Exxon Mobil May Lead Mega-Merger Parade
The energy industry is on the cusp of a series of mega-mergers
following last week's announcement of an historic combination of
Exxon and Mobil, according to many observers. Driving the
consolidation, they say, is extremely low commodity prices. That
reasoning was reinforced last week when gas prices plummeted to
historic lows for December (see related story this issue).
Exxon and Mobil officials maintain the pairing of giants is not
a short-term response to flagging oil prices, but rather a
positioning for long-term growth in a truly global environment
where state-owned oil companies are significant competitors.
Analysts and others watching the deal unfold placed more weight on
oil prices that are at a 12-year low and predict serious
consolidation among the biggest players. Indeed, the impetus to
combine must be strong for Exxon and Mobil to willingly face what
could be blistering regulatory review and the significant challenge
of melding their disparate cultures.
Exxon and Mobil intend to pair to create a company called Exxon
Mobil, which would be a titan with worldwide oil and gas reserves
of more than 20 billion barrels equivalent. Exxon is the largest
U.S. oil and gas company and on a global scale is second in size
only to Royal Dutch-Shell Group. Mobil is the second largest U.S.
oil and gas company following Exxon and the fourth largest in the
world. Exxon-Mobil would unseat Shell as the world's largest oil
company and would eclipse General Motors Corp. as the largest U.S.
Exxon Mobil would have combined gas sales of about 14 Bcf/d
worldwide and major LNG assets contributed by Mobil. Exxon produces
6.3 Bcf/d of gas and had gas/oil exploration/production in 30
countries at the end of 1997. Mobil produces 4.6 Bcf/d of gas and
had gas/oil exploration/production activities in 25 countries at
the end of 1997. In the U.S., Exxon produced 2,062 MMcf/d in 1997,
while Mobil's 1997 domestic production averaged 1,160 MMcf/d.
In a conference call last week, Exxon Chairman Lee R. Raymond
predicted big things for the gas side of the combined company.
"Longer term, the potential may even be greater for natural gas
with 175 Tcf of discovered gas resources in close proximity to the
world's primary demand areas and our combined technologies. Mobil's
LNG experience and Exxon's proprietary gas-to-liquids and
high-strength steel technology should help position Exxon Mobil to
be an efficient low-cost supplier. Upstream unit costs will
decrease as we apply our respective best operating practices, and
given the large asset base, we will have numerous opportunities to
high grade and maximize the value of our capital investments. Our
combined technologies will offer strategic advantages."
The Exxon Mobil announcement followed news in August that
British Petroleum and Amoco would combine to create BP Amoco PLC.,
which will have a market capitalization of $110 billion, combined
reserves of around 14.8 billion Boe and three million barrels of
daily oil and gas production, including 3.2 Bcf/d in North American
gas production and 31.5 Tcf of proven gas reserves worldwide. Last
month, Seagull Energy and Ocean Energy announced their stock
combination to create the 10th largest independent domestic
producer based on a pro forma market equity capitalization of $1.8
billion (see NGI Nov. 30, 1998).
In the event the Exxon-Mobil merger is approved by shareholders
and regulators, it will be by far the largest merger ever of
industrial companies based on market capitalization. Exxon has a
market capitalization of about $170 billion, while Mobil's market
capitalization (prior to the run-up in its stock price) hovers
around $70 billion, making the combined market capitalization about
The Exxon-Mobil transaction, as well as the BP-Amoco deal, is
seen mainly as a reaction to depressed crude oil prices, which are
causing energy companies to initiate drastic cost-saving and
efficiency measures to remain competitive. Exxon and Mobil said
they expect to see $2.8 billion in annual savings by combining
their operations, but analysts are wary.
Industry prognosticators see more mergers between major energy
companies on the horizon, primarily as defensive measures. "Mergers
develop a certain momentum. If you see that two of your biggest
competitors have gotten together, you may feel that will give them
further competitive advantages, ...so you start looking around for
other available partners," said Michael P. O'Brien, a partner in
the Boston-based law firm of Bingham Dana L.L.P. "You had BP-Amoco
already in August. Now if Exxon and Mobil [goes through], that will
certainly bring pressures to bear on the other oil and gas
Allen Mesch, director of the Maguire Oil and Gas Institute at
Southern Methodist University in Dallas, agreed. "[Competitors]
will say, 'If everybody else is getting bigger, we need to get
bigger.' I think [it] will create some urgency on the part of some
boards." With this latest mega merger on the horizon, analysts are
positing candidates for the next big deal "Almost any permutation
or combination" of the top 10 energy companies is possible, said
O'Brien. Key candidates would be Texaco, Chevron, and Atlantic
Richfield. "The shoe is waiting to fall with those guys," remarked
"Chevron is certainly walking around looking for someone. I'm
pretty confident that they were also in negotiations at one point
and time with Mobil. One thing that could possibly happen is
Chevron and Texaco could get together. I wouldn't doubt that you'll
see something from Chevron pretty darn soon," said a Washington
energy observer. Arco, which owns about 80% of producer Vastar Gas,
"is still a pretty attractive prospect for people," as well as Oxy,
Pennzoil, Phillips Petroleum, Unocal and Marathon Oil.
Texaco is high atop the list of possible industry combos, says
Don Hosmer, president of Royale Energy, a West Coast producer and
marketer. In fact, he noted that "Texaco threw out [merger] feelers
just the other day. Their chairman said that if oil prices continue
to stay low, something will have to happen."
"I'd say there's going to be a tremendous amount of
consolidation in the industry. I don't know if it'll reach
oligopoly stage...," the Washington energy observer noted. Although
"it's properly referred to as a concentration," the goal of energy
companies in combining their operations is to realize efficiencies.
"These people aren't getting together because it's fun, they're
getting together because they see an economic opportunity."
Nonetheless, Raymond said the deal still would have come about
if oil were $20 a barrel. "This is not a short-term business. This
is a very long-term business. Decisions that we're talking about
today are not driven by the short-term price of oil. They're driven
by our views of what the competitive situation is going to be as
this industry moves forward."
In reaching a definitive agreement, Exxon and Mobil had to
tackle a number of tough issues, said O'Brien. Foremost, he pointed
out, was the combining of contrasting corporate cultures.
Specifically, was this to be a merger of equals or was it an
acquisition of Mobil by Exxon? He doubted that it could be
considered the former, given that Exxon's market capitalization is
about three times that of Mobil's.
A producer source said Exxon and Mobil have "very, very
different cultures," and that merging them would be difficult, if
not impossible. The majority of Exxon's top and middle management
hail from Texas, while Mobil's work force is "very eclectic," he
said. "If there's any company that's a melting pot, it's Mobil." He
thinks many of Mobil's high- and middle-level executives are going
to be out of jobs if the merger goes through. "If I were a vice
president or a senior vice president at Mobil, I'd either try to
quash the deal for my own survival sake or I'd get my resume out on
the market real quick." Another energy insider agreed that mixing
the two cultures would not be easy but, he added, "either you work
together or you don't have a job."
It's been speculated that up to 20,000 employees from both
companies, but probably more so from Mobil, could be displaced by
the deal. In a press briefing, the companies said job cuts would
number around 9,000 from a worldwide work force of 123,000. Royale
Energy's Hosmer noted the layoffs, especially those on the
companies' exploration and production staffs, could turn into
opportunities for smaller producers. "One of the benefits for the
small producers is that there could be a lot of exploration talent
out there," post-merger, looking for jobs.
Other tough issues tackled in the definitive agreement included
corporate headquarters, board representation; corporate name; and
how the different styles and personalities of Exxon Chairman
Raymond and Mobil Chairman Lucio A. Noto would fit into the
management of the surviving company, said O'Brien. As the smaller
of the two, Mobil fought for as much "autonomy or representation"
in the merged company as possible. "Someone asked me this morning,
'Is this a sad day for you,'" Noto recounted during last week's
conference call. "I will tell you it is not. I'm personally
convinced that it's a good day for our shareholders, for the
majority of our employees who will have opportunities to work in
this new company, for our customers, and really also for the United
"The biggest risk [to an Exxon-Mobil merger] will be antitrust
in that the antitrust regulators in the U.S. have been quite
aggressive over the past year and a half or so. If they find a
problem with BP-Amoco, they'll certainly have a problem with
Exxon-Mobil," O'Brien said. The producer source agreed, saying
Exxon and Mobil are "too big a set of companies to be ignored by
the Justice Department and the Federal Trade Commission." Attorneys
general in states where Exxon and Mobil have a huge presence in the
retail market also are likely to closely review the merger.
Raymond seemed to concede last week that the companies are
braced for a tough antitrust review. "We would be absolutely amazed
- although pleasantly surprised - if the FTC said we did not have
to rationalize some assets."
Still, O'Brien believes both Exxon and Mobil could argue the
merger would pose no anticompetitive concerns since oil is an
"international commodity which is beyond the power of U.S. oil
companies to manipulate." He said he believes "very strong
arguments can be made."
For the deal to pass muster, "I think there will certainly have
to be divestiture of some assets, mostly service stations [in the
Northeast] and possibly some refineries and stuff" in Texas and
Louisiana, said John Sharp, vice president of federal and state
affairs and counsel for the Natural Gas Supply Association (NGSA).
"While I think the FTC will scrutinize very much the joint assets
of this proposed merger, I think ultimately it will certainly be
approved. I don't see antitrust problems as any kind of killer of
A BT Alex. Brown report on the merger, titled "Fire and Ice,"
points out differences between the BP-Amoco deal and Exxon-Mobil.
"The market reaction to the news of the BP-Amoco merger was
positive, while the initial market reaction to the Exxon-Mobil
announcement was negative. Although there are still outstanding
issues to be addressed with the British Petroleum-Amoco merger, it
is generally perceived that their corporate cultures will mesh more
easily, and that there will be fewer regulatory issues than with
Exxon-Mobil. In addition, BP has more experience with mergers, and
its motivation to grow bigger in order to prosper was more
Jofree Corp. analyst Carol Freedenthal said he believes any
antitrust issues would mainly relate to the oil side of the
business as Mobil turned over its gas marketing group to PanEnergy,
since acquired by Duke Energy. Mobil retained a 40% interest in the
unit. "Exxon has done very little to develop their [gas] group.
It's really a gas sales group and not what I would call marketing."
In the event the Exxon-Mobil deal is sanctioned, it would undo
part of what the U.S. Supreme Court did in 1911 when it busted up
the Standard Oil Trust. Mobil's ancestor companies were Standard
Oil Co. of New York and Vacuum Oil, two of the companies making up
Standard Oil before the break-up. Before it was Exxon, Exxon was
Standard Oil Co. of New Jersey, the largest of the companies formed
by the trust break-up.
Exxon, headquartered in Irving, TX, had 1997 sales of $137.2
billion and profit of $8.5 billion. Mobil, headquartered in
Fairfax, VA, had 1997 sales of $65.9 billion and profit of $3.3
billion. Exxon has about 80,000 employees, and Mobil has about
Joe Fisher, Houston; Susan Parker, Washington, D.C.