If there's ever been a time to acquire an oil company, it's during this trough in the cycle -- and ExxonMobil (XOM 1.65%) just announced a $12 billion debt offering.
In this clip, Sean O'Reilly, Tyler Crowe, and Taylor Muckerman talk about what the company might want to do with the money, how it's handled acquisitions recently, and what's likely motivating it to take on the debt now.
A transcript follows the video.
This podcast was recorded on March 3, 2016.
Sean O'Reilly: Guys, is ExxonMobil finally going bargain hunting? They're obviously the biggest, the baddest integrated oil major. They are not on the ropes, although the stock's seen better days. They just announced a $12 billion debt offering. What are they going to do with this money? Are they going to do a little bit of shopping? Because obviously prices are pretty low right now.
Tyler Crowe: I mean, if there was a time to do it, now would be it.
O'Reilly: Now would be it.
Crowe: You can kind of leverage the fact that ExxonMobil has a credit rating better than the United States Treasury. We can say it. $12 billion is certainly an attractive thing, and considering that this past year, this was the very first year where ExxonMobil did not 100% replace their reserves in a very, very long time, and for some, that can be concerning. At the same time, with companies that have attractive leases or attractive land holdings that could fit well into an ExxonMobil portfolio, it's kind of that quick hit. We can replace reserves very quickly at probably a price that is less than what it would take to go out and actually explore unknown reserves. The economic cost or the risk cost involved with exploration could be out there. Certainly, looking at shale across the United States right now and various other places, there's a lot of opportunities if Exxon wanted to go hunting. We're really worried about losing their reserve replacement rates.
O'Reilly: Yeah, that's a really good point that they haven't replaced 100% of their reserves. Taylor, do you think this is just to make sure that dividend stays?
Taylor Muckerman: Well, $12 billion is the dividend, so that's for one year. They could cover it and have $12 billion.
O'Reilly: What a coincidence!
Muckerman: I don't think that they're necessarily worried about that dividend this year. I don't think they're going to spend $12 billion on an acquisition either, but if they did, there's some companies out there with a market cap under $12 billion. Granted, you're going to have to pay a premium for these companies so they won't be able to spend on a $12 billion market cap company, because they're going to ask for a premium. You're looking at companies like Devon Energy, Marathon Oil, Continental Resources. Cheniere Energy might be an interesting deal because they could source their own natural gas and export it. There's a few companies out there that have interesting stories behind them and have seen their stocks plummet. I doubt they'll spend all $12 billion on an acquisition, though.
O'Reilly: Well, at the same time, the last time they made a major acquisition was XTO Energy back in 2010. They did tap into their massive reserve of bought-back shares when they did that, too. We could say they have $12 billion in debt ready to pull the trigger. They have $220 billion, $230 billion in treasury stock that they could use to go jump at somebody if they were really inclined to do so.
Muckerman: You're probably going to look at an acquisition of a company whose shares have declined further than Exxon's, though. Otherwise you might not be getting as good of a deal on your shares because Exxon shares are down as well. Yeah. That's a huge --
O'Reilly: That's a pretty big war chest right there.
Muckerman: Huge war chest.
O'Reilly: Can you guys imagine Howard Hamm selling out to Exxon?
Muckerman: Yeah. It'd be pretty interesting.
O'Reilly: I'd be surprised.
Muckerman: Probably relieve a lot of stress in his life.
Muckerman: Turn those shares that he has into actual money rather than depreciating assets.
O'Reilly: He took out a billion-dollar loan to pay off his ex-wife.
Muckerman: Yeah, because he knew his shares were in the toilet, so he didn't want to use those to pay her off.
O'Reilly: Yeah, fair enough.