Home » A $100 billion question: Will Exxon or Chevron go shopping in Europe?

A $100 billion question: Will Exxon or Chevron go shopping in Europe?

US oil companies Chevron and Exxon Mobil are swimming in cash. Meanwhile, their stock-valuation premium over European peers is becoming wider. At what point should they acquire a peer rather than buy back their own comparatively expensive shares?

Chevron said last week that it would increase its dividend about 6%, and the company raised its share-buyback authorization to $75 billion. Exxon Mobil said Tuesday that it would repurchase as much as $35 billion of its own shares this year and next. For some perspective, the companies’ combined share-repurchase authorizations are enough to buy British oil company BP.

Major European oil companies have been cheaper than U.S. peers for some time, in large part because European equities have been trading at a discount that has only widened since the Brexit referendum in 2016. Still, while the Euro Stoxx 50 index is 28% cheaper than the S&P 500 on the basis of enterprise value as a multiple of expected earnings before interest, taxes, depreciation and amortization, the three major European oil companies trade at an even steeper discount of 42%—compared with Exxon and Chevron. That gap used to be smaller: 38% at the end of 2021 and about 32% on average from 2009 to 2019.

Part of it can be explained by major U.S. oil companies’ larger exposure to high-return assets such as U.S. shale, according to a recent Citi report led by equity analyst Alastair Syme. Major European oil companies have also spent more on green technologies such as wind and solar, which have steady but unexciting returns compared to oil and gas. Another part of it is European investors’ reluctance to own energy stocks in a policy environment that is tougher on the fossil-fuel industry.

Cross-border deal activity might be the only viable way to close that valuation gap, according to Citi’s report, which also notes that a trans-Atlantic merger-and-acquisition deal has significant potential synergies and could hypothetically reduce operating expenses by as much as 15-30% of the target company’s market capitalization. Major U.S. oil companies certainly have the balance sheet to consider it: Exxon and Chevron ended the year with net debt around 5% and 3% of capital, respectively.

A tie-up doesn’t seem that far-fetched considering the fact that Exxon and Chevron were contemplating one with each other just over two years ago. Of course, one significant difference is that oil prices are buoyant today. Previous tie-ups tended to occur when oil and gas prices were weak: The initial demand shock of Covid-19 preceded Exxon and Chevron’s talks and Asia’s financial crisis preceded Exxon’s merger with Mobil in 1999 and Chevron’s merger with Texaco in 2001.

While there would be antitrust scrutiny, it isn’t insurmountable. Upstream assets are less likely to pose an issue because the oil majors have such diverse global asset positions. The five major oil companies combined produced just 9% of the world’s oil and gas in 2022, a far cry from their 32% market share in 1971, according to Citi’s analysis. Refining operations could get more scrutiny, but companies could meet regulatory requirements by divesting themselves of certain assets. And, while the EU and U.K. have instituted energy-windfall taxes, they apply to profits in the region, which don’t account for a significant share of production for any of the major oil companies.

Exxon and Chevron’s chief executives said on their most recent earnings calls that they are open to acquisitions, though neither mentioned major European oil companies specifically. When asked about M&A opportunities on Exxon’s earnings call on Tuesday, Chief Executive Darren Woods mentioned the Permian Basin and the low-carbon-solutions space as areas where the company could extract more value through acquisitions. Chevron CEO Mike Wirth said on the company’s earnings call on Friday that the bid-ask spread is still wide on oil-and-gas and clean-energy companies. Notably, both companies have boasted about progress on “high-grading” their portfolios by selling noncore assets, so a trans-Atlantic megamerger would be quite a pivot.

Still, as the valuation gap with European peers widens, it will be difficult for Exxon and Chevron to keep their eyes off those giant, juicy targets.