There were no big surprises at the ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) analyst meetings; both companies are looking to reduce capital spending, just as they have in the past several years. At the same time, Exxon has issued several billion in new debt and now has some extra cash on the books.
There's no lack of buyout speculation in the energy industry with oil prices where they are. While Tyler cautions against buying any company purely on the chance of a buyout, Taylor offers some advice for Fools who are itching to make a speculative bet.
A full transcript follows the video.
Taylor Muckerman: Welcome to Industry Focus. This is the energy edition, and today we're talking big oil.
We had some analysts' presentations the other day, and I found out that ExxonMobil has a higher credit rating than the U.S. government.
Tyler Crowe: That's really not that surprising, considering what's been going on, is it? Well actually, as of late, with low oil prices I wouldn't be completely shocked if somebody were to downgrade. But considering how stable a business that has been for the past 100 years, AAA all the way, baby.
Muckerman: All the way, yes. They got $8 billion just a few days ago in a debt raise; only supposed to be $7 billion, but people are champing at the bit for some Exxon debt. I was pretty interested by that; just raising some cash, I guess. Hopefully they think that interest rates might be rising even though oil prices are holding inflation down. They wanted to get some more cash on the balance sheet.
Crowe: By the look of it, what's been going on is both Exxon and Chevron went into their analyst day meetings, and were pretty much saying exactly what everyone thought that they would say.
If you look at what they were saying, both of them are going to be looking to lower their spending rate over the next couple of years, which is the exact same thing they said last year, and the exact same thing they said back in 2013.
Muckerman: Yes, even when oil prices were riding high.
Crowe: They were like, "Look, we're spending an awful lot of money on new projects. We want to stop growing for the sake of growing, so we're going to wind down our capital a little bit and actually start to return some money to shareholders."
How opportune now, that as the capital spending is winding down, that we're actually getting a reduction in oil prices. It's going to help them weather the storm, almost, in anticipation.
Just to give some numbers on that, Chevron's looking at about $35 billion in spending this year, about $5 billion less than last year. They want to get it down to about $30 billion by 2017, which is mostly going to be a reduction in all their construction; all their big project spending like Gorgon, LNG, and all of those things like that.
Muckerman: I have to question that though, because they've had a lot of cost overruns. We'll have to see if they can operate efficiently out there and get those projects online.
Crowe: Fair enough. The other thing that made me question that, too, is it seemed really conservative and optimistic, the fact that they were going to be able to cut $10 billion from last year, and then not have any new project construction going on.
It's like, "Okay, we're going to wind all these down," but didn't really project out, "Well, we've got these other projects that we're working on, that we need to actually start spending money on."
I thought it might have been a little conservative, optimistic. We'll have to see. These guys always do their five-year plans, so we'll see what happens when it comes to that.
Muckerman: When I'm looking at this I see Exxon, they're cutting projects as well. They're not starting new projects. They're looking at a window of only $40-60 to validate some new projects.
Not only is that maybe a little bit more accurate than past predictions of oil prices right now, but it's certainly more prudent than I would have expected, because they don't even expect oil to stay below $60 for much more than a year or two, so I don't know why they're looking at projects through that window, when these projects take several years to come onboard.
Maybe, just maybe, they're going to look at other companies to purchase, with projects under way.
Crowe: They did just issue a whole bunch of new debt. They've got a little bit of extra cash standing on the books, and there are a lot of shale companies right now that are looking to be bought.
One of the big news stories that we had in the past week was Whiting Petroleum (NYSE:WLL) has said that they are going to go on sale because at $50 a barrel, after that Kodiak Oil & Gas acquisition that they made, they just bundled themselves up with a little bit too much debt. They think it's time, "Maybe we need to move on and get bought by somebody big."
Muckerman: Yes, we've been saying this for a long time now. With oil and gas companies, debt is one of the biggest factors you have to look at as an investor.
When you see a company offering itself to be bought, that's a pretty strenuous scenario for investors. You get a little worried; what if somebody doesn't come to buy them? Why does Whiting Petroleum want to be bought? Because they don't think they can cover debt if oil prices stay where they are for an extended period of time.
This is just what happens with a cyclical industry like oil and gas. How do you think Exxon got as big as it is? It's made a $41 billion acquisition of XTO Energy; a little bit still under question, because at the time natural gas prices had fallen from a 2008 peak.
Unfortunately 2010, when the acquisition was made, wasn't the bottom of natural gas prices so that acquisition hasn't necessarily panned out as well as they had thought. But in 1999 they bought Mobil, and we haven't seen oil prices that low since the acquisition.
Prices were slowly falling from 1996 on into '99, but since then -- it was in the teens per barrel -- and we haven't seen that price level since, so that acquisition obviously accretive.
Crowe: Looking really good right now.
Muckerman: Looking really, really good. Even with oil prices at $50, that Mobil acquisition is still paying dividends. That's just what happens; the bigger get bigger because they stay stable. They have cash on the balance sheets.
They understand that there are going to be years, and multiple years or periods where companies just can't make it, so then they swoop in.
Crowe: Yes. Just a small word of advice to investors out there who may be looking at this situation and be seeing a whole bunch of big-name companies in the oil and gas space, and people speculating that they are a buyout candidate right now.
Please, please, please do not be buying these companies on the speculation that they might be actually getting purchased or not.
I read a couple articles on this a couple days ago, and there were some names in there. When I looked at it I said, "These are some of the more solid companies, and solvent ones, in the space and they're saying that they are going to be the big acquisition targets."
We're talking about these debt-laden, even smaller companies, are the ones that are really in trouble, and the ones that are probably looking to get bought anytime soon.
Just because you might see a name -- say like a Devon Energy (NYSE:DVN) or a Continental Resources (NYSE:CLR) or something like that -- in an article that says they may get bought, by the sounds of it, it's more speculation than anything else, by the journalists.
Really, really be careful about making a purchase in this space purely based on that, because it just doesn't seem to make as much sense as it may sound on paper.
Muckerman: That being said though, if you are speculating on that, you might as well hitch your wagon to a company that is strong enough to withstand not being bought out.
You don't want to go and hop in on a debt-laden company, hoping that it gets bought out, and if it doesn't then you're stuck with a company that might go bankrupt. Or maybe not that bad, but they might just not be able to survive for much longer.
Crowe: Shocking statement of the day, guys: Make investments in great companies, regardless of what the environment is.
Muckerman: Right. You saw Whiting pop, I think 10% or something like that, I don't remember exactly, when they announced that they were looking for a buyer.
They haven't found one yet, so if they don't find one, you have to imagine that the stock's going to pull back at least that 10% or more, because the investors are going to be like, "Well, if Exxon or Chevron don't even want this company, what do I want this company for?"
Crowe: Yes, it could look a little rough.
Mentioning the fact that there was some silly journalism in the energy space, which seems to occur on a daily basis, actually ...
Muckerman: They're struggling for material because nothing's happening right now.
Crowe: I happened to see another "End of OPEC" article a couple days ago. They just keep on regurgitating that exact same thing -- which, by the way, don't ever write that, ever again.
But one of the great ones, again, in the overly verbose ways of making things sound very smart when they're actually just very, very basic things. The award goes to Barclays Capital for an analyst note that they wrote on oil prices where they said, "A few transient fundamental factors and shades of confidence" are existing in the oil market, but "we expect further weakness ahead as these factors ahead, as these factors fade."
Basically what they said is, "You know, oil could go up, but the chances are it could go down again too." Congratulations, Barclays. Way to really, really sell it!
Muckerman: They're just trying to remain middle of the road, without sounding middle of the road.
Crowe: Yes. It just makes you sound smart at the same time. Well folks, that is the end of our podcast today. I'm Tyler Crowe, here with Taylor Muckerman.
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