Why an ExxonMobil-Chevron Mega Merger is Unlikely to Happen
Reports of a merger between ExxonMobil XOM and Chevron CVX surfaced recently, with sources claiming that sometime last year the CEOs had explored a potential combination of the nation’s largest and second-largest energy companies. The rumored consolidation talk was triggered by the coronavirus-led slump in fuel demand and prices.
On paper, ExxonMobil and Chevron — both carrying a Zacks Rank #3 (Hold) — fit together seamlessly. As far as similarities are concerned, both are fully integrated, meaning they participate in every aspect related to energy — from oil production, to refining and marketing. Some industry watchers are excited about the prospect and believe that an alliance between the two would drive down costs and lead to per-share accretion even in the face of low commodity prices.
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The merger would have created the nation’s largest energy firm with combined revenue of more than $275 billion. With ExxonMobil’s market capitalization of $190 billion and Chevron’s $160 billion, they would be almost equal partners.
That said, there could be a number of hurdles, which could pose a significant obstacle to such an amalgamation.
Regulatory & Antitrust Issues: First and foremost, if such a deal were to be considered, the two companies would have to meet a number of legal and regulatory requirements. As is the case with merger talks surrounding the #1 and #2 players of any sector, there are apprehensions regarding the substantial concentration of selling power. With a dominant position in key markets and the control of around 20,000 retail gas stations, the deal would have to obtain antitrust clearances. Even then, the consolidation might require the companies to sell assets worth billions worldwide to reassure officials about enough competition.
The Gorgon Puzzle: The massive Gorgon LNG project in Australia might turn out to be another stumbling block for the mega merger. With both companies betting big on the future of LNG, the $69 billion mega development — with a shipment capacity of 15.6 million metric tons per year — is a key element of their long-term production growth plans. While Chevron is the chief operator of Gorgon LNG project holding a 47.3% stake, ExxonMobil and Royal Dutch Shell RDS.A own a 25% interest each. In other words, a deal between ExxonMobil and Chevron would give the combined firm a majority control of the project — enough to concern regulatory authorities.
Ton of Debt on Their Books: While the entity would be mammoth in terms of scale and revenues, so would be the merged company’s debt. As of Dec 31, 2020, the combined debt is estimated at nearly $112 billion. In particular, Chevron’s obligation has swelled in recent times following the Noble Energy acquisition. Considering the coronavirus-stung energy environment with capital access (both debt and equity) becoming increasingly difficult and expensive, the massive debt liability of the combined company will restrict other investment opportunities for some time as debt repayment becomes a priority.
Dividend Conundrum: ExxonMobil has a $3.48 annual payout and a 7.6% yield, while Chevron’s yearly dividend of $5.16 offers a yield of 5.9%. Therefore, ExxonMobil’s payout is higher than Chevron’s. Should a merger happen, the dilemma for management would be whether to hike the payout to ExxonMobil’s levels or trim it down to what Chevron pays. An increase to match ExxonMobil’s returns might eliminate the primary reason why some investors choose Chevron i.e., better capital management.
Different Spending Strategy: ExxonMobil’s spending is mostly on longer-term projects. By contrast, Chevron’s investments are directed more to shorter-cycle opportunities as the company is already through some of its megaprojects in Australia (Gorgon and Wheatstone), the U.S. Gulf of Mexico and elsewhere. In other words, Chevron made huge capital commitments during the 2012-2016 period and trimmed down its growth spending since. But ExxonMobil didn’t embark on a spending spree back then and has only ramped up growth investments over the past few years. Further, ExxonMobil is heavily inclined toward conventional assets like Guyana that require high fixed costs, while Chevron’s primary focus area is onshore North American shale.
Upstream Vs. Downstream: Despite its integrated structure, Chevron generates most of its earnings from its upstream segment. By comparison, ExxonMobil has a relatively balanced mix of upstream, downstream/refining and the high-margin chemicals business that makes them less sensitive to oil prices. Chevron’s smaller downstream portfolio means that the company is more exposed to commodity price fluctuations. Overall, ExxonMobil’s defensive characteristics supports them during a downturn, while Chevron’s high oil leverage can benefit it when fuel prices are on an upswing.
The rumored accord between ExxonMobil and Chevron would be one of the largest corporate deal announcements in history, creating a juggernaut that can produce nearly 7 million barrels per day of oil equivalent. But the prospect of such an action will most probably run into big regulatory problems apart from several other challenges. Even if the oil titans manage to unite their businesses, the total market capitalization of around $350 billion would come nowhere near some of S&P 500’s most-valuable companies like Apple AAPL, Amazon AMZN and Microsoft MSFT and is less than half of Tesla's TSLA value – symbolic of the energy sector’s fall from grace in recent years.
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