No Money Down: Analysts See Logic in Chevron, Exxon M&A Strategy

Despite supermajors sitting on piles of cash, both Exxon Mobil’s acquisition of Pioneer Natural Resources and Chevron Corp.’s acquisition of Hess were all-stock transactions. Analysts have various reasons why they believe the no cash and no debt deals were the right move for the supermajor buyers.

One analyst said Exxon Mobil and Chevron did not use cash because they wanted to avoid borrowing at higher interest rates. Another said they want to hold on to their cash for optionality.

Others added that the transaction is good for stock. All-stock transactions help insulate deals from commodity price volatility, just as they did during the COVID-19 pandemic. WPX Energy and Devon Energy announced their merger in September 2020, at a time when WTI averaged less than $40/bbl. At close, in January 2021, WTI averaged $52/bbl for the month.

RELATED: Analysis: How Chevron’s Hess Deal Boosts LatAm Position

Sam Margolin, an analyst at Wolfe Research, said oil and gas companies have come to see the benefits of having paid off so much debt after the pandemic, and they don’t want to reverse that even if it means using no debt for massive acquisitions.

“They don’t want to mess with the balance sheet,” he said. “They don’t want to issue debt with rates where they are. I think it’s as simple as that.”

Margolin said Exxon and Chevron have been leaders in paying off debt, and it’s helped their stock price.

Llyod Byrne, an analyst at Jefferies, said the current market environment and relatively high price of oil, sets the stage for such all-stock transactions.

“When you’re in an $80 price environment, using stock isn’t a crazy idea on the part of the buyer,” Byrne said. “On the seller’s part, there’s a lot of incentive to do that. A seller de-risks by moving into a larger IOC [international oil company] of course. And then if they want to keep some interest in the entity, you can do it with these all-stock transactions. … If you don’t want to sell the shares, you get to defer the taxes and not sell it, or you could sell it because it’s almost like cash, it’s liquid.”

Michael Scialla, an analyst at Jefferies, told Hart Energy he expects some modest unhappiness behind the scenes with stockholders from acquired companies but, as with Chevron’s $6.3 billion acquisition of PDC Energy in May.

“I know for a fact that some holders of some of these companies haven’t been completely happy with that. I know some of the PDC holders and in some of the other deals too, where some of the bigger companies acquired, they weren't pleased with an all-stock acquisition of the stock that they held,” he said.

Stockholders may push back, but it's unlikely to hinder the deals from closing, he said.

Gabriele Sorbara, an analyst at Siebert Williams Shank, said shareholders of the acquired companies will ultimately benefit because of greater scale and synergies.

“These companies should benefit on a proforma basis. They should rerate higher. They’re going to have more scale and synergies in the entity. You lose the G&A quickly. You combine the assets, you can drill longer laterals,” he said.

RELATED: Exxon Seeks Drilling Efficiencies, Lower Costs on Pioneer’s Midland Acreage

Sorbara said larger companies would rather keep cash for optionality than use it for acquisitions, especially with the current uncertainty in the markets.

“There is a backwardated forward curve on oil. There’s weak NGL prices and with gas there still is some uncertainty. It’s really dependent on the winter,” Sorbara said, adding that the volatility also makes an all-stock deal better for the acquirer.

“There’s no need to reset deal price if the sector falls apart or if the sector rallies the price. It moves with the acquirer’s equity. So it kind of fixes the valuation versus an all-cash deal,” he said.

TD Cowen analyst Jason Gabelman said the all-stock transactions are mitigating risk in these and other transactions, such as IOCs issuing equity for M&A.

“If you buy a company for $5B cash and [the] oil price doubles, that target company would likely not be happy with the price. Issuing equity pegged to your own stock price significantly reduces that issue,” he said. “International oil companies are able to issue equity for large deals given their equity currency has strengthened post-COVID, which is a testament to company performance in addition to broader commodity environment. They can then use the large cash stockpiles over time to buy back stock they issued for the deals.”