Oil giant ExxonMobil (XOM 1.37%) has finally found its acquisition. After months of rumors that it was seeking a deal to buy an independent U.S. oil producer, it announced on July 13 it would purchase Denbury (DEN +0.00%) for $4.9 billion. Both companies' stocks are down about 2% as of this writing, bucking the trend for most independent and integrated oil and gas stocks, which are generally up today.
But taking a step back and looking at the bigger picture, what does this deal mean for ExxonMobil? Increased M&A activity is generally a positive sign that management sees good prospects ahead. Does this big buy indicate investors should be looking at ExxonMobil as an emerging bull-market winner? Let's take a closer look.
Putting it under the microscope
According to the terms released, ExxonMobil is acquiring 100% of Denbury for $4.9 billion in an all-stock transaction. Denbury investors will get 0.84 shares of Exxon stock for every share they own of Denbury. In return, ExxonMobil will get Denbury's existing oil and gas production of just under 48,000 barrels per day on average, which is produced with the aid of some 4 million tons of CO2 it injects into wells each year. This "enhanced oil recovery" process results in 10% to 20% increased oil recovery, as well as sequestration of the CO2.
In other words, ExxonMobil isn't just getting some extra U.S. (mainly) oil and gas production; it's also boosting its efforts to lower its carbon emissions. In addition to its controlled oil and gas reserves, Denbury also owns and operates 1,300 miles of CO2 pipelines and 10 well-located onshore sequestration sites.
NYSE: DEN
Key Data Points
Exxon's acquisition history is spotty
One of the global giants in the space, ExxonMobil hasn't always been a great acquirer. Its 2010 purchase of XTO Energy is perhaps the poster child. ExxonMobil significantly overpaid in an attempt to take a bigger piece of the U.S. natural gas market. Valued at $41 billion, the deal failed to deliver the expected returns, and was the precursor to a "lost decade" for the company and the energy industry broadly.
The timing of the XTO deal may feel analogous to this acquisition as well. Exxon's earnings had bounced back strongly from the Great Recession lows, and were moving higher on the oil sector bull market. Similarly, the company is more profitable now than it has ever been, and is set for continued strong profits in the years ahead. Does that portend another short-sighted bad investment that won't deliver? I'm certain some investors have those concerns.
NYSE: XOM
Key Data Points
Why the Denbury deal should work out much better (or just hurt less)
While it's easy to look at the past and draw certain conclusions, I do think the outcome for ExxonMobil is more likely to be good this time around. As a starting point, the XTO Energy deal was big, working out to more than 11% of ExxonMobil's enterprise value at the time. The Denbury acquisition, on the other hand, is about 1.1% of Exxon's enterprise value based on the terms of the deal. And since it's stock based, the math will remain relatively favorable, with minimal dilution and no impact on the balance sheet at all -- at least on the front end.
Additionally, since this is a small deal, it's introducing some incremental changes. This will point ExxonMobil in the direction it probably needs to be going with carbon capture and provide it with techniques that it can use to increase oil production in lower-carbon ways, while also giving the company hard assets that it can leverage and expand on.
Is ExxonMobil a bull-market buy now?
While we aren't technically in a bull market for the entire market, oil stocks certainly are, up more than 135% in the past three years and well above pre-pandemic peaks, if a little off all-time sector highs. More importantly, ExxonMobil looks to be positioned for a strong run for years to come, with massive operational improvements and lower-cost production setting it up to pump out free cash flow even if oil prices were to fall.
The Denbury acquisition, frankly, isn't likely to move the needle very much. It's tiny versus the scale of ExxonMobil, and even if it goes poorly, it isn't large enough to cause significant damage to cash flow or the operational improvements we've seen. To the contrary, because it is a smaller deal and offers those incremental things that Exxon needs to be advancing, my analysis is that management is making good, prudent decisions as an acquirer. That's a very positive sign.
With shares trading for the lowest cash flow multiples the market has seen in many years, investors could do a lot worse than ExxonMobil.
