Is it possible that a mega-merger could be in the cards between ExxonMobil (NYSE:XOM) and Anadarko Petroleum (NYSE:APC)? This is the rumor on Wall Street, and it would seem that it has some substance.
Buying up growth
Exxon has been struggling to drive production growth during the past year, and the company spends more than it can afford on capital projects. It would appear that bolt-on acquisitions are the only way forward.
Anadarko has an attractive portfolio of assets and a superior five-year track record. Between 2009 to 2013, Anadarko has driven production higher by 7% per annum. The company has achieved a reserve replacement ratio of 160% and is targeting a long-term production growth of 5% to 7%.
However, it's Anadarko's assets that would be really attractive for Exxon.
Attractive asset base
Anadarko has been building a strong portfolio of onshore U.S. assets since 2009, and production from these assets has surged.
Anadarko's U.S. onshore reported net sales volumes are expected to total 635,000 barrels of oil equivalent during 2014, 12% year-on-year growth and 80% higher than production volumes reported during 2009. Unfortunately, this production is gas for the most part, although the company is working to drive liquids production higher.
By the end of 2014/early 2015, Anadarko is targeting daily liquids production of 375,000 barrels. Back in 2009, the company's liquids production was zero.
Anadarko's attractive assets are not just located within the U.S., however. The company has low-risk development opportunities around the world, including prospects within the Gulf of Mexico and Africa. In total, Anadarko has 25 deepwater exploration/appraisal wells planned this year and 8 billion barrels of low-risk development opportunities.
The real prize
Even though Anadarko has plenty of attractive assets, what Exxon really needs is to acquire an efficient company that will not be a waste of cash and will almost immediately boost returns.
Unlike ExxonMobil, Anadarko has been keeping its spending under control during the past few years. Free cash flow has exceeded $1 billion per annum since 2011. What's more, during the first quarter of this year, Anadarko funded all of its capital spending with asset sales, reducing the need for debt financing.
Will Exxon pay?
There is no question that Anadarko would make an attractive acquisition for ExxonMobil. In particular, the company's onshore U.S. assets would make Exxon one of the largest onshore U.S. operators. The cost savings that could be driven from this position alone would been a huge boost for the world's largest oil company.
Nevertheless, Anadarko's price has worried some analysts. In its March 2014 Investor Conference, Anadarko's management stated that they believe that the company's net asset value is $140 per share, 30% above current levels. Anadarko is unlikely to accept an offer below this level.
Additionally, Exxon would have to offer a premium to the net asset value. Wall Street estimates a premium of 20% would be acceptable. With this in mind, it is reasonable to suggest that Exxon would have to offer $168 per share for Anadarko, a premium of 57% to the current price; this could be hard to justify.
$168 per share would value Anadarko at a tad under $85 billion.
A deal between ExxonMobil and Anadarko is not an unreasonable suggestion. Anadarko has some very attractive assets and would add a much-needed boost to Exxon's production and cash flow. However, the price tag could be a sticking point. For Exxon, though, $85 billion may seem like a small price to pay for Anadarko's attractive asset base.