Over the next 25 years, the demand for energy and energy-related products will likely increase by as much as 50%, to 160 million barrels of oil per year. As the world’s largest company by revenue, at $404.5 billion for fiscal-year 2007, Exxon Mobil (XOM) is poised for upside appreciation if management starts buying up beaten-down oil and natural gas assets in the near future.
Exxon, which has not done a major deal in the oil and natural gas space in years, should use the company’s $40 billion in cash and AAA rating to float a multi-billion-dollar bond offering to help finance accretive buys in the space.
Here are some companies Exxon should take a look at:
National Oilwell Varco (NOV): National Oilwell Varco is the world's leader in design and manufacture of equipment and various components used in oil and natural gas drilling, production and exploration. The company operates in the segments. Rig technology, which represents 56% of total sales in 2007 on operating profits of 65%, provides vital components for land- and offshore-based drilling rigs. Oil services and supplies, which represents 30% of total sales in 2007 on operating profits of 33%, sells such things as motors, pumps and drill-bit heads. Distribution services, which represents 14% of total sales in 2007 on operating profits of 4%, includes the company's recent merger with Grant Prideco.
Shares of National Oilwell are down about 70% for the year. The stock trades with a forward P/E of 4.1 and EV/EBITDA of 2.8.
Given National Oilwell Varco's market share in the service business and the fact that 90% of all current rigs use some sort of NOV component, Exxon would be mistaken not to make a bid.
Sandbridge (SD): Sandridge is an interesting mid-sized oil and gas exploration company based in Oklahoma. As of mid-2008, it had net proved reserves of 1,516.2 billion cubic feet of natural gas.. It also had 1,234 net producing wells and had interests in approximately 822,287 net natural gas and oil leased acres. Sandridge also owns six rigs in East Texas and two rigs in Oklahoma.
Production in Sandridge’s key asset of West Texas Overthrust, or WTO, is up 29% for the year. Exxon will be particularly interested in Sandridge’s reserve growth, which went from 380 billion cubic feet equivalent in 2003 to 2,143 billion by the third quarter of 2008. Shares of Sandridge are down a massive 85% for the year and trade with a forward P/E of 28.26.
Anadarko Petroleum (APC): An interesting name for Exxon to look at both on the natural gas side and the oil side is Anadarko, which has wells in the U.S., the Gulf of Mexico and Algeria. For U.S. domestic usage, the Gulf of Mexico is a strong local source. Anadarko is drilling deep to develop new fields, and it has the best rig inventory lockups for the Gulf.
It has an equally impressive record on land, with plans to drill 9,000 to 11,000 wells in Wyoming, Utah and Colorado in the next five years. On the natural gas side, Anadarko is developing a recently acquired property in the South China Sea, which will provide more local supply for the Southeast Asia area.
In the last three years, Anadarko has logged a 50% deep-water-drilling success rate, the highest in the industry. CEO James Hackett said recently that the market was valuating Anadarko as if oil was trading at $18 a barrel. Shares of Anadarko are down 45% for the year, trading with a forward P/E of 14.63 and EV/EBITDA of 3.096.
ATP Oil & GAS (ATPG): ATP Oil & Gas is an independent oil and gas company with its principal assets based in the Gulf of Mexico and the North Sea. At about $5.49, it is sitting near its 52-week low of $3.89, down a whopping 85% from its all-time high of $58, reached on Nov. 1, 2007. ATP is trading with a forward P/E of 2.49 and EV/EBITDA of 2.756, which are both extremely depressed valuations given what the company has done.
Right now, the market is valuating ATP as if its assets are declining, as if its forward reserves are basically worthless and as if oil is going to $5 per barrel and natural gas is going to $3.
From 2005 to 2007, ATP saw a compound annual growth rate of 79%, with its natural gas reserves going from 20 billion of cubic feet equivalent to a whopping 64 billion of cubic feet equivalent. Recently, ATP sold a 10% stake in its Gomez Hub for $82 million dollars. This percentage sold comprises 0.8% of ATP’s proved reserves and 0.5% of ATP’s proved and probable reserves. Thus, it is safe to deduce that ATP’s proved reserves are worth about $10.3 billion, and given ATP’s 98% success rate in converting nonproducing properties to producing status, proved and probable reserves could be worth north of $15 billion.
In both 2004 and 2007, ATP was awarded the Offshore Energy Achievement Innovation/Technology award. The stock trades at 0.4 times expected 2008 cash flow, and it just approved a share repurchase program to buy back up to 3.5 million shares, or roughly 10% of the outstanding stock.
Production growth is up 31% year over year and even faster growth is projected in the future. In the coming weeks, ATP will be updating production and monetization levels to investors, which would be a prime time for the stock to catch a bid.
Other companies Exxon should look at as potential acquisitions include Exco Resources (XCO), Newfield Exploration (NFX), Weatherford International (WFT), Plains Exploration (PXP) and Atlas America (ATLS).
Posted on Dec. 9, 2008
