This is when it pays to be an oil major. Exxon Mobil Corporation (XOM), one of the largest oil and gas energy companies in the world, is said to be in talks with Eni SpA (ADR) (E) of Italy regarding the acquisition of its gargantuan Area 4 gas field in Mozambique.
XOM stock owners should be beaming from ear to ear at the news.
Fortune cites sources familiar with the matter as saying Exxon is specifically interested in buying a 15% stake in the field, which Eni owns 50% of, and which has incredible reserves of 85 trillion cubic feet.
It’s about time XOM used its massive resources to pull the trigger in a down market; this purchase would mark the first major acquisition Exxon has made since the severe downturn in energy markets began in 2014.
Though Mozambique — located in southeast Africa, directly to the west of Madagascar — seems far from Asia, the gas from Area 4 will be used primarily to supply growing Asian markets. China, in particular is anxious to diversify away from its reliance on dirty coal, and China Natural Petroleum Corp. bought a 20% stake from Eni two years ago, near peak valuations, at $4.2 billion.
XOM stock should benefit in the long-run as gas prices rebound from current lows. It’s a strategy reminiscent of Warren Buffett’s Berkshire Hathaway Inc. (BRK.A, BRK.B), which goes on absurd buying sprees in market downturns, snapping up bargain deals on the cheap and reaping the rewards as the market recovers.
Long-term Benefits for XOM Stock
In the U.S., natural gas prices are down 30% in the last year, but have stabilized recently and are up nearly 8% in the last month. One could easily make the argument that China’s decelerating growth has already been built into the energy markets, and that energy prices seem to have bottomed already.
Natural gas hit a 52-week low around $1.73 per million BTU on March 7, and currently goes for $1.93/million BTU, according to the Wall Street Journal.
Crude oil’s bottom below $30 per barrel on Jan. 12 is arguably more visible, which obviously is also great news for XOM stock if the trend holds up.
Either way, Exxon stock is one of the more resilient names in the energy sector over the last year; despite oil plunging from $58 per barrel to $39 per barrel yesterday, XOM stock has actually gained 0.8% in the last year. That’s better than the S&P 500 as a whole, which is down about 1%.
Tack on dividend payments — XOM yields about 3.5% currently — and you’ve got a stock that’s frankly whooped up on the rest of the market despite an objectively terrible period for energy prices.
As for Exxon’s potential purchase of a stake in Area 4, it should provide even more upside for shareholders when natural gas recovers. Another source in the Fortune article said that XOM could be interested in perhaps purchasing Eni’s entire 50% stake in the Mozambique enterprise, which I believe would be an even shrewder acquisition.
No matter what Exxon decides to do, I think it’s a bullish sign that the company is finally looking to invest in an effort to grow the top line instead of constantly looking to cut capital expenditures to support the bottom line.
As of this writing, John Divine did not hold a position in any of the aforementioned securities. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
