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DJ Exxon Mobil and Chevron Talked Merger Last Year. But the Logic Has Faded. -- Barrons.com

· 02/05/2021 20:03
By Avi Salzman

Exxon Mobil and Chevron, the two largest U.S. oil companies, discussed a megamerger last year that would leave the U.S. with one oil giant for the first time in decades, reports The Wall Street Journal. A deal would create a $300 billion or so company that could produce seven million barrels of oil and equivalents a day, making it the largest operator outside of Saudi Aramco. The Journal says talks are off, but could be restarted. Both companies declined to comment.

That the pair even considered merging is a sign of how much the industry has changed. Talks reportedly began as oil prices collapsed last year. Prices have since rebounded. Analysts worried that Exxon's cash flow would not cover its dividend, which happened in 2019 and 2020. But higher prices and cost cuts may allow it to self-finance the dividend.

In 1999, the merger of Exxon and Mobil led to a period of growth. "There were big new [drilling] opportunities in Venezuela, Qatar, Kazakhstan, and Angola that required capital," wrote Citi analyst Alastair Syme. "Mergers provided the industry with the balance sheets to compete."

Today, big producers are cutting back and focused on reducing breakeven levels. And, as CFRA's Stewart Glickman wrote, a merger would be unlikely to drive pricing power, with the new entity wielding only 7% of global oil production, 15% of U.S. refining capacity. That said, stranger things have happened. Exxon took a huge loss in the last quarter, its fourth in a row. It's facing a challenge from activist investors, and analysts are seeking ways to improve results. Talks could restart.

Last Week

Higher Ground

Stocks rose, erasing the previous week's losses, fueled by the Nasdaq and tech. Earnings were strong, led by record quarters from Alphabet and Amazon.com. Oil giants reported losses, including Exxon Mobil's $20 billion. Ford Motor and General Motors were hit by a chip shortage. And January saw a moderate pop in new jobs, after several months of declines. For the week, the Dow industrials rose 3.9%, to 31,148.24; the S&P 500, hitting another high, soared 4.6%, to 3886.83; and the Nasdaq surged 6%, to 13,856.30, also a record.

The Downside

Hedge funds retreated from short plays on GameStop and other high short-interest stocks, and prices and volatility thudded to earth. Investors faced decisions on when, or if, to sell. GameStop lost 80% and AMC Entertainment, 49%. Robinhood raised another $2.4 billion from investors -- $3.4 billion in a week. Day traders on Reddit, meanwhile, drove silver up to its highest point in eight years, then saw it slip as the CME Group applied higher margin requirements.

Going Big

President Biden met with GOP senators who offered a relief plan one-third the $1.9 trillion he had proposed; he suggested compromise was possible. Senate Democrats then cast the bill as a budget matter, thus allowing a straight majority to pass it. The administration says it will increase weekly Covid-19 vaccine allocations to more than 11 million, and use 40,000 drugstores to distribute them. Johnson & Johnson applied for emergency-use authorization for its one-dose vaccine.

A New Antitrust Front

Sen. Amy Klobuchar, head of the antitrust subcommittee, introduced a comprehensive rethinking of antitrust law, raising the pressure on Big Tech, particularly Alphabet and Facebook, already facing federal lawsuits.

The Defense

Former President Trump lost one legal team for his impeachment trial, apparently over disagreements on strategy and fees. Briefs from his new team argued it's unconstitutional to impeach a former president and it was his First Amendment right to express his election suspicions. The trial starts on Tuesday.

Annals of Deal-Making

The Wall Street Journal reported that Exxon Mobil and Chevron discussed a $300 billion merger last year. Talks were preliminary and could resume...The special purpose acquisition company frenzy continued. Former Boeing CEO Dennis Muilenburg plans to raise $200 million for a SPAC. Rocket maker Astra Space, backed by Salesforce's Marc Benioff and former Google CEO Eric Schmidt; Wheels Up, an online jet booker; Fertitta Holdings, parent of Golden Nugget casinos and Landry's restaurants; and DNA-testing start-up 23andMe are merging with SPACs to go public...Kraft Heinz may sell Planters Peanuts to Hormel Foods.

Write to Avi Salzman at avi.salzman@barrons.com

(END) Dow Jones Newswires

February 05, 2021 20:03 ET (01:03 GMT)

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