Summary
- Exxon Mobil's management is convinced that oil prices will be higher in the future, which would make oil production facilities a solid investment.
- If this is true, getting additional production for the lowest price possible would be the best move, in order to juice returns.
- Occidental Petroleum has high production levels and could therefore be a worthwhile acquisition candidate, for Exxon Mobil or others.
- Additional arguments for an Occidental Petroleum acquisition include a Permian Basin focus, management incentives, and low break-even prices.
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Article Thesis
Exxon Mobil (XOM), one of the leading Western oil & gas companies, will embark on a huge spending spree to grow production by about 1 million barrels per oil per day. This is a quite costly program, however, and Exxon Mobil could increase production by an even wider amount by acquiring Occidental Petroleum (OXY), which would cost less.
At the same time, such an acquisition would solve Occidental Petroleum's main problem - the company owns strong assets with attractive break-even costs, but it also has weak management at the same time. Getting these assets under the control of Exxon Mobil (or any other acquirer) would solve the one key issue that has been so disastrous for Occidental Petroleum's shareholders.
Source: Seeking Alpha's image bank
Why Could Such A Deal Make Sense?
Attractive Long Term Oil Prices
In short, my belief that Occidental Petroleum could be an acquisition target for Exxon Mobil can be broken down to the following statement:
Exxon Mobil's current growth program does only make sense when oil prices will be above the current level in the long run. In that scenario, getting as much additional production capacity as possible, at a low price, would be an opportune move.
Either of the two following scenarios should occur in the long run:
- In a world where future oil prices are high enough to justify huge investments in new oil projects, Occidental Petroleum's existing assets will also be producing strong cash flows.
- In a world where oil prices remain so low that Occidental Petroleum's assets are not generating attractive cash flows, other oil assets will not, either, and Exxon Mobil's current growth projects would be a waste of money.
It is, I believe, not 100% certain which of the two scenarios regarding future oil prices will be the correct one, but I believe that the first scenario of higher oil prices is way more likely. This is mainly due to the fact that oil demand is forecasted to grow through 2040, while underinvestment could lead to lower oil supply over the coming years. Some analysts go as far as forecasting oil prices of $190 a couple of years down the road, although I don't see this as very likely. Exxon Mobil's management seems to agree with the first scenario of attractive long-term oil prices - otherwise, they would not have decided to embark on a major growth program.
