What’s Next for Exxon After Rosneft’s Buy?

by Aaron Levitt | November 1, 2012 7:00 am

In 2010, Exxon (NYSE:XOM[1]) made its biggest purchase in more than a decade: a $34.9 billion buy of XTO Energy.

More recently, the company made a $2 billion drilling rights purchase from Denbury Resources (NYSE:DNR[2]) and a $2.91 billion bid for Canada’s Celtic Exploration — which came with a delicious 104,000 acres in the Duvernay shale.[3]

And despite all that, the integrated giant is now in a bit of a pickle.

While the last two deals will certainly boost Exxon’s long-term output in unconventional resources and shale gas, the firm is losing its “King of the Oil Patch” crown.

That moniker now instead goes to Russian giant Rosneft (PINK:RNFTF[4]). After its state-backed $55 billion deal[5] for BP (NYSE:BP[6]) and AAR’s huge TNK-BP joint venture closes, Rosneft will be the biggest oil producer based on output — around 4.6 million barrels of equivalent per day. Simply put, Rosneft’s output would exceed that of every Middle Eastern country except Saudi Arabia.

With Exxon falling behind its rivals in finding new huge oil reserves, it begs the question: Is another XTO-style buy on the horizon for the integrated monster?

Fifth Straight Quarter Of Declines

Despite being one of the biggest energy firms on the planet, Exxon Mobil seems to be having some trouble “Keeping with the Joneses.” As production from older fields continues to decline, Exxon has had trouble replacing those reserves. In Thursday’s earnings report, Exxon said its oil and gas output declined 7.5% to 3.96 million barrels oil equivalent per day — the fifth straight quarter of decline.

According to data compiled by Bloomberg, that is the longest streak of declines in more than 13 years. Last year, Exxon only grew its reserves by 0.5%. That’s after growth of 7.9% and 8.9% in 2010 and 2009, respectively. This was mostly due to its mammoth purchase of XTO.

The second issue is that the integrated giant is discovering less oil and natural gas than ever before. A key metric in the oil and gas world is the so-called reserve-replacement ratio. The stat measures just how much oil and gas reserves an E&P firm replaces after it pumps that energy[7] from its wells.

Last year, Exxon discovered enough oil and natural gas to replace 107% of what it extracted. By comparison, that is one-third the ratio of Rosneft’s, while Italian energy firm Eni (NYSE:E[8]) saw boasted one of 142%. Exxon is also lagging behind on sales growth, with analysts estimating only a 3% increase through 2014. Rosneft again beats the Texas-based giant at 28% sales growth.

In response to the lower production and declining legacy fields, Exxon has taken a decidedly different path to growing its reserves. Back in the 1990′s and early 2000’s, many producers sought firms that churned out large volumes of crude and gas every day. A perfect example of this was Chevron’s (NYSE:CVX[9]) big buys of Texaco and Unocal. However, Exxon’s focus has been on acquiring companies with vast tracts of unexplored acreage. While these forward-thinking purchases[10] and acreage will eventually bare fruit, it doesn’t help the firm today.

That fact is helping fuel plenty of speculation that Exxon could be forced to buy what it can’t find[11].

Even though Exxon is still digesting the XTO purchase, it has plenty of firepower on its books to get another huge deal done. Current cash on its books exceeds debt by over $2.2 billion and, despite declining production, free cash flows remain very rich. It may just have bust out the checkbook in order to prevent itself from falling to far behind.

Plenty of Potential

Given the size and scope of the energy giant, there’s plenty of opportunities of scale[12] that would give a direct boost to energy production and reserves. Analysts peg Exxon’s potential buys at three major independent E&P firms: Apache (NYSE:APA[13]), EOG Resources (NYSE:EOG[14]) and Anadarko (NYSE:APC[15]). Each has an interesting mix of current oil and gas production as well as big proven reserves in the ground.

Buying Anadarko, EOG or Apache would give Exxon access to businesses growing at least six times as fast as its own. Anadarko is expected to boost revenue nearlt 27% through 2014. At the same time, EOG and Apache will see revenue growth of 37% and 21%, respectively. That’s far better than Exxon’s estimated 3% revenue growth.

There are also other reserves to consider. For example, it’s been learned that EOG’s 650,000 acres in the Eagle Ford Shale can take twice as much drilling than previously thought. That means it holds more NGLs that early estimates suggest. EOG’s reserve-replacement ratio stands at 167%.

Likewise, Apache’s holdings in the Liard Basin may hold as much as 40 trillion cubic feet of gas and Anadarko’s African holdings continue to churn out tons of production each day[16].

None of these buys would be cheap, but it would take someone the size of Exxon to get them done. With production at the energy major already declining, though, time is money. The company just may just be planning on making a big bid for them.

To be honest, Exxon isn’t going away anytime soon[17] and I wouldn’t lose sleep over any of this if I was a shareholder. Still, the company will need to do something to help boost its declining reserves — and opening up its wallet and making a major instantly accretive purchase could be the way to go.

The trio of Apache, Anadarko and EOG are just some of few larger independents that could be on Exxon’s radar screen.

As of this writing, Aaron Levitt did not own a position in any of the aforementioned securities.

Endnotes:
  1. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  2. DNR: http://studio-5.financialcontent.com/investplace/quote?Symbol=DNR
  3. Duvernay shale.: http://www.investorplace.com/2012/09/all-eyes-on-canada-for-next-big-shale-play/
  4. RNFTF: http://studio-5.financialcontent.com/investplace/quote?Symbol=RNFTF
  5. $55 billion deal: http://investorplace.com/2012/10/bp-and-rosneft-one-sale-two-winners/
  6. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  7. pumps that energy: http://investorplace.com/2012/10/5-oil-services-buys-beyond-the-big-two/
  8. E: http://studio-5.financialcontent.com/investplace/quote?Symbol=E
  9. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  10. forward-thinking purchases: http://investorplace.com/2012/09/exxon-makes-another-forward-looking-move/
  11. forced to buy what it can’t find: http://investorplace.com/2012/10/is-canadas-energy-hotbed-cooling-off/
  12. opportunities of scale: http://investorplace.com/2012/10/3-income-pumping-pipeline-power-players/
  13. APA: http://studio-5.financialcontent.com/investplace/quote?Symbol=APA
  14. EOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=EOG
  15. APC: http://studio-5.financialcontent.com/investplace/quote?Symbol=APC
  16. production each day: http://www.investorplace.com/2012/02/africa-energy-growth-story-tullow-oil-anadarko/
  17. isn’t going away anytime soon: http://investorplace.com/2012/10/exxon-stock-a-buy-despite-stumbling-before-record-high/

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