ExxonMobil (XOM) announced yesterday that they are suspending share buybacks. This may look like a company conserving cash during a difficult operating environment but it is probably a sign that ExxonMobil’s management has found something even better to buy.
A more plausible reason Exxon is ending buybacks: it’s preparing to acquire another company whose shares are even more deeply discounted than Exxon’s. And with “just” $3.7 billion in cash on hand at the end of the fourth quarter, its likely that Exxon would use its shares as currency for a buyout.
Who would they buy? The options abound for a company still sporting an equity market cap of $318 billion. Anadarko Petroleum (APC) has long been rumored to be a prime Exxon target; its shares are down about 65% to a market cap of $19 billion. Occidental Petroleum (OXY) float is $51 billion, ConocoPhillips (COP) $47 billion and Apache APA Corp. (APA) is at $15 billion. Deeper in the discount bin, Marathon Oil (MRO) shares could be had for $6.5 billion, or Devon Energy (DVN) for $11 billion.
Of course Exxon would also need to assume any debt carried by an acquisition target. But that wouldn’t be a problem — compared with the averaged overleveraged oil company, Exxon has modest gearing with $38 billion in debt outstanding.
Buying other energy companies during periods of distress is what ExxonMobil does. In 1998 when oil prices crashed Exxon bought Mobil. ExxonMobil has the balance sheet and the ability to buy more assets during this period of distress. It’s not a matter if they’ll buy, it is a matter of when.