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The CEOs of ExxonMobil Corp and Chevron Corp held preliminary talks in early 2020 to explore the combination of the two largest US-based oil producers in what would have been the biggest merger of all time, according to the media.
The talks, which are no longer active, are indicative of the pressure exerted by the most dominant companies in the energy sector as the COVID-19 pandemic has taken hold and crude prices have fallen.
Discussions between Exxon CEO Darren Woods and Chevron CEO Mike Wirth were serious enough that legal documents involving certain aspects of the merger discussions were drafted, one of the sources told the Reuters news agency. The reason why the talks ended could not be learned, Reuters reported.
But the Wall Street Journal, citing its own unidentified sources, reported that the talks could be revived in the future.
Reuters sources requested anonymity as the matter is confidential. Exxon and Chevron, which have market caps of $ 190 billion and $ 164 billion, respectively, declined to comment, Reuters said.
Shares of Exxon and Chevron plunged last year after a Saudi-Russian price war and fallout from the novel coronavirus outbreak drove the value of oil into the crater. Exxon’s stock was hit the hardest, with investors voicing concerns about the company’s long-term profitability and its spending decisions.
During their talks, the CEOs of Exxon and Chevron considered realizing synergies through significant cost cuts to help weather the slowdown in energy markets, one of the sources told Reuters. At the end of 2019, Exxon employed approximately 75,000 people and Chevron approximately 48,000.
Following the failed talks with Exxon, Chevron then acquired oil producer Noble Energy in a $ 5 billion cash and stock deal that closed in October.
Regulatory control
A combination proposed last year would almost certainly have sparked intense antitrust scrutiny by the US Department of Justice, a process that typically takes months. And such a review would also have potentially collided with the US presidential election last November, raising further uncertainty as to how quickly such a deal could be authorized, if at all.
Now, under the Biden administration, the window could be almost closed because Democrats have historically been less supportive of such deals, one of the sources said. President Joe Biden has put climate change at the forefront of his agenda, promoting renewable energy jobs as opposed to traditional jobs in the oil industry.
Biden recently officially revoked the license to construct the Keystone XL pipeline. General Motors said last week it would aim to stop selling gasoline and diesel vehicles, which depend on oil, by 2035.
The White House and Justice Department did not immediately respond to Reuters requests for comment.
News of the failed talks emerged as Exxon came under pressure from some of its shareholders over its strategic direction.
Engine No. 1, a San Francisco-based investment firm, appointed four directors to Exxon’s board last week and is pushing the company to spend its cash better, preserve its dividend and invest more in clean energy. Exxon is also in the crosshairs of the DE Shaw hedge fund, which is pressuring the company to cut costs and improve performance.
Exxon releases its fourth quarter results on February 2. Chevron reported a surprise fourth-quarter loss of $ 11 million last week as low margins on fuel, acquisition costs and currency effects outpaced improving drilling results.
Potential giant
A combined Exxon-Chevron would only be eclipsed by Saudi Aramco, which has a market value of around $ 1.8 trillion and has already pushed many U.S. drillers to the brink of money by flooding the market with oil.
It could also be the biggest business combination ever, depending on its structure. This distinction now belongs to the purchase of approximately 181 billion dollars of the German conglomerate Mannesmann AG by Vodafone AirTouch PLC in 2000, according to the research firm Dealogic.
Such a deal would bring together the two largest descendants of John D. Rockefeller’s Standard Oil monopoly, which was broken by US regulators in 1911 and reshape the oil industry.
Despite the inevitable antitrust concerns, Exxon and Chevron could argue that a merger would represent the United States’ best chance to take on the Saudi state-owned conglomerate and the other largest state-backed oil producers in the world, one of the sources told Reuters.
The oil price war between Arabia and Russia last year, for example, highlighted the vulnerability of U.S. producers to foreign governments who can effectively dictate the price of crude by forcing energy companies to they amount to increasing or reducing their production.
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US oil companies compete with each other and set their own production targets, with Washington only having limited intervention capacity.
Exxon and Chevron, with their powerful balance sheets, have weathered the turbulence in energy markets following the pandemic that has forced some small independent oil and gas producers into bankruptcy.
Yet they also felt the pain. Demand for oil evaporated in early 2020 as governments imposed travel restrictions and stay-at-home orders to slow the spread of the COVID-19 pandemic.
At some point in April, the price of US West Texas Intermediate crude futures turned negative for the first time, meaning sellers had to pay buyers to get rid of the commodity. Prices have since rebounded to around $ 52 a barrel.
Exxon and Chevron have cut jobs in the past year. At the end of last year, Exxon left its dividend unchanged after increasing the payout to shareholders every year since 1982.
In an interview with the Wall Street Journal on Chevron’s results last Friday, Wirth, who – like Exxon’s Woods – is also chairman of his company’s board, said the consolidation could make the industry more efficient. He was speaking generally and not about a possible Exxon-Chevron merger.
“As for things on a larger scale, it’s happened before,” Wirth told the newspaper, referring to the mega-mergers of the 1990s and early 2000s. “Time will tell.”
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