Insight - What to call a merged Exxon-Chevron? Not Exron


Unusual position: The past decade’s lousy return on capital demonstrated bigger isn’t always better –and can, in fact, encourage the sort of hubris that swells balance sheets and shrinks bottom lines. — Reuters

WHAT would one even call a merged Exxon Mobil and Chevron? Exron sounds a little too much like another former energy powerhouse from Texas.

Standard Oil would be a reasonable compromise given it would reunify so many of the baby Rockefellers. But the PR types and the lawyers might think it best not to put that in front of the Department of Justice.

How about Stranded Oil? Grimly amusing, but a little too close to home.

Sunday evening’s report from the Wall Street Journal that the CEOs of the two oil giants had a preliminary conversation about merging last year is intriguing on a number of levels.

It should be said upfront that this comes from people “familiar” with the situation and the talks aren’t said to be still happening. Even so, here are some preliminary observations and questions.

First, assuming the conversation took place, who called whom? One look at the exchange ratio of Exxon Mobil Corp and Chevron Corp would suggest superficially that Chevron’s Mike Wirth picked up the phone on the off chance Exxon’s Darren Woods was feeling anxious.

But it seems doubtful, given Wirth won plaudits for walking away from the Anadarko Petroleum Corp battle and was close to nailing down a buyout of Noble Energy Inc (announced last July).

Moreover, the shift in the relative valuation alone would suggest Chevron coming out on top in any deal or at least not just being absorbed by the Borg. But it is exceedingly difficult to imagine Exxon ever agreeing to a deal of such scale which didn’t just result in a bigger Exxon.

It is easier to imagine Exxon approaching Chevron – although, I stress, this is pure speculation on my part.

Chevron just reported results that show it exited 2020 bloodied but still with the best balance sheet of its peers and no questions being asked about its dividend.

While the company isn’t pushing into renewables with the gusto of its European peers, Chevron’s “high returns, low carbon” slogan speaks to the two biggest concerns about oil among institutional investors.

In contrast, Exxon finds itself in the unusual position of needing higher oil prices to squash speculation about a dividend cut and grudgingly giving ground on climate disclosure after the appearance of activist shareholders.

A mega deal with its nearest would be the ultimate pivot away from its current woes, offering a chance to refocus attention on cost-cutting – the two have roughly US$14bil of combined SG&A expenses – shedding the weakest assets and, in the process, forging a bigger, stronger balance sheet.

In other words, it would sound quite a bit like the rationale given for the first round of mega mergers back at the end of 1990s.

Yet there would be critical differences, too.

The supermajors were born in the aftermath of the 1998 crash in oil prices, but were also sold as the natural evolution for an industry that had tapped out traditional heartlands like the United States and needed to hunt new reserves.

Getting bigger was the key to taking on ambitious oil and gas projects – a way to venture out and conquer the world.

A deal today would also come in the aftermath of a historic crash in oil prices. But the context has changed.

The past decade’s lousy return on capital demonstrated bigger isn’t always better –and can, in fact, encourage the sort of hubris that swells balance sheets and shrinks bottom lines.

Big Oil mostly missed the shale boom and Exxon’s expansionary tendencies of late are precisely why it has sold off.

Meanwhile, climate change looms large for all oil companies (stranded oil). This wouldn’t be about launching a bigger ship on a voyage of discovery but instead gathering a lot more wagons to circle up and defend a position.

What sort of multiple do you put on that story?

That isn’t nothing; consolidation is needed in the oil business. But the cultural and political risks that would come with an Exxon-Chevron proposal make it look much less compelling than the more straightforward acquisition of smaller companies (as with Chevron and Noble).

Finally, the timing is interesting. Again, the relative positioning is important here, with Chevron looking fine no matter what really happened.

For Exxon, though, the story raises uncomfortable questions around why the company might have felt the need to contemplate such a radical move, even preliminarily.

Again, I’m not saying it did or didn’t; I don’t know. But this sort of thing certainly isn’t helpful just two days before Exxon looks set to report its first annual loss in at least several decades, and with an activist campaign ongoing. Like so much else over the past year, it’s an Exxon oil story that’s anything but standard.

Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. The views expressed here are the writer’s own.

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