a new compliance regime for corporations that will make them all saints --- voila!!!

So it is best for Exxon to let Shell grovel in its own problems -- strapped for cash, with a poor and demoralized culture it will be tough for them to compete head on with Exxon.

For a long time Exxon has been wanting a very strong position in Natural Gas, especially, after it was forced to disposed of certain assets in Germany and Holland. My guess is that British Gas will be in Exxon's periscope, and there have been rumors in the press to that effect on and off.

But then again, I am of the school that says -- why pay a premium for an acquisition, when the "best" acquisition is to buyback Exxon's stock. It is the cheapest way of increasing reserves per share without paying a premium to third party shareholders.

So while I believe Exxon will go for an acquisition, I will be as happy if they did not and just continued to purchase $28 to $30 billion worth of its stock every year.

Madame Butterfly