The Exchange

Could Growth and Legacy Fuel Exxon to Tap Debt Market?

The Exchange

By John Licata

Stale is a word not typically associated with Exxon Mobil (XOM) but is an adjective I’m afraid represents the company rather well. XOM’s cash position has dropped from over $38bln in 2008 to $4.61bln as of the June 2013 quarter while the company’s debt to equity ratio has risen to the highest levels since late 2010 (0.117).

So could it make strategic sense for CEO Rex Tillerson to make XOM more debt heavy near-term to position for huge growth longer-term? That strategy has actually helped many major integrated oil companies in the past (see chart) and it could be the very logic that XOM must embrace to help pay for stock buybacks and all the recent dividend hikes.

Good timing

XOM’s paper, which is rated Aaa and AAA by Moody’s and Standard & Poor’s respectively, may be more secure than US Treasuries, so the timing could be very appropriate to raise cash, especially as Fed taper talks again start to make the rounds. Also, the company appears to be needing to find new ways to boost earnings and offset a slowing production profile. It also may sting those in the corner offices that XOM is also no longer the highest market cap company in the world. That distinction goes to Apple (AAPL). Additionally, there are those in portfolio manager circles who actually prefer investing in Chevron (CVX) over XOM due to that company’s increased investments in high margin oil versus domestic natural gas which has plagued XOM with prices still near 40-year lows.

Tillerson has been a bit more forthcoming on global warming after being called out for saying civilization will simply adjust to rising sea levels and climate change. XOM even had a recent keynote presentation at the World Nuclear Association in London. So could Team Tillerson be about to jump into the deep end of the pool and make a splash in the debt market ahead of any retirement plans? It’s possible.

Possible targets

Acquiring BP (BP) would likely bring a lot of negative criticism to XOM since there are still bad feelings and outstanding liabilities regarding the 2010 Deepwater Horizon oil spill. XOM for ConocoPhillips (COP) makes sense but XOM already has a significant portfolio of nat gas assets. Therefore buying COP would likely face much antitrust scrutiny. The fact XOM would have to pay COP a healthy premium and then spend the time to divest the nat gas assets makes me less inclined that move would be a match made in heaven.

What would get me excited is to see XOM take a page from French energy company Total (TOT) and make a large push to capitalize on the growing appetite for solar power. Going solar could help XOM modernize its energy portfolio and perhaps see alpha not witnessed by shareholders since the company’s $40bln acquisition of XTO.

While the jury may be out on what XOM may or may not do next, I don’t believe Tillerson is very happy XOM had to lower its stock buyback plan. While some may question XOM’s immediate cash flow, Tillerson may be starting to think about how he would like to be remembered when he passes the leadership baton at XOM. Tillerson, age 61, has now been the CEO and Chairman of XOM since 2005 (two years longer than his predecessor, Lee Raymond) which means he has also held the reigns more than the average 5.5 years Challenger Gray and Christmas says is the average number of years of for the average CEO.

So if time is ticking on Tillerson’s tenure at XOM, he (more than ever) may be open to tapping the debt markets to seek bigger alpha in renewables, especially solar, to attract a whole new investor to XOM and help offset reliance on the slowing production growth story that is plaguing this behemoth. That would certainly solidify Tillerson’s legacy at XOM on top of feeding an already attractive dividend policy.

John Licata is the Founder/Chief Energy Strategist of Blue Phoenix Inc., an independent research company focused on advanced energy and cleanweb solutions.

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