Exxon & Chevron Discuss Merger: A New Standard Oil?
Zacks Investment Research | Feb 01, 2021 02:55AM ET
The oil & gas industry has been hit with a hurricane of challenges over the past 6 years, and 2020 has propelled the entire sector into a tailspin. Now the two largest US oil conglomerates, Exxon Mobil (XOM) and Chevron (CVX) are in merger discussions that could change the course of this space forever.
The COVID-19 pandemic was a wake-up call for the US energy space. The swelling US crude supply glut in mid-April (with demand all but vanishing overnight) sent oil futures plummeting into negative territory for the first time in history. There has also been a considerable market sentiment push towards renewables & sustainable power sources in 2020. This sustainable movement in the equity markets has been further stimulated by the new Biden administration and Congress's blue wave. The regime change has benefited renewable energy stocks and left oil & gas companies' shareholders with shaky hands even as oil prices rise.
Consolidation
Consolidation has been an answer for the oil industry quandaries, with small players being picked up left and right in this highly uncertain market. Now the big Kahuna's in the space are considering a business combination that could represent one of the largest mergers in corporate history, bringing back the two largest ancestors of John Rockefeller's Standard Oil empire, which was broken up over a century ago.
Exxon Mobil and Chevron are in negotiations over a potential merger that would forever change the US oil industry. Both stocks have been hammered by the microscopic terror that brought the world economy to its knees. Over the past 52-weeks, XOM has plummeted roughly 35% in value, while CVX is down 20%.
The combined company would have a market value north of $350 billion, making it the second-largest publicly traded energy company on earth behind Saudi Aramco (SE:2222). According to the WSJ and independent analyst Paul Sankey, this merger would create cost-cutting synergies of $15 billion in administrative expenses and $10 billion in cap-ex.
This merger would greatly benefit both enterprises with Chevron's proven savvy management team and ExxonMobil's vast book of assets, establishing the oil giant that the US needs. The combined company could produce 7 million barrels a day, or roughly 7% of the world's liquid fuel demand (once normality resumes).
Buy The News
I like both XOM and CVX at their current share levels, with my preference being towards CVX because of its ability to navigate choppy market waters much more effectively. Energy prices have been ripping higher since the beginning of November. Oil & gas prices have greatly benefited from the reopening trade catalyzed by positive vaccine news that has sent optimistic outlooks tearing across every sector in the market.
Get The News You Want
In the chart from the US Energy (NASDAQ:USEG) Information Administration (EIA), you can see that liquid fuel consumption will breach 100 barrels a day by the first quarter of 2022 and reach its 2019 peak demand by the end of next year.
XOM and CVX are each trading at a support level that I believe represents a robust buying opportunity. Below you can see the Fibonacci retracement levels that each stock is bouncing off today circled in red (I especially like where CVX is trading at).
XOM Support Level: $44.50
CVX Support Level: $84.40
CVX and XOM are both devoted to maintaining their lofty dividends and have the liquidity to do so. These stocks' high single-digit yields are almost as safe as US Treasury bonds as these firms have no intention of cutting the dividends that shareholders have relied on for almost a century.
Long-Term Outlook For Energy
There is no doubt that the world is headed towards sustainable and less pollutant energy, but this transition is going to be much slower than many anticipate. Demand for both natural gas and oil will continue to rise over the next decade with energy needs.
Still, there will be mounting worldwide efforts to reduce emissions and transition to alternative & renewable sources of energy. These efforts will likely be enforced by both domestic and global authorities.
Natural gas is expected to see a sharper increase in utilization as liquified natural gas (LNG) investments spike amongst all energy companies in recent years. This is seen as a highly lucrative way for energy businesses to maintain current operations and produce lower emission commodities. Pipelines are expected to be the primary method of natural gas transportation by the end of this decade.
XOM & CVX have been investing in alt energy such as LNG, biofuels, hydrogen fuel cells, and other renewable energy sources like solar & wind, but oil remains the most profitable commodity for most energy giants.
Sustainable Energy Alternative
NextEra Energy (NYSE:NEE) (NEE) is one notable exception. This enterprise is leading the charge in the renewable energy space, and its share price appreciation illustrates this anticipated economic shift towards sustainability. NEE has seen returns of roughly 190% in the past 5 years (nearly doubling the S&P 500) while at the same time yielding a healthy 1.7% dividend. This innovation-driven energy giant has stayed buoyant even amid the pandemic as the world looks towards the future.
The future of NextEra Energy is bright, being the largest producer of solar and wind energy, a leader in battery storage, and not to mention maintaining a massive backlog of renewable energy projects. In this indefinite low-interest-rate environment that the Fed has provided the equity markets, NextEra's significant future earnings are now worth more today than ever. The new democratic government wave has created a tailwind of momentum for NEE that should continue its drive through the roaring 20s.
Final Thoughts
Big Energy conglomerates are far from dead, and you better believe that they are looking towards the future. Oil has been and will likely remain a substantial-top and bottom-line driver for energy firms over the next decade. I suspect that LNG will be a growing part of all US energy companies' portfolios. With the US being the largest natural gas producer in the world, American energy is well-positioned for this growing trend.
CVX and XOM are robust long-term buys at their currently discounted valuations. These shares will continue to rebound as the economy is revived and a resurgence in demand is established. If the merger is pursued, I expect the upside for both stocks to be much more substantial.
NEE is making a big bet on renewable energy, and it looks to be panning out nicely. These shares have been on a relentless rally for decades as the enterprise pushes towards the future of energy. I suspect that this market outperformer will continue to drive growth in the coming decade.
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