By Christopher M. Matthews, Emily Glazer and Cara Lombardo
The chief executives of Exxon Mobil Corp. and Chevron Corp.
spoke last year about combining the oil giants, according to people
familiar with the talks, testing the waters for what could be one
of the largest corporate mergers ever.
Chevron Chief Executive Mike Wirth and Exxon CEO Darren Woods
spoke shortly after the coronavirus pandemic took hold, decimating
oil and gas demand and putting enormous financial strain on both
companies, the people said. The discussions were described as
preliminary and aren't ongoing but could come back in the future,
the people said.
Such a deal would reunite the two largest descendants of John D.
Rockefeller's Standard Oil monopoly, which was broken up by U.S.
regulators in 1911, and reshape the oil industry.
A combined company's market value could top $350 billion. Exxon
has a market value of $190 billion, while Chevron's is $164
billion. Together, they would likely form the world's second
largest oil company by market capitalization and production,
producing about 7 million barrels of oil and gas a day, based on
pre-pandemic levels, second only in both measures to Saudi
Aramco.
But a merger of the two largest American oil companies could
encounter regulatory and antitrust challenges under the Biden
administration. President Biden has said climate change is one of
the biggest crises the country faces. In October, he said he would
push the country to "transition away from the oil industry." He
hasn't been as vocal about antitrust matters, and the
administration has yet to nominate the Justice Department's head of
that division.
One of the people familiar with the talks said the sides may
have missed an opportunity to consummate the deal under former
President Donald Trump, whose administration was seen as more
friendly to the industry.
A handful of sizable oil and gas deals were completed last year,
including Chevron's $5 billion takeover of Noble Energy Inc. and
ConocoPhillips' roughly $10 billion takeover of Concho Resources
Inc., but nothing close to the scale of combining San Ramon,
Calif.-based Chevron and Irving, Texas-based Exxon.
Such a deal would be noteworthy in the oil industry, surpassing
in size the mega-oil-mergers of the late 1990s and early 2000s,
which included the combination of Exxon and Mobil and Chevron and
Texaco Inc.
It also could be the largest corporate tie-up ever, depending on
its structure. That distinction currently belongs to the roughly
$181 billion purchase of German conglomerate Mannesmann AG by
Vodafone AirTouch Plc in 2000, according to Dealogic.
Many investors, analysts and energy executives have called for
consolidation in the beleaguered oil-and-gas industry, arguing that
cutting costs and improving operational efficiencies would help
companies weather the pandemic-induced downturn and prepare for an
uncertain future as many countries seek to reduce their dependence
on fossil fuels to combat climate change.
In an interview discussing Chevron's earnings Friday, Mr. Wirth,
who like Mr. Woods also serves as his company's board chairman,
said that consolidation could make the industry more efficient. He
was speaking generally and not about a possible Exxon-Chevron
merger.
"As for larger scale things, it's happened before," Mr. Wirth
said, referring to the 1990s and early-2000s megamergers. "Time
will tell."
Paul Sankey, an independent analyst who hypothesized a merger of
Chevron and Exxon in October, estimated at the time that the
combined company would have a market capitalization of about $300
billion and $100 billion in debt. A merger would allow them to cut
a combined $15 billion in administrative expenses and $10 billion
in annual capital expenditures, he wrote.
Exxon was America's most valuable company seven years ago, with
a market value of more than $400 billion, nearly double Chevron's.
But Exxon has fallen from its heights following a series of
strategic missteps, which were further exacerbated by the pandemic.
It has been eclipsed as a profit engine by tech giants such as
Apple Inc. and Amazon.com Inc. in recent years and was removed from
the Dow Jones Industrial Average last year for the first time since
it was added as Standard Oil of New Jersey in 1928.
Exxon's shares have fallen nearly 29% over the last year, while
Chevron's are down about 20%. Chevron briefly topped Exxon in
market capitalization in the fall.
Exxon endured one of its worst financial performances ever in
2020. It is expected to report a fourth consecutive quarterly loss
for the first time in modern history on Tuesday and already has
posted more than $2 billion in losses through the first three
quarters of 2020.
Chevron also has struggled, reporting nearly $5.5 billion in
2020 losses Friday. But investors have expressed more faith in
Chevron because it entered the downturn with a stronger balance
sheet -- in part because it failed in its $33 billion bid to buy
Anadarko Petroleum Corp. before the pandemic, having been outbid by
Occidental Petroleum Corp. in 2019.
Exxon has about $69 billion in debt as of September, while
Chevron has around $35 billion, according to S&P Global Market
Intelligence.
Some investors have grown increasingly concerned about Exxon's
direction under Mr. Woods as the company faces a rapidly changing
energy industry and growing global consciousness about climate
change. Some are also worried that Exxon may have to cut its hefty
dividend, which costs it about $15 billion annually, due to its
high debt levels. Many individual investors count on the payments
as a source of income.
Mr. Woods embarked on an ambitious plan in 2018 to spend $230
billion to pump an additional one million barrels of oil and gas a
day by 2025. But before the pandemic, production was up only
slightly and Exxon's financial flexibility was diminished. In
November, Exxon retreated from the plan and said it would cut
billions of dollars from its capital spending every year through
2025 and focus on investing in only the most promising assets.
Meanwhile, the company's woes have helped draw the attention of
activist investors. One of them, Engine No. 1 LLC, has argued that
the company should focus more on investments in clean energy while
cutting costs elsewhere to preserve its dividend. The firm
nominated four directors to Exxon's board Wednesday and called for
it to make strategic changes to its business plan.
Exxon also has been in talks with another activist, D.E. Shaw
Group, and is preparing to announce one or more new board members,
additional spending cuts and investments in new technologies to
help it reduce its carbon emissions.
Rivals such as BP PLC and Royal Dutch Shell PLC have embarked on
bold strategies to remake their business as regulatory and investor
pressure to reduce carbon emissions mounts. Both have said they
will invest heavily in renewable energy -- a strategy that their
investors so far haven't rewarded.
Exxon and Chevron haven't invested substantially in renewables,
instead choosing to double down on oil and gas. Both companies have
argued that the world will need vast amounts of fossil fuels for
decades to come, and that they can capitalize on current
underinvestment in oil production.
Write to Christopher M. Matthews at
christopher.matthews@wsj.com, Emily Glazer at emily.glazer@wsj.com
and Cara Lombardo at cara.lombardo@wsj.com
(END) Dow Jones Newswires
January 31, 2021 16:40 ET (21:40 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.
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