Exxon Mobil (XOM.N) and Chevron (CVX.N) are leveraging their substantial cash reserves to secure transformative acquisitions, using an all-stock payment approach.
This strategy enables the two largest U.S. energy companies to navigate the volatile oil and gas market effectively.
Chevron recently announced its $53 billion all-stock acquisition of Hess (HES.N), shortly after Exxon revealed its own $59.5 billion all-stock purchase of Pioneer Natural Resources (PXD.N).
These moves follow a series of smaller all-stock deals over the past three years, including Exxon’s $4.9 billion purchase of Denbury (DEN.N) and Chevron’s acquisitions of PDC Energy and Noble Energy for $6.3 billion and $5 billion, respectively.
In a turbulent energy market characterized by geopolitical tensions and price fluctuations, utilizing stock as currency helps reconcile price disagreements with acquisition targets.
CEOs of the acquired companies, often deeply attached to their firms, are hesitant to agree to cash deals that may not reflect future energy price changes.
Selling for stock allows the acquired company’s shareholders to benefit from the combined entity’s potential growth and defer taxes by holding onto their new shares.
Exxon and Chevron are motivated by a desire to avoid the risks associated with exploring unproven reserves, especially as oil and gas resources become scarcer. They aim to acquire peer companies skilled in operating within lucrative oil and gas regions like the Permian Basin and Guyana.
The all-stock deals represent a strategic move for both Exxon and Chevron, as they seek to bolster their operations in these regions while minimizing cash outlays.
The Hess deal, for example, carries only a 4.9% premium to the closing share price due to the company’s already high valuation.
By avoiding the use of cash in acquisitions, Exxon and Chevron can direct their substantial cash reserves toward other purposes.
Potential options include returning excess cash to shareholders, who will now include those from the acquired companies.
Maintaining strong dividend payments and share buyback programs can compensate existing shareholders for the dilution caused by the issuance of new stock.
Chevron plans to increase its dividend by 8% in the first quarter and buy back $20 billion worth of stock annually.
This buyback program is sufficient to repurchase all the stock issued to acquire Hess within three years.
Exxon, while not providing specific dividend updates, has signaled its intention to buy back shares worth $17.5 billion annually over the next two years.
In this way, the availability of cash indirectly supports the all-stock deals by allowing companies to gradually reduce share counts after issuing new equity, ensuring a balanced approach to their acquisition strategies.