Very few attractive targets for takeover due to debt; doing deals has gotten harder, not easier
The amount of debt oil and gas companies took on to fuel growth during the shale revolution has made them too encumbered to be attractive targets for acquisition ExxonMobil (ticker: XOM, ExxonMobil.com) CEO Rex Tillerson said. “It’s like buying a home with a big mortgage, and there’s not a lot of equity,” he said.
Companies have managed to avoid takeovers and bankruptcies to some extent by taking on more debt, or issuing new shares to stay afloat. “There are a lot of quality resources out there,” said Tillerson. “It’s just how they’ve been encumbered.” Because of the debt associated with the companies, Tillerson said ExxonMobil is focused on buying assets instead.
In 2015, oil and gas bankruptcies totaled $17.85 billion across 42 companies. Despite the unpleasant picture that figure paints, many have been surprised that there were not more companies going under as oil prices sank last year. More companies are likely to file in 2016, however, with spring bank redeterminations likely to bring a rash of new bankruptcies. Lynn Helms, director of North Dakota Department of Mineral Resources, expects five or six companies to file in North Dakota alone.
ExxonMobil has been affected by the oil price downturn like every other company, but it has managed to weather the storm better than others, reports Houston Chronicle. Debt has grown from 7% to 18% of its capital in the last three years, but that remains well below the median of 184% in EnerCom’s E&P Weekly.
The company’s size and strong balance sheet makes it one of the few U.S. operators in a strong position to purchase other companies amid the downturn, but Tillerson said both debt and stock sales have “destroyed” the value of the oil beneath Texas and North Dakota, unless those companies are willing to sell their best assets for cheap.
Sellers are still asking too much for their assets, said Tillerson. “It’s tough for us because we would like to do something. We see there’s a lot of quality resources out there,” but doing deals has “gotten more difficult, not easier.”
Not growing for growth’s sake
Tillerson said the company was changing trajectory from a previous goal of 3% growth through the end of the decade to maintain flat production instead. “We take a lot of grief when the volumes don’t grow,” said Tillerson. “It doesn’t bother us. We know it’s all about the shareholder’s money. One of the things that seems to be lost on people is just staying flat when you’re running a depleting business – that’s quite an accomplishment.”
Exxon said this week that it will cut $7.9 billion in spending this year as it focuses on maintaining flat production through the end of the year. XOM believes that production will come in 4-4.2 MMBOEPD through the end of the decade, in line with 4.1 MMBOEPD in 2015.
The company also borrowed $12 billion in corporate debt, which could be used for a number of things, including asset purchases. Pavel Molchanov, an analysts with Raymond James, believes it will likely be used to pay the company’s dividend.
The payout to investors is approximately $12 billion per year, a price tag the company will not be able to cover with free cash flow if oil prices stay around $35 per barrel, Molchanov explained.
