The Rise of Stock-Based Acquisitions in the Energy Market
The Shift Towards Stock Payments
Exxon Mobil and Chevron, two major players in the U.S. energy sector, are opting for stock-based payments when acquiring other companies. This arrangement allows them to secure transformative deals despite the unpredictable nature of oil and gas prices. Chevron recently announced its $53 billion all-stock acquisition of Hess, while Exxon plans to purchase Pioneer Natural Resources for $59.5 billion in stock. These deals follow a trend of all-stock transactions in the energy market, including Exxon’s $4.9 billion purchase of Denbury and Chevron’s acquisitions of PDC Energy and Noble Energy for $6.3 billion and $5 billion, respectively.
Benefits in a Volatile Energy Market
Using stock as currency helps bridge price disagreements with acquisition targets in an industry marked by volatility. Geopolitical turmoil and fluctuating oil and gas prices have made it challenging for companies to agree on cash deals. By accepting stock as payment, the acquired company’s shareholders can participate in the potential growth of the combined entity and defer taxes by holding onto their shares. For the CEOs of the acquired companies, this approach allows them to avoid potential regret if energy prices rise after a cash deal is finalized.
Strategic Moves by Exxon and Chevron
Exxon and Chevron’s interest in stock-based acquisitions stems from their desire to minimize the risk associated with exploring unproven reserves. With oil and gas resources becoming scarcer, both companies are under pressure to acquire skilled operators with access to lucrative regions like the Permian Basin and Guyana. These acquisitions offer Exxon and Chevron the expertise needed to navigate these regions effectively.
The Value of Stock-Based Deals
The recent acquisitions by Chevron and Exxon have been priced at a slight premium compared to the target companies’ share prices. This is because the valuations of these companies were already high, with Hess shares experiencing a 330% return to shareholders over the past three years. Despite the premium, stock-based deals allow Chevron and Exxon to avoid the larger premiums associated with cash deals. This strategy aligns with the companies’ goal of keeping their cash piles intact.
Utilizing Cash for Shareholder Benefits
While stock-based acquisitions leave Exxon and Chevron with substantial cash reserves, these companies can utilize their excess funds to benefit shareholders. Both companies plan to increase dividends and engage in share buyback programs. Chevron intends to raise its dividend by 8% and repurchase stock worth $20 billion annually, while Exxon could buy back shares worth $17.5 billion per year over the next two years. These initiatives aim to compensate existing shareholders for any dilution resulting from the all-stock acquisitions.
In conclusion, stock-based acquisitions have become a popular strategy for Exxon and Chevron to secure transformative deals in the energy market. By utilizing stock as payment, these companies can navigate price disagreements and benefit from the expertise of acquired companies. Additionally, the excess cash from these deals allows Exxon and Chevron to support their shareholders through increased dividends and share buybacks.
