The multinational fuel giant, Exxon Mobil Corporation (XOM, Financial) is all set in the market for its new hunt. The company holds a record of being the strongest one in the energy sector.
Even when the market is pretty shaken up because of the plummeting prices of crude oil, Exxon Mobil performs fairly well. The American company has a very strong cash position, which makes it easier for the oil giant to beat other companies by acquiring them.
Bigwigs Of The Energy Sector
Previously during 2009, when the price of natural gas came down by 70 percent, Exxon Mobil acquired XTO Energy Inc putting the valuation of the Texas-based company at $41 billion. It was an all-stock based deal then.
Exxon did place a huge-sum bet on the fact that the prices of natural gas would recover. Possibly it is planning to do the same in the current scenario of ever reducing crude oil prices. Compared to the price levels in July 2014, the crude oil prices have now become half of what it was. Last year, the company traded above $100 per barrel, which slipped below $50 per barrel in January. Brent crude oil futures are standing at $57.05 per barrel, whereas West Texas Intermediate crude oil futures for March delivery stand at $51.21 per barrel.
The current prices have shaken the energy sector pretty badly. It is because of this slump the profit margins of the producers are getting dried up. Financial instability has led them to ‘succumbing to acquisitions’ as their last resort. This picture is expected to be quite beneficial for Exxon Mobil considering its strong cash reserves. Slump symbolizes its hunt for an opportunity to acquire a weaker unit.
Exxon is believed to have a better credit rating than even the US government. Because of this, the company can manage cheaper loans. Analysts speculate that the company could target any of its competitors for acquisition. Believing the numbers, the company has a cash flow of over $11 billion in 2015. The company also holds 3.8 billion shares, valued at around $350 billion. With money muscles, Exxon can acquire almost any of the companies in the energy sector.
THE NEW PREY
According to Paul Sankey of Wolfe Research, BP plc (BP, Financial) is an obvious choice for Exxon to take over.
The British company is currently facing severe and harsh blows of the business environment which could be around $13 billion, primarily because of the company’s role in 2010 Deepwater Horizon oil spill. That was the worst oil spill disaster in the history of USA. The verdict is yet to come for this case (expectedly by the end of April), but so far the evidence has proved that BP was negligent.
Conclusion
If Exxon would acquire BP, then this would mitigate the impact on the reputation of BP due to the fine impending on it. Meanwhile, the closure of the deal would also ensure a boost in Exxon’s ability to explore and locate new sources of oil and natural gas. Exxon holds a better history in dealing with the long term legal troubles and huge fines. Exxon also has a market cap almost three times that of BP. From an investors perspective, it would be best to up our positions in Exxon Mobil, and for investors who are yet to make an entry into the oil sector, this is the right time to do so as prices are bottoming out and Exxon Mobil looks in great shape once the crude prices start their recovery journey upwards.
