ExxonMobil’s TMI issue

With $12bn raised in a recent debt offering and more than $300bn of its own shares held in treasury, ExxonMobil has the dry powder to purchase just about any oil and gas company in the world.  From Anadarko to Devon to even BP, the regular rumblings of an acquisition bid are rarely dismissed completely for one reason – ExxonMobil has the resources to do it.

But chief executive Rex Tillerson told analysts in New York City last week the company is in no hurry when it comes to M&As, and that most potential takeover targets are either overburdened with debt or their stock price diluted by repeated equity sales to raise funds. 

An important addendum to the debt and dilution worry is reflected in something said by many in the industry over the past year when it comes M&A: buyers and sellers are simply too far apart to do deals. Now, more so than maybe any other time in the energy business, buyers know more about the value of those assets and are very unlikely to overpay. This abundance of informed buyers stems from the shale assets at the core of the current boom. Companies have known about shale formations for years, having drilled through and around them for decades without being able to produce from them economically. They were in many ways well-mapped nuisances.

When the right combination of hydraulic fracturing and horizontal drilling came together during the last decade to make shale production economic, a flurry of seismic mapping and formation analysis followed. That employment boom in the US wasn’t just roughnecks.  Reservoir engineers, seismic engineers and data analysts went to work poring over well logs and data files.

There was also plenty of data-sharing on assets when the industry went through an early consolidation phase, followed by bigger deals like ExxonMobil’s $42.5bn purchase of XTO and BHP Billiton’s $12.1bn play for Petrohawk. And since prices have fallen, the many rounds of additional financing from banks and private equity investors have meant even more data collection and sharing, as investors want to know just what it is backing up those loans.

One finds good deals when there’s inefficiency in the market, an imbalance of information between buyer and seller. But the information explosion that accompanied the production boom means those information mismatches are less common. So even a deep-pocketed-yet-notoriously frugal company like ExxonMobil, where “shareholder value” is the pounding drumbeat of daily operations, has a hard time finding a situation it can exploit.  Until something tilts that balance, the big M&A deals may be rare beasts in the oil patch.

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