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ExxonMobil Builds an $8 Billion War Chest for Acquisitions

By Matthew DiLallo – Mar 8, 2015 at 11:30AM

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With unparalleled access to cheap debt ExxonMobil potential sellers have it on speed dial.

The oil market remains largely shell shocked. Lulled to sleep by years of triple-digit oil, no one saw the crude-oil plunge coming. That left too many oil companies with too much debt now that oil is $50 a barrel. Some are nervously considering whether it's better to sell out now to a larger rival than to wait to see if conditions improve. Among the first calls they'll likely make when looking for a buyer is ExxonMobil (XOM 0.69%), which should have its pick of the cream of the acquisition crop in what appears likely to be a massive consolidation wave that's poised to hit the industry over the next couple of years.

Getting ready to deal
ExxonMobil's biggest advantage over any rival isn't just its size but its access to capital. It's triple-A credit rating is better than the U.S. government, meaning it can borrow as much cheap money as it needs. That's pretty clear after the company recently tried to raise $7 billion in debt only to see demand so strong that it ended up increasing its ask to $8 billion. That cash gives it quite a war chest that it can use to buy out weaker rivals. If it ends up needing even more cash it can easily expand its balance sheet because the company carries very low leverage as we see on the following slide.

Source: ExxonMobil. 

With low leverage and exceptional access to capital ExxonMobil really has a lot of open doors that should enable the company to make a deal of its choosing in a market that could be quite conducive to deal making. The reason its peers will be much more willing to sell is because ExxonMobil has one other thing going for it that its peers lack, which is the ability to still make a ton of money even with lower oil prices. Last year $17.6 billion in free cash flow poured into the company's coffers, which was head and shoulders above rivals as many lacked free cash flow before the oil price plunge, suggesting they'll be even more hard pressed to generate any now that the price is cut in half.

Get ready for the rumor mill
Making a deal is exactly what the company intends to do. Given its unparalleled access to capital CEO Rex Tillerson recently said that "there's really no limitation on what we might be interested in or considering" when it comes to a deal. There is a general consensus that he'll be ambitious in deal making. So much so that there have been some rumors in the market that Exxon might be interested in rival big oil giant BP (BP -0.14%), which is a deal that's not beyond the realm of possibilities given that Exxon can just as easily use equity as well as debt to fund a massive purchase. However, such a megadeal with BP comes with greater risk due to BP's legacy issues involving the Gulf of Mexico spill, so that particular deal might not be one the company pursues.

Beyond BP analysts are tossing around a number of other potential targets that include globally diversified exploration and production companies like Anadarko (APC) or Hess (HES -0.87%) as well as U.S.-focused companies like Whiting Petroleum (WLL) or Continental Resources (CLR). The one commonality of these potential targets is that each has a prime position in top U.S. shale plays like the Bakken, Eagle Ford, Permian Basin, and Midcontinent. Larger targets like Anadarko and Hess have shale scale as well as deepwater assets in attractive basins like the Gulf of Mexico and West Africa. On top of that all have reasons why they might be up for sale as Hess, for example, is under activist pressure, while Anadarko has had some legacy legal issues to overcome. Meanwhile, Whiting and Continental have seen their stock prices decimated by the oil price rout.

The list of course goes on from there as almost any oil company with strong assets could be in play at the right price. The only question that remains is if ExxonMobil will look for a deep value deal like an indebted shale driller or if it will seek to acquire a more premier global player. Of course with its war chest and access to capital it could opt for both options.

Investor takeaway
ExxonMobil clearly is getting ready to go shopping. After recently testing the debt market it found that investors are still willing to hand it as much cheap cash as it needs. That leaves the company with near limitless options as it searches out its next deal.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

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