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Too late, too soon

1 February 2021 By Robert Cyran, George Hay

A mega-merger between Exxon Mobil and Chevron is the right deal, but at a tricky time. Uniting the two companies, with a combined market capitalization of roughly $350 billion, looks enticing on paper with savings potentially worth as much as $20 billion or more. But Exxon would need humility, and the U.S. government a desire for a fossil fuel champion. Both are huge hurdles.

The two companies toyed with the idea of a deal early last year, according to a Reuters article, noting that the talks went far enough as to draw up legal documents. There’s good reason for the two oil giants to forge ahead, at least on paper. Together they could cut combined operating costs about 5%, or $3 billion, according to JPMorgan estimates. The value of these, assuming corporate taxes rise to 30% and capitalized on a multiple of 10, is just over $20 billion.

Exxon could use the help more. The value of its shares including dividends are off a quarter in five years, while Chevron’s are up more than 20%. The companies’ market capitalizations have converged, putting Exxon in shooting distance for a takeover, at least in terms of size. Meantime, Exxon has an activist banging around for change. Investors may soon become impatient if they know that a deal is on the horizon.

The prospects for a deal off a spreadsheet are grimmer, though. The massive crunch on Exxon’s stock would require Chief Executive Darren Woods to admit that the firm hasn’t kept pace under his watch. And yet there’s an argument that a deal is happening at an Exxon low point. The massive crunch in demand for oil because of the pandemic resulted in slashed investment across the sector. With the end of the pandemic in sight, and investment in future projects low, demand may soon outstrip supply.

President Joe Biden’s administration is sure to be less friendly to a deal than its predecessor, too. Democratic administrations tend to view increased corporate concentration skeptically, and this would effectively create a U.S. oil company that would seek to compete with nationalized firms, like Saudi Aramco. While creating a national champion might be useful for energy security, Biden seems more interested in winding them down. Both companies might try to curry favor by offering big investments in carbon-friendly solutions. Only then, though, the merger could make less sense.


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